Regulator Turns to Peregrine Executives for Fixes, Details on Fraud
By Jacob Bunge and Ianthe Jeanne Dugan
A key financial regulator has interviewed the executive team that ran Peregrine Financial Group Inc. in an effort to improve its oversight of the industry, which was heavily criticized in the wake of the broker’s collapse last July.
Investigators working on behalf of the National Futures Association talked with most of Peregrine’s senior ranks—including jailed founder and Chief Executive Russell Wasendorf Sr. —over the past month, according to people involved in the process.
Regulators seeking input from the failed firm’s management is “a highly unusual move, but it’s a great lessons-learned tool,” said Ken Springer, president of Corporate Resolutions Inc. and a former white-collar crime investigator for the Federal Bureau of Investigation.
The Chicago-based NFA drew scrutiny from investors and policy makers after the revelations of fraud at Peregrine. Directors of the industry-funded agency, which federal futures market regulators depend upon for day-to-day policing of brokers, last summer ordered an external review of its practices while putting on hold potential management changes and bonus payments to top officials.
A special committee of the NFA’s board hired California-based Berkeley Research Group to conduct the analysis, which officials at the association said will likely be presented to directors later this month.
In addition to Mr. Wasendorf Sr., who spoke with investigators at the Cedar Rapids Correctional Center in Iowa, Berkeley Research Group officials in December met with his son, Russell Wasendorf Jr., Peregrine’s former president and chief operating officer, according to people with direct knowledge of the matter.
Investigators also interviewed Brenda Cuypers, Peregrine’s former chief financial officer, General Counsel Rebecca Wing, and Susan O’Meara, who had been the firm’s chief compliance officer, these people said.
Questions for the former Peregrine executives centered on how the NFA can make its audits more comprehensive and finding broader ways to better supervise brokers that deal in futures and currencies, according to people involved in the discussions. Investigators also sought further details of Mr. Wasendorf Sr.’s scheme and Peregrine’s own operations, the people said. It wasn’t clear how the former Peregrine executives responded.
Peregrine slid into bankruptcy following revelations that Mr. Wasendorf Sr. illegally tapped client money to fund business ventures and pay regulatory costs for his firm over nearly 20 years. He pleaded guilty in September to charges of embezzlement, mail fraud and lying to regulators, and awaits sentencing.
Mr. Wasendorf Sr. aired his own critique of regulators’ audit practices in a confession letter he penned ahead of his attempted suicide July 9.
“It was relatively simple to deceive the Regulators during their Annual Audits since their Audit Modules guided them to find a number, tick a box, tie out totals, etc.,” Mr. Wasendorf Sr. wrote in the letter, which was recovered by law enforcement officials. “They had no way to detect a counterfeit bank statement.”
Mr. Wasendorf’s crimes dealt another blow to the already-bruised reputation of the U.S. futures industry, after the late-2011 implosion of a larger player, MF Global Holdings Ltd. , left an estimated $1.6 billion worth of investors’ money unaccounted for, according to trustees.
The thoroughness of the NFA’s auditing drew fire from some customers of Peregrine as details of Mr. Wasendorf’s scheme emerged last summer, including an instance when his fraud nearly came to light during a 2011 NFA audit.
An NFA campaign last year to shift futures brokerages toward an automated system for confirming bank balances helped unveil Mr. Wasendorf Sr.’s scheme. The agency took further steps in the months following Peregrine’s collapse to improve monitoring of investor funds and boost the expertise of its examiners, and last month began monitoring futures account balances on a daily basis with some banks.
“We expect the Berkeley review will include recommendations for strengthening NFA’s regulation of the industry, and we look forward to reviewing them,” said a spokesman for the NFA in a statement. “If some of the recommendations in the review come from ‘unique’… or non-traditional sources, we look forward to reviewing them as well.”
Jane Kelly, the public defender representing Mr. Wasendorf Sr., had no comment.