March 26, 2023

DealBook: At Peregrine Financial, Signs of Trouble Seemingly Missed for Years

Russell Wasendorf in 2009 at the Cedar Falls headquarters of the Peregrine Financial Group.Rick Tibbott/Waterloo Courier, via ReutersRussell Wasendorf in 2009 at the Cedar Falls headquarters of the Peregrine Financial Group.

2:18 p.m. | Updated CEDAR FALLS, Iowa—It was a triumphant moment in 2009 when a delegation of Iowa lawmakers visited here to tour the gleaming, new headquarters of the Peregrine Financial Group.

“This is impressive,” Charles E. Grassley, the Republican senator from Iowa, said, admiring the futures trading firm’s state-of-the-art facility. “This is a company that’s on the top of things.”

Today, the only impressive thing about Peregrine is the depth of its problems. After a suicide attempt by its founder on Monday, regulators discovered about $215 million in customer money was missing. The Commodity Futures Trading Commission filed a lawsuit charging fraud. Criminal authorities are investigating. Peregrine has filed for bankruptcy and shut down.

On Friday, Russell Wassendorf, a prominent futures industry executive and the founder of Peregrine, was arrested on charges of making false statements to regulators. He was set to appear in federal court later in the day in Cedar Rapids, Iowa.

As Mr. Wasendorf faces criminal charges, Peregrine’s angry customers are asking how futures industry regulators could have missed another potential fraud. The scandal comes just months after MF Global, the defunct futures brokerage firm, lost more than $1 billion in clients’ money.

It now appears that regulators missed the red flags for years.

The customers are just heartbroken over what happened, said Tom Power, a broker.Peter Wynn Thompson for The New York Times“The customers are just heartbroken over what happened,” said Tom Power, a broker.

In 2004, a Peregrine client sent a letter to the National Futures Association, the firm’s primary regulator, and the C.F.T.C., asking it to intervene to prevent the firm from misusing its customers’ money, according to a person with knowledge of the correspondence and a copy of the letter obtained by The New York Times. Five years later, a tipster wrote to the N.F.A. asking it to review Peregrine’s bank account information for accuracy, according to people briefed on the matter who spoke on the condition of anonymity because the investigation was private. The tip was anonymous, and it is unclear how seriously the N.F.A. took it.

The auditor for Peregrine was a one-person shop run out of the accountant’s home in Glendale Heights, Ill., a Chicago suburb. As part of its investigation, the C.F.T.C. is looking into the role that the individual played, according to a person with knowledge of the case.

After the collapse of MF Global, the C.F.T.C. ordered a review of all futures firms to ensure the safety of customer money. The N.F.A. — where Mr. Wasendorf serves on an advisory committee — gave Peregrine a clean bill of health in January.

Government regulators are examining whether Mr. Wasendorf doctored bank statements provided to the N.F.A., according to people briefed on the matter who were not authorized to speak publicly because of the investigation. Authorities are also expected to question officials at U.S. Bank, which held the client’s money.

“The entire industry is outraged that it happened the first time, let alone a second time,” said Michael V. Dunn, a former commission of the C.F.T.C., referring to the collapse of two brokerages. “We need to do something about this.”

The N.F.A. declined to comment. Calls to Peregrine’s auditor were not immediately returned.

For Tom Power, a former MF Global broker, it is hard not to take the brokerage scandals personally.

After losing his job when MF Global went bust, Mr. Power, 31, started his own business. He has spent the last eight months signing up clients still circumspect about their losses at MF Global. For his new venture, he chose to clear his trades through Peregrine, which is commonly known as PFGBest.

“The customers are just heartbroken over what happened,” Mr. Power said. “To have to call these same guys that were with me at MF and tell them it happened again? It’s just devastating.”

Futures firms like Peregrine match buyers and sellers of contracts for commodities like wheat and oil, charging a thin commission for the service. Farmers and others use such contracts to protect themselves from large price fluctuations.

