UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||)||CFTC Docket No. 00-32|
|Peregrine Financial Group, Inc.||)||ORDER INSTITUTING PROCEEDINGS|
|190 S. LaSalle Street||)||PURSUANT TO SECTIONS 6(c) AND 6(d)|
|7th Floor||)||OF THE COMMODITY EXCHANGE ACT,|
|Chicago, Illinois 60603,||)||AS AMENDED, MAKING FINDINGS AND|
|)||IMPOSING REMEDIAL SANCTIONS|
The Commodity Futures Trading Commission ("Commission") has reason to believe that Peregrine Financial Group, Inc. ("Peregrine" or "Respondent") has violated Section 4f(b) of the Commodity Exchange Act, as amended ("Act"), 7 U.S.C. § 6f(b) (1994), and Commission Regulations 1.10(b)(1), 1.12(a), 1.12(b), 1.17(a), 1.18(a) and 1.18(b), 17 C.F.R. §§ 1.10(b)(1), 1.12(a), 1.12(b), 1.17(a), 1.18(a) and 1.18(b) (2000). Therefore, the Commission deems it appropriate and in the public interest that a public administrative proceeding be, and hereby is, instituted to determine whether Peregrine engaged in the violations as set forth herein and to determine whether any order should be issued imposing remedial sanctions.
In anticipation of the institution of this administrative proceeding, Peregrine has submitted an Offer of Settlement ("Offer") that the Commission has determined to accept. Without admitting or denying the findings herein and prior to any adjudication on the merits, Peregrine acknowledges service of this Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, As Amended, Making Findings and Imposing Remedial Sanctions ("Order"). Peregrine consents to the use of the findings herein in this proceeding and in any other proceeding brought by the Commission or to which the Commission is a party.1
The Commission finds that:
Peregrine, a registered futures commission merchant ("FCM"), was below its minimum financial requirements as of March 26, 1999, in violation of Section 4f(b) of the Act and Commission Regulation 1.17(a). In addition, Peregrine failed to file timely notice with the Commission that its adjusted net capital was less than the minimum required on that date, failed to file notice that its adjusted net capital was below the early warning threshold on several occasions, failed to keep accurate books and records, and filed with the Commission an inaccurate capital computation and statement of financial condition on its Form 1-FR-FCM as of March 26, 1999. These violations of the Act and the Regulations occurred primarily because Peregrine improperly classified certain receivables as "current assets."
Peregrine Financial Group, Inc. is an Iowa corporation with its principal place of business located at 190 South LaSalle Street, 7th Floor, Chicago, Illinois. It has been registered with the Commission as a FCM since July 15, 1992.
C. PEREGRINE'S CAPITAL, RECORDKEEPING AND REPORTING VIOLATIONS
In August 1999, the Division of Trading and Markets of the Commission completed an audit of Peregrine as of March 26, 1999 ("1999 audit"). The 1999 audit disclosed that several adjustments would be required to Peregrine's financial statements to make them comply with the requirements of the Act and Regulations. Specifically, the 1999 audit disclosed that Peregrine had improperly classified certain receivables as "current assets."
1. Receivables Improperly Classified as "Current Assets"
Commission Regulation 1.17 details the minimum financial requirements for FCMs and introducing brokers. In calculating capital, Regulation 1.17(c)(2)(ii) states that all unsecured accounts receivable2 are to be excluded from "current assets" except for, among others, receivables resulting from the marketing of inventories commonly associated with the business activities of the registrant; provided, such receivables are outstanding no longer than three calendar months from the date they are accrued.3
The Division of Trading and Markets' Financial and Segregation Interpretation No. 5 - Unsecured Accounts Receivable Included in "Current Assets", [Vol. 1] Comm. Fut. L. Rep. (CCH) ¶7115 (Sept. 7, 1979) ("Interp. No. 5"), treats unsecured receivables resulting from services rendered by an FCM in the ordinary course of its business in the same way as those resulting from the marketing of inventories as detailed in Regulation 1.17(c)(2)(ii)(A). Therefore, unsecured receivables which meet the conditions in Interp. No. 5 will be deemed current assets providing the receivables are not outstanding longer than three calendar months from the date accrued. The FCM is required to demonstrate under Interp. No. 5 that:
1. the services are rendered by an operating unit of the FCM which is in the business of regularly offering such services;
2. such services are rendered to the general public in addition to persons affiliated with the FCM; and
3. such services are billed to and paid for by persons affiliated with the FCM in a regular manner, consistent with billings to and payments by persons not affiliated with the FCM. Peregrine's unsecured receivables did not result from such services. The two misclassifications of receivables discussed below comprised the bulk of Peregrine's undercapitalization.
