July 12, 2012 6:00am EST New York, NY- As regulators search for the $220 million dollars of investors' money missing from privately-held Peregrine Financial Group (PrivCo Private Company Ticker: PEREGP), PrivCo has untangled the web of relationships with Peregrine Financial Group, and PrivCo has uncovered a series of recurring red flags that emerged over the years surrounding Peregrine Financial Group. These red flags went largely undetected or underplayed by regulators as well as many of Peregrine’s own clients and key business partners - all left stunned by the firm’s sudden collapse.
After a series of growing client complaints about missing funds, unauthorized trading, and a suicide attempt by its Founder and CEO, Russell R. Wasendorf, Sr., on July 9, 2012, Peregrine Financial Group, Inc. assets were seized and frozen by federal regulators. On July 10, 2012, Peregrine Financial Group filed a petition for Chapter 7 liquidation Bankruptcy Court. After extensive analysis, including obtaining key original documents, PrivCo has untangled Peregrine Financial Group’s complex web of relationships:
On March 21, 2007, Peregrine client Chenli Chu - an elderly immigrant to the U.S. from Taiwan - filed a complaint seeking to recover damages of $500,000 in losses from respondents Peregrine Financial Group ("PFG") and Peregrine's sales head James Francis Kelly ("Kelly") alleging various violations of the Commodity Exchange Act and FINRA regulations. Chu was a senior citizen who had invested her $500,000 of retirement money with Peregrine after being approached by a third-party Introducing Broker retained by Peregrine.
Chu alleged that Peregrine fraudulently opened and maintained accounts in Chu's name, executed unauthorized trades, and failed to supervise the account. The hearing occurred on June 3-4, 2008 and December 2, 2008, in Los Angeles, California. The parties submitted post-hearing memoranda through March and April of 2009.
“[Peregrine's] actions were the proximate cause of the damages Chu suffered. Based upon the facts and reasoning stated above, it is evident that Respondents violated Section 4b of the Commodity Exchange Act in their handling of account K0058. Respondents recklessly failed to disclose the material fact that Chu's [trades] ran counter to Chu's expressed instructions for account K0058. These actions resulted in the loss of Chu's $500,000. During the time in question, Kelly was employed as an associated person for PFG. Therefore, PFG is liable for the fraudulent conduct of Kelly, as an associated person and agent, pursuant to 7 U.S.c. § 2(a)(1)(B).”
In reality, Chu's "losses" may have been from trades that were fictional. Peregrine potentially used the excuse that she suffered "trading losses" - for ficitious trades she never authorized: a cover-up for simply taking Chu's funds from her account. Despite the Judge's extensive detailing in the final ruling of Findings of Fact that quoted from incontrovertible documentary evidence - including increasingly frantic emails from Chu to Peregrine that she had not authorized any trades - no further inquiry was made by regulators, nor was the case referred by the Judge in the civil case to regulators or law enforcement recommending further investigation into the firm to determine whether any other Peregrine clients in addition to Chu were subjected to similar illegal activities.
Red Flag 2: Peregrine’s Brokerage Unit (Best Direct) Terminates Vice Chairman Neil Aslin In May 2011 In An Attempt Avoid Complying With FINRA's "TAPING RULE; Aslin Files Lawsuit v. FINRA To Overturn Taping Rule's Application to Peregrine; Aslin Remains at Peregrine, But "Hides In Plain Sight"
On June 26, 2011, Peregrine Financial's President and Vice Chairman, Neil J. Aslin, filed a class action lawsuit against securities regulator FINRA, alleging that his carrying of the Taping Rule requirements to Peregrine, due to disciplinary actions received at his previous firm Brewer Financial Services, violated his civil rights and caused him to be terminated as an officer by Peregrine's Best Direct brokerage unit. He alleged that this happened so that Peregrine would not have to begin taping and archiving client-broker phone calls in compliance with FINRA's Taping Rule:
“BEST Direct thereafter terminated Plaintiff on May 4, 2011 for the sole purpose of avoiding the taping requirements of FINRA Rule 3010(b)(2)… BEST Direct has informed Plaintiff that if the “taint” regarding his association with a Disciplined Firm is removed or if he is not counted by FINRA as an individual under the “taping” requirement of FINRA Rule 3010(b)(2), BEST Direct would revoke Plaintiff’s termination.”
