PFG's Downfall in Retrospect: Consequences and Lessons

By Sam Nadler

Sam Nadler is a senior at Vanderbilt University studying history. 

This past July marked the two-year anniversary of the uncovering of a massive fraud at the commodities brokerage firm Peregrine Financial Group (PFG). PFG's CEO, Russell Wasendorf Sr., stole money from customer brokerage accounts over the course of almost two decades. Amazingly, Wasendorf managed to escape the detection of both the regulators charged with preventing such fraud, and his employees at PFG. Two and a half years later, it is instructive to look back on the institutional deficiencies that allowed Wasendorf to commit fraud, the judicial consequences that arose from the case, and the steps taken by regulators to prevent similar fraud schemes in the future. 

In the wake of the fraud’s discovery, many were dismayed by how 'simple' it was for Wasendorf to embezzle funds and evade regulators. PFG represented itself as a legitimate commodities brokerage firm, matching buyers and sellers of contracts, which dealt with commodities like wheat and oil.  However, in 2012, Wasendorf admitted to stealing over $200 million in investor funds for his own use beginning as early as 1993. Wasendorf doctored paper bank statements to make it look like PFG's accounts held far more than they actually did. In the note he left before his failed suicide attempt in July 2012, Wasendorf wrote, "Using a combination of Photoshop, Excel, scanners, and both laser and ink jet printers I was able to make very convincing forgeries of nearly every document that came from the bank."  Wasendorf convinced the National Futures Association (NFA), the self-regulatory organization charged by the Commodities Futures Trading Commission (CFTC) to regulate commodities brokers, that a P.O. Box he had rented belonged to the U.S. Bancorp branch that handled PFG's account. He sent the doctored accounts to the NFA with the P.O. box as the return address. [1]

The fraud ended abruptly when the NFA changed its audit process to an online-based platform called confirmation.com. The New York Times reported that, for now-obvious reasons, Wasendorf "was opposed to the system" and "fought the directive for several days." On July 9, 2012, knowing that the downfall of PFG was imminent, Wasendorf wrote a confession and attempted to asphyxiate himself outside of PFG's headquarters in Cedar Falls, Iowa. In the subsequent criminal proceedings of September 2012, Wasendorf pled guilty to charges of embezzlement, and was sentenced in January of the following year to 50 years in prison.

In civil court, both the firm's clients and the Commodities Futures Trading Commission initiated proceedings against Wasendorf and PFG. On December 21, 2012 the clients’ lawsuits were combined into a single class action lawsuit  that included additional charges against the U.S. Bank and JPMorgan. Both firms had done business with PFG, and the trustees leading the class action suit argued that they had "improperly allowed PFG and Wasendorf Sr. to withdraw customer funds to use for non-customer purposes from accounts the banks held for PFG’s customer funds." [2] On March 27, 2014, JPMorgan agreed to a settlement of $15 million dollars. US Bank was ordered to pay $18 million to Peregrine customers earlier this year.

Perhaps the only productive results from the PFG case are the regulatory reforms implemented by the CFTC in the aftermath. Especially noteworthy, and a direct response to the PFG fraud scheme, is a mandate that requires Futures Commission Merchants (FCMs) to "grant regulators... direct electronic access to customer accounts." [3]  Laura Goldsmith notes in her journal article that the "The CFTC tailored this requirement to correct oversight gaps that allowed Russell Wasendorf, Sr. to take advantage of Peregrine’s customers without detection by using ‘Photoshop and a post office box.’" [4] Goldsmith assures that "under this measure, regulators could ensure ‘24-7-365’ that an FCM keeps customer funds segregated and safe."  These reforms, created to prevent such seemingly amateurish methods of deceiving regulators, should help prevent PFG-type disasters from happening in the future.    

While recovering customer money should be the top priority in cases of fraud, a forward-looking mentality concerned with preventing future fraud is also necessary. If regulators can learn from their failures, then frauds like PFG can at least help make financial markets safer in the future. This ability to adapt must continue to define responses to financial fraud as regulators continue to combat firms and individuals looking to game the system.


[1] Phillips, Matthew. "Why Did it Take 20 Years to Catch Peregrine's CEO?" Bloomberg Businessweek. businessweek.com, 26 July 2012. Web 20 Oct. 2014. <http://www.businessweek.com/articles/2012-07-26/why-did-it-take-20-years-to-catch-peregrines-ceo>
[2] "Peregrine Financial Group Class Action Lawsuit." Girard Gibbs LLP. girardgibbs.com, Web 20 Oct. 2014. <http://www.girardgibbs.com/peregrine-financial-group/> 
[3] Goldsmith, Laura "The Collapse of MF Global and Peregrine Financial Group: The Response from the Futures Industry, Regulators, and Customers." BU Review of Banking and Finance Law, Vol. 32. Page 32. 
[4] Ibid.
Photo Credit: Flikr user Terence Wright