Speculators also play the futures market and they, too, have been burned. Mark Tucker, a part-time investor, has had the misfortune of dealing with both MF Global and PFGBest.

“You’re prepared to take risks,” said Mr. Tucker, who lost about $80,000 between the two firms. “But you don’t expect risks to come from money being stolen out of your account.”

Peregrine’s problems have also rocked Cedar Falls, a small town of about 40,000. An Iowa native, Mr. Wasendorf came here in the late 1960s to attend the University of Northern Iowa. He started a commodities trading business in 1967 in the basement of his Cedar Falls home. Eventually, the business moved to Chicago, the epicenter of the futures markets.

But during the middle of the last decade, Mr. Wasendorf decided to move Peregrine’s headquarters to Iowa. He persuaded many of his employees to move with him, promising a cheaper cost of living and a better quality of life. To entice them, he spent about $15 million on a new building adjacent to the exclusive Beaver Hills Country Club on the outskirts of town. The offices had a day care center with an outdoor playground, a Montessori school for the employees’ children, and free breakfast and lunch for the firms’ nearly 150 workers.

With the broad smile and clean-cut looks of a television news anchor, Mr. Wasendorf, 64, is a rock star in Cedar Falls. He has given generously to his alma mater, recently making a $2 million pledge to the school’s athletic program. His Peregrine Charities organizes a popular annual triathlon in town. Scheduled for next month, the race has been canceled “due to the recent emergency events,” according to the charity’s Web site.

Mr. Wasendorf has eclectic business interests beyond Peregrine, like a publishing company, and a real estate operation in Bucharest, Romania.

In Cedar Falls, he is best known as a restaurateur. When he moved Peregrine’s headquarters here, he opened an upscale Italian restaurant called My Verona, a name paying tribute to the Northern Italian town. The restaurant has been closed since Monday.

Mr. Wasendorf lives extravagantly. Though his primary residence is in Cedar Falls — a compound carved out of Iowa farmland on the outskirts of town — he regularly flew his private jet for meetings in Chicago, where his son ran the business. Employees jokingly referred to the plane as Air Wasendorf. He flew around the world to attend Lady Gaga concerts.

Adding to the mystery surrounding Peregrine’s collapse, Mr. Wasendorf had invited friends and employees to his wedding on Aug. 4, to be held at a Lutheran church in Cedar Falls with a reception at My Verona.

But records show that he married his fiancée, Nancy Paladino, who works in his restaurant business, at a chapel at the Bellagio Hotel in Las Vegas on June 30. Friends say he had planned to hire the band Styx to perform at the wedding, though the band declined.

Just nine days after his wedding, the local police found Mr. Wasendorf, the head of the firm, unconscious in his car behind the building with a tube running from the exhaust pipe into the car’s interior. An empty bottle of vodka rested by his side. He left a suicide note suggesting financial crimes had been committed.

“This whole thing is a shock,” said Jon Crews, the Cedar Falls mayor.

Beneath the surface there were signs of trouble.

In late May, the Wasendorfs hosted their annual brokers’ meeting in Cedar Falls. Brokers from across the country descended on the town, where they enjoyed beef Wellington and an open bar at My Verona. But by that time, employees had been told they would face a 10 percent pay cut in June, followed by another 10 percent cut the following month, according to employees and firm memos. Mr. Wasendorf also canceled the annual employee picnic, telling staff members that they would be invited to his reception.

Around the same time, Mr. Wasendorf boasted of a new restaurant he planned to open in neighboring Waterloo, to be called My Verona 2. Some employees wondered how Mr. Wasendorf could afford such expenditures when he was cutting their pay.

The brokerage firm started to unravel recently.

The N.F.A. was in the middle of changing part of its audit process to an online platform, where bank statement information would feed directly to the regulator. This month, Peregrine was facing its first audit under the new system, called, and Mr. Wasendorf was opposed to the system, according to people with knowledge of the matter.