The suit further stated that Peregrine would re-hire Aslin so long as the firm could do so and avoid complying with the Taping Rule:
"BEST Direct has informed Plaintiff that if the “taint” regarding his association with a Disciplined Firm is removed or if he is not counted by FINRA as an individual under the “taping” requirement of FINRA Rule 3010(b)(2), BEST Direct would revoke Plaintiff’s termination.”
Aslin lost the case, which was dismissed by the judge on April 30, 2012. This case demonstrates that Peregrine was not willing to risk having regulators taping and archiving of its brokers' phone calls with clients - which provide backup proof of whether trades were requested and authorized by its clients - a clear red flag. Despite the Judge’s dismissal, Peregrine in fact did NOT terminate Aslin, other than simply stating so in writing to FINRA in an attempt to avoid the firm's having to comply with the Taping Rule. In fact, Aslin continued to "hide in plain sight," continuing to be employed as Vice Chairman of the three member Peregrine Board and the firm's President, which even a simple review by FINRA or others of Peregrine's official website ("Peregrine Financial: About Us: Leadership") would have revealed. (See PrivCo Exhibit: Peregrine Financial "Leadership", retrieved by PrivCo on July 12, 2012).
On February 24th, 2012, Veraja-Snelling & Company, Peregrine’s auditor since at least 2008, signed off on the 2011 audited financial statements of Peregrine's wholly-owned registered broker-dealer subsidiary, Best Direct Securities, in its mandatory annual financial filings with the Securities And Exchange Commission (its annual Broker-Dealer S.E.C. "Rule 17a-5" filings). The financial statements were filed with the S.E.C. on May 31, 2012, opened with the clean audit statement from Veraja-Snelling and Company, and were obtained by PrivCo. Veraja-Snelling & Company, as described in a press release for its duties as auditor of STL Marketing Group (OTCPK: STLK), was a CPA firm “with over 20 years of audit and fraud prevention experience.” However, upon further review by PrivCo, Veraja-Snelling & Company, the purportedly experienced anti-fraud auditing company, was in fact just one woman - Jeannie Veraja-Snelling - purportedly operating an audit firm out of a one bedroom residential house. Multiple calls by PrivCo to Jeannie Veraja-Snelling were not returned.
Red Flag 4: Peregrine's In-House Attorneys Appeal Taping Rule Judgement, Directly Represent Former Officer Aslin on Appeal to Overturn Ruling Requiring Peregrine to Begin Compliance with FINRA Taping Rule:
Shortly after Aslin (and clearly now, Peregrine) lost their suit seeking to prevent the firm from complying with FINRA's Taping Rule, on May 23, 2012 - mere weeks before Peregrine's collapse - Peregrine's in-house attorneys, Rebecca Wing and Jennifer Muchoney, represented Aslin in appealing the judgment to the Seventh Circuit Court of Appeals:
Red Flag 5: National Futures Association Charges Peregrine And Senior Executives At Firm In February 2012 With "Unauthorized Trading In Client Accounts" and "Fraudulent Sales Tactics," Simultaneously Settles Allegations For Modest Fine Paid By Peregrine
After a series of additional complaints from several Peregrine clients regarding unauthorized trading in their accounts, a formal Complaint was made on February 8, 2012 by commodities futures broker regulator, the National Futures Association ("NFA"), against Peregrine. The NFA Complaint charged Peregrine, and its officers Russell Wasendorf, Russell Wasendorf Jr., Chief Compliance Officer Susan O'Meara, and Peregrine Director of Foreign Exchange Nolan J. Schiff with failure to supervise and prevent fraudulent tactics used by third party solicitors contracted by Peregrine to work on its behalf as "finders" to solicit new customer money for Peregrine, referred to in securities regulations as Guaranteed Introducing Brokers ("GIBs") and with knowingly using multiple GIBs with a history of discplinary records, in violation of securities regulations. The Complaint stated that Peregrine used a stunning 113 of these “Introducing Brokers” across the U.S. to solicit new customer money for Peregrine:
“PFG conducts much of its retail brokerage business through a network of GIBs. As of May 2011, it had 113 GIBs in various locations throughout the country. PFG’s GIB network, together with some independent introducing brokers, introduced customers to PFG.”
