AAII Investor Update: Another Futures Firm Implodes

Thursday, July 12, 2012
Charles Rotblut, CFA
AAII Journal Editor

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What do you think of the PFG scandal?

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 30.2%, down 2.4 points
  Neutral: 35.0%, up 1.0 points
  Bearish: 34.7%, up 1.4 points

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »


Nine months after the collapse of MF Global, another futures trading firm has imploded. Peregrine Financial Group (PFG), also known as PFGBest, filed for Chapter 7 in federal bankruptcy court on Tuesday. The filing occurred a day after the firm’s founder, Russell Wasendorf Sr., attempted suicide. Wasendorf is accused of misappropriating customer funds, making false statements and fraud.

Details of what happened are still emerging, but the National Futures Association alleges that PFG claimed to have in excess of $220 million in customer accounts, when it actually only held $5.1 million. Wasendorf is said to have falsified bank statements as far back as February 2010. Regulators discovered the discrepancy while researching the company’s possible involvement with a Minnesota Ponzi scheme.

The debacle extends beyond PFG. Wasendorf owned several other businesses, including SFO Magazine and W&A Publishing/Trader’s Press. These businesses have been shut down. (The Des Moines Register says 125 people who worked for Wasendorf’s various businesses have lost their jobs.) The implosion also directly affects me because W&A Publishing is the publisher of my book, “Better Good Than Lucky.” My book is now in limbo because although I own the copyright, W&A Publishing holds the license to publish it. (And with no publisher, there is no way to replenish bookstore inventories.) Though I’m not happy, I feel worse for the people I knew at Wasendorf’s companies who lost their jobs.

So what happens now to PFG? Customer accounts are frozen and PFG is being liquidated. Wasendorf’s other companies will probably be liquidated as well. As of yesterday, a trustee for PFG had yet to be named. It will likely be a while before PFG customers know how much money they will get back.

Had this been a traditional brokerage firm, as opposed to a futures firm, the outcome for investors would be different. The Securities Investor Protection Corporation (SIPC) returns cash, stock and other securities when a brokerage firm fails. Should a brokerage firm go bankrupt, the SIPC returns the assets held in the account, typically within one to three months. There are limitations and the SIPC does not protect against bad investments (or bad investment advice), only failed brokerage firms. More information can be found on the SIPC’s website.

The bigger question is why didn’t regulators catch this alleged fraud sooner, especially in the wake of MF Global? News reports say PFG had been investigated before, including for complaints about the handling of customers’ money. Yet, it does not appear that regulators pushed for electronic verification of account funds with PFG’s bank until the missing money was discovered on Monday, the same day that Wasendorf attempted suicide. Rather, Wasendorf allegedly sent doctored bank statements, from a post office box he controlled, to regulators. And regulators accepted those statements as being factual.

Clearly, the National Futures Association and its overseer, the Commodity Futures Trading Commission, need to be more aggressive about how they monitor futures firms to ensure customer money is being handled properly. Reuters reported last night about a plan to force executives to sign off on major withdrawals from customer accounts. This a positive step, but it does not go far enough to catch the actions of malfeasant executives. Rather, a more aggressive monitoring process that includes routine electronic verification of account balances is needed.

More on AAII.com

The Week Ahead

More than 60 members of the S&P 500 will report earnings next week. Included in this group are Dow components The Coca-Cola Company (KO) and Johnson & Johnson (JNJ) on Tuesday;
American Express (AXP) and Bank of America (BAC) on Wednesday; and Microsoft (MSFT) and The Traveler’s Companies (TRV) on Thursday.

The week’s first economic reports will be June retail sales, the July Empire State manufacturing survey, and May business inventories, all of which will be published on Monday. Tuesday will feature the June consumer price index (CPI), June industrial production and manufacturing capacity, and the July National Association of Homebuilders’ housing price index. June housing starts and business permits and the periodic Federal Reserve Beige Book will be published on Wednesday. Thursday will feature June existing home sales, June leading indicators and the July Philadelphia Fed survey.

Federal Reserve Chairman Ben Bernanke will give his semiannual monetary policy testimony before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.

The Treasury Department will auction $15 billion of 10-year inflation-protected securities on Thursday.

AAII Sentiment Survey

Bullish sentiment declined, extending its streak of consecutive below-average readings, in the latest AAII Sentiment Survey..

Bullish sentiment, expectations that stock prices will rise over the next six months, declined 2.4 percentage points to 30.2%. This is the 15th consecutive week that bullish sentiment has been below its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 1.0 percentage points to 35.0%. This is a 10-week high for neutral sentiment.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 1.4 percentage points to 34.7%. This is the 10th consecutive week and the 13th out of the last 14 weeks that bearish sentiment has been above its historical average of 30%.

This is the longest streak of consecutive below-average bullish readings since a 29-week period that ran from April 2, 1993, until October 15, 1993. Typically, periods of below average optimism have been interrupted by one or two weeks of above-average bullish sentiment. This has not been the case during the current streak.

AAII members remained worried about the pace of global economic growth and the ongoing sovereign debt crisis in Europe. Also fraying their nerves is the ongoing volatility in stock prices.

This week's special question asked AAII members about their expectations for second-quarter earnings. Responses were mixed, with the largest number of respondents bracing for disappointing results, marked by declines in profits. The next-largest group thought earnings would be in line with expectations and not show much year-over-year growth. The third-largest group is optimistic that profits grew last quarter.

» Take the sentiment survey