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How Did Regulators Miss This Latest Broker Fraud? , bp holdings barcelona Answered


The year 2007 brought one of the biggest scandals in memory to hit the futures community. Brokerage Sentinel Management Group collapsed in what prosecutors later said was a fraud by its chief executive and its head trader, leaving customers out hundreds of millions of dollars. That December, one of the leaders of the industry, Russell Wasendorf Sr., warned authorities that beefing up policing in response would be overkill.
"The regulators missed on this one, but fraud is not easily detected," Wasendorf wrote in an editorial in Stocks, Futures and Options, or SFO, an industry magazine he published. "Those who set out to line their own pockets have ways of hiding it, at least for a while."
He knew what he was talking about. Unbeknownst to regulators, Wasendorf had been stealing from his customers' accounts for years, a fact he confessed after he tried to asphyxiate himself in a car outside Peregrine's headquarters in July. The dramatic end to his career came amid the implementation of electronic monitoring by regulators of Peregrine's accounts, a step Wasendorf had resisted.
Interviews with former employees, colleagues and associates, as well as an examination of court filings and company documents seen by Reuters, paint a picture of an entrepreneur who, by using relatively simple tools, was able to keep regulators off the scent for years. He did this even as his behavior grew increasingly showy and erratic.
As the financial shocks of 2008 savaged his business, Wasendorf went on a multiyear shopping binge, finishing an eco-friendly $24 million headquarters, opening a gourmet Italian restaurant in Cedar Falls, breaking ground on a second kitchen nearby, and installing a wood-fired pizza oven in his backyard. Wasendorf pleaded guilty to mail fraud, embezzlement and lying to regulators last week. He remains in solitary confinement and under suicide watch inside an Iowa jail.

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His confession left key questions unanswered: how much money he ultimately stole from customers; whether he acted alone, as he claims; how regulators missed red flags over the years; and why they waited so long to subject the prominent broker to significant scrutiny. Federal prosecutors say Wasendorf stole approximately $200 million from customer accounts over the years. The 64-year-old pleaded guilty to embezzling at least $100 million.

Wasendorf was riding high in 2008. But as the design plans for his new headquarters were finished and the land was purchased, the economy weakened and trading diminished. An investment he made in Romanian property, once valued on paper at $150 million, collapsed as a bubble there burst. Most painfully, the Federal Reserve slashed interest rates to near zero, crippling Peregrine's ability to profit off interest. By this point, Wasendorf had given up any hope of repaying whatever money had been taken, according to Linda Livingston, his pastor.
On the surface, the good times rolled on. In Iowa, Wasendorf Sr. set the rules at Peregrine headquarters, pampering his staff. In Chicago, where his son, Peregrine president Russell Wasendorf, Jr., spent half his work week, competition with rival firms intensified. Peregrine brokers in Chicago handled trades; new accounts were opened through a call center in Cedar Falls.
Russ Sr.'s temper flared regularly. He tore up a contract in front of a furniture supplier who missed a delivery date by a matter of hours. He yelled at architects when he felt the plans for the new headquarters were not up to snuff, according to Rick Young, whose company installed the building's climate systems. The new $24 million headquarters, a glass building on a wooded lot next to a country club, opened in 2009. The same year, Peregrine seized on another chance to top up the client funds that Wasendorf was raiding, acquiring $80 million in customer accounts held by Alaron Trading.
A year later, the Commodity Futures Trading Commission revealed that Alaron had let a customer run up a $4 million deficit without collecting the funds to back the losses, and the regulator stripped the unit of its license. But by then, Peregrine had control of Alaron's former accounts, and Alaron was not doing business as a futures brokerage.
Things still looked good on the outside: By its peak in early 2011, Peregrine was overseeing more than $500 million in segregated client funds, according to regulatory data, making it one of the country's 10 largest independently owned brokers. Wasendorf lived the part. Among his passions was food. At the glass-walled cafeteria at his new Cedar Falls headquarters, gourmet meals were provided free.
Wasendorf took his private jet to Chicago to catch Bears football games from his private box. He traveled to Europe and Asia; he bought fine wine and photography equipment. He scouted properties in Cedar Falls, snapping up prime space for a restaurant, then a second, then a third site for a commercial kitchen, according to property and tax documents at Black Hawk County in Iowa.