Regulatory Failure: Peregrine Financial Group Accounting Scandal of 2012 – Todd Benschneider

On July 9, 2012 CEO and founder of Peregrin Financial Group, Ralph Wasendorf drafted a detailed suicide note, rigged a hose from his car exhaust through a window, started the engine, and drifted off to sleep. However, his suicide attempt failed, the following morning a passerby noticed the car running and called police. Paramedics removed Wasendorf unconscious but alive, the suicide note was passed onto the regulatory office of the Commodity Futures Trading Commission (Touryalai. 2012).

Despite Wasendorf’s brilliance in brokering futures trades, he had much to learn about the genius of clean air automotive emissions controls. Todays automobiles generate only trace levels of poisonous carbon monoxide, so instead of death by poison gas, Wasendorf was merely exposed to about 8 hours of low oxygen levels and made a complete recovery. Had Wasendorf used today’s mobile browser technology and Googled “suicide by car exhaust”, Google would have guided him to choose the much deadlier 1959 Thunderbird over the 2001 Chevrolet Cavalier Convertible from his car collection.

The suicide note contained a detailed confession for defrauding PFGBest investors for the past 20 years. The letter apologized to his family for disgracing the family name; however, the note justified his fraud by directing blame toward vindictive regulators who he had long believed were jealous of his success and unnecessarily burdened his firm with regulatory expenses that made the success of honest small firms cost-prohibitive. The note also belittled the regulatory agencies for their incompetence at detecting fraud and alleged that they were so consumed with punishing honest mistakes made by traders that they could never find deliberate fraud that they were assigned to be investigating.

Wasendorf claimed that regulatory failures for verifying bank records allowed him to create false bank records for over 20 years, forgeries that were being mailed back to auditors from a fake PO Box he had created in bank’s name. In a melodramatic closing, the suicide note announced that Wasendorf had punished himself far harsher than he would suffer at the hands of prosecutors by sentencing himself to death (Reinitz. 2012). However it could be argued that prosecutors trumped his death sentence with their alternative: 50 years of maximum security prison, $215 million in restitution and a life sentence of isolation, shame and regret.

The path toward uncovering the fraud began in 2009, in response to a string of high profile financial scandals; new advancements in audit technology were being developed that would soon to plug loopholes that had made accurate auditing a challenge. The changes included a newly developed electronic clearinghouse which allowed for an immediate and simultaneous verification of all account balances, discrepancies in those balances would quickly reveal PFG’s falsified bank statements. However regulators met with strong resistance to the new audit technology, which resulted in many firms such as FGBest being carefully scrutinized for their refusal to participate in the new verification clearinghouse ( 2012).

The beginning of the end for PFG came the wake of a multitude of regulatory scandals caused by PFG traders, which resluted in an agreement to open the company books for a detailed audit to ensure future compliance. That final audit came to a head on the afternoon of Wasendorf’s  suicide attempt when the National Futures Association froze all PFGBest accounts after discovering that $220 million dollars in investor deposits were unaccounted for and that Wasendorf himself had forged bank documents to hide those missing funds from auditors. Wasendorf was warned by a tipster that the following morning he would be arrested on embezzlement charges (Zwick. 2013).

Some company insiders believe that the motive for suicide was to protect his personal assets from prosecutors. In the final weeks before the scandal was exposed, Wasendorf secretly married his girlfriend and changed his will to name her as his sole beneficiary. He also deposited $50,000 in a bank account for his new stepdaughter under the guise of a college fund; money that she quickly withdrew the day of the suicide attempt. If his suicide had been a success, the reassignment of his estate, would have created a unique challenge for prosecutors to return the misappropriated funds from Wasendorf heirs to the victims of his fraud and ultimately he may have enjoyed a final victory of once again outwitting regulators. However, death with dignity would be denied, as emergency crews resuscitated the Wasendorf forcing him to witness his own disgrace and watch his new wife file for divorce the following week. With no assets at his disposal and no allies to offer financial assistance, Wasendorf was unable to afford his own attorney, with his defense case presented by an inexperienced public defender and Wasendorf found himself sentenced to 50 years of maximum security prison (Reuters. 2012).

