The U.S.
Commodity Futures Trading Commission reviewed operations at Peregrine Financial Group Inc. at least twice since 2006 without detecting the fraud that led to the collapse of the futures broker and a $200 million shortfall in client funds.
The Washington-based agency conducted examinations at Peregrine in 2007 and 2008, according to a list of CFTC reviews obtained through a public records request. The list, which includes reviews between 2006 and Nov. 9, 2011, does not detail what records or procedures examiners evaluated.
A third review was listed in 2011. A CFTC official said the 2011 exam was scheduled to oversee compliance with foreign exchange regulations but didn't take place because of limited resources. The official spoke on condition of anonymity because the agency was still reviewing the matter.
Peregrine is under investigation after Chairman and Chief Executive Officer Russell Wasendorf Sr. attempted suicide. Wasendorf had written a signed statement that he committed fraud for two decades at his Cedar Falls, Iowa-based company, according to a criminal complaint.
CFTC chairman Gary Gensler is scheduled to testify today at the Senate Agriculture Committee, which has jurisdiction over the agency. Stephanie Allen, a CFTC spokeswoman, declined to comment on the reviews.
'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,” Gensler said in testimony prepared for the hearing. “Just like the local police cannot prevent all bank robberies, however, market regulators cannot prevent all financial fraud. But nonetheless, we all must do better.”
The CFTC sued Peregrine over the shortfall on July 10, less than a year after being scolded for poor oversight following the collapse of 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 is still working to restore its reputation after failing to detect Bernard Madoff's multi-billion-dollar Ponzi scheme, which came to light in 2008.
Gensler told reporters last week 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'
“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,” he said on July 11.
The futures association said last week that Peregrine's chairman may have falsified bank records after only $5 million was found in an account that was reported to have $225 million in June.
Although day-to-day oversight is handled by the NFA, the CFTC retains the legal power to conduct direct oversight when it chooses. The agency used that power to conduct 146 reviews of futures brokers during the nearly six years included in the public records request.
Industry Review
Futures regulators, including NFA and CME, are conducting a new industrywide review of brokers' bank accounts to ensure the integrity of customer funds, a person briefed on the matter said yesterday. The person spoke on condition of anonymity because the review hasn't been publicly announced. NFA's chairman has requested that the Jenner & Block law firm be retained to conduct an internal review of auditing procedures and how they were used to oversee Peregrine, the regulator said in an e-mail statement yesterday.
Public records indicate Peregrine had at least one previous violation related to treatment of customer funds. In 1996, Peregrine paid $75,000 to resolve NFA claims that the company engaged in false and deceptive promotion and failed to accurately calculate segregated funds, according to records posted on NFA's website.
The CFTC gave itself a grade of 100 percent for its direct examinations of futures brokers in 2011, according to a performance analysis by the agency issued on Feb. 13.
Proper Segregation
After the MF Global collapse, CFTC led a review with NFA and CME of the 70 futures brokers that hold customer funds, including Peregrine.
On Jan. 25, the CFTC announced that customer funds at the brokers were properly segregated. The agency said the review was a “snapshot” of the industry's compliance with regulations and didn't involve a “lengthy examination” of the brokers, according to a statement from the CFTC. The review relied on brokers' records and didn't involve regulatory officials independently confirming balances of customer funds at other entities.
“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, the current system in which customer funds are held at the firm level must be reevaluated.”
--Bloomberg News--
