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MF Global PFGBest Victim Forum > Insight: PFGBest regulator known for inexperienced auditors

WASHINGTON/CHICAGO (Reuters) - The watchdog that missed for nearly two decades the blatant fraud at failed brokerage PFGBest has frequently sent out fresh college graduates to look over the books of complex financial firms, people familiar with its operations say.

The spectacular flame-out of PFGBest and its founder Russell Wasendorf Sr. this week has thrust into the spotlight the National Futures Association, an industry-funded regulator not well known outside of financial markets.

The regulator, which oversees mostly smaller, independent futures operations, has little turnover at the top, and an army of young auditors with a lack of real-world work experience before they come to the NFA.

"When they come in and do an audit, they're not experienced enough," said a former employee of PFGBest.

An NFA spokesman declined to comment on the age or experience of its auditors.

Chris Hehmeyer, the NFA's non-executive chairman, defended the organization in an interview with Reuters on Friday, saying the NFA's insistence on requiring Wasendorf to sign an authorization to check bank balances stopped the fraud in its tracks.

"They are the ones that uncovered this whole thing," Hehmeyer said of NFA auditors. "If they hadn't caught him, it could have gotten a lot bigger."

Dan Roth, the head of the NFA, said that auditors had just started conducting a new review of Peregrine Financial Group, as it is legally known, about two weeks ago. Asked if he was satisfied with NFA's audits of PFGBest, he declined to comment, citing the ongoing inquiry.

The NFA has been PFGBest's primary regulator since the broker's inception in 1992, responsible for annual audits that ensure customer money is adequately safeguarded.

Wasendorf has confessed, in a signed statement, that he duped the regulator for two decades. The FBI arrested him on Friday and accused him of stealing more than $100 million from clients using little more than a rented P.O. Box, Photoshop software and inkjet printers.

The NFA oversees 64 futures brokers, which collectively hold $7.4 billion in customer money, Commodity Futures Trading Commission figures show. As of 2011, sources say the NFA had just about 300 employees.

Wasendorf, who tried to kill himself in his car on Monday morning outside of PFGBest's Cedar Falls, Iowa, offices, left a detailed confession in which he admitted forging bank documents for 20 years.

His suicide attempt came a day after he gave NFA permission to check his bank balances directly and electronically.

'FOLLOW THE CHECK LIST'

It is not the first time the head of a brokerage under NFA's oversight has been accused of massive fraud.

Last month, the chief executive and former head trader of Sentinel Management Group Inc were indicted for allegedly defrauding customers out of more than $500 million before the futures brokerage went bankrupt in 2007.

It was the biggest loss of customer money in any futures brokerage bankruptcy to date, and was overshadowed only recently by the failure last October of MF Global, leaving customers with a $1.6 billion fund shortfall.

Jul 14, 2012 at 21:21 | Unregistered CommenterMarcus Fields