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Senator: Peregrine Raises Questions on Self-Regulatory Groups

Sen. Tom Harkin (D-IA) last Tuesday questioned the effectiveness of self-regulatory watchdog groups, such as the National Futures Association (NFA), as the "first line of defense" against market abuse following the disclosure that Iowa-based Peregrine Financial Group (PFG) and its founder Russell Wasendorf Sr. allegedly defrauded customers of more than $200 million.

In a complaint filed in federal court on July 10, the Commodity Futures Trading Commission (CFTC) alleged that Wasendorf embezzled millions of dollars, manufactured phony bank statements, forged signatures and created fake bank addresses (see Daily GPI, July 11). The activities reportedly went on for nearly two decades without the NFA or the CFTC noticing. The alleged misappropriation of funds was uncovered during an NFA audit of PFG subsidiary PFGBest, which has since filed for Chapter 7 liquidation. Membership in the NFA is mandatory for all participants in the futures markets, including energy.

NFA last Monday said that it retained the law firm of Jenner and Block to conduct an internal review of its auditing practices and procedures with respect to Peregrine.

To prevent a repeat of Peregrine, "I believe it's critical that we further update our rules giving regulators direct electronic access to all bank accounts and custodial accounts," said CFTC Chairman Gary Gensler.

"I'm astounded that this could go on for nearly two decades and yet nobody checked to see where these bank statements were going, who they were going to," Harkin said during a hearing of the Senate Agriculture Committee. The NFA was the "controlling agency" over Peregrine, not the CFTC, he said. However, "self-regulation only works if you have really tight controls from the regulatory body over them, which would be the CFTC," Harkin said.

"I'm losing faith in self-regulation unless there is adequate tight oversight by the agency" funded by the federal government. "So you [CFTC] have to have the personnel and resources to be able to [adequately] oversee the National Futures Association," he said.

Harkin asked Gensler how the House Appropriations Committee's proposal to cut agency funding by $25 million for fiscal year 2013 would affect the CFTC and the markets that it oversees. "I think there would be more mayhem in the markets," Gensler responded.

"I'm worried about the integrity of...markets, especially in the areas of swaps and futures," Harkin agreed. "When I hear people say, 'We need to get rid of the reforms of Dodd-Frank,' it makes me wonder whether or not [the] people are paying attention to the same things that we read about in the paper. It's high time that we get the regulations out," and finalized.

Harkin called on regulators to continue their investigation to determine whether anyone else other than Wasendorf was involved in the alleged fraud. "I find it hard to believe that one person with hundreds of employees dealing with all [of] these accounts could be the sole person responsible."

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