(February 2012 NFA Case No. 12-BCC-001)
Among the allegations by the NFA against Peregrine was that in 2010 and 2011 on multiple occasions fraudulent sales tactics were employed by Peregrine's GIBs, that annual GIB Audits and GIB Audit Reports filed by Peregrine with the NFA contained fraudulent information, that client accounts were placed in trades with commissions as high as 40% of the amount invested without client knowledge, that additional unauthorized trades were made by Peregrine, and that Peregrine employed multiple third party Introducing Brokers with unclean discplinary records as "finders" for new customer money, despite those Introducing Brokers' extensive regulatory disciplinary records - and who were given "clean" reviews by Peregrine in its annual GIB Audit Reports despite their brokers' long histories of securities violations on file. (The annual GIB Audit Reports were prepared by a third-party audit firm as mandated by securities regulations. The audit firm Peregrine used to prepare its annual "clean" GIB audits: a firm called Investment Reference, Inc., which PrivCo research reveals is run by a man by the name of Dennis Stahr, who prior to creating Investment Reference, Inc. had already allegedly been the principal of a total of four firms barred by regulators from the securities industry, which should have served as yet another red flag to regulators.)
THE NATIONAL FUTURES ASSOCIATION'S SETTLEMENT WITH PEREGRINE ON FEBRUARY 8, 2012: Despite the serious nature of the allegations and findings by the National Futures Association against Peregrine and several of its most senior officers, the National Futures Association decided to immediately accept Peregrine's offer to settle the matter with an effective slap on the wrist: on the same day its filed its Complaint against Peregrine, February 8, 2012, the NFA accepted Peregrine's offer to immediately settle the Complaint by simply paying the NFA a one-time fine of $700,000 without admitting nor denying the allegations in the NFA's Complaint, along with a promise to abide by NFA rules in the future, and a promise to designate one individual inside the firm by the end of this year to act as Peregrine's full-time Anti-Money-Laundering Compliance Officer.
PrivCo finds that no such officer was designated at the time of Peregrine's collapse days ago.
With the multitude of red flags contained in Peregrine's and its GIBs' customer complaints, and the considerable sums those clients had already lost in accounts at Peregrine, the mild penalty to Peregrine by the National Futures Association in February raises serious questions. But it may be partly explained by Peregrine CEO Russell Wasendor Sr.'s cozy relationship with that regulator, the National Futures Association: Wasendorf Sr. served on the Advisory Board of the National Futures Association at the time of the NFA's settlement of the case against him, his firm, and his son, Russell Wasendorf Jr. (The settlement coincided with Wasendorf's resigning from the National Futures Association Advisory Board; the NFA subsequently announced merely that "Wasendorf's term ended in February 2012.")
Red Flag 6: National Futures Association Asks Peregrine's Bank (U.S. Bank) To Confirm Peregrine's Bank Account Balance, Receives Two Conflicting Bank Statements
In early 2011, as part of its routine bank account confirmations, PrivCo sources confirm that the National Futures Association sought to verify Peregrine's bank account balance at the firm's bank, U.S. Bank. PrivCo has learned that the NFA received a statement from U.S. Bank showing that Peregrine Financial Group had less than $10 million in the firm's bank account, rather than the approximately $200 million anticipated by the NFA. PrivCo has learned that in the days following the findings, the NFA asked Peregrine about the low balance, and that several days later the NFA received a new confirmation letter on U.S. Bank letterhead stating that the account in fact had a balance of $218,650,550; a copy of the falsified bank account statement has been obtained by PrivCo (see PrivCo Exhibit: PrivCo Private Company Report: Peregrine Financial Group: "Peregrine Financial Group Falsified Bank Statements"). The NFA accepted the updated statement without inquiring further into the material discrepancy between the two conflicting bank statements (possibly because of Wasendorf's role at the time on the NFA's Advisory Board). Upon obtaining a copy of Wasendorf's July suicide note and confession, PrivCo now knows that Peregrine Financial's CEO Russell Wasendorf, Sr. falsified that and other bank statements using Photoshop and other means for nearly 20 years in order to show the NFA and other regulators fraudulent bank balances that did not exist (see PrivCo Exhibit: Peregrine Financial Group Inc: "Peregrine CEO Russell Wasendorf Sr.'s Suicide Note And Financial Fraud Admission Letter" July 2012).
