SAN FRANCISCO (Reuters) - Regulators of Peregrine Financial, whose former CEO on Thursday was sentenced to 50 years for stealing $215 million from his customers, lacked the skepticism needed to assess the risk of fraud at the now-defunct futures brokerage, a study showed.
Although regulatory audits of Peregrine were conducted in a “competent and proper fashion” and were “dutifully” implemented, the auditors did not look closely enough at the firm’s financial losses, the way it handled its financing, and its internal controls, according to the study by Berkeley Research Group LLC released on Thursday.
The study was commissioned by the National Futures Association (NFA), the regulatory body responsible for auditing many of the smaller U.S. futures brokerages, including Peregrine Financial.
Critics have blamed NFA for not catching the fraud, which CEO Russell Wasendorf Sr conducted and concealed for nearly the entire 20 years he ran the company.
NFA said in a statement that it would adopt an extensive list of recommendations by the consulting firm, including better training of its auditors to instill more skepticism.
The study stopped short of blaming NFA for missing the fraud, which Wasendorf confessed to last July and for which he will spend the rest of his life in jail.
But it did note a series of serious deficits.
It found that NFA auditors were duped by ruses that included a faked fax from Peregrine Financial CEO Russell Wasendorf Sr. “correcting” a bank statement to show the firm’s main bank account had $211 million more than an earlier statement had shown, the study said.
Auditors also failed to question losses at the firm, which had totaled $21 million from 2000 to 2011, and did not scrutinize the fact that Wasendorf made $69 million in capital contributions over that period, the study said.
They did not pay attention to the fact that the firm’s chief financial officer, Brenda Cuypers, had no formal education beyond a two-year community college degree, or notice that the firm’s auditor was a one-person shop run from a suburban Chicago home.
Reporting by Ann Saphir; Editing by Bernard Orr and Richard Pullin