Regulators apparently deceived in PFGBest fraud

Things are falling apart faster on the PFGBest fiasco than I can read the news articles. So I’ll take this on just one bite at a time.

The Wall Street Journal reports in their article, Red Flags at Failed Broker, that the regulators of Peregrine Financial Group, Inc. were successfully mislead by the company.  Far more details will follow in the near future, I’m sure. Perhaps every few hours.

The Commodity Futures Trading Commission and National Futures Association are the key regulators. Futures trading is not my world, so here is some background:

The CFTC says the NFA, which is one of the futures industry’s self-regulators, is in charge of directly overseeing small futures firms like Peregrine, commonly known as PFGBest.

The article describes two involvements of the regulators with PFGBest.

In the first comment I’ll quote, notice the use of a fax number to send back correspondence:

Last year, NFA regulators were notified by U.S. Bank of a nearly $200 million shortfall at Peregrine. The regulators subsequently received a fax purporting to show there was no fund discrepancy, but never followed up to reconcile the two reports. Investigators now believe the fax was sent from a number controlled by Mr. Wasendorf, according to people briefed on the investigation.

In the second comment, notice the use of a controlled P.O. Box:

The NFA sent its requests for verification of the account balances to a post-office box that had once been registered to U.S. Bank, a unit of U.S. Bancorp, but was taken over by Mr. Wasendorf, said people familiar with the matter. In the most recent audit, the NFA had asked Mr. Wasendorf to verify the statements electronically.

A quick summary of the depth of the fraud: Mr. Wasendorf allegedly gained control of a PO Box it was previously used by U.S. Bank. He somehow communicated to NFA regulators that they should use his controlled address for correspondence.  He allegedly had a fax number he could use to send documents. He was able to quickly scan and alter documents.