Peregrine crashes and Wasendorf gets 50 years

Today Russell Wasendorf Sr has been jailed for 50 years, essentially receiving a life sentence. Even with a sentence cut for good behaviour he would be at least 106 yrs old before he would be set free. He is convicted of defrauding over 13,000 customers of at least $200M through his Peregrine Financial Group, a finance brokerage based in Iowa, USA. The story about Peregrine is the oft quoted basement start and finally reaching the peaks of financial stardom with riches untold through hard work. The bare facts mark the rise of Wasendorf’s climb to the top.

Factual history

Peregrine Falcon. Image: Wikipedia

Peregrine Falcon. Image: Wikipedia

Russell Wassendorf was born in 1948 in Iowa.

In 1969 he married his first wife and had a son, Russell Wasendorf Jr., but it ended in divorce fairly quickly.

At school he loved acting and at university he developed film making skills and later produced a winning documentary film on soybeans.

He married his second wife in 1976 but this too ended in divorce.

He then worked in a local futures commodities magazine firm producing promotional videos.

1980 he established his own competing futures local commodities magazine at the rear of a barber shop in his home town of Cedar Falls, Iowa. A year later his business was growing and by 1985 he bought a small brokerage in futures trading for local farmers. He forecast the stockmarket crash of 1987 and saved clients who listened to him from ruin in doing so. By the early 1990s he had moved office into the Chicago heartland of stock trading, a short stroll from the Chicago Board of Trade. Client funds under his control were about $2 million at the time, but shortly after he opened Peregrine Financial Group (PFGBest) in 1992, the defrauding began. He created a ponzi scheme with incoming client funds paying off other clients dividends and so on. By 1993 an investigator from the Commodity Futures Trading Commission had found irregularities, he ordered 6 more audits and it put Peregrine at risk.

Wasendorf’s inevitable financial ruin was delayed by some remarkably stupid decisions of the National Futures Association by off-loading clients of one troubled brokerage to another. In doing so they turned a blind eye to the irregularities and added fresh funds into his cash flow to keep the wolves at bay. Only a year later the NFA fined Peregrine for false advertising and also for not keeping proper accounts of clients’ money. This was settled by paying a $75,000 fine to the NFA and the wolves kept quiet. So quiet that Peregrine was able to do this twice more of receiving life-saving accounts from other troubled brokerages.

In 1998 Wassndorf invited his son to join him in the Peregrine Group to implement an online trading system. His son eventually became President of PFGBest while his father tried all sorts of schemes to stay afloat. One of the schemes did pay off and brought in much needed funds. Peregrine rose to become one of the top ten of brokerages in terms of funds administered – cited at over $200M by 2006. After he had committed to building a large head quarters in his home town – Cedar Falls, Iowa, the crash happened with the impact of the Global Financial Crisis.

On the 9th July 2012, Wasendorf Sr., tried to commit suicide outside of his headquarters in Cedar Falls. He failed but his suicide note alerted authorities and the ensuing evidence led to his trial and sentence of 50 years imprisonment.

An Arrogant Fraudster?

My curiosity was raised by the conflicting reports about Russell Wasendorf Sr, he seemed to be painted as a Bernie Madoff – having the luxurious lifestyle, the jet, the flash headquarters, the fact that he joined one of the advisory boards of his regulators, -Madoff became the Chair of his regulator, a son who was in the business and genuinely shocked receiving the news about his fraudster father. Millions of dollars were spent on a lavish lifestyle, corporate contributions to charities and so on. The similarities are striking. But my intuition and research tells me otherwise.

It is my belief that Wasendorf (Sr., unless noted otherwise) is far from being an Arrogant Fraudster but a Likeable Fraudster. Madoff fits the profile of an Arrogant Fraudster, whereas Wasendorf does not.

A Very Likeable Fraudster

The Likeable Fraudster is someone who uses organisational funds for his own use to build up his image for the most important people in his life.  These people would include a spouse or a parent.

Russ Wassendorf Sr. Photo:Linn County Jail

Russ Wassendorf Sr. Photo:Linn County Jail

Behind the eyes of a convincing executive is a severely wounded child. Possibly we will never know of the wounds, how they were incurred, or when. But there are identifying events that indicate a wounded psyche: many marriages and subsequent divorces, family breakdown, overwhelming drive to be seen to be good in his home town. A Reuters article captures the behind the scenes Wasendorf:

“Less known were the personal tensions he faced, including a split with a brother, two divorces, a last-minute mystery wedding in Las Vegas and seething resentment against establishment rivals in Chicago. His pastor says Wasendorf knew his ruse was doomed several years before it unraveled. A rift emerged with his only son, Russ Jr., who warned the Iowa shift was an expensive folly – and prepared this summer to move to Australia.”

