15 July 2012

“This is deja vu all over again!” That was the comment of a trader last week after hearing the news that for the second time in ten months, a trading brokerage firm serving customers across the nation filed for bankruptcy and lost millions of dollars in segregated-customer funds that were no longer segregated, in violation of law.

Why the deja vu? This happened just ten months ago, October 31st of last year, when MF Global filed bankruptcy and its Chairman told a Congressional committee that he could not account for $3.2-billion of customer funds that somehow just disappeared. After that event last year which really damaged the integrity of the futures industry, we heard from the regulators...the National Futures Association, the Commodity Futures Trading Commission and officials at the CME Group, saying steps will be taken to provide more oversight and regulations to ensure this doesn’t happen again.

So the question now in the industry is “How did this happen again?” In this case, the company that filed bankruptcy is Peregrine Financial Group (also known as PFGBest) based in Cedar Fall, Iowa, and we’re now learning that the highly respected veteran Chairman and founder of the company had been reporting false financial numbers to the National Futures Association for the last two years.

The CFTC complaint that was filed after the bankruptcy filing, for example, showed the records of the company indicated a balance of $207-million in the 1,845 customer-segregated accounts as of Feb. 28, 2010, but in reality the bank balance was just under $10-million, and just last week we discover only $5-million in the accounts, while the company reported to have over $218-million That is a huge difference, and we can only wonder why regulators and auditors were unable to discover the discrepancy.

Trading volume dropped after the MF Global bankruptcy and customers are still waiting for regulators to find and return 30% of the lost funds; ten months after it happened. Now, traders, producers and hedgers are asking “Who do we trust?”, and “Can we trust anybody?” I share the pain and I am truly concerned about this latest loss of market integrity because I still believe the futures market plays an important role in risk management, but now the risk seems to be “Will somebody take my money?” The industry must fix it and fix it quickly.

My thoughts on Samuelson Sez.