Fifty Shades of Fraud: Wasendorf, Peregrine and Copycat Fraud

Russell Wasendorf, Sr. allegedly did a lot of shady, illegal things with other people’s money, but he was speaking the truth when he said it was “relatively simple” to fool regulators. Wasendorf, the founder of Peregrine Financial Group, is facing charges and enforcement actions by the FBI, CFTC and NFA for misappropriating customer funds, lying to regulators and other violations. A closer examination of Wasendorf’s alleged crimes revealed a kaleidoscope of copycat fraud. That is to say, all of the activities for which he has been charged seem to have precedent elsewhere.

Let’s take a look at Bernie Madoff first. Like Madoff, Wasendorf relied on a no-name accounting firm to oversee Peregrine’s financials. And while we are not saying Jeannie Veraja-Snelling is not a decent CPA, there is no way one woman who uses her suburban home outside of Chicago as her office could effectively sign-off on the reported, albeit falsified, $500 million in assets belonging to the company. Also similar to Madoff was Wasendorf’s position on the National Futures Association advisory board. Wasendorf relied on this gig to cushion his reputation as a credible executive interested in maintaining ethics and regulation in his industry. Madoff did the same as a former member of the board of NASD (now FINRA). Which begs the question: do these regulatory bodies do any sort of employment screening? And, lastly, both Madoff and Wasendorf declared in their confessions that they were lone soldiers in their crimes. While it has been proven that Madoff had assistance in his Ponzi scheme, it has yet to be determined whether Wasendorf had any accomplices.

Wasendorf did not rely on Madoff’s playbook alone. Earlier this month, he attempted suicide and reportedly left confession notes for his son and his wife (whom he secretly married several weeks earlier in Las Vegas). But Wasendorf’s failed suicide was not a unique move. Sam Israel III, the disgraced hedge fund manager of Bayou Group who defrauded investors of millions of dollars, had faked his suicide on June 9, 2008 in an attempt to avoid his prison sentence.

Finally, the Peregrine/Wasendorf scandal brings to mind two other recent incidents that have caused investors financial havoc: with the ongoing case of MF Global, we have loosely shuffled funds belonging to clients and, unfortunately, like R. Allen Stanford, none of the victims of Wasendorf’s alleged scam are eligible for remuneration by the Securities Investor Protection Corp. (SIPC). Both Stanford and Wasendorf allegedly screwed their customers to the point of no return and no recoup; just loss. Also mirroring Stanford and Wasendorf , Peregrine had a history of being charged by regulators for inappropriate use of funds.

In February 2012, the NFA charged Peregrine, Wasendorf and other officers with unauthorized trading in client accounts and failure to prevent fraud. The same day the complaint was filed, the NFA accepted Peregrine’s offer to settle immediately with a $700,000 fine and, of course, the golden regulatory rule of not admitting or denying the charges. NFA had issued complaints against Peregrine and its officers in the past: in 1994 and 2004, and in September 2000, the CFTC had fined the firm $90,000 for finding the company was undercapitalized, failed to keep accurate books and records, among other things. Sound familiar? Wonder if Wasendorf’s position on the NFA (see above) had any influence on these decisions?

So while we continue to witness the unraveling of the Peregrine/Wasendorf debacle, Wasendorf’s words should not be overlooked: “relatively simple” to deceive the regulators. Like Madoff, Stanford and Israel, Wasendorf allegedly used some proven techniques to defraud investors and regulators alike. Maybe someday the regulators will get their hands on an inside copy of “Investment Fraud for Dummies” and start preventing fraud and protecting investors. Until they do, as we have said before, investors need to start protecting themselves.

Joelle Scott is Director of Business Intelligence with Corporate Resolutions Inc. Opinions expressed here are entirely her own.

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