a. Wasendorf and Associates Receivable
The largest single adjustment made to Peregrine's net capital in the 1999 audit was the reclassification of $364,348 in receivables from Wasendorf and Associates, Inc. ("W&A") from current to non-current. On August 13, 1998, Peregrine entered into an agreement with W&A whereby W&A granted Peregrine a two year unlimited license for the exclusive use of a software package called BEST Direct ("BEST"). In return, Peregrine advanced the cost for developing the BEST software to W&A. Peregrine claimed these development costs as a current asset under Interp. No. 5.
The W&A receivable fails to meet the requirements of Interp. No. 5 because Peregrine is not in the business of regularly making loans for software development and such loans are not made to the general public.
b. Professionals Commodity Group Receivable
Professionals Commodity Group, Inc. ("PCG") was a co-commodity pool operator for a commodity pool for which Peregrine is the "administrator." Peregrine recorded a $45,000 receivable from PCG resulting from advancing to PCG the development costs of the commodity pool. Peregrine classified this receivable as a current asset, pursuant to Interp.
No. 5. The PCG receivable fails the tests set forth by Interp. No. 5 in that the services performed by Peregrine, i.e., financing the development costs of forming a commodity pool, are not rendered to the general public. The PCG receivable does not qualify for special treatment under Interp. No. 5 and should not have been reflected as a current asset on Peregrine's 1-FR-FCM as of March 26, 1999.
2. Failure to File Notices of Undercapitalization and Early Warning Status
Pursuant to Regulation 1.12(a)(1)-(2), a FCM that knows or should know that it is undercapitalized must immediately give the Commission telephonic notice of such undercapitalization, and confirm it in writing. Within 24 hours of such notice, the FCM must file, among other things, a statement of financial condition and a computation of its minimum capital requirements. Peregrine gave notice regarding its undercapitalization as of March 26, 1999 on June 2, 1999, after being notified of the need for a reclassification of assets by T&M. Peregrine's notice was, therefore, untimely.
Periodic infusions of capital were made into Peregrine on several dates in 1998 and 1999. Peregrine's adjusted net capital immediately preceding the capital infusions was below the early warning level. Regulation 1.12(b) sets an "early warning level" at 150 percent of the minimum capital level required.4 If the FCM's net capital falls below the early warning level, the FCM must give written notice within five business days of the event. Although Peregrine had taken remedial action (the capital infusions) in response to its net capital deficiencies, Peregrine never provided the Commission with any written notice and thus failed to comply with the early warning notice requirements of Regulation 1.12(b), on or about at least December 24, 1998 and January 28, 1999.
3. Failure to File Accurate Form 1-FR-FCM and Keep Accurate Records
Regulation 1.10(b)(1) requires each FCM to file with the Commission a financial report on Form 1-FR-FCM for each fiscal quarter of each fiscal year no later than 17 business days after the date for which the report is made. Any Form 1-FR-FCM filed with the Commission must, of course, be accurate.
Regulation 1.18(a) provides that each FCM must prepare and keep current ledgers or other similar records which show or summarize, with appropriate references to supporting documents, each transaction affecting its asset, liability, income, expense and capital accounts, and in which all asset, liability and capital accounts are classified into either the account classification subdivisions specified on Form 1-FR-FCM or categories that are in accord with generally accepted accounting principles.
Regulation 1.18(b) requires each FCM to prepare a formal computation of its adjusted net capital and of its minimum financial requirements pursuant to Regulation 1.17 as of the close of business each month. This computation must be completed and made available for inspection by the Commission within 17 business days after the date for which the report is made.
