This story is interesting. On Monday, Federal CFTC regulators shut down Peregrine Financial. (CFTC = Commodities Futures Trading Commission) Peregrine Financial claimed to have $220M of segregated customer money, but they only had $5M. This is nearly an exact duplicate of MF Global.
After MF Global failed, the CFTC said “We audited all the other futures brokers. Everything is fine! Move along! Nothing to see here!” Either they were lying, or they were incompetent.
Allegedly, Peregrine looked the other way for another Ponzi scam involving Trevor Cook. The Ponzi scam was a large percentage of Peregrine’s business, giving them an incentive to ignore the fraud. It turned out that Peregrine also was a fraud. After the Trevor Cook incident, why didn’t regulators carefully audit Peregrine? That’s criminal negligence by the CFTC.
Allegedly, Peregrine submitted fake bank statements to CFTC regulators. Here’s a nice link describing how he forged the paperwork. Allegedly, Peregrine was submitting false bank statements to regulators since 2010 or earlier. The CFTC wanted to switch to electronic submission of balance information by the bank, but Peregrine’s CEO resisted, which was suspicious. His fraud would have been discovered if they switched to direct electronic statements. Why didn’t the CFTC regulators directly subpoena records from the banks, rather than relying on forged documents by Peregrine executives? That only takes an hour, and is part of “Auditing 101″.
If you are a Peregrine Financial customer, you probably are SOL. Your account is frozen. You will be margin-called out of your positions, or you’ll have to cough up more money. You will only recover pennies on the dollar after bankruptcy, and only then after months/years of waiting.
This article was interesting. After Peregrine failed to make a margin call, the broker Jefferies liquidated all positions with Peregrine. Jeffries cleared through Peregrine. Jefferies had advance warning of Peregrine’s bankruptcy. Did they leapfrog ahead of other creditors? Jefferies customers lost nothing, but did that come at the expense of other Peregrine customers? Jefferies is a much bigger broker, so they can reimburse customers for any losses due to Peregrine.
Did Peregrine’s scam end, only because they couldn’t make the margin call? Even though Peregrine had stolen segregated customer money, they still didn’t have enough cash to pay the margin call? The scam didn’t end because regulators wised up, but because Peregrine ran out of money.
Jon Corzine was never indicted, after stealing $1.6B of customer segregated money. It would be ironic if Russell Wasendorf goes to prison, but Jon Corzine does not. The lesson is that insiders can get away with crime, but small fry like Wasendorf go to prison. There are two justice systems, one for insiders and one for everyone else.
Jon Corzine was clever enough to cover his tracks, with subordinates who stole money for him without being explicitly ordered to steal. That gives Corzine plausible deniability. Russell Wasendorf probably was personally involved with the theft of customer money. He tried to commit suicide on Monday, but failed.
As I mentioned before, you’re an idiot if you trust the US financial system. The best investment is physical delivery of gold and silver. However, if you have gold and silver in your home, you may be robbed. With physical gold, you can be robbed either by regular criminals or by criminals wearing badges and uniforms. Due to the way “asset forfeiture” laws work, police can steal your property without a trial. Possession of gold or cash is evidence of a crime, because only a criminal wouldn’t trust a bank. When you buy gold from a State-licensed dealer, your ID is recorded, and that information may be leaked to criminals.
A pro-State troll says “Buy gold and silver PM funds, like GLD/SLV/PHYS/PSLV!” Sometime in the next 5-10 years, there will be a default on one of the big PM funds. They will be worthless, when all investors try to cash out at the same time. Allegedly, those PM funds are secretly practicing fractional reserve banking. They don’t have all they metal they’re supposed to have.
Only a fool would still use the futures markets. Just like with MF Global, Peregrine’s customers are losing their investment.
If you use the futures markets, you’re exposed to counterparty risk. Your broker can steal your money, and you’re stuck with the loss. Therefore, futures prices should always be in backwardation. The default risk is priced into the future, and shorter futures have less default risk exposure.
If enough people stop using the futures markets, then the futures price will start diverging from the real price. For example, the “official” futures price of gold may be $1600/oz, but if you want to buy a physical gold coin or bar, you’ll have to pay $3000+/oz.
If you use the financial system, you’re letting banksters gamble with your money. You are an unsecured creditor, when the banksters default. For banks and the stock market, there’s FDIC and SIPC insurance. However, those are paid for by a tax on your account, in the form of higher fees/commissions and lower interest rates. There is no equivalent to FDIC/SIPC for the futures market. The brokers resisted for a long time, but after MF Global and Peregrine, that may change.
The financial industry uses the ridiculous principle of “self regulatory organization”. The banks are supposed to regulate themselves. As you might imagine, that’s been a disaster, as indicated by MF Global, Peregrine, Lehman, Bear Stearns, Madoff, and many other scams.
Peregrine Financial stole $220M of segregated customer money. It’s the exact same thing that MF Global did. A year later, and the government is still powerless to stop flagrant bankster theft. “Segregated customer money” is supposed to be one of the sacred provisions of the futures market, but the government isn’t able to enforce that clearcut law.
If you were a Peregrine Financial customer, you are SOL. Corzine got away with stealing $1.6B from his customers, but Russell Wasendorf will probably go to prison. Wasendorf is a low-ranking State criminal, and is expendable for an example to be made. Corzine is a high-ranking criminal, and immune from prosecution.
You’re an idiot if you still use the futures markets. You’re an idiot if you trust the US financial system. Whenever you use a bank, you’re financing bankster gambling. As long as you use paper money, you’re letting banksters rob you via inflation.