He fought the directive for several days, the person said, until relenting on Sunday. The N.F.A. started getting confirmations through the system Monday morning.

As for the industry itself, lawmakers were already considering a move to crack down on futures firms after the MF Global fiasco. Now many participants are hoping the outrage will bolster those efforts.

Futures firms, anxious about the impact of the Peregrine collapse, are considering lining up for a voluntary audit to reassure clients, according to people familiar with the effort.

On Thursday, Mr. Grassley asked his colleagues on the Senate’s agriculture committee to address the Peregrine scandal at a hearing next month. He also requested that the C.F.T.C. provide information on what it did in response to red flags at Peregrine.

“People need to have confidence in our commodity trading system in order for it to work for farmers and investors the way it’s intended,” Mr. Grassley said.

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RSA Faces Angry Users After Breach

The company’s admission of the RSA tokens’ vulnerability on Monday was a shock to many customers because it came so long after a hacking attack on RSA in March and one on Lockheed Martin last month. The concern of customers and consultants over the way RSA, a unit of the tech giant EMC, communicated also raises the possibility that many customers will seek alternative solutions to safeguard remote access to their computer networks.

Bank of America, JPMorgan Chase, Wells Fargo and Citigroup said they planned to replace the tokens as soon as possible. The banks declined to say how many customers would be affected, although SAP said that most of its 50,000 employees used RSA’s tokens and that it was seeking to replace them all.

Defense industry officials said Tuesday that concerns about the tokens had prompted some of the nation’s largest military contractors to accelerate their plans to shift to computer smart cards and other emerging security technology.

The RSA tokens provide security by requiring users to enter a unique number generated by the token each time they connect to their networks.

Competitors eyeing the dominant market share of RSA are offering special deals like $5 rebates per token to customers that are considering a switch.

For now, however, the biggest worry for RSA is how to appease angry customers as well as mollify computer security consultants, who have been increasingly critical of how long it took the company to acknowledge the severity of the problem.

Industry officials said that Lockheed, the nation’s largest military contractor, made the security changes suggested by RSA after its attack in March. They included increased monitoring and addition of another password to its remote log-in process. Yet the hackers still got into Lockheed’s network, prompting security experts to say that the tokens themselves needed to be reprogrammed.

Arthur W. Coviello Jr., RSA’s executive chairman, made the offer in a letter posted on the company’s Web site on Monday. He said RSA was expanding the offer to companies other than military contractors, particularly those focused on protecting intellectual property and their corporate networks. He also said it was suggesting that banks use two additional RSA services to avert fraud in authenticating computer log-ins.

Mr. Coviello said in the letter that characteristics of the attack on RSA “indicated that the perpetrator’s most likely motive” was to steal security information that could be used to obtain military secrets and intellectual property. He said that RSA had worked with military companies to replace their tokens “on an accelerated timetable.”

Michael Gallant, an EMC spokesman, said, “We have not withheld any information that would adversely affect the security of our customers’ systems.”

“We provided very specific recommendations, we provided details of the attack, and we worked closely with customers to strengthen their overall security,” Mr. Gallant said.

The company’s admissions were too little, too late, industry experts said.

“They got pushed really hard by some of their customers, particularly in the financial services sector,” said Gary McGraw, chief technology officer for Cigital, a computer security consulting company based in Washington. “They came around, but they came around late.”

Mr. McGraw said that companies would be wise to replace RSA’s tokens and that some companies — banks, in particular — had done so. Like many people, he criticized RSA for failing to disclose the potential danger of the problem to its customers.

Until Monday, RSA said publicly and privately in meetings with customers that replacements were unnecessary, he said. “They shared their party line that everything is fine — pay no attention to the explosion in the corner,” Mr. McGraw said.

Reporting was contributed by Verne G. Kopytoff, Riva Richmond and Eric Dash.

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