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Will bankrupt PFGBest’s fraud case be last straw for investors?

Managing Director Andreas Diessbacher poses for photograph White River Group 440 S. LaSalle St. Wednesday July 11 2012 Chicago. |

Managing Director Andreas Diessbacher poses for a photograph at White River Group, 440 S. LaSalle St., Wednesday, July 11, 2012, in Chicago. | John J. Kim~Sun-Times

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Updated: August 13, 2012 2:05PM

Chicago futures trader Andreas Diessbacher has been hit by financial lighting twice.

A year ago, as a broker for MF Global, Diessbacher lost a livelihood managing accounts worth $30 million when the firm collapsed after raiding customer cash. He formed his own business and brought some clients to another brokerage, PFGBest, now closed and bankrupt as investigators review a shortfall of more than $200 million.

The repeated scandals have ruined the reputation of the futures industry and caused customers to flee or reduce the money they allocate for trading, Diessbacher said.

“I handled three clients today closing their accounts from other firms,” he said. “Their money was safe, or theoretically it was safe.” He said they wanted out nonetheless.

Futures trading is a giant global enterprise with a heart that beats in Chicago because of the exchanges here. Diessbacher, a commodity trading adviser, said the business needs to adopt greater protections for customer money.

“There is a need for a backstop, such as an insurance fund,” he said. “It works fine on the securities side of the business.”

Diessbacher said his clients had $8 million tied up in the MF Global collapse, where a trustee has identified a $1.6 billion shortfall. PFGBest and its corporate parent, Peregrine Financial Group Inc., was smaller, but Diessbacher said his clients had $9 million there and he also had some personal money at the firm.

With accounts frozen and some money allegedly unaccounted for, it’s not known when or if the clients will come out whole.

In 2007, another Chicago-area trading firm collapsed and its victims are still waiting for more than $600 million in restitution. MF Global, among the world’s largest futures brokerages, failed last year and a trustee has been able to claw back more than three-quarters of some customers’ funds, but people who used it for foreign trading have seen far less.

“You have to come up with some customer protection scheme,” said Frederick Grede, the trustee brought in for the 2007 collapse of Sentinel Management Group Inc. Grede said his recovery efforts for customers were hampered by a court decision granting priority to another creditor.

In each case of the big brokerage failures, the firm declared bankruptcy. The filing complicates customer restitution because other creditors might have claims.

“I think the markets have to step up and find a solution or I’m afraid one will be imposed on them by Congress,” Grede said. He noted that MF Global and PFGBest represented similar clientele — smaller investors, many who use the markets as an extension of farming and ranching.

Another trader, John Roe, an MF Global victim who has organized others in a restitution effort, said he’s afraid PFGBest will be the last straw for individual investors in futures. Large firms, he said, will choose their trading partners more carefully.

Insurance is needed, but so is a different regulatory system because the exchanges and agencies that police the futures market aren’t up to the job, Roe said. “It seems that if someone wants to steal, they’re going to steal,” he said.

Stock traders enjoy coverage from the Securities Investor Protection Corp., which insures accounts up to $500,000. The money comes from a fee assessed on every trade. But the futures industry has resisted such a proposal, arguing that it would burden the business with costs and that it would be too expensive to insure its core customer — big institutions that risk millions of dollars at a time.

That thinking is under review.

Jack Sandner, chairman of E-Trade Futures LLC and retired chairman of the Chicago Mercantile Exchange, said executives at CME Group Inc. are discussing ideas with regulators. CME owns the Merc and the Chicago Board of Trade.

Insurance “would give confidence to the customer, but it’s not the slam dunk that it is in the securities industry,” Sandner said.

He said another approach is to have a centralized place for the customer funds on deposit with all futures brokers.

Terry Duffy, CME executive chairman, gave his views on customer insurance last April in testimony to the U.S. Senate Banking Committee. “The futures markets are mostly professional markets with very different risk profiles from the securities markets. Given the size and scope of the majority of the accounts in this business, a government insurance scheme may be a cost prohibitive and/or ineffective solution,” Duffy said.

But he left the door open, calling insurance “an idea that needs to be explored.”

CME has said that MF Global has caused a decline in trading, but how much has been hard to measure. So far this year, activity at the CME exchanges is down about 10 percent from the pace of a year ago, but the decline could be due to many factors.

In late 2011, CME said the MF Global scandal cost it $29.1 million, but in that case the company had regulatory duties. MF Global had a clearing membership, meaning that it guaranteed its customers’ trades. CME had no direct oversight over PFGBest, which cleared its trades through another firm.

The exchange owner has taken several actions to restore faith in the markets, such as requiring its clearing member firms to provide a daily accounting of customers funds approved by the chief executive or chief financial officer. The reports used to made monthly.

CME also set up a $100 million fund to protect the accounts of farmers and ranchers who use one of its clearing firms.

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