CFTC calls emergency meeting after PFGBest scandal

WASHINGTON Thu Jul 12, 2012 6:37pm EDT

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WASHINGTON (Reuters) - The Commodity Futures Trading Commission has called an emergency industry meeting to explore how to better protect customer money, days after the discovery that millions of dollars of customer funds went missing at now-bankrupt futures broker PFGBest.

Scott O'Malia, a commissioner at the U.S. futures regulator, invited the agency's Technology Advisory Committee to meet on July 26 in Washington.

The group, which is made up of futures industry representatives, will discuss ways that banks can provide quick automated verification to customers that their funds are safe, after the discovery earlier this week of a roughly $200 million shortfall in customer funds at Iowa-based PFGBest.

"This fraud and the fraud perpetrated at MF Global that came to light less than year ago both involve the theft of customer funds by intermediaries," O'Malia wrote in an email to committee members on Thursday. "What we need is a technology solution that eliminates the possibility of theft and misappropriation of customer funds."

Peregrine Financial Group, PFGBest's regulated unit, filed for bankruptcy on Tuesday in Chicago after regulators accused it of misappropriating customer funds for more than two years.

The CFTC, which along with industry regulators had given a clean bill of health to dozens of brokers following spot checks in January, alleged that Peregrine and its owner, Russell Wasendorf Sr, had defrauded customers and lied to regulators in order to hide the shortfall.

The bankruptcy has sent shockwaves through a futures industry still jittery less than nine months after MF Global collapsed. Investors and customers of that futures brokerage became rattled over its multi-billion dollar bet on European sovereign debt and the firm's subsequent downgrades by credit rating agencies, resulting in a liquidity crunch.

An estimated $1.6 billion in customer funds went missing during the firm's chaotic final days.

ELECTRONIC OVERSIGHT

The committee's technology focus goes to the heart of the alleged PFG fraud, which relied on paper submissions of bank balances, according to a source familiar with the matter who declined to be identified.

Wasendorf intercepted confidential regulatory documents that were mailed by the National Futures Association to what the industry group believed was U.S. Bank, PFG's bank, a person close to the situation told Reuters. Instead, they were sending the documents, used to independently verify a broker's bank balances, to a post office box that Wasendorf had set up, the source said.

Wasendorf forged signatures and fabricated bank balances on the documents and simply mailed them back to the Chicago-based NFA, the person said. The scheme apparently began to unravel as the NFA shifted to electronic confirmations.

The NFA "started getting suspicious. He was resisting this new way of confirming the balance," the source said. Wasendorf only recently signed the authorization, a decision that would quickly have led regulators to uncover the discrepancy.

On Monday Wasendorf was rushed to the hospital after a suicide attempt.

"In an age where we can check our bank accounts and credit card balances on a mobile phone, there is no reason why FCM customers cannot have similar confidence that their investments are secure each and every day," O'Malia wrote, using the industry term for a futures commission merchant.

The technology committee, which is chaired by O'Malia, will also explore better ways to give the CFTC and first-line regulators like the NFA direct access to customer account information, without compromising confidentiality.

The committee will also take a close look at current collateral and segregation rules and how well they protect segregated funds.

A subcommittee recently proposed a definition of high frequency trading, a key first step in beefing up oversight of the hotly debated algorithm-based trading space.

Citigroup said it is giving its customers Internet access to details about how their collateral is invested, responding to customer concerns following the loss of funds in MF Global. The system, called Citi Velocity, began working over the weekend, before news broke about PFGBest.

(Reporting by Alexandra Alper; Editing by Gary Hill and Phil Berlowitz)

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