CHICAGO/CEDAR FALLS, Iowa (Reuters) - Russell Wasendorf Sr., the founder and CEO at failed futures brokerage PFGBest who now stands accused of a massive fraud, has a giant smile and a jeweled pinky ring, a private jet and a temper.
“You could have not sent me a more clear message of the low regard you hold me and my firm,” Wasendorf wrote in a letter, dated October 20, 2000, to Jack Sandner, a former chairman of the Chicago Mercantile Exchange. “I guess I should have taken the hint when you refused to take my phone calls or when you refused to write a foreword in my latest book.”
Wasendorf, in the letter, said that Sandner, who ran a brokerage called RB&H that provided clearing services to PFGBest and other smaller brokerages, was charging him $1 million a year more than another firm would. Wasendorf, whose firm was then only a fraction of its current size, soon took his business elsewhere.
Sandner, a current CME Group Inc board member and pillar of the Chicago futures community, declined this week to elaborate on the letter from 2000, saying that it can “speak for itself.”
The letter and conversations with half a dozen senior industry executives who have worked with or competed against Wasendorf over the past two decades provide a portrait that tempers the image of benevolent benefactor, cultured restaurateur and rural economic champion that he cultivated in bucolic Cedar Falls, Iowa — the town where his firm was headquartered after relocating from Chicago in 2009.
No one responded to visits this week to the houses of Russ Sr. or his son, Russell Wasendorf Jr., the 42-year-old president and chief operating officer of the company.
A lawyer in the Chicago office of PFGBest, which is legally known as Peregrine Financial Group Inc., referred calls to the firm’s spokeswoman, who did not return calls.
At the heart of the often rough-and-tumble U.S. futures industry in Chicago, where Wasendorf ran the company he owned for nearly two decades, the Marion, Iowa, native was an outsider trying to push his way in.
As he built an unusual empire that included a Romanian property company and a glossy magazine, the 64-year-old became a leading industry figure, writing occasional op-ed pieces and proudly pulling big guests to industry events.
PFGBest grew through the acquisition of a series of rival brokers, including one accused by regulators of falsely inflating its capital and another fined for mishandling customer money. Within the industry he was still seen as a striver with an “inflated” ego, according to two former executives at brokerages who declined to be named.
But Wasendorf also worked to boost Chicago’s futures industry, including championing the 2007 merger between the two Chicago futures exchanges, a deal that many Wall Street banks opposed but that Leo Melamed, another prominent former CME chairman, has said helped turn Chicago from world’s hog butcher to “world’s risk manager.”
And his move to Cedar Falls brought an estimated annual boost of $125 million to the region, said Steve Dust, CEO of the Greater Cedar Valley Alliance & Chamber, on whose board Wasendorf served.
“The events of the week are tragic personally and to a community that had come to appreciate the economic and civic contributions of PFG and the Wasendorf family,” Dust said.
In the letter to Sandner, Wasendorf boasted about how he and his chief financial officer had recently taken on business from First Commercial Financial Group, a brokerage that had been accused by regulators of falsely reporting capital levels, and “made it into a first class operation.”
“You can get rid of the firm you disdain and I can have a chance to get a return on my investment,” he wrote. Other firms would be “proud to do business with us.”
Another former head of a brokerage firm told Reuters he had set up a meeting in Chicago with Wasendorf and Russ Jr. at their headquarters in the hopes of securing PFGBest’s clearing business. PFGBest was not a member of the major futures exchanges, meaning it had to route its trades through another firm for clearing.
After an hour with the two seated at an imposing board room table, the former executive got an uneasy feeling and dropped the idea.
While rivals and erstwhile business partners may not have liked or trusted Wasendorf, none said they ever suspected that he would commit the kind of fraud he is accused of by regulators: pilfering half his clients’ funds and covering it up for more than two years.
Peregrine Financial Group filed for bankruptcy protection on Tuesday, and the Commodity Futures Trading Commission and the National Futures Association have accused the firm and Wasendorf of misappropriating more than $200 million in customer funds, and then hiding the missing funds for more than two years.
Those developments follow a series of events leading up to Wasendorf’s attempted suicide on Monday: an unannounced marriage in Las Vegas on June 30, a month before a local church wedding he had planned (Wasendorf and his first wife had divorced in 2010 after 24 years of marriage); signing over power of attorney to his son on July 3; and a decision to relent to regulators’ demands that he switch to an electronic system for verification of PFGBest’s bank balances.
On Monday, one week before PFGBest would celebrate 20 years in business, Wasendorf was found, incoherent but breathing, near his Cedar Falls office in a closed car with a hose pumping in exhaust, a note nearby indicating “possible discrepancies” in PFGBest’s financials, the sheriff’s report said.
He was airlifted to a hospital in Iowa City, and was reportedly in a coma. Neither the hospital nor his family has confirmed his current condition.
The move to Cedar Falls, in 2009, took Wasendorf 300 miles from Chicago, where the National Futures Association had for years audited his firm yearly to vouch for its compliance with industry regulations.
While a handful of other Midwest brokers are also based far from the famed La Salle Street, the move was unusual — and the $18 million construction of a new headquarters there, said some, was reflective of Wasendorf’s grand ambitions.
His reception in Cedar Falls was a warm one. The town of some 40,000, reliant on a small university and John Deere factories, gained dozens of new, professionals jobs.
None of the dozens of people interviewed there had anything but glowing words for Wasendorf.
