Peregrine Financialâ€™s Failure and the Failure of Regulation
Russell Wasendorf Sr. before the fall.
Russell Wasendorf Sr., 64, founder and chairman of Peregrine Financial Group, slumps forward in his car in the parking lot of his firm, a tube running from the exhaust pipe to his slightly cracked window, a suicide note on the seat beside him. He is discovered there, close to death, and later falls into a coma in the hospital where he remains on life support. So fails another firm engaged in the criminal financial malfeasance, in this case stealing farmers’ hard-earned funds invested as a hedge against commodity price volatility. Investigators find that the company’s bank account is $220 million dollars short of what the books say it is, with a paltry $5 million available to panicked creditors. When will we learn that Ponzi schemes grow in the shade of self-regulated industries?
Wasendorf is—or was—one of those rock-star CEOs to his own minions. His inner circle was known within the Cedar Falls, Iowa-based company as “Wasendorfians” according to Associated Press. Blind loyalty and deference to the charismatic founder of the company set up a culture that allowed the kind of machinations that build fraud machines, which is what this firm was. The handwriting on the wall was there for all to see. A relationship with convicted Minneapolis mega-Ponzi-schemer Trevor Cook, a $700,000 fine from the National Futures Association, and an over-the-top opulent campus should have been signals that something was amiss, but it took a federal lawsuit over Peregrine’s dealing with Cook to bring down this particular house of cards.
But where, we wonder, was the Commodity Futures Trading Commission, the federal agency charged with regulating the agricultural futures industry? On the sidelines, the answer seems to be, where we can usually find the federal agencies charged with protecting the public. The MF Global meltdown, a debacle much larger than the Peregrine fiasco, should have been the canary in the CFTC’s coalmine. But instead of getting aggressive, the agency allowed the National Futures Association, an industry interest group, to conduct a little PR and window dressing “study” that showed the industry to be solvent and well-regulated, just as Peregrine was getting ready for the swan dive to oblivion. It was not an “audit,” says the National Futures Association in its defense. So what’s the point other than to fool investors?
The CFTC is just one of a number of federal financial regulatory agencies that don’t regulate because they little or no budgets with which to regulate. And that is by design. The simplest way to disable meaningful regulation, free marketers in Congress have found, is to leave the enabling legislation in place whiled gutting the agencies with budget cuts. This form of de facto deregulation allows firms like Peregrine, and men like Wasendorf, to make their own rules. And Wasendorf did, attempting to cut reporting corners at every opportunity. And he was good at what he did apparently, up to a point, the same as all Ponzi schemers.
Phil Flynn, a former Peregrin trader, was reported in a Tuesday AP story as saying, “It's mind-boggling to me. They're talking about new regulations, but that doesn't get to the crux of the problem. The crux of the problem is, where's the money? You say you have X amount of dollars. Where is it?” Flynn, it should be noted, left the firm in February after the National Futures Association fined the firm, because he evidently saw what he called “the big red flag.” His big regret? That he didn’t get out faster.
And where is money? While the CFTC allowed Wasendorf to play Where’s Waldo with the firm’s assets, 30,000 creditors faced a hidden exposure they never saw coming.
Meaningful financial regulation remains right where we left it before the Dodd-Frank bill—nowhere. A few in the financial press, perhaps most notably the New York Times led by business reporter Gretchen Morgenson, have continued to raise the issue, but it seems that to those in Congress and the financial industries they fail to regulate the failures of criminal firms are more like freak occurrences of nature rather than inevitable and predictable outcomes of deliberate strategies of self-regulation by industry, a practice that has never worked, and never will. The outcome is that Peregrine is in bankruptcy, its customers who played by the rules are fleeced and the CFTC, which, like Peregrine, didn’t, goes on with business as usual.