Commodity Watchdog to Beef up Audit Practices
In the wake of the PFGBest scandal, the National Futures Association announces it is initiating a review of its practices.
Willie Vogt 
Published: Jul 17, 2012
A lot of questions have been raised about the Peregrine Financial Group scandal, which may have involved years of systematic fraud and embezzlement. For the National Futures Association, on of two key regulatory bodies those questions are driving a little "introspection."
NFA announced this week that it has hired the law firm Jenner and Block to "conduct a careful internal review of NFA's audit practices and procedures, and the execution of those procedures in the specific instance of PFG…" The Cedar Falls, Iowa, broker appears to have been defrauding the industry for some time and according to a signed statement from PFG's founder released by the FBI the fraud was at the highest level.
TOUGHER OVERSIGHT? The National Futures Association is bringing in an outside firm to audit it's broker monitoring procedures to help avoid another Peregrine debacle. In its statement, NFA notes that it intends "to identify and implement any regulatory oversight changes that may be necessary to improve the detection of fraud and protection of segregated customer funds."
The PFG fraud was discovered using electronic surveillance of the broker's bank accounts. That access, which NFA is encouraging for all the firms it audits, allows the association to tap actual bank accounts and check financial health of a brokerage. PFG had been dragging its feet in signing up to allow NFA access to its accounts.
According to press reports, Russell Wasendorf Sr., PFG's founder, had signed on to allow the access just days before attempting suicide. And the signed statement he provided in the wake of the suicide attempt purports to show how he used a paper-based fraud scheme to make NFA think PFG's accounts were flush with cash when they weren't. NFA discovered the shortfall very soon after PFG signed on to allow electronic access to its records.
Reviews of segregated accounts procedures for all brokers could be taken up in the wake of this scandal. NFA's effort to get brokers to sign on to electronic marketing could be stepped up as well. For farmers who have money at their brokers, it might be time to check in even with a trusted broker to discuss procedures in place. However, fraud on the level and nature of what happened at PFG would have been very difficult to track without the new electronic surveillance. Check out the FBI report for more details of how Wasendorf says he defrauded customers.
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