U.S. futures regulators urged a delay in cash payouts to bankrupt Peregrine Financial Group's former customers, after finding false bookkeeping that cast doubts on a plan to return a portion of funds frozen since the brokerage's mid-July collapse.
The Commodity Futures Trading Commission said in a court filing that Peregrine Financial's books need double-checking after it found $45 million in "fictitious bookkeeping entries" and unusual activity or balances in customer accounts.
The brokerage's bankruptcy trustee last week announced a long-awaited plan to return $123 million to Peregrine clients, whose accounts have been frozen since the firm's CEO attempted suicide on July 9 and confessed to years of bilking customers.
The firm filed for bankruptcy protection on July 10 and the CEO, Russell Wasendorf Sr., was arrested three days later.
Customers have been pressing the trustee hard to return funds, citing financial hardship and the closure of at least two businesses stemming from their lack of access to money.
While acknowledging that funds should be returned as soon as possible, the CFTC called for more checks, which it said would cause only a short delay to the trustee's distribution plan.
"Caution is warranted to ensure that the books and records of the Debtor may be relied upon to avoid the possibility of distributions based on fictitious data," the CFTC said in a filing in federal bankruptcy court in Chicago. "This is especially true given the magnitude of the proposed distributions -- $123 million."
Wasendorf said in his confession that he faked bank account statements and other documents to fool regulators for years into thinking he had more in customer funds than he really did. He was indicted last month for lying to regulators.
The trustee has not explained adequately how he can be sure of the accuracy of the records he is relying on to decide which customers get how much money, the CFTC said in the filing.
"The CFTC strongly favors making customer distributions, and believes that the Debtor's customers are rightly concerned about accessing as much as possible of their money as soon as possible," the CFTC said.
"Testing of the validity of the Debtors' books and records is necessary before they can be relied upon to support such a distribution, to avoid a mis-distribution of customer funds."
A judge is set to hear arguments on the issue on Wednesday. The trustee did not respond to a request for comment.
The case is In re Peregrine Financial Group Inc 12-27488 U.S. Bankruptcy Court, Northern District of Illinois
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