Who is Russel Wasendrof?

Russell Wasendorf Sr., the “Madoff of the Midwest,” was born in Iowa in 1948 and went on to study filmmaking at the University of North Iowa. After shooting a short publicity film for the American Soybean Association, he moved into commodities trading and started a trading firm, Wasendorf & Son, from his basement. The business took off when he suggested clients sell up shortly before the October 1987 stock market crash. By 1990 he had moved to Chicago and renamed his brokerage Peregrine Financial Group (PFG); he turned it into a futures commodity merchant two years later.

What was the scam?

A falling out with a major investor led to a struggle to meet capital requirements, which attracted attention from regulators. Wasendorf decided to divert $200,000 temporarily worth of segregated customer funds to get the regulators off his back, using counterfeit bank documents to hide the evidence. Initially, this ensured the firm’s survival. But having broken the law once, Wasendorf began regularly stealing from clients to invest it in various personal ventures, including commercial real estate in Romania, and spending it on publicity and celebrity events.

What happened next?

Wasendorf’s wild spending, the failure of his ventures, and a downturn in business-led too a
widening the gap between reported and actual client funds, especially following the collapse of Lehman Brothers in 2008. Despite these problems, Wasendorf spent $24m on a new headquarters for his firm, which he opened in September 2009, and bought a private jet and Italian restaurant. His involvement in an unrelated scandal in 2012 caused regulators to demand direct access to PFG’s accounts. Realizing his game was up, Wasendorf tried to commit suicide, confessing his crimes in a note. After being saved by an employee, Wasendorf was tried and convicted of fraud.

What lessons are there to be learnt?

Regulators estimate that there was a $200m discrepancy between reported client funds and the actual amounts. Despite the seizure and sale of Wasendorf’s assets, PFG’s 12,000 clients only ended up getting around 30% of their money back. Regulators ignored several tip-offs that PFG was using dubious accounting methods, some of which came as early as 2004, though the fact that a company its size was using a one-person audit firm should have raised suspicions.

Kris Paterson is a writer for WhatJobs.com

Image Credits: Chicagotribune