My latest column @Forbes is about the most recent futures industry fraud case, PFGBest. PFGBest is another reason why the industry’s poor business environment, wracked with a crisis of confidence after MF Global, just got much worse.
I have also been extensively quoted in the Chicago Tribune Phil Rosenthal’s column this past weekend on the case.
PFGBest has a long story behind it. CEO Russell Wasendorf, who admitted to a twenty year fraud on customers in his suicide attempt note, started the firm in 1980, according to MarketsWiki, an online open source knowledge base for current and historical information about the global exchange traded capital, derivatives, environmental and related OTC markets. The site is run by Chicagoan John Lothian who publishes a subscription-only industry newsletter.
PFGBest (formerly Peregrine Financial Group, Inc. – PFG), founded in 1980, is a privately held non-clearing registered Futures Commission Merchant. PFGBest has branch offices in Chicago; Bloomfield and New York City, NY; Camarillo and Mission Viejo, CA; Cedar Falls, IA; Scottsdale, AZ; Altamonte Springs, FL, and McKinny, TX. It serves Canada through an office in Toronto, and its Asian division offers brokerage and other services to clients who speak various Chinese dialects. The company also has a network of brokers spanning the globe.
Peregrine Financial Group hit the big time in the mid 1990s when a firm named First Commercial Financial Group was forced by regulators to move its customer business after regulators found financial irregularities. First Commercial’s business was moved to Peregrine and to RB&H, the firm headed by then CME Chairman Jack Sandner. RB&H became a part of MF Global. (Sandner is currently chairman of E-Trade Futures and on the board of the CME Group.)
Lothian writes in his blog on July 12:
Former CME Chairman Larry Rosenberg was CEO of First Commercial.
It is safe to say that Mr. Wasendorf did not get the pick of the litter when the customer business, which cleared at RB&H, was split up between RB&H and Peregrine. First Commercial was a party to 75 CFTC reparation cases and a respondent to 10 NFA arbitrations prior to their registration finally being revoked by the NFA in 1996.
Mr. Wasendorf and his firm Wasendorf & Son was also involved with another CME-related firm that had its own unhappy ending, GNP Commodities, headed by one-time CME Chairman Brian Monieson. GNP was the party to 117 CFTC reparation cases and five NFA arbitration awards. GNP also had two NFA, three CFTC and six exchange regulatory actions against it before its registration was revoked.
Of course Alaron also had its problems. It was a party to 55 CFTC reparation cases, was a respondent to 12 NFA arbitration cases and two NFA, two CFTC and 15 exchange regulatory actions. By contrast, Peregrine was party to 38 CFTC reparation cases and 31 NFA arbitration awards, as well as four NFA and one CFTC regulatory actions.
One issue that provoked heated discussion at the Chicago forum was auditor independence. It seems many of these Certified Public Accountants and broker-dealer auditors were under the mistaken impression that it’s the AICPA’s rules for auditor independence that apply to them, not the SEC’s. SEC rules, post-Sarbanes-Oxley Act of 2002, prohibit an auditor of an SEC-registered firm from performing a list of nine prohibited services including bookkeeping and systems design and implementation for its audit clients.
Several audit firm professionals tried to convince the SEC and PCAOB staff that they were mistaken in the belief that broker-dealer auditors could not sign the broker-dealer audit opinion as well as help implement accounting software, prepare period-end journal entries and compile those same financial statements and regulatory reports that they would audit. PCAOB staff told me that this issue has come up at every forum.
Those audit firm professionals were dead wrong. The changes that will have to occur to bring the audit firms, and their clients, in line may mean not only consolidation of audit firms that can not deliver audit-only services cost effectively and per the standards, but also consolidation of broker-dealers who do not want hire competent accounting and systems professionals in-house or pay for it separately from a firm other than their auditor.
How many other broker-dealer frauds will we see because external auditors are not independent, objective and professionally skeptical enough?
Thanks to Lance Goldberg for additional PFGBest history.