- PrivCo's calls to Peregrine in-house attorneys Muchoney and Wing were not returned.
- The appeal by Peregrine Vice Chairman Neil Aslin to the Seventh Circuit Court of Appeals seeking to prevent implementation of FINRA's Taping Rule at Peregrine was still pending when Peregrine's CEO attempted suicide and the firm collapsed.
- PrivCo’s calls to Peregrine's accounting audit firm Veraja-Snelling & Company, and to Jeannie Veraja-Snelling, went to voicemail, with messages left by PrivCo unreturned.
- Calls by PrivCo to Peregrine Compliance Officer Steve Zakrzewski, signer of Peregrine's annual Rule 17a-5 SEC broker-dealer financial filings, to the Iowa Phone number listed in Peregrine's most recent affidavit signed by Zakrzewski in Peregrine's final Annual SEC financial statements filing in May 2012, went unanswered and messages left by PrivCo with Zakrzewski went unreturned. Calls placed by PrivCo to Peregrine's wholly-owned broker-dealer subsidiary Best Direct Securties LLC's clearing firm Sterne Agee (PrivCo ticker: STERP) were not returned by publication time. (See update below.)
Status As of July 13, 2012:
None of the numerous red flags leading up to the final July 2012 seizure of the firm's remaining assets by authories and the Chapter 7 bankruptcy filing were ever connected by U.S. securities regulators before Peregrine Financial Group's collapse this week.
Peregrine Financial Group CEO Russell Wasendorf attempted suicide on July 9, 2012 in his car in Peregrine's parking lot, leaving behind a suicide note with a detailed admission of his nearly two decades-long embezzlement of clients funds and financial fraud.
Peregrine Financial Group CEO Russell R. Wasendorf, Sr. was hospitalized after his July 9th suicide attempt and arrested and charged on July 13, 2012.
Total missing client funds exceed $215 million as of July 13, 2012.
PrivCo has obtained the text of Wasendorf's suicide note, which included a detailed admission of how he perpertrated the financial fraud at Peregrine for nearly 20 years (see PrivCo Exhibits: Peregrine Financial Group Inc: "Peregrine CEO Russell Wasendorf Sr.'s Suicide Note And Financial Fraud Admission Letter" July 2012).
Research Note updated to include statement from clearing firm Sterne Agee received by PrivCo after publication:
Statement provided to PrivCo by Sterne Agee:
"Sterne Agee was not involved in any alleged wrongdoing by Peregrine, has never been associated with Peregrine's commodities business and Sterne Agee has no direct connection with Peregrine. In fact, Sterne Agee only served as the clearing broker for Peregrine's broker-dealer subsidiary, Best Direct Securities."
Note: PrivCo in no way intended to imply or accuse Sterne Agee of being complicit in or in any way involved with the fraud alleged to have occurred at Peregrine Financial Group.
Update (7/18/12) - Statement provided to PrivCo by Dennis Stahr of Investment Reference Inc.:
"Investment Reference discontinued compliance auditing of GIBs for PFG in April of 2010. No financial data was included in the compliance audits and no audits were ever done in the headquarters of PFG by Investment Reference...The NFA had issues with our audits only with PFG, even though we audited hundreds of GIBs for five other FCMs during the same period."
Dennis Stahr, Compliance Consultant
Dennis star also told PrivCo by phone that his GIB Audits for Peregrine Financial began in 2002.