* CFTC's technology committee to meet on July 26
* Will discuss how technology can boost customer protection
* Meeting is response to shortfall at PFGBest
By Alexandra Alper and Sarah N. Lynch
WASHINGTON, July 12 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
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.
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
"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
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.