Friday, February 14, 2014

Peregrine Financial Group Inc.: Loses $215 Billion (2012)

PFGBest logo
Peregrine Financial Group, also known as PFGBest, filed to liquidate under Chapter 7 bankruptcy, after a lawsuit was filed against them early July 2012. Peregrine is a futures-trading business founded by Russell Wasendorf Sr. headquartered in Cedar Falls, Iowa. Its main business is brokerage, mainly trading in the commodities and currency markets. Most of its clients are farmers and other individual investors. (Bundge). The stakeholders involved with PFGBest include Russell Wasendorf Sr., the employees of the firm, and all of their clients, who invest their money with the firm. The Commodity Futures Trading Commission (CTFC) sued Peregrine and its CEO Wasendorf Sr. after the National Futures Association (NFA) prohibited the company from participating in any more business. The CTFC sued them for fraud by falsely reporting customer funds, violating customer fund segregation laws, and falsely reporting financial statements (Touryalai). Shortly after the lawsuit was filed, Russell Wasendorf Sr. was found in his car after a failed suicide attempt. There was a suicide note that alluded to "a crime that had been committed” (Bunge). The firm had been falsely reporting that it held more in its clients account then they really did. There is approximate $215 billion in customer assets that cannot be found. The NFA audits found that there was a discrepancy between what they were reporting and what was actually there, leading to them finding fraudulent bank statements. “The NFA conducted an audit of the firm which said it held in excess of $220 million in a segregated customer account, when, in fact, that account held approximately only $5.1 million” (Touryalai). Wasendorf pleaded guilty in court, and investors report that his $24-million headquarters was “financed with money siphoned from customers” (Cohn).

The company falsely reported financial statements, and customer funds leaving its clients empty handed. To determine if the actions of Wasendorf and Peregrine were ethical, it should be examined using four major theories of ethics.

The first of the four theories is utilitarianism. Utilitarianism ethics often refers to doing the greatest amount of good for the greatest amount of people., and can be defined as “an ethical tradition that directs us to make decisions based on the overall consequences of our acts" (DesJardens 24). This means that decisions are said to be ethical if the result benefits the majority of people involved. When applying the theory of utilitarianism to the Peregrine case, the stakeholders involved must be examined. First, Russell Wasendorf is a major stakeholder in the case. He was the CEO of the company. He benefited from his actions, because he was the one who received the money he embezzled. Second, the employees of the company are stakeholders. They did not benefit from Wasendorf’s actions because the company was forced to liquidate, so they all lost jobs. Last, Peregrine’s clients are the largest group of shareholders. $215 billion of client assets were reported missing, and not recovered, so the clients did not benefit from his actions. By applying utilitarianism, it can be concluded that the actions of this company were not ethical because they did not do good for the greatest amount of people. They only benefited the CEO of the company.

Russel Wasendorf Sr. Chairman of PFGBest

The second theory to be applied is the Kantian approach, which is essentially opposite to Utilitarianism. The Kantian approach "emphasizes acting with respect toward all autonomous beings" (Salazar). This means that all people must be treated with equal respect, no matter what. A person following the Kantian approach would but individuals before the consequences of their actions, which is why it is the opposite of Utilitarianism. The Kantian approach also focuses on the formula of humanity, which expresses the need to not use people as a means. When applying the Kantian approach to the Peregrine case, the company’s clients must be looked at. They were used as a pawn for Wasendorf to earn money. He did not consider that they needed their money. He only used them for a way for him to make more money. They were not treated with respect because they were lied to about balances in their accounts with the company, and the company’s health. The clients were not respected and were only treated as a means to make money so the actions of the company would be ruled unethical under the Kantian approach.

The next theory is Friedman’s Economic Theory, also known as Individualism and was founded by famous economist Milton Friedman. Individualism states that everyone has the right to pursue their own interests, but people do not have the right to stand in the way of others pursing their own interests. This theory can be taken a step further by applying it to business and corporate social responsibility. "The only goal of business is to profit, so the only obligation that the business person has is to maximize profit for the owner or the shareholder's" (Salazar). Under Individualism, a business is solely concerned about profit maximization to benefit the shareholders, and not of the business' obligations to society at large. Peregrine’s actions did benefit the shareholders at the time. By falsely reporting the balances of customer accounts, they reported higher assets and higher liabilities. They falsely reported that the company was doing better than it really was doing. Public opinion of this company went downhill because they thought the company was cheating them of their money. This resulted in reporting of higher profits, which is the goal under this theory. Individualism would say that the actions of Peregrine were ethical because they maximized profits for the business. Although it is ethical under this approach, it is not the best move for the company because it forced them into bankruptcy.

Virtue Theory
PFGBest headquarters in Cedar Falls
The last theory to be used is virtue theory. Virtue theory is based on Aristotle’s ethics and says that for something to be good it must perform its function well. It also says that people must perform rationality to function well, which will, in turn, make them happy. To apply this to the Peregrine case, one of the four virtues of business can be looked at. Honesty must be utilized in business. In this case, honesty was not present. Wasendorf lied about account balances and falsely reported the company’s financial statements. Those actions cannot be considered honest. The company is not following one of the four virtues so the actions would be ruled unethical. The company also doe not follow the rest of the three virtues. Wasendorf did not show courage in his actions because he was not willing to stand for the right actions. He also does not display temperance because he does not have reasonable desires because stealing client money is not reasonable. He also does not show justice, because stealing client money is not a fair practice. So, the rest of the four virtues show that the actions of this company were not ethical.


Bunge, Jacob, Jerry A. DiColo and Josh Dawsey. "Scandal Shakes Trading Firm ---Regulators Cite Peregrine in Missing $215 Million; Company Files for Bankruptcy." Wall Street Journal, Eastern edition ed.Jul 11 2012. ProQuest. Web. 10 Feb. 2014 .
Cohn, Emily. "Peregrine CEO Russell Wasendorf Sr. Sentenced To 50 Years In Prison." The Huffington Post., 31 Jan. 2013. Web. 10 Feb. 2014

DesJardins, Joseph R. "Ethical Theory and Business." An Introduction to Business Ethics. 5th ed. New York, NY: McGraw-Hill/ Irwin, 2014. 23-37. Print.

Salazar, Heather. Business Ethics, Economics, and Individualism. Powerpoint Slides

Salazar, Heather. “Kantian Business Ethics,” in Business in Ethical Focus, ed. Fritz Allhoff and Anand J. Vaidya (Broadview Press, 2008).

Touryalai, Halah. "Peregrine Files For Bankruptcy After $215M Goes Missing, Where Were The Regulators?." Forbes.Com (2012): 37. Business Source Premier. Web. 10 Feb. 2014.

1 comment:

  1. Jess, I really like this whole post overall; how you worded things, used numbers to support your analysis, and were very clear about everything. I agree with each point that you made, and the only segment I feel could have been looked at from another persepctive and added upon was Friedman's views. As I mentioned in a comment on another classmate's blog, while the main goal of a firm through Friedman's views was maximizing profits, it was doing so by abiding by the rules of society embodied in law and ethical custom. I also learned about this case because I had never heard of it, but it goes to show that trying to falsify reports amongst other things is not a fool-proof plan and can eventually lead to bankruptcy. Very good post overall!