(By P.J. Huffstutter, Ann Saphir, Tom Polansek and David Sheppard, Sep 24, 2012, Reuters)

I am always drawn to the childhood of fraudsters to see if there are any clues to what trauma the fraudster faced. Certainly his family were impoverished to the point of being homeless, as Wasendorf’s christian names are of a local Pastor and his son who took the family in and gave them an attic to live in about the time when he was born. By the time Wasendorf was 5 years old, his father, a foreman at a meatpacking company, was dead. His widowed mother Ida, had to look after the four children on her own. A church-going woman, his mother married Norval Brunkin in 1975, when Wasendorf was 27. It was unlikely that there was no apparent stepfather when he grew up. But a more telling fact is her occupation: After 15 years as  a test radio repair operator retiring in 1969, when Wasendorf was 21, she became a stockbroker, says her obituary.

Her youngest child obviously admired and emulated her by following her footsteps by using his natural gifts of persuasion and media skills into the local securities industry. There is no hint of fraud or dysfunction until much later in life. Why would a young man pursue the same occupation as his mother? It would be very likely that he would have been close to her and having no father she would have set as a role model for him. His older brother Lewis was estranged from Wasendorf, so there has to be some prior dysfunctional relationship of some sort. However, there are no reports of Wasendorf making himself superior to others, his greatest need was to be good at his profession and be the ‘home town boy’ who made good, sharing his wealth with local charities and his university. Undoubtedly the grinding poverty in the early 1950s would have been highly stressful as well as the loss of his father. There are pointers that the Wasendorfs were not a straight forward family.

  • His father being a foreman of a meat packing factory and yet homeless.
  • His brother’s blatant disaffection and expressed dissatisfaction of life choices to his wealthy younger brother.

What I have found in my research is that Likeable Fraudsters have an overwhelming need for them to look successful with all the trappings. There is an underlying drive to endure that this is the case. The motivation for fraud comes out of severe stress. His mother died in 1990 after a short illness. He loved his mother very much, he mentions her (but not his father) to his new wife in his suicide note. The grief of losing his 76 year-old mother suddenly that 1990 summer would have been overwhelming. There is no mention of any prior illness in the Death notice.  It is my intuition that it is the grief that rocked him to the core, and a business audit tipped the balance and he begins to defraud in 1992-3.

Wasendorf himself admits that a 1992 investigation  with a resulting 6 audits by the Commodity Futures Trading Commission was his crisis point:

“I had no access to additional capital and I was forced into a difficult decision: Should I go out of business or cheat?” his [suicide] letter states. “I guess my ego was too big to admit failure. So I cheated, I falsified the very core of the financial documents of PFG, the Bank Statements.”

It is that point that he was pushed into using other people’s money for his own, to keep up the image that he was building himself. Yet the facade was only his latest move creating Peregrine Financial Group. If he had stayed a small town broker it would have unlikely that the fraud would not have happened. But there again, he could NOT be a small town broker. He had to be an uptown flash broker, which he wasn’t, and he had a seething hatred for the Chicago brokers who, in his view belittled him.

Not being a psychiatrist, but used to seeing these types of profiles, it is my guess that the real hatred was against his father and other older males, including his older brother. This is more than feeling angry on missing out on a father in his childhood. He was made to feel small and useless by a living person not a dead one. Very likely there was physical abuse and certainly emotional abuse in his childhood, as his reaction later in life is typical of those who are made to feel impotent as a child.

Wasendorf shows a primitive response by blaming others for his action. His outrage by the treatment he received from the investigator and the Chicago establishment caused him, in his own mind to defraud. He states categorically in his suicide notes that he had no option.

Yet he did have an option, and that is to face the fact that he was a good salesman, but not a funds manager. His traumatic childhood had set him on a path to prove himself that he was worthy of a lifestyle of the rich and famous. Whoever or whatever instilled in him as a child that he was unworthy, poor and trash, is the real perpetrator of the fraud. Someone, somewhere, in the 1950s, set the time bomb that was later detonated in 1992-3 by the death of his mother and the investigator’s determination to find administrative errors.

What is remarkable is that his suicide attempt was in 2012, he kept up the pretence for over 20 years. He must have been strong as an ox to do that, convincing his wives and son as well as the community that he was not doing any harm to anyone.

The suicide attempt was real and he had prepared for his death over a number of weeks. He married his third wife and made a will that she would inherit everything. He wrote notes to his son and new wife explaining what he did and why. He wrote that he had done it deliberately and why, taking responsibility for falsifying bank statements and so on. He apologised for his actions, and was remorseful about what he had done.

This is exactly the pattern of the Likeable Fraudster when close to being found out, or when the tension becomes unbearable, they will give themselves up OR commit suicide.

Far from being a Bernie Madoff, Wasendorf deserves our compassion and the 50 year sentence for his folly. He has lost absolutely everything.

Whoever belittled him in his childhood

is the real criminal.

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Filed under Creating successful image, Likeable Fraudster

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