Regulators Maintain Perfect Record Of Incompetence – Massive Fraud At Peregrine Financial Goes Undetected

What is the point of having numerous regulatory agencies if they can’t detect blatant fraud despite numerous red flag warnings?

Banking regulators turned a blind eye to absurdly reckless lending policies until the entire financial system came close to collapse in 2008.  Regulators managed to convince themselves that Bernard Madoff’s $50 billion Ponzi scheme was a clean operation until he tipped them off by confessing.   Allen Stanford, chairman of Stanford Financial Group, managed to steal $7 billion dollars from investors before regulators finally realized he was running a criminal enterprise after his operations collapsed.   Politically connected MF Global Holdings also evaded risk supervision by regulators until after it collapsed due to huge trading losses it incurred using customer funds.  The common theme of the financial frauds cited share the common trait of operating undetected right under the noses of regulators.

Regulators have managed to keep their perfect record of incompetency intact with the collapse this week of Peregrine Financial Group, aka PFG Best.  The Wall Street Journal highlights this latest regulatory failure – Red Flags At Failed Broker.

Futures-industry regulators missed multiple possible warning signs over the years about major problems at Peregrine Financial Group Inc., including several raised by their own investigators.

The enforcement actions filed against the brokerage by the Commodity Futures Trading Commission and National Futures Association on Monday—after its founder Russell Wasendorf Sr. attempted suicide amid $215 million in allegedly missing customer funds—follow four previous actions by regulators against the company since 1996. Previous allegations included inaccurate accounting, insufficient capital and problems with segregating customer money, documents show.

The failure by regulators to detect allegedly falsified bank statements at Peregrine for at least two years has again raised questions about their ability to protect customers of futures brokerages. Last fall, futures regulators failed to detect problems that led to the implosion of MF Global Holdings Ltd.

The Wall Street Journal reports that after U.S. Bank notified regulators of a $200 million shortfall last year, regulators never properly investigated the circumstances regarding the missing funds.  In addition, regulators apparently had no problem with the fact that Peregrine, the country’s 37th largest futures merchant was audited by a one person accounting firm.  Regulators were also unable to properly conduct the basic audit procedures involved in verifying cash balances at Peregrine.

The verification of cash balances is one of the most important yet simple audit procedure employed in the audit of a company.  In order to assure the integrity of the verification of cash account balances, the auditor must adhere to basic and common sense principles.  A request for verification of cash balances must be independently mailed by the auditor and the auditor must also ascertain that the cash verification form is being sent to the correct bank at the correct address to ensure the integrity of the cash balance verification.

The auditors assigned to the Peregrine audit somehow managed to botch the verification of cash balances.  In an astonishing act of incompetence, the Wall Street Journal reports that the auditors sent their request for verification of cash balances to a post office box controlled by Peregrine Financial which promptly verified cash balances that did not exist.

The latest poll from Rasmussen Reports shows that 57% of the public has little confidence in the U.S. banking system, the “lowest level in over a year.”  Based on events of the recent past, the 43% of respondents who are “at least somewhat confident in the stability of the U.S. banking industry” are either delusional or illiterate.

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