In the months that followed prosecutors began an online auction to sell Wasnedorf’s personal assets including estate items as trivial as his clothing and kitchenware, most importantly to the press was his vintage wine collection. His estate including a home that was built for $1.4 million along with two vacation homes, sold for pennies on the dollar and in total netted just over $4 million. The newly built  PFG $24 million corporate headquarters brought a mere $2.8 million and still carried a mortgage balance of $6 million which was co-signed for by Wasendorf’s only son Russell Wasendorf Jr.

The son, Russell Jr.former COO of PFG later relocated to Orlando, FL and was forced into a bankruptcy by the mortgage shortage, along with hundreds of thousands of dollars in legal bills from investor suits (Bunge. 2013).  After the liquidation of Wasendorf Sr personal assets the bankruptcy trustee estimated that $190 million in misappropriated funds were lost or missing, the bulk of those losses occurred at the peak of the recession (Reintz. 2013).

In the final years of PFG several long term employees began to question Wasendorf’s mental health. Former employee Phil Flynn an employee of five years, who left months before the scandal was revealed began to see a recurring theme of inappropriate behavior. For Flynn, the final warning came in February of 2012 after PFG admitted some wrongdoing and agreed to pay the NFA $700,000 in trading violations. Flynn also retold a story of the final PFG Christmas party in 2011: “Wasendorf Sr. gave an awkward, rambling speech at the company Christmas party about his early business career and what it takes to become a success. It was kind of a downbeat thing for a Christmas party, kind of out of place and weird (Reinitz. 2013).”

Following the discovery, analysts were shocked by the transparency of the PFG fraud and questioned how so many obvious red flags could be ignored by auditors and regulators in regards to PFG’s finances. Investigators suspect that the small accounting firm Veraja-Snelling had been cooperating with Wasendorf to aid in defrauding regulators. Critics now question why a small, locally-owned  firm was allowed to audit the complex books of a commodities trading firm with over $500 million in assets (Reuters. 2013).

While in comparison to the Enron scandal, which was remarkable by how intricately complicated and untraceable the flow of money became as it flowed from deal to deal and back and forth through subsidiary accounts; however,  in contrast the PFGBest scandal will be remembered by how amazingly detectable the fraud would seem to any investigator with fraud training. Using a remarkable lack of technology tools, Wasendorf’s scheme relied solely on doctoring PFG’s paper bank statements with a scanner and household grade Photoshop software, later having those falsified documents mailed in preaddressed envelopes that he provided from auditors to his fake post office box. The simplicity of the process left industry analysts in shock that in 20 years the red flags were continually failed to uncover this simple forgery (Reintz. 2012).

Work Cited

Finkelstein Thompson, LLP. “Finkelstein Thompson Investigates Peregrine Financial Group,

Inc. and PFGBest’s Alleged $200 Million Shortfall.” Business Wire (English) Nov. 0007:

Regional Business News. Web. 11 Jan. 2014.

McFarlin, Michael. “Restoring confidence in the post-MF Global world: customer confidence

was shattered after the MF Global and PFGBest bankruptcies revealed gaping holes in the

supposed bulwark of segregated funds. The industry has responded, but is it enough?(MF

GLOBAL: 1 YEAR LATER).” Futures (Cedar Falls, Iowa) 2012: 42. General OneFile.

Web. 11 Jan. 2014.

“-Regulators Fault US Bank For Fraud At Peregrine Financial.” Global Banking News (GBN)

(2013): Regional Business News. Web. 10 Jan. 2014.

“The end of a 20-year-old fraud; Lessons for auditors from the Peregrine scandal.(assurance).”

Accounting Today 2012: Academic OneFile. Web. 10 Jan. 2014.

Touryalai, Halah. “Peregrine Files For Bankruptcy After $215M Goes Missing, Where Were The

Regulators?.” Forbes.Com (2012): 37. Business Source Premier. Web. 10 Jan. 2014

Zwick, Steve. “In PFG Fraud, Everyone Loses — Except The Lawyers.” Futures: News, Analysis

         & Strategies For Futures, Options & Derivatives Traders 41.10 (2012): 32-34. Business   

         Source Premier. Web. 11 Jan. 2014.


Leave a Reply