As discussed above, based on the application of the Commission's interpretation of the classification of certain receivables, the 1999 audit disclosed that Peregrine's general ledger and its statement of financial condition and net capital computation in its Form 1-FR-FCM as of March 26, 1999 were inaccurate, in violation of Regulations 1.10(b)(1), 1.18(a) and 1.18(b).
OFFER OF SETTLEMENT
Peregrine has submitted an Offer of Settlement in which, without admitting or denying the findings herein, it: (1) acknowledges service of this Order; (2) admits the jurisdiction of the Commission with respect to the matters set forth herein; (3) waives the filing of a Complaint and Notice of Hearing, a hearing, all post-hearing procedures, judicial review by any court, any objection to the staff's participation in the Commission's consideration of the Offer, all claims which it may possess under the Equal Access to Justice Act, 5 U.S.C. § 504 (1994) and 28 U.S.C. § 2412 (1994), as amended by Pub. L. No. 104-121, §§ 231-232, 110 Stat. 862-63, and part 148 of the Commission's Regulations, 17 C.F.R. §§ 148.1, et seq. (2000), relating to, or arising from, this action and any claim of double jeopardy based upon the institution of this proceeding or the entry in this proceeding of any order imposing a civil monetary penalty or any other relief; (4) stipulates that the record basis on which this Order may be entered shall consist solely of this Order and the findings in this Order to which it has consented in the Offer; and (5) consents to the Commission's issuance of this Order, which makes findings and orders that Peregrine: (a) cease and desist from violating Section 4f(b) of the Act and Commission Regulations 1.10(b)(1), 1.12(a), 1.12(b), 1.17(a), 1.18(a) and 1.18(b); (b) pay a civil monetary penalty of $90,000; and (c) comply with its undertakings as set forth herein.
FINDING OF VIOLATIONS
Solely on the basis of Peregrine's consent, as evidenced by the Offer, and prior to any adjudication on the merits, the Commission finds that Peregrine violated Section 4f(b) of the Act, 7 U.S.C. § 6f(b) (1994) and Commission Regulations 1.10(b)(1), 1.12(a), 1.12(b), 1.17(a), 1.18(a) and 1.18(b), 17 C.F.R. §§ 1.10(b)(1), 1.12(a), 1.12(b), 1.17(a), 1.18(a) and 1.18(b) (2000).
Accordingly, IT IS HEREBY ORDERED THAT:
1. Peregrine shall cease and desist from violating Section 4f(b) of the Act and Commission Regulations 1.10(b)(1), 1.12(a), 1.12(b), 1.17(a), 1.18(a) and 1.18(b).
2. Peregrine shall pay a civil monetary penalty in the amount of Ninety Thousand Dollars ($90,000) within ten (10) business days of the date of this Order and make such payment by electronic funds transfer to the account of the Commission at the United States Treasury or by certified check or bank cashier's check made payable to the Commodity Futures Trading Commission and sent to Dennese Posey, or her successor, Division of Trading and Markets, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581, under cover of a letter that identifies Peregrine and the name and docket number of this proceeding. A copy of the cover letter and of the form of payment shall be simultaneously transmitted to the Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, D.C. 20581. In accordance with Section 6(e)(2) of the Act, 7 U.S.C. § 9a(2) (1994), if Peregrine fails to pay the full amount of this penalty within fifteen (15) days of the due date, it shall be automatically prohibited from trading on all contract markets and its registration with the Commission as a futures commission merchant shall be automatically suspended until it shows to the satisfaction of the Commission that payment of the full amount of the penalty with interest thereon to the date of payment has been made; and
3. Peregrine shall comply with the following undertakings:
A. Cooperation. Peregrine shall cooperate fully and expeditiously with the Commission in the Commission's assessment of whether Peregrine is carrying out all aspects of its undertakings including, but not limited to, explaining its financial income and earnings, budget, status of assets and financial statements.
