The revelation that another futures commission merchant (FCM) accessed what are ostensibly protected customer funds is quite unsettling, especially since it's coming on the heels of the failure at MF Global in October of 2011. Unsettling, but not surprising. Russell Wasendorf, Sr. was the sole person at Peregrine Financial Group (PFG) to have access to customer accounts. His admission of a two-decades-old fraud echoes the Madoff affair. What is to be done?

SEE: The Pioneers Of Financial Fraud

A futures trader, Russell R. Wasendorf, Sr. founded what came to be known as "PFG Best" in 1972 in Cedar Falls, Iowa. The firm offered education and research services to futures market participants, incorporating itself as an FCM in 1992 and registering with the National Futures Association (NFA). The firm grew organically, developing proprietary forex trading systems and by acquisition. In 2011, Character Counts, an Iowa nonprofit, bestowed the Iowa Character Award on PFG Best. As stated on the firm's website "The achievement honors individuals, schools and organizations that consistently demonstrate and promote the six pillars of character: trustworthiness, respect, responsibility, fairness, caring and citizenship."

The edifice has crumbled. The firm's founder has behaved in a manner that runs counter to the very pillars of character for which he and his firm were feted. Add lack of courage to the list of misdeeds. In a suicide note, Wasendorf admitted to the ease with which he committed forgery of bank statements as he was the sole individual with access to the firm's bank accounts. Missing funds have come to approximately $215 million. The firm has been shuttered while regulators look for the money and prosecutors prepare their case against the founder.

SEE: How did currency trader John Rusnak hide $691 million in losses before being caught for bank fraud?

The Investigation
Industry regulation is accomplished through a combination of governmental oversight through the Commodities and Futures Trading Commission (CFTC) and self-regulation through exchanges such as the Chicago Mercantile Exchange (CME) and the NFA, a self-regulatory organization. In the wake of the MF Global collapse, regulators conducted on site reviews of various FCMs, PFG included. The firm received a green light from the NFA. One has to wonder how they got it wrong. The futures industry has suffered two black eyes in less than a year. In the case of PFG, though, the answer would appear simple enough: all control was vested in one person. Rogues carry out their deeds in silence. Think of Kweku Adobole, Nick Leeson or Jérôme Kerviel. Each was able to accumulate losses and perpetuate fraud due to lack of supervision. While Russell Wasendorf, Sr. was at the helm, he failed to put in place proper controls that could have prevented the firm's implosion. Occasional warnings by the firm's customers were sounded some years ago, but went unheeded. Newly promulgated CFTC rules on reporting and reserve requirements, while a step in the right direction, appear equivalent to strapping a passenger with a seatbelt after the accident has occurred. Moreover, in what eerily echoes an aspect of the Madoff scandal, Peregrine's auditor was a one-person firm operating out of a residential location. More robust oversight was lacking. What the auditor's role in the affair was, if any, has yet to be determined.

The Bottom Line
The NFA's efforts at implementing stronger monitoring procedures such as electronic confirmation of customer account balances are a welcome effort. Nonetheless, trust in the industry has been severely damaged. Efforts to regain that trust need to be extensive and ongoing ... no easy task.