In the wake of the sentencing of Peregrine Financial Group Inc. CEO, Russell Wasendorf, for his massive fraud, one of the regulators he was convicted of deceiving, the National Futures Association, says it will adopt recommendations made in an independent analysis of the NFA’s audits of PFG that failed to uncover the ongoing fraud.

Wasendorf was sentenced to 50 years in federal prison after pleading guilty to mail fraud, embezzlement, and making false statements to both the NFA and the Commodity Futures Trading Commission (CFTC). In a plea agreement, he admitted to stealing millions of dollars from the firm’s customers over 20 years by withdrawing money secretly from a customer segregated bank account, and submitting false reports to the NFA and CFTC to cover his tracks.

Peregrine ex CEO sentenced to 50 years in jail

Now, following a special meeting of its board of directors, the NFA board voted to accept the recommendations made by Berkeley Research Group (BRG) as part of its analysis of the regulator’s audits of Peregrine. It said that NFA staff will develop a plan to act on the recommendations, and the board will appoint a special committee to oversee the implementation of the recommendations.

The report’s 21 recommendations, which cover a wide range of topics, including auditor hiring, training, supervision and continuing education, are “designed to improve the operations of NFA audits”. In particular, the report recommends that NFA enhance its training and procedures to ensure a greater sense of professional skepticism; that the NFA conduct more testing of firms’ internal controls, the qualifications of outside auditors, and the sources of firms’ capital; and, that it take steps to better identify potential risk factors in firms’ operations.

“BRG conducted an independent, thorough, and accurate review of NFA’s audits of Peregrine Financial, and identified areas in which NFA could have been more inquisitive,” said Todd Petzel, chairman of a special committee comprised of NFA’s public directors that retained BRG in August 2012. “Its recommendations are smart and appropriate. With the full backing of the board, management will implement these recommendations and we expect the result will be improved regulation and oversight and a stronger, more secure industry.”

The NFA also notes that BRG found that, overall, its audits were conducted in a competent fashion, that there were no complaints from customers, or attempts at whistleblowing regarding Wasendorf’s fraud. It says BRG also concluded that Wasendorf “was able to conceal his fraud meticulously by providing numerous convincingly forged documents to NFA and others.”

“NFA has already taken steps to address some