WASHINGTON, July 25 (Reuters) - The frontline regulator for
failed futures brokerage Peregrine Financial Group says the
firm's founder "fooled" regulators with his massive fraud, even
though the auditors who examined the firm followed all of the
proper steps and procedures.
In prepared testimony for a U.S. House Agriculture Committee
hearing later on Wednesday, National Futures Association
President Daniel Roth stresses the lengths Peregrine Financial
Group's founder, Russell Wasendorf Sr., went to in hiding his
scheme for roughly two decades.
"The simple fact is that Wasendorf's forgeries fooled us,
and fooled us for longer than any of us would like," Roth said.
Wasendorf was arrested earlier this month after admitting to
using little more than a rented post office box, Photoshop
software and inkjet printers to dupe regulators by intercepting
bank confirmation requests in the mail and forging the documents
to conceal the missing money.
NFA, which oversees mostly smaller, independent futures
operations, says it was its efforts to confirm Peregrine's bank
balance electronically that uncovered the fraud.
Peregrine, known as PFGBest, advised clients on July 9 that
all funds were on hold because of a suicide attempt by
Wasendorf. He left a signed note at the scene that laid out the
details of his fraud.
His brokerage filed for bankruptcy the next day, and the
Commodity Futures Trading Commission filed a civil case against
alleging Wasendorf had misappropriated more than $200 million in
The collapse of Peregrine, also known as PFGBest, came only
nine months after futures customers suffered another shock with
the demise of the even larger MF Global brokerage.
An estimated $1.6 billion in customer funds went missing
during MF Global's final chaotic days, and regulators are still
investigating what happened.
CFTC Chairman Gary Gensler, who will also testify on
Wednesday, plans to lay out more details about red flags at
Peregrine dating back to the 1990s.
Those problems, he said, included issues with net capital
rules and financial controls as well as questions about "the
abilities of the firm's auditor," among other things.
He did not name the auditor. Reuters previously reported
that for at least 2010 and 2011, PFGBest was using a tiny
auditing firm based in a suburban Chicago home.
In response to the various problems, the CFTC in 2000 fined
Peregrine $90,000 and forced it to hire a second independent
accounting firm. Gensler said Peregrine retained
PriceWaterhouseCoopers, one of the Big 4 auditing firms which
also served as the outside auditor for MF Global.
The loss of customer money at two future brokers in less
than a year has dealt a blow to investor confidence in the
Regulators are likely to face tough questioning from
lawmakers on Wednesday how the fraud went on so long without
"Who is minding the store,?" House Agriculture Chairman
Frank Lucas plans to ask in an opening statement. "What we need
is regulators doing their job."
The collapse of Peregrine and MF Global have also caused
some, including Gensler, to call for a fresh review of the
Roth, in his written testimony, called Wasendorf's actions
an "elaborate fraud" executed by all kinds of forgeries that
were not just limited to bank statements.
"Forged external records included bank statements, bank
confirmations, print-outs of daily online summary reports of
bank balances, cashier's checks, bank acknowledgement letters,
bank deposit tickets and bank receipts all purportedly from US
Bank," Roth said. "Moreover, Peregrine submitted to NFA false
daily segregation reports, monthly financial statements and
segregated investment detail reports and annual certified
Some critics have questioned why the NFA did not catch the
fraud sooner, and pointed to Wasendorf's use of the P.O. box as
a potential red flag.
Roth said it is "not at all uncommon" for banks that hold
customer money to use P.O. boxes to receive confirmation
requests. And he added that the NFA "followed audit steps" that
were consistent with CFTC rules and regulations.
Nevertheless, Roth admitted that the NFA's audit steps "are
not good enough anymore" and laid out a series of next steps the
organization plans to take.
One proposal, set to be presented at the NFA's August board
meeting, would require futures brokerages to provide regulators
with online, view-only access to bank balances.
Exchange operator CME Group Inc, which was the front-line
regulator for MF Global, also plans to adopt the same rule.
In addition, the NFA and the CME plan to perform an
immediate confirmation of all customer segregated bank accounts
using the new e-confirmation process.
"The completion of this work within the next week or so
should help ensure that another Peregrine is not lurking in the
industry," Roth said.
(Reporting by Sarah N. Lynch)
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