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NFA Adopts PFG Report Recommendations

Alice Attwood reports as the National Futures Association continues to close loopholes
following the PFG meltdown.

The National Futures Association’s
(NFA) board of directors has voted
to accept the recommendations
made by Berkeley Research Group (BRG)
as part of its extensive audit of the
collapsed Peregrine Financial Group

BRG was appointed to independently
audit PFG following that firm’s collapse
amidst accusations its CEO Russell
Wasendorf had falsified financial
statements, resulting in more than $200
million of client funds going missing. The
firm has compiled 21 recommendations
for the NFA, and the body’ board will
appoint a special committee to oversee the
implementation of BRG’s directives.

According to the BRG, the 21
recommendations are designed to,
“improve the operations of NFA audits,”
and include topics such as auditor hiring,
training, supervision and continuing
education. The report makes particular
reference to audit staff, stating that the
NFA should enhance its training and
procedures in order to instil a greater
sense of professional scepticism, as well
as conducting more testing of members’
internal controls, qualifications of outside
auditors and sources of companies’ capital

BRG also recommended that NFA take
steps to better identify potential risk
factors in futures commission merchant
(FCM) operations.

Todd Petzel, chairman of a special
committee comprised of NFA’s public
directors that retained BRG in August
2012, says, “BRG conducted an
independent, thorough, and accurate
review of NFA’s audits of Peregrine
Financial, and identified areas in which
NFA could have been more inquisitive. Its
recommendations are smart and
appropriate. With the full backing of the
Board, management will implement these
recommendations and we expect the result
will be improved regulation and oversight
and a stronger, more secure industry.”

The futures body has already taken
steps toward addressing BRG’s
recommendations, says president of the
NFA, Dan Roth, “For example, we have
expanded our use of Certified Fraud
Examiner training for our audit staff,
increased our recruiting of experienced
supervisors and directed our managerial
 taff to spend more time in the field
during audits. NFA and CME Group have
created a process to receive daily
confirmations from all banks holding
customer segregated funds. The
segregation confirmation system will
perform an automated comparison of that
information with the daily reports filed by
the FCMs and generate immediate alerts
for any material discrepancies.”

Roth continues, “Our primary goal is to
thoroughly review the BRG report and
develop a plan to implement its
recommendations. We will present our
plan to the Board in the near future. We
are confident that the actions already
taken by NFA and other regulators, along
with the recommendations proposed by
BRG, will help us to create a stronger
regulatory environment and a better

BRG’s review of the NFA’s audits of
PFG examined documentation from 1995
to 2012, including 190,000 NFA
documents containing over three million
pages, including over 166,000 emails and
related attachments. BRG also conducted
interviews of 32 individuals with
knowledge of the factors or circumstances
surrounding NFA’s audits of PFG,
including 25 current or former NFA
employees and five former PFG officials,
including former Wasendorf.

Details surrounding the extend of the

fraud began to emerge after the NFA
published an affidavit from one of its
compliance officers, stating that PFG was
required to maintain $400 million in
segregated funds, although after
investigations with U.S. Bank, it was
revealed that PFG had $5 million, despite
telling the NFA that the firm had $225
million on deposit (Profit & Loss,
July/August 2012).

The affidavit also suggested that
falsification of documents had been taking
place at least since early 2010, at which
time, PFG reported balances of $207
million and $218 million in February 2010
and March 2011 respectively, although
these were in fact only $10 million.

The news caused uproar throughout the
futures industry, including calls for more
stringent controls in order to protect
clients in such cases. The NFA promptly
took Member Responsibility Action
(MRA) to protect customers because the
firm failed to demonstrate that it met
capital requirements and segregated funds
requirements, nor did PFG have sufficient
funds to meet its client obligations.

Days after the attempted suicide of
Wasendorf Sr, PFG filed to liquidate under
Chapter 7 of the US Bankruptcy Code. It
was then that Wasendorf admitted to the
20-year fraud, stating that he began to
siphon funds just a year after launching
the brokerage in 1983. 

Paul Gogliormella

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