For all of the deserved criticism the National Futures Association (NFA) is getting these days for missing the “steal and spend racket” over at Peregrine Financial Group, the latest lawsuit involving the current NFA chairman Chris Hehmeyer appears rotten. This is a case only the futures industry could cook up and turn into a “You can’t make this stuff up” kind of story.

Let’s start with the Alaron suit and move backward from there. No doubt, many in the industry have seen or heard about the suit filed by Alaron Trading Corporation against Chris Hehmeyer on Monday for $4 million in damages and another $12 million in punitive damages. Among the many items alleged in this 22-page suit in Cook County Circuit Court are: “negligent misrepresentation, fraudulent misrepresentation, intentional interference with contractual relationships between Alaron and its introducing brokers” and interference with the sale of Alaron’s customer business to Peregrine Financial Group in 2009.

In short, Alaron’s president Steve Greenberg is accusing Hehmeyer of not playing fair with the customer accounts Alaron shifted over to Penson GHCO in late 2008. Ultimately, Alaron agreed to sell its business to Russ Wasendorf Sr.’s Peregrine Financial Group for $2 million, and “up to another $2 million if sufficient customer assets transferred to PFG.”

As the story goes in the lawsuit, Hehmeyer lied or misrepresented the terms of Penson GHCO’s services for Alaron, as well as fees paid by Penson to Alaron for those accounts. Not only that, but the suit implies Hehmeyer may have used his position as the non-executive vice president at the NFA inappropriately against Alaron. Ultimately, the suit claims that Hehmeyer and Penson GHCO convinced two major introducing brokers with Alaron to stay with Penson and not switch accounts over to PFG. Because of that, the second $2 million from PFG never was paid.

That’s not all of the story, according to my sources.

What isn’t noted in the lawsuit is that Alaron already filed a suit against Penson, along with Penson’s general counsel Carl Gilmore in 2010. That case was handled as an out-of-court arbitration at the NFA, and was agreed to by all three sides. That legally binding arbitration largely focused on the same details listed in the lawsuit, and was won by Penson and Gilmore in January 2012. Not only did Penson and Gilmore win the arbitration case, but Alaron was ordered to pay a $400,000 fee for the bulk transfer of customer accounts out of Penson and over to PFG. This ruling against Alaron and in favor of Penson and Gilmore was also confirmed by a Cook County Court.  

The crux of that arbitration case rested on several factors, largely that Alaron was in deep trouble in 2007. The firm lost $3 million in funds it had on deposit at Sentinel, another shady firm that is still winding up its bankruptcy. Given that, the CME Group booted Alaron out as a clearing member firm because it was undercapitalized. That ultimately forced Greenberg to move the customer business to a clearing member firm like Penson. When Alaron wanted to move those accounts over to PFG, about half of the segregated funds stayed at Penson. Penson said it did nothing wrong or inappropriate in allowing customers to voluntarily stay there.

And in retrospect, who wouldn’t? Why would a customer or IB want to switch its business over to another non-clearing FCM like PFG?

Where all of this leads is anyone’s guess. It is conceivable that the Cook County Court will look at the arbitration case and dismiss this suit. It’s possible it will take a fresh look at how this deal went down, and potentially drag Hehmeyer and the NFA down with it.

The irony in this case is almost too much to bear – A guy is being sued because his firm held onto accounts of customers who voluntarily chose to stay there, and would have gone to another firm that stole virtually all of its customers’ money.

Oh, and the attorney representing Alaron in this case? Nicholas Iavarone, the same guy who represented Russ Wasendorf Sr. all those years, and currently represents Russ Wasendorf Jr.

You can’t make this stuff up.

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