“We’re shocked, absolutely shocked,” said Jim Mudd Jr., whose family went in jointly with Wasendorf Sr. to buy a Hawker Beechcraft private jet around the time PFG moved to Cedar Falls. “We didn’t see this coming.”
Mudd said his family sold its stake in the plane about 18 months ago to Wasendorf. It is parked at Livingston Aviation in Waterloo, said to be for sale.
Cedar Falls Mayor Jon Crews told Reuters the company and family were key figures in the community and donated millions of dollars to local institutions, including the University of Northern Iowa athletic department.
But looking back there may have been some signs. Two weeks ago he noticed work had stopped on Wasendorf’s latest project, the construction of a sauce bottling plant on Main Street.
“At the time all I could think was, ‘huh, that’s a little strange, maybe they are having problems with their contractor,’” he said. “Now I think it might have been a clue.”
Wasendorf began his career as a futures trader in 1972, and built his brokerage on the back of a fortune made after advising clients to sell stock just before Black Monday in 1987, according to a timeline on his firm’s website.
He was an early advocate of electronic trading and specialized in small accounts. He had a full-time person to deal with reporters, rare for a brokerage his size.
“When I met him he always had an entourage around him,” said Phil Flynn, a broker who left PFGBest on May 31.
He also bulked up his firm by absorbing the customers of at least three futures brokerages with checkered disciplinary histories that added client funds, if not cachet. PFGBest’s customer base nearly doubled between 2008 and 2010 to more than $400 million in segregated client funds, making it one of the country’s 10 largest independently owned brokers.
The takeover of First Commercial accounts more than a decade ago does not appear on the company’s official timeline, though Wasendorf boasted to Sandner in the 2000 letter about converting its “corrupt corporate culture” into an “attractive culture as to entice superlative industry talent.”
The CFTC had fined First Commercial, its CEO and another employee in 1999 for undertaking a “calculated, long-term scheme” to evade capital requirements, according to a regulatory order. The pair used checks they knew were bad to fool regulators into believing the firm had more money than it did.
In 2009, Peregrine acquired most of the accounts of Chicago rival Alaron Trading Corp, faced with bankruptcy after losing millions in the 2008 bankruptcy of Sentinel Management.
Alaron often had run-ins with the regulators. In 2010, the CFTC fined the firm $260,000 for a 2008 incident in which it failed to supervise its customers’ trades adequately, and “allowed” it to withdraw its broker registration.
PFGBest itself has been fined four times, most recently for $700,000 by the NFA for failing to notice a massive $194 million forex-trading Ponzi scheme run by Trevor Cook in Minnesota, who used a PFGBest account. Cook is serving 25 years in prison. The receiver has sued PFGBest for $48 million.
Wasendorf’s empire also gained some unusual outposts. Together with several former Chicago options traders, he helped found one of Romania’s largest property development companies, Avrig 35, which grew to have investments estimated at more than $1 billion by 2007 before the global financial crisis.
He also owned several restaurants, including the elegant Allen’s in Chicago as well as the now shuttered MyVerona Restaurant, which carried 240 varieties of wine, in Cedar Falls.
Wasendorf Sr.’s favorite quote, according to his Facebook page: “If I wanted patience, I would buy it.”
The page, which had been removed from the site by Wednesday, featured what he called “Brush with Greatness” photos of himself with former Federal Reserve chief Alan Greenspan and former First Lady Barbara Bush.
Both spoke at industry events after being sponsored by SFO (Stocks, Futures and Options), a glossy “vanity” magazine about the industry that Wasendorf started in 2001. It was shuttered on Tuesday.
Last October Wasendorf ushered former President George W. Bush and his family on stage at CME Group Inc’s annual Leadership Conference in Naples, Florida.
A CME Group spokeswoman Wednesday declined to comment on Wasendorf’s involvement in the event.
With Russ Sr. now the focus of the investigation, the task of helping dismantle what remains of the firm falls to Russ Jr., who friends and insiders say was caught as much by surprise as the rest of the industry.
Russ Jr. sounded “like he was in another world” when he told employees of his father’s suicide attempt on a call Monday afternoon, one of the firm’s brokers told Reuters.
On Wednesday, an executive at the firm’s Iowa headquarters said Russ Jr. had told him personally that there were “no signs, no indications.”
On Tuesday morning, Russ Jr. called to cancel his family’s membership at the Beaver Hills Country Club in Cedar Falls, where they had belonged since 2007, general manager Chad Hoffman said.
The homes of father and son in Cedar Falls underscore the two men’s differences: Russ Sr.’s a large, elegant property surrounded by a tall metal fence, complete with a rolling front lawn and a small pond, the largest and nicest home on the block. Russ Jr.’s, on the opposite side of town in a upper-middle-class neighborhood, is a modest faux brick affair on a cul-de-sac, near his mother’s house, Wasendorf’s ex-wife, Connie.
At Runner’s Flat, where Russ Jr. and his wife, Amber, buy their running shoes, the phone has been ringing with customers asking whether a weekly open swim at George Wyth State Park in nearby Waterloo would go on as planned, owner Scott Gall said.
The open swims, attracting as many as 70 participants, were sponsored by PFGBest’s charitable arm, and onsite childcare was provided by the firm’s staff. The swims will go on, he said he told them, but there may not be anyone to look after the kids.
“They are just normal people,” he said of Russ Jr. and his wife, who works for Peregrine Charities. “They are just a couple of people who like to run and buy their shoes here.”
Additional reporting by Tom Polansek in Chicago, and Jonathan Spicer and David Sheppard in New York; Editing by Jonathan Leff and Leslie Adler