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Peregrine Financial Fraud: What Shocks Me

Posted by Larry Doyle on July 20, 2012 7:26 AM |

After close to four years of tracking and highlighting stories of financial frauds and accompanying regulatory failures, I am not easily shocked. The other day while reading of the news surrounding the fraud and failure of the Peregrine Financial Group in Cedar Falls, Iowa, I was shocked.

We now know the fraud at Peregrine was carried out over a 20 year time period. Excruciatingly painful for Peregrine’s customers? No doubt. But in light of all we have learned about our captured regulators, is this shocking? Regrettably, no, it is not.

Peregrine’s owner and CEO Russell Wasendorf maintains he perpetuated this fraud on his own. Is this to be believed? Not on its face, but this assertion alone does not shock me.

I “would” be shocked to think that there are not other Peregrine-type frauds out there. Why is that and what truly shocks me about this situation at Peregrine? 

In the process of reading a review of the Peregrine fraud, I learned the following shocking news in the Financial Times:

. . .  reforms must allow for self-regulatory organisations and the CFTC to have direct electronic access to futures brokers’ customer funds, without asking for permission as is current practice.  (LD’s highlight)

I literally gagged the other day upon reading that statement. Are you kidding me? Not to make light of this painful situation, but as I drank my coffee after having read this news, I envisioned the following exchange between regulators:

“How ya doing today?”

“Good, yeah, . . . doing just fine.”

“Anything new out there?”

“No, not really. Had a few questions and concerns about some stuff going on over at Peregrine, but that’s about it.”

“Peregrine, . . . really? Russ Wasendorf? He’s a good guy, . . . no?”

“Supposed to be. I know he’s highly thought of in his community. Unfortunately, though, when we wanted to check some things out with Peregrine’s customers, we just did not get the green light, you know, the permission from Russ, to look into it.”

“Really? Uh…ok. . . . Anything else new?”

“No, no, . . . that’s about it.”

For the customers of Peregrine, I do not mean to make light of your pain.

I do mean to shame the financial regulators from the CFTC and NFA (National Futures Association) who failed to perform. Permission? Are you serious?

How many other frauds are out there right now because our captured regulators did not get the permission to check customer accounts?

“You bowling tonight?”

“Yeah, yeah, yeah . . . my wife gave me permission. See you there!!”

Financial regulatory oversight in America circa 2012 = J-O-K-E!!

Navigate accordingly.

Larry Doyle 

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Ron Larson

    We need to have a national pull-your-cash-out day. All customers of CFTC regulated firms withdraw all your cash for one day, lets say Aug 01.

    This will show you what firms out there aren’t being honest. If all the customers of a firm take out all their cash on the same day, the firm will have to produce the money, all of it.

    • Ron Larson

      We should call it “Show me my money” day. In fact, I’d like to see the CFTF require all it’s firms to do it. That will shake out all of the skeletons in the closet. But I don’t think they have the courage.

      • LD

        I like the way you think, BUT you have to know the CFTC and other regulatory bodies would be PETRIFIED to see this happen.

        Who should spearhead it?

        The CFBTA, that is, the Commodity Floor Brokers and Traders Association

        It would take some balls on their part too. Do they have them?

        I like the way you think.

  • JR

    Ron….your idea is stunning…..why not have an annual day in which customers are given their money back….and establish for sure that the firm holding their funds has the ability to do so.
    Common sense.
    wow. i love it

  • AN

    Scary, but why do I get the feeling that most of these firms in the USA (and around the world actually) will fail very quickly if such a run is made. LD is right, as there are many many more shady firms out there with hundreds of millions or even billions of investor money at risk.

  • LD

    Starting to admit ineptitude…in today’s WSJ, Regulators Seek Outside Audit Advice After Peregrine Collapse

    Futures regulators are seeking advice from the organization that oversees the auditors of public companies after coming under attack for missing red flags of an alleged 20-year fraud at Peregrine Financial Group Inc.

    The Commodity Futures Trading Commission has reached out to the Public Company Accounting Oversight Board for “insights and expertise,” CFTC Chairman Gary Gensler said at a House Agriculture Committee hearing Wednesday.

    Mr. Gensler said that the commission was considering tightening other rules and that CFTC staff is reviewing the agency’s oversight of industry-funded self-regulatory organizations that are directly responsible for auditing firms like Peregrine.

    Committee Chairman Frank Lucas (R., Okla.) said that the futures market needs regulators “doing their job” rather than more regulations.

    “New regulations mean nothing when regulators are not enforcing the existing rules on the books,” Mr. Lucas said in his opening statement.

    “These regulators, I’m not sure they can ever get ahead of this,” Rep. Collin Peterson (D., Minn.) said at the hearing.

    The CFTC delegates direct oversight of small futures firms to the industry-funded National Futures Association, which has been criticized for missing warning signs in periodic audits of Peregrine.

    The CFTC also noted problems with NFA’s audits in a 2000 enforcement investigation of Peregrine, Mr. Gensler said.

    Sen. Tom Harkin (D., Iowa) questioned NFA in a letter sent Tuesday about the role of Peregrine Chief Executive Russell Wasendorf Sr. on NFA’s advisory committee, the auditing of futures firms, the budget of the organization, and the NFA’s former enforcement actions against Peregrine. Mr. Harkin is a member of the Senate Agriculture Committee, which is planning on holding a similar hearing Aug. 1.

    Mr. Gensler also said in his testimony that the CFTC will invite industry representatives and reform advocates to a public meeting to discuss protecting customer funds in the second week of August.

    Mr. Wasendorf was arrested earlier this month by federal authorities on charges of lying to regulators. Some $215 million in client money that was supposed to be safeguarded by Peregrine has gone missing, according to regulators.

    The charges came after Mr. Wasendorf attempted suicide July 9, leaving behind a confession, according to federal investigators. Peregrine filed for Chapter 7 bankruptcy protection a day later.

  • JR

    Amazing that states, through their attorney general’s, have not proposed laws to invalidate the actions/activities/arbitration of SROs. If Massachusets passed a law severely limiting the legal standing of SROs, say in the futures industry, would trading firms stop doing business in that state? Perhaps we have reached the tipping point…that the concept of SROs is moved to the garbage bin of history.
    Why are SROs not in the cross-hairs?

    • LD

      JR,

      I like the way you are thinking here because the evidence is rampant that SROs do not work and have not worked. They are little more than traffic cops to monitor some minor parking violations and/or write traffic tickets BUT they are no more prepared nor positioned nor inclined to regulate effectively.

      There is REAL risk out there going unchecked as a result.






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