Peregrine Financial: 4 Common Methods of Camouflaging Fraud

By Nicholas Elliott

Financial frauds are shocking when they come to light and one of the first questions usually raised is “why couldn’t investors/regulators have seen this?”

The latest potential example is Peregrine Financial Group Inc., where Russell Wasendorf Sr. allegedly defrauded clients of his futures brokerage firm over a period of 19 years. Wasendorf, who confessed his actions in a statement, has been sued by the Commodity Futures Trading Commission for fraud, violating customer fund segregation laws and lying to regulators. He has been charged by the Federal Bureau of Investigation with making false statements and hasn’t entered a plea.

Based on the contents of the confessional statement and the criminal complaint, Wasendorf’s behavior had several points in common with other schemers who escaped close scrutiny for years:

Home-made forgeries: Wasendorf said in his confession that he forged bank statements and bank correspondence using Adobe Photoshop, scanners, Excel and printers, which regulators admitted fooled them.

Similarly, Marc Dreier forged financial statements and other documents using basic methods as part of a Ponzi scheme that brought down his eponymous New York law firm.

Mark Zimbelman, a professor of accounting at Brigham Young University in Provo, Utah, writes that regulators and auditors are “easy to fool if all they are doing is checking for supporting documents, given today’s technology.” A more skeptical approach raises the chances of detection, according to Zimbelman, but “most auditors and regulators are not too hard to fool…because they just want to dot the i and cross the t.”

Financial respectability: Bernie Madoff had been chairman of the board of directors at the Nasdaq Stock Market and sat on the board of governors of the National Association of Securities Dealers. Wasendorf sat on an advisory committee at the National Futures Association, the body responsible for oversight of firms such as his own.

Such positions of responsibility can “legitimize” fraudsters in the eyes of investors and regulators, said Ken Springer, president of investigative firm Corporate Resolutions Inc.

Small-time accountants: It’s a familiar pattern: Wasendorf’s auditor was a single-proprietor business operating from a Chicago suburb; R. Allen Stanford used a small firm in Antigua; Madoff employed a small shop in a New York City suburb; and Bayou Hedge Fund Group created its own accounting firm to hide its fraud.

Springer said investors and customers should look at whether a firm’s accountant measures up to the size and complexity of its business. “That’s a basic question you should be asking,” he said.

Pillar of the community: Stanford was a hero to many in Antigua, where he based his financial empire, and Scott Rothstein donated millions of dollars to charity and spent lavishly on himself with fraudulent gains from a Ponzi scheme.

Wasendorf relocated the headquarters of Peregrine to Cedar Falls, Iowa, and made other investments in the city. The Wall Street Journal described how he spent decades building an “image as a business kingpin and philanthropist.”

Such a sterling public image can lull outsiders into a misplaced sense of security.