B. Accounting Practices. Peregrine agrees within 30 days of the Order to implement the following initiatives and changes to its accounting practices:
1. Expense, rather than capitalize, to the extent permissible by generally accepted accounting principles, all costs relating to technological development programs when preparing any financial report to the Commission or any net capital computation under the Commission's Regulations;
2. Classify all receivables as non-current assets (except those specifically allowed as current assets pursuant to Commission Regulation 1.17(c)(2)) for the purpose of determining adjusted net capital under the Commission's rules. If Peregrine receives collateral that is other than an equity security traded on a nationally recognized securities exchange or a security guaranteed as to its principal and interest by the United States government, Peregrine shall, immediately upon receiving such collateral, notify the Division of Trading and Markets at the Commission's Chicago Regional Office ("T&M");
3. Balance daily the cash activity initiated by Peregrine and prepare complete monthly reconciliations of all balance sheet accounts, brokerage accounts, securities balances, and bank accounts and clearly identify in such reconciliations all unresolved adjustments. Open commodity futures and options positions shall be reconciled by no later than the close of business on the business day following the transaction date. All adjustments will be booked immediately as they are identified and not carried over from period-to-period. Any unresolved amounts shall be afforded worst case treatment in reporting balances in financial reports, including net capital computations, prepared by Peregrine. The reconciliations will provide sufficiently detailed explanations to allow for ready assessment of reconciling items by management, outside auditors, and Commission staff;
4. Prepare and review a weekly listing of aged accounts receivable to ensure that all receivables that are not current assets as defined in Commission Regulation 1.17(c)(2), 17 C.F.R. § 1.17 (c)(2), are excluded from determinations of Peregrine's adjusted net capital;
5. Record in its books and records details of all repurchase and reverse-repurchase transactions by recording the gain on such transactions, on the same date such transactions are entered into and unwound;
6. Account for all funds in U.S. dollars, using the exchange rate in effect as of the date of the conversion of any foreign currency into U.S. dollars; and
7. Develop and implement procedures to ensure that: (1) funds received by Peregrine from customers are credited to the customer's account on the day such funds are received and deposited to a segregated bank account; (2) funds received by Peregrine from persons who are prospective customers, but who have not submitted the acknowledgment of having received and understood the risk disclosure statement, as required by Commission Regulation 1.55(a), 17 C.F.R. § 1.55(a), are returned to the prospective customers within four business days of the date such funds were received for domestic transactions and within six business days of the date such funds were received for international transactions; and (3) Peregrine keeps a written record of all customer or prospective customer funds received prior to having required paperwork completed as required by Commission Regulations, the rules of the National Futures Association and the rules of any exchange of which Peregrine is a member.
C. Financial Reporting. Peregrine agrees within 30 days of the Order to implement the following initiatives and changes to its regulatory financial reporting:
1. Adopt a series of weekly and monthly operating reports that will compare its actual financial results to its budget;
2. For a period of two years, file with T&M a quarterly report, within 30 days of the end of each fiscal quarter, comparing its actual financial results to its budget. Such reports shall explain material variations from budget;
3. For a period of two years, prepare and submit to T&M a complete financial report on Form 1-FR-FCM as of the close of business each month. The report will be filed with T&M within 17 business days of the end of the month. It will include all statements in the Form 1-FR-FCM. A supplemental schedule shall be included which will report total maintenance margin required separately for customers' and noncustomers' accounts; the total of all undermargined customer and noncustomer accounts (whether or not a charge against net capital is taken for such accounts); and a list of all investments made by Peregrine for its own account in other than U.S. Treasury obligations; and
4. For a period of two years, Peregrine will notify T&M in writing within two business days of all additions and withdrawals of capital of $100,000 or more, and include in such notice the source of funds, the form of capital (i.e., cash, securities, or other property), and the reason for the addition or withdrawal. Such notice will be in addition to any other notice required to be filed pursuant to Commission Regulation 1.12, 17 C.F.R. § 1.12.
