Brokerage Shortfall Puts CFTC on Spot

Peregrine Fund’s $200 mln in missing funds renews scrutiny of regulator.

The main U.S. futures regulator is facing renewed scrutiny after suing Peregrine Financial Group Inc. for a customer funds shortfall nine months after MF Global Holdings Ltd. collapsed.

The Commodity Futures Trading Commission filed a complaint against Peregrine in federal court in Chicago yesterday after an industry-run regulator cited a $200 million shortfall in customer segregated funds. The National Futures Association said the brokerage’s chairman may have falsified bank records after only $5 million was found in an account that was reported to have $225 million on or about June 29.

Peregrine is under investigation over the alleged missing funds after Russell Wasendorf Sr., the firm’s chairman and chief executive officer, unsuccessfully attempted suicide. Republicans who scolded the CFTC over its handling of MF Global cited similarities to the New York brokerage’s failure.

“I would have expected regulators to be particularly attentive to situations like the one at PFG in the wake of the MF Global collapse, so I’m disappointed this wasn’t discovered earlier,” Representative Randy Neugebauer, a Texas Republican who is leading an investigation of MF Global’s $1.6 billion customer-fund shortfall, said in an e-mail yesterday.

The Senate Agriculture Committee, which has jurisdiction over the CFTC, is holding a July 17 hearing on derivatives regulations that is scheduled to include testimony from Gary Gensler, the agency’s chairman. Senator Debbie Stabenow, the Michigan Democrat who is chairman of the committee, said it is imperative that futures market customers know their money is safe.

“We are working closely with regulators to find out what happened because farmers and small businesses need assurances that their funds are safe from reckless or criminal activity,” Stabenow said in a statement yesterday.

Senator Richard Shelby, the top Republican on the Senate Banking Committee, said he’s working with Senator Tim Johnson, the South Dakota Democrat who leads the panel, to gather information on the Peregrine shortfall.

“In the wake of MF Global, this latest failure raises serious questions about our current regulators and whether they are capable of doing their jobs,” Shelby said in an e-mail.

Senator Charles Grassley, an Iowa Republican, said the situation raises questions about the dual oversight of the industry by self-regulators and the CFTC.


‘Working Diligently’

“I want to know if the existing set up with the National Futures Association and the Commodity Futures Trade Association is working to safeguard this marketplace,” Grassley said in a statement. “Regulators need to be on the ground working diligently to sort out what’s going on.”

The CFTC, NFA and CME Group Inc. conducted a review of futures brokers’ segregated customer funds after MF Global’s collapse last year. On Jan. 25, the CFTC announced that customer funds were properly segregated at 70 futures brokers. The review was a “snapshot” of the industry’s compliance with regulations and didn’t involve a “lengthy examination” of the brokers, according to a statement from the CFTC. The review relied on brokers’ records and didn’t involve regulatory officials independently confirming balances of customer funds at other entities. The agency said the review wasn’t intended to serve as an industry audit.

The CFTC depends on the self-regulatory system involving NFA and CME in part because it has a small budget of $205 million, Gensler said yesterday.

“I think it’s in the nature of our funding as well that we rely on the NFA and the CME and others to be the first line of oversight,” he said.

Peregrine was undergoing an audit, and “as our complaint lays out, in the midst of that audit we’ve alleged fraud as happening,” Gensler said.

“We’re going to vigorously pursue actions like this,” he told reporters after a CFTC meeting in Washington.

Senator Pat Roberts, a Kansas Republican, said Gensler should be prepared to answer lawmakers’ questions over Peregrine. Roberts cited the CFTC chairman’s decision to recuse himself from the MF Global investigation because of his prior relationship at Goldman Sachs Group Inc. with Jon S. Corzine, who ran MF Global until its filing for bankruptcy on Oct. 31.

“Last time he ’stepped aside’ rather than get involved,” Roberts said yesterday in an e-mail. “I hope that this time he’ll step up to the plate and help us get the answers.”


Bloomberg News


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