The
Commodity Futures Trading Commission reviewed operations at Peregrine Financial Group Inc. at least twice in the past six years without detecting the fraud that led to the collapse of the futures broker and a $200 million shortfall in client funds.
The CFTC conducted examinations at Peregrine — commonly referred to as PFGBest — in 2007 and 2008, according to a list obtained through a public-records request. The list, comprising exams between 2006 and Nov. 9, 2011, doesn't detail the records or procedures evaluated.
A third review was listed last year.
The 2011 exam was scheduled to review compliance with foreign-exchange regulations but didn't take place because of limited resources, said a CFTC official, who asked not to be identified because the agency is still looking at the matter.
PFGBest came under investigation after chairman and chief executive Russell Wasendorf Sr. attempted suicide. He had written a statement that he had committed fraud at the company for two decades, according to a criminal complaint.
Stephanie Allen, a CFTC spokeswoman, declined to comment on the reviews. In testimony last Tuesday before the Senate Agriculture Committee, which has jurisdiction over the agency, CFTC Chairman Gary Gensler acknowledged the breakdown of oversight procedures.
"SYSTEM FAILED'
“Although we do not yet know the full facts of what happened in this matter, the system failed to protect the customers of Peregrine,” Mr. Gensler said in his testimony.
“Just like the local police cannot prevent all bank robberies, however, market regulators cannot prevent all financial fraud,” he said. “But none-theless, we all must do better.”
The CFTC sued PFGBest over the shortfall July 10, less than a year after being scolded for poor oversight in the collapse of futures broker MF Global Holdings Ltd., which left an estimated $1.6 billion gap in customer funds.
Lapses in federal oversight have triggered a political backlash from U.S. lawmakers and others.
The Securities and Exchange Commission still is working to restore its reputation from failing to detect Bernard Madoff's multibillion-dollar Ponzi scheme.
Mr. Gensler told reporters July 11 that the CFTC relies on industry-funded self-regulators, including the National Futures Association and CME Group Inc., to conduct routine oversight of futures firms, in part because its $205 million budget is inadequate.
OTHERS "FIRST LINE'
“I think it's in the nature of our funding, as well, that we rely on the NFA and the CME and others to be the first line of oversight,” Mr. Gensler said.
In June, after only $5 million was found in an account that was reported to have $225 million, the NFA alleged that Mr. Wasendorf falsified bank records
Although the NFA handles day-to-day oversight, the CFTC retains the legal power to conduct direct oversight when it chooses. It used that power to do 146 reviews of futures brokers during the nearly six years included in the public-records request.
INDUSTRY AUDIT
Futures regulators, including the CME and the NFA, are conducting an industrywide review of brokers' bank accounts to ensure the integrity of customer funds, said a source briefed on the matter, who asked not to be identified, as it has not been announced publicly.
The NFA's chairman has requested that the law firm Jenner & Block be retained to conduct an internal exam of auditing procedures and how they were used to oversee PFGBest, according to a statement e-mailed last Tuesday.
Public records indicate that PFGBest had at least one previous violation related to treatment of customer funds. In 1996, it paid $75,000 to resolve NFA claims that the company had engaged in false and deceptive promotion, and failed to calculate segregated funds accurately, according to records posted on the association's website.
The CFTC gave itself a grade of 100% for its direct examinations of futures brokers last year, according to a performance analysis by the agency issued Feb. 13.
After MF Global imploded, the CFTC led a review of the 70 futures brokers, including PFGBest, holding customer funds. On Jan. 25, the agency said the funds were properly segregated.
“We are appalled by the recent violations of customer segregated funds that have shaken the very core of our industry,” CME Group said in a July 13 statement. “Without question, th-e current system in which customer funds are held at the firm level must be re-evaluated.”