D. Excess Early Warning. Peregrine agrees that, starting within 30 days of the date of the Order and for a period of two years thereafter, it will maintain its adjusted net capital at a level that is at least $800,000 above Peregrine's "early warning level" (i.e., $800,000 above 150% of Peregrine's minimum capital requirement under the Commission's rules). In the event that Peregrine's adjusted net capital at any time is below such enhanced capital level, Peregrine will:
1. Immediately inform T&M of such fact by telephone and in writing via facsimile transmission (312-353-3690), and follow up by the next business day with a written explanation of why adjusted net capital is below the enhanced level; and
2. Within 48 hours, bring its adjusted net capital above the enhanced capital level.
Nothing in this paragraph affects or modifies any of Peregrine's other duties or responsibilities under the Act or Commission Regulations.
E. Quarterly Evaluation. Peregrine agrees that it will retain a certified public accountant ("CPA") acceptable to T&M, other than the CPA it retains to certify its annual financial reports, to evaluate Peregrine's financial statements for the quarters ending October 31, 2000, March 31, 2001, and June 30, 2001, in accordance with the Schedule of Agreed-Upon Procedures set forth in Attachment A hereto, and to submit a report thereon to Peregrine and T&M within 45 days of the end of those quarters.
F. Public Statements. Peregrine neither admits nor denies the findings of this Order. By this language, Peregrine agrees that neither Peregrine or any of its agents or employees under its authority and control shall take any action or make any public statement denying, directly or indirectly, any findings in the Order or creating, or tending to create, the impression that the Order is without a factual basis; provided, however, that nothing in this provision affects Peregrine's: (i) testimonial obligations; or (ii) right to take legal positions in other proceedings to which the Commission is not a party. Peregrine will undertake all steps necessary to assure that all of its agents and employees under its authority and control understand and comply with this agreement.
Unless otherwise specified, the provisions of this Order shall be effective on this date. A copy of this Order shall be served on Peregrine at the address set forth in the caption of this Order, on all contract markets, and on the National Futures Association.
|By the Commission.|
|Dated: September 7, 2000||______________________|
|Jean A. Webb|
|Secretary to the Commission|
Commodity Futures Trading Commission
Schedule of Agreed-Upon Procedures and Findings
October 31, 2000, March 31, 2001 and June 30, 2001
I. Obtain copies of the October 31, 2000, March 31, 2001 and June 30, 2001 Peregrine Financial Group, Inc. ("PFG") trial balance, net capital computation and supporting schedules and:
a. foot the net capital computation for mathematical accuracy.
b. agree current assets per the 1-FR as defined by CFTC Rule 1.17 to the PFG supporting schedules and to the trial balance and through inquiry and reading of PFG supporting documentation, ascertain appropriate classification as "current" or "non-current" pursuant to CFTC Rule 1.17.
c. read other asset line items per the Form 1-FR Net Capital Computation and through inquiry and reading of the supporting documentation, ascertain appropriate classification of assets as "current" or "non-current" pursuant to CFTC Rule 1.17.
d. for receivables from related parties and affiliates (as defined by Statement of Financial Accounting Standards ("SFAS") No. 57) (1) obtain a list of amounts due to PFG from such parties, along with PFG's identification of the aging of such items, and (2) note that regardless of the PFG aging of such related party and affiliate receivables, all such items were classified as "non-current" pursuant to CFTC Rule 1.17.
II. Obtain a detailed list of accounts payable (which includes, amongst other items, payroll and commission payables) as of October 31, 2000, March 31, 2001 and June 30, 2001 and agree the payables balance per the accounts payable detail sub-ledger to the trial balance. Read supporting documentation to ascertain whether such payables were appropriately classified in accordance with CFTC Rule 1.17; ascertain if accruals were performed in accordance with Generally Accepted Accounting Principles.
III. Obtain copies of certain monthly reconciliations as of October 31, 2000, March 31, 2001 and June 30, 2001 for "current" assets and payables referred in (I) above. Read the reconciliations to obtain an understanding of reconciling items and to ensure that these are reasonable and ascertain if appropriate entries were recorded to resolve such reconciling items and to permit them to be classified as items which do not require reductions to net capital based on their resolution within timeframes permitted by CFTC Rule 1.17.
