Judge weighs how to refund clients of defunct brokerage

IOWA CITY, Iowa The judge overseeing the bankruptcy of an Iowa-based brokerage is facing an unusual decision about what to do with its remaining assets: Are customers whose highly regulated accounts were looted by the company founder more deserving, or are those whose accounts remained untouched even though they may have known they were less protected?

Customers who traded foreign currency through Peregrine Financial Group, Inc. say their money is sitting in bank accounts that can be traced directly to them - and they want it back. Yet seven months after the company collapsed when Chairman Russell Wasendorf Sr. confessed to a stunning fraud, they haven't received a dime. Other customers who traded commodities such as oil and corn have received up to 40 percent back - even though Wasendorf looted their accounts to expand his business empire and fund his lavish lifestyle.

Wasendorf is expected to be sentenced Thursday to a lengthy prison term for embezzling up to $215 million that investors trusted with the Cedar Falls-based company, nicknamed PFGBest. But it could be months before customers learn how much they will be refunded - which observers say will likely be no more than 50 or 60 percent of their money and could be less for some.

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The outcome will be decided by how U.S. Bankruptcy Judge Carol Doyle decides to treat different types of PFGBest customers. Should commodities investors - who were promised their funds would be protected and given priority in case of bankruptcy - get larger refunds than customers in the lightly-regulated foreign currency market, known as forex? Or should forex customers get all of their money back because it wasn't stolen?

Peregrine's bankruptcy trustee has so far given preference to commodities customers. In an initial distribution of funds last fall, customers that traded options and futures on regulated exchanges received 30 or 40 percent of their money back. Meanwhile, forex customers have not received anything because the trustee found their accounts were not "commodity contracts," which are given first priority for payouts when a brokerage goes bankrupt. The trustee has said that payouts for forex customers will be decided through the course of the case.

Wasendorf has admitted taking customer money over nearly 20 years to promote his image as a successful businessman and philanthropist, and falsifying documents to hide the theft from the National Futures Association and the U.S. Commodity Futures Trading Commission, which regulated the company. Wasendorf, 64, faces up to 50 years in prison for the fraud, which shook confidence in an industry that was still reeling from the collapse of MFGlobal.

"It's unbelievable Wasendorf was stealing out of the regulated side of the business and not the unregulated side," said John Roe, co-founder of the Commodity Customer Coalition, which is lobbying for quick and maximum refunds for commodity customers. He called forex trading "the Wild West" of the industry since it lacks strict oversight, but said, "Amazingly, their money for the most part is there. It's going to be very interesting to see how the law treats that."

Attorneys representing forex customers - and a much smaller group that traded metals, who also haven't received money - have intervened in the bankruptcy to argue their money should not be considered the bankruptcy estate's property and should be returned entirely. They say their funds can be directly traced to specific accounts at PFG and at outside banks PFG used for their trading. At a minimum, they say they should be treated equally to other PFG customers.

The outcome of the dispute could mean thousands of dollars to individual investors. The trustee has to decide how to distribute roughly $137 million in cash the company is holding, including $45 million linked to forex and metals accounts. The priority of classes of customers could also affect a separate proceeding in which a receiver is liquidating Wasendorf's personal and other business assets to pay back victims.

Roe said the best case scenario for commodities customers is to receive perhaps 60 percent of their money back, compared to 40 or 50 percent, "depending on how the law breaks for them." He said forex customers could theoretically get 100 percent of their money back if their attorneys prevail - or very small payouts if they are treated as general creditors, which he said was more likely.

Roe said he doesn't think the forex customers' argument will succeed because they were warned when they opened the accounts that they wouldn't receive the same protections as commodities investors. "That's one of the things that's going to tear apart their case," he said.

Attorneys for the forex customers, however, argue that they were promised by PFG representatives that their funds would remain customer property and be held separately for their trading. They say the warning that their funds lacked safeguards was vague and contradicted by other statements. Given the "top down culture of corporate fraud at PFG," the court should resolve the ambiguity in their favor, their attorneys argued in a court filing.