The Peregrine Financial Group Inc. trustee didn’t complete necessary tests before announcing a plan to distribute $123 million to customers of the defunct futures brokerage, the U.S. Commodity Futures Trading Commission said.
The tests were essential because Peregrine collapsed amid a fraud and theft of money by founder Russell Wasendorf Sr., the CFTC said in a filing yesterday in U.S. Bankruptcy Court in Chicago.
“The CFTC is in favor of distributing money to the debtor’s customers as soon as is reasonable and practicable,” the regulator said. “Because this case involves allegations of fraudulent books and records of the debtor’s estate, however, the CFTC believes that distributions should be made only after reasonable due diligence to ensure that the data underlying the distribution are reliable.”
Peregrine filed for Chapter 7 liquidation on July 10, hours after the CFTC filed a lawsuit accusing the firm and Wasendorf of misappropriating more than $200 million in customer funds.
The CFTC said it had consulted with the trustee, Ira Bodenstein, about methods for performing validity tests of commodity customer accounts, to ensure money didn’t go to any claimant who may have been involved in the theft of customer money.
Bodenstein didn’t complete those tests or explain to the court what methods he followed, the CFTC said. Instead, he told commission staff over the past weekend what steps he plans to complete in the future, the CFTC said.
“The CFTC believes that it would be prudent for the trustee to complete validity testing -- and, in parallel, work on the implementation of the mechanics of the distribution -- before this court authorizes the distribution,” the commission told the judge handling the liquidation.
The CFTC said its “preliminary” investigation uncovered more than $45 million in fictitious bookkeeping entries and unusual activity or balances in customer accounts.
Bodenstein last week asked the judge in Chicago to allow $123 million in distributions starting with a payment that would give customers 30 percent to 40 percent of their assets trapped in the collapsed firm.
He would hold back $58 million of the funds available to deal with “variations in claim amounts,” he said in a filing. A court hearing on his plan is set for Sept. 12...
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