|Past Member Newsletters|
January 31, 2013
We wanted to send you a personal update on all that has happened in the months following the collapse of Peregrine Financial Group Inc. (PFG), and let you know that we have taken steps to refine and improve our regulatory practices and better protect you, your customers and the industry in the wake of this tragic situation.
As you know, in July 2012, PFG filed for bankruptcy following the attempted suicide of its former president and CEO Russell Wasendorf, Sr., and subsequent discovery that he had defrauded PFG customers by using segregated funds for his personal gain and submitting falsified records to NFA and the Commodity Futures Trading Commission (CFTC).
Shortly after we uncovered the PFG fraud, a Special Committee of NFA's public directors commissioned an independent review of our audit practices and procedures by Berkeley Research Group (BRG). As part of the review, BRG analyzed the execution of those audit procedures specifically in relation to PFG to ensure we followed the audit steps set forth by the Joint Audit Committee, a representative committee of the Audit and Financial Surveillance departments of U.S. futures exchanges and regulatory organizations, and were consistent with CFTC regulations.
During its investigation, BRG conducted a comprehensive review of NFA's audits of PFG from 1995 through 2012. BRG examined more than 190,000 NFA documents containing over 3 million pages, including more than 166,000 emails and related attachments. BRG also conducted interviews of 32 individuals with knowledge of the factors or circumstances surrounding NFA's audits of PFG, including 25 current or former NFA employees and five former PFG officials (including Russell Wasendorf, Sr.). The results of BRG's analysis and a list of recommendations were presented to the Board late last week.
Earlier today, we convened a special meeting of our Board of Directors, during which the Board voted to accept BRG's recommendations. NFA staff will soon develop a plan to act on the recommendations and present it to the Board. The Board will also appoint a special committee to oversee the timely implementation of the recommendations.
BRG's review found that, overall, "NFA audits were conducted in a competent fashion and the auditors dutifully implemented the appropriate modules that were required in the annual audits" following the standards set by the Joint Audit Committee.
The review also found that, unlike in the Madoff Ponzi scheme, there were no complaints from customers and no whistleblowers stepped forward to call attention to Wasendorf's fraud. BRG specifically concluded that Wasendorf "was able to conceal his fraud meticulously by providing numerous convincingly forged documents to NFA and others."
BRG also put forth a list of 21 recommendations, which it says are "designed to improve the operations of NFA audits" based on the results of its analysis. The recommendations cover a wide range of topics, including auditor hiring, training, supervision and continuing education. In particular, BRG suggested that NFA enhance its training and procedures to ensure a greater sense of professional skepticism among its audit staff. We feel that, once implemented, BRG's recommendations will make us a more-effective regulator. We also believe that these suggestions will prove helpful for any regulatory organization, especially in the continual struggle to overcome a "check the box" mentality.
Additionally, BRG recommended that NFA conduct more testing of Members' internal controls, the qualifications of outside auditors and the sources of firm capital contributions. BRG also suggested that NFA take steps to better identify potential risk factors in FCM operations.
NFA already has taken significant steps to address some of the issues highlighted in BRG's recommendations. For example, we have expanded our use of Certified Fraud Examiner training for our audit staff, increased our recruiting of experienced supervisors and directed our managerial staff to spend more time in the field during audits.
As noted in previous Member communications, NFA and the CME Group have implemented a system to receive daily confirmations from all bank depositories holding customer segregated funds in 2012. The system will be expanded to include all segregated depositories in 2013. The segregation confirmation system will perform an automated comparison of that information with the daily reports filed by the FCMs and generate immediate alerts for any material discrepancies.
We understand the default of PFG caused tremendous pain and financial distress not only to you, our Members, but also to the industry and—most significantly—PFG's customers. In response to this, we are confident that the actions already taken by NFA and other regulators, along with the recommendations proposed by BRG and the Special Committee, will help us to create a stronger regulatory environment and a better industry.
Daniel J. Roth
Christopher K. Hehmeyer
To read the complete version of BRG's Recommendations Report and Report of Investigation, click here.