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PFGBest: Just Like Madoff, Regs Ignored Every Single Warning Bell

Regulators missed multiple red flags that something was amiss. And some of those signs were starkly similar to the clues they also missed in the Madoff scandal.

After a suicide attempt by the founder of Peregrine Financial on Monday, regulators discovered about $215 million in customer money was missing. The CFTC has since filed a lawsuit charging fraud, and Peregrine has filed for bankruptcy and shut down.

Does all this sound familiar? It should. Just a week ago, we were reporting on the whereabouts of Jon Corzine, who was eventually found looking “downcast” in the Hamptons, months after a scandal that brought his firm, MFGlobal, down, and with it almost $1 billion in customer money.

It turns out that regulators missed all the warning signs that something was amiss. And some of those signs were starkly similar to the clues they also missed in the Madoff scandal.

Much has been made of the SEC’s failure multiple times to act on whistleblower Harry Markopolos' tips that something was devastatingly wrong with Bernie Madoff’s accounts.

In fact, so much was made of this that the Dodd-Frank Act that was passed in 2010 contained a special ‘whistleblower’ provision to incite other tipsters to come forward with promises of financial rewards and protection.

It turns out that a whistleblower came forward to denounce Peregrine to regulators several years ago. But apparently little, if nothing, was done – even as the Madoff scheme unraveled in the public eye almost four years ago.

The NY Times reports that in 2004, a Peregrine client sent a letter to the National Futures Association, the firm’s main regulator as well as the C.F.T.C., asking for an intervention to prevent PFGBest from misusing its customers’ money, according to a person with knowledge of the correspondence and a copy of the letter obtained by the Times.

From the Times:

Five years later, a tipster wrote to the N.F.A. asking it to review Peregrine’s bank account information for accuracy, according to people briefed on the matter who spoke on the condition of anonymity because the investigation was private. The tip was anonymous, and it is unclear how seriously the N.F.A. took it. Another major red flag that regulators missed, and that is strangely reminiscent of the Madoff case, is that the auditor for Peregrine was a one-person shop run out of the accountant’s home in Glendale Heights, Ill., a Chicago suburb.

As part of its investigation, the C.F.T.C. is looking into the role that the individual played, according to reports.

The accountant who had audited Madoff’s investment advisory business for more than a decade, David G. Friehling, operated from a tiny storefront office in the New York City suburb of New City in Rockland County. He was subsequently charged with securities fraud and with aiding the investment adviser fraud committed by Madoff.

After the collapse of MF Global, the C.F.T.C. ordered a review of all futures firms. The N.F.A., where Wasendorf serves on an advisory committee, gave Peregrine a clean bill of health in January.

“The entire industry is outraged that it happened the first time, let alone a second time,” Michael V. Dunn, a former commission of the C.F.T.C., told the New York Times, referring to the collapse of two brokerages. “We need to do something about this.”

The disappointing fact is that despite the Madoff and MFGlobal scandals that ruined hundreds of investors, no lessons seem to have been learned.

The only question that unfortunately still begs to be answered at this point is, which financial firm will be next?

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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