Back in the day, before the latest round of shady brokers and scam artists began to dominate the trading world, PFGBest was considered the gold-standard in retail trading. That was before it all fell apart, though.
CEO Russel Wasendorf stole $215MM from his customers; thousands from the present day SquidEyes partners, alone, plus millions more from our Ars Unica customers (Ars Unica being a precursor firm to SquidEyes). What’s worse, we were just a few weeks shy of being cash-flow positive when Wasendorf botched his suicide and the whole thing came to light. Needless to say, the debacle killed our firm!
To be clear, this kind of thing had happened before, and will undoubtedly happen again. Indeed, an even bigger meltdown occurred the year before; at MF Global, in 2011. Thankfully, although we were in talks with the firm at the time, we didn’t get burned.
So what’s the moral of this story? Reputation counts when one is picking a broker, but even with the supposed “best of the best” it can be impossible to know if you’re safe. PFGBest was extremely well regarded (in addition to being the the firm’s CEO, Wasendorf was the publisher of the top industry’s magazine at the time: Stocks, Futures & Options. Then again, MF Global was helmed by NJ Governor John Corzine, so go figure.
Thankfully, things are better today; I think.
The collapse of the two firms were significant events in the financial industry that had lasting impacts on regulatory oversight. These events highlighted various weaknesses and raised concerns about the safety of customer funds in the futures and commodities markets. In response to these incidents, several regulatory changes and reforms were implemented to address these issues:
- Increased Regulatory Scrutiny: The failures of PFGBest and MF Global prompted regulatory authorities, including the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), to intensify their scrutiny of futures brokerage firms. This involved more rigorous examination procedures and ongoing oversight to ensure compliance with financial regulations.
- Customer Fund Protections: One of the key lessons from these events was the need to enhance customer fund protections. Regulatory changes were introduced to strengthen the segregation of customer funds from the firm’s proprietary capital. This ensures that customer funds are kept separate and protected from the firm’s operational risks.
- Risk Management and Reporting Requirements: Regulatory authorities imposed stricter risk management and reporting requirements on futures brokerage firms. Firms are now required to maintain more robust risk management practices and provide regular reports on their financial health and the status of customer funds.
- Enhanced Disclosure and Transparency: There was an increased emphasis on enhancing transparency and disclosure practices. Brokerage firms are now required to provide more detailed information to their customers regarding the risks associated with trading and the protections in place for their funds.
- Strengthened Internal Controls: Regulatory changes also focused on improving the internal controls and governance of brokerage firms. Firms are expected to have more robust internal controls, risk management committees, and compliance functions to prevent similar incidents from occurring.
- Customer Education: Regulatory authorities have encouraged firms to prioritize customer education. Firms are expected to provide educational resources to help customers understand the risks and complexities of the futures and commodities markets.
- Brokerage Firm Insolvency Procedures: Improved procedures and regulations were put in place to handle the insolvency of brokerage firms more effectively. This includes mechanisms for the orderly transfer of customer accounts to other solvent firms in case of a brokerage firm’s failure.
- International Coordination: The events of PFGBest and MF Global also underscored the importance of international coordination among regulatory authorities. Efforts were made to harmonize regulations and coordinate oversight to ensure that similar incidents are less likely to occur on a global scale.
These regulatory changes and reforms were implemented to address the vulnerabilities exposed by the PFGBest and MF Global failures and to enhance the overall safety and integrity of the futures and commodities markets. They reflect a commitment to protecting customer funds and maintaining confidence in these financial markets.