Peregrine Financial Group Inc. filed to liquidate in bankruptcy after the U.S. Commodity Futures Trading Commission sued the brokerage, alleging a $200 million “shortfall” in client funds.
Peregrine listed assets of more than $500 million and debt exceeding $100 million in a Chapter 7 petition filed yesterday in U.S. Bankruptcy Court in Chicago. Separately, U.S. District Judge Rebecca Pallmeyer issued an order freezing Peregrine’s assets at the CFTC’s request, saying it appeared there was “good cause” to believe the firm and its founder, Russell Wasendorf Sr., violated the federal Commodity Exchange Act.
The CFTC sued earlier yesterday, a day after Wasendorf was found by employees of the firm outside its Cedar Falls, Iowa, offices semiconscious in his car after what Black Hawk County, Iowa, Sheriff Tony Thompson said was a suicide attempt.
The National Futures Association, an industry self-regulator, said July 9 that Peregrine reported it had about $400 million in customer-segregated funds on or about June 29, of which $225 million was on deposit at U.S. Bank.
The regulator said it learned that Peregrine’s chairman “may have falsified bank records” after finding only $5 million on deposit. The brokerage offered futures, cash, foreign exchange and options on futures trading.
Peregrine is being probed by the U.S. Federal Bureau of Investigation, said Sandy Breault, a spokeswoman for the agency’s Omaha, Nebraska office.
Also yesterday, Ronald Kotulak, who claims to have been employed by Peregrine in Chicago, sued the firm on behalf of a group of as many as 100 fellow workers, alleging they were the victims of a mass firing July 9 in violation of federal law.
Citing the U.S. Worker Adjustment and Retraining Notification Act, Kotulak claimed he and his colleagues are owed wages, commissions, vacation pay and retirement plan contributions that would have been paid out over the next two months.
“Defendant was required by the WARN Act to give the plaintiff and the class members at least 60 days advance written notice of their terminations,” according to Kotulak’s complaint, now part of the bankruptcy proceeding.
Thompson said in a phone interview yesterday that Wasendorf was found in his car with a note, the contents of which the sheriff declined to divulge. A hose ran from the vehicle’s exhaust pipe into the passenger compartment, he said.
An officer with the sheriff’s office arrived just after 8 a.m. July 9 at Peregrine offices, where paramedics were attending to Wasendorf, according to an incident report e-mailed to Bloomberg News.
Wasendorf was breathing as he was taken from his car and was incoherent, according to the report. He was later airlifted to University of Iowa Hospitals in Iowa City, it said.
“A note was found in the vehicle that indicated possible discrepancies with accounts at Peregrine Financial Group,” according to the report.
“Some accounting irregularities are being investigated regarding company accounts” after “a recent emergency involving Wasendorf, a suicide attempt,” Peregrine told its customers July 9 in an e-mailed message. A copy was obtained by Bloomberg News and confirmed by Patricia Campbell, a company spokeswoman in Chicago.
The NFA “and other officials” have frozen all customer money, the company said in its e-mail. Wasendorf owns the entire firm, according to the e-mail.
Campbell yesterday didn’t reply to voice-mail and e-mail requests for comment on the federal probe and CFTC lawsuit.
Peregrine started as Wasendorf & Son Inc. in 1980, according to a timeline on the firm’s website. It evolved into Peregrine in 1990 and moved its headquarters to Chicago. Two years later, it was incorporated as a futures commission merchant.
In 2009, the firm opened a new office at One Peregrine Way in Cedar Falls, according to the website. Wasendorf was parked outside that office when he was found July 9.
In its complaint, the CFTC alleged the missing money was misappropriated by the firm and its founder.
“The whereabouts of the funds is currently unknown,” the regulator said.
The possible loss of customer money at Peregrine follows the bankruptcy last year of MF Global Holdings Ltd., where as much as $1.6 billion in missing client cash has yet to be recovered by trustees overseeing the liquidation of the firm.
Futures industry leaders including CME Group Inc. Chairman Terrence Duffy said MF Global’s failure was the first time a futures brokerage’s collapse led to the loss of customer money, which is supposed to be segregated in separate accounts.
Jefferies Group Inc. has a clearing relationship with Peregrine and after the broker couldn’t meet a margin call it “began an orderly liquidation” of the firm’s trades, the New York-based investment-banking firm said yesterday in a statement.
“Jefferies does not expect to incur any loss in respect of PFG,” according to the statement. The bank said it will hold all proceeds from the liquidation in segregated accounts.
The NFA has prohibited Peregrine from soliciting or accepting new customer accounts or funds, placing trades for customers except to liquidate positions or distributing customer money.
Pallmeyer’s order yesterday prohibited the destruction of the firm’s books and records and granted the CFTC’s request for access to inspect them. She also appointed a receiver, Michael M. Eidelman of Chicago’s Vedder Price PC, placing him in charge of the business.
“Until further order of the court,” she said, “the receiver’s compensation is limited to $25,000 to be satisfied first out of available assets of defendant Russell R. Wasendorf Sr. and then from available assets of defendant Peregrine Financial Group Inc.”
The bankruptcy case has been assigned to U.S. Bankruptcy Judge Carol A. Doyle. An initial creditors’ meeting has been scheduled for Sept. 5.
Allan J. DeMars, a lawyer with the Chicago firm Spiegel & DeMars, had initially been appointed trustee for the Peregrine bankruptcy. In a letter filed with the court late today, DeMars said he was stepping aside at the request of the U.S. Trustee, Patrick Layng.
Former U.S. Trustee Ira Bodenstein, now a partner in Chicago’s Shaw Gussis law firm, has been selected as DeMars’ replacement. He has five days to tell Layng and the court if he rejects the assignment.
Neither Layng nor DeMars replied to after-hours voice-mail messages seeking comment on the replacement of DeMars with Bodenstein.
The bankruptcy case is Peregrine Financial Group Inc., 12-27488, U.S. Bankruptcy Court, Northern District of Illinois (Chicago). The regulatory case is U.S. Commodity Futures Trading Commission v. Peregrine Financial Group Inc., 12-cv-5383, U.S. District Court, Northern District of Illinois (Chicago). The employment case is Kotulak v. Peregrine Financial Group Inc., 12-cv-5447, U.S. District Court, Northern District of Illinois (Chicago).