Lawmakers call for oversight overhaul after broker collapse

Lawmakers are renewing their calls for heightened oversight of a financial market vital to the nation’s farmers following another dramatic collapse of a futures broker and the disappearance of supposedly protected customer funds.

On Tuesday, regulators announced that hundreds of millions of dollars in customer funds had gone missing from the recently bankrupted Peregrine Financial Group Inc. (PFG) in an incident with troubling similarities to the collapse last year of the firm MF Global.

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The Commodity Futures Trading Commission (CFTC) has charged that PFG, an Iowa-based futures merchant that sold derivatives to farmers looking to hedge risk against fluctuating crop prices, misused customer funds for years, leaving over $200 million missing.

Senate Agriculture Committee Chairwoman Debbie Stabenow (D-Mich.) said her staff is digging into the issue and considering whether new laws are needed to protect customers.

“It is absolutely imperative that there is accountability in the futures markets so customers can feel safe knowing their money is protected,” she said. “We are working closely with regulators to find out what happened. … Congress also has a responsibility to assess current customer protections and strengthen them, where needed, to put a stop to executives misusing customer funds in the future.”

Sen. Richard Shelby (Ala.), the ranking Republican on the Senate Banking Committee, directed his ire toward regulators for allowing another firm to apparently abuse protected funds.

“In the wake of MF Global, this latest failure raises serious questions about our current regulators and whether they are capable of doing their jobs,” he said in a statement.

On Tuesday, the CFTC filed suit in U.S. District Court against PFG and its chief executive, Russell Wasendorf. The lawsuit claims that the firm committed fraud by misrepresenting its holdings in customer accounts. When the firm reported holding over $220 million in customer funds during a July audit, it actually had just $5.1 million on hand, according to the lawsuit.

The CFTC alleges that PFG misled regulators on the dire state of its finances and says the whereabouts of the missing funds is “unknown.” The firm declared bankruptcy Wednesday.

The call for oversight comes just six months after lawmakers went through a similar examination after the collapse of MF Global. That high-profile bankruptcy led to multiple hearings in both the House and Senate, as irate members grilled former executives for the firm about how $1.6 billion in customer funds could have gone missing.

MF Global had been run by Jon Corzine, a former Democratic senator and governor of New Jersey. Corzine and other MF Global executives repeatedly maintained that they did not know what happened to the customer funds in the final hectic days trying to keep the firm afloat, and a trustee is currently working to try and locate and restore whatever is possible of the $1.6 billion in funds.

In PFG’s case, the CFTC alleges that the firm had failed to keep customer funds segregated as mandated by law for over two years, going back to February 2010. And while MF Global’s collapse was a major blow to the once-lofty reputation of Corzine, the situation is even more dire at PFG, where Wasendorf was found by employees in the firm’s parking lot after an apparent suicide attempt. In its suit, the CFTC said he is now in a coma.

One need look no further than the schedule for Stabenow’s panel to realize the brief period between the two failures. What was supposed to be an Aug. 1 hearing to further discuss the MF Global bankruptcy and how to ensure the futures markets remain reliable now will surely focus on the meltdown at PFG as well.

The committee also had planned a July hearing with regulators and financial market experts to discuss the Dodd-Frank financial reform law two years after its passage. Among those slated to testify is Gary Gensler, head of the CFTC, who now will likely have to field questions on the latest event.

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