IV. Obtain a list of disbursements (cash and wire transfers) for 20 business days subsequent to October 31, 2000, March 31, 2001 and June 30, 2001 and select all items over $10,000 and select a representative sample of items below $10,000:
a. read the list and inquire of management about the nature of the items.
b. determine if the disbursement has been appropriately included or excluded as a liability/asset as at the date noted above.
V. Obtain a copy of PFG's budget:
a. read the budget and inquire of the reasonableness of data.
b. inquire of management regarding the process in place to monitor actuals against the budget
c. read management reports documenting this process.
VI. Based on the procedures performed in Steps I, II, and III above, compare the excess net capital reported by PFG in its October 31, 2000, March 31, 2001 and June 30, 2001 1-FR to any adjustments detailed in Attachment B to this Schedule of Agreed-Upon Procedures, noting any differences; ascertain the net percentage effect, if any, on excess net capital.
VII. For receivables due from related parties and affiliates (as defined by SFAS No. 57), outstanding as of October 31, 2000, March 31, 2001 and June 30, 2001, obtain copies of incoming wire transfer documents or bank deposit slips (with copies of checks presented to PFG) to satisfy such outstanding receivables to ascertain if such outstanding receivables were paid on or before the dates noted above, or if not paid in full, are classified as non-current on the October 31, 2000, March 31, 2001 and June 30, 2001, 1-FR calculation of net capital.
VIII. a ) Obtain PFG's weekly pro-forma calculation of net capital prepared during the months of October, 2000, March, 2001 and June, 2001 and read each of such weekly calculations noting that PFG identified a line as "excess net capital" and that such line item indicated a positive amount of at least $800,000.
b) Obtain all daily customer segregation and secured funds calculation reports prepared during October 2000, March, 2001 and June 2001. Read each report noting if segregated and/or secured funds increased by more than 10% on a day-to-day basis, or by more than 25% during a week noting that if such increases occurred, an interim, pro-forma net capital computation was prepared, and if prepared, that "excess net capital" was identified as at least $800,000.
IX. Obtain copies of wire transfer receipts/deposit slips evidencing cash capital contributions made by the shareholder (Russell Wasendorf), or any future shareholder that may invest in PFG, during the quarters ending October 31, 2000, March 31, 2001 and June 30, 2001. Agree such wires/deposits to the corresponding bank statements for the account to which the funds were wired/deposited.
X. For every cash receipt (check or wire transfer) to PFG's operating accounts (i.e., non-seg and non-30.7 secured accounts) in an amount of $100,000 or more, either as an individual cash receipt or aggregated by payor, which is received during the quarters ending October 31, 2000, March 31, 2001 and June 30, 2001, identify such cash receipt and perform the following:
a. Inquire of PFG's management regarding the nature and originator of the transaction; and
b. If the amount does not represent receipt of cash to satisfy a revenue related activity, inquire of PFG's management if such cash receipt represents a payment for funds advanced (i.e., loans) to either affiliates or independent third parties. If the fund represent an advance, obtain detail supporting the nature and reason for the advance.
1 Respondent does not consent to the use of the Offer, this Order, or the findings in this Order to which it has consented to in the Offer, as the sole basis for any other proceeding brought by the Commission other than a proceeding to enforce the terms of this Order. Respondent also does not consent to the use of the Offer, this Order, or the findings in this Order consented to in the Offer, by any other person or entity in this or any other proceeding. The findings made in this Order are not binding on any other person or entity named as a defendant or respondent in this or any other proceeding.
2 Secured receivables are counted as current assets if (1) they are "secured by readily marketable collateral which is otherwise unencumbered" and (2) the readily marketable collateral is in the possession or control of the FCM, or the FCM has a perfected security interest in the collateral. (Commission Regulation 1.17(c)(3)(i)-(ii)).
3 There are six exceptions to this rule in Regulation 1.17(c)(2)(ii)(A)-(F). Relevant to this matter is the exception in Regulation 1.17(c)(2)(ii)(A), which allows for the inclusion as "current assets" of receivables resulting from the marketing of inventories commonly associated with the business activities of the registrant; provided, such receivables are outstanding no longer than three calendar months from the date they are accrued.
4 The purpose of the early warning level is to give the Commission advance notice of a potential capital problem at a FCM.