Peregrine Financial Futures Accounts by SIPC, Chief Says

SIPC CEO  Stephen Harbeck
Stephen Harbeck, president and chief executive officer of the Securities Investor Protection Corp. Photographer: Joshua Roberts/Bloomberg

Peregrine Financial Group Inc. futures customers won’t have their losses covered by the Securities Investor Protection Corp. even if they were defrauded, the fund’s chief said.

The U.S. Securities Investor Protection Act provisions make customers of a futures commission merchant like Peregrine ineligible for payment, SIPC Chief Executive Officer Stephen P. Harbeck said today in a telephone interview.

Harbeck said his organization, an industry fund that covers losses from brokerage firm failures, has been told Peregrine’s futures business is in a company separate from the registered broker-dealer that’s covered by SIPC. Peregrine’s securities broker traded on a so-called fully disclosed basis where the accounts are held by a unit of Sterne Agee Group Inc., Harbeck said.

While securities customers can look to Sterne Agee, futures customers aren’t covered, he said. A representative of Sterne Agee declined to comment.

“SIPC has not been informed that it is appropriate to take action at this time,” Harbeck said.

If the information Harbeck said SIPC was given is borne out, the collapse of Peregrine won’t unfold like MF Global Inc. and Bernard L. Madoff Investment Securities Inc., where SIPC named trustees and paid the costs of the liquidation.

Peregrine filed for Chapter 7 bankruptcy liquidation in Chicago yesterday after being sued by the U.S. Commodity Futures Trading Commission, which accused the firm and its founder, Russell R. Wasendorf Sr., of misappropriating at least $200 million.


Peregrine assets were initially frozen by the National Futures Association, a commodities industry self-regulator, on July 9 after it determined the Cedar Falls, Iowa-based firm had only $5 million on deposit with U.S. Bank after claiming it had $225 million there and a total of $400 million in customer-segregated funds.

Wasendorf, 64, who established the company as Wasendorf & Son Inc. in 1980, attempted suicide that same day in his car outside its Cedar Falls offices. He was discovered by firm employees who called for help.

Peregrine customers were told by e-mail later on July 9 that the firm was being investigated for “accounting irregularities.” They were also told about the suicide attempt.

U.S. District Judge Rebecca Pallmeyer yesterday granted a CFTC request to freeze the firm’s assets and appointed Chicago bankruptcy lawyer Michael M. Eidelman as receiver.

Court Protection

Peregrine then filed for bankruptcy court protection, reporting it had more than $500 million in assets, more than $100 million in liabilities and at least 10,001 creditors. An initial meeting of creditors has been scheduled for Sept. 5.

The bankruptcy petition was signed for by Russell R. Wasendorf Jr., the firm’s chief operating officer. Six days earlier, the younger Wasendorf had been given a power of attorney to exercise in the event his father became “incapacitated,” according to a corporate resolution filed with the petition.

Madoff customers received payments from SIPC because the Madoff firm was a registered broker covered by SIPC. MF Global had securities and commodities customers under one roof. Because commodities and futures customers of MF Global weren’t covered by the SIPC fund, the MF Global trustee isn’t distributing any SIPC funds to those customers.

Stanford Victims

Victims of the Ponzi scheme run by Allen Stanford were also found to be ineligible for SIPC coverage on July 3. A federal judge in Washington ruled that the Securities and Exchange Commission, which was seeking compensation for 7,000 people who invested in the scheme, failed to show they met the definition of “customer” under the Securities Investor Protection Act.

The bankruptcy case is Peregrine Financial Group Inc., 12-27488, U.S. Bankruptcy Court, Northern District of Illinois (Chicago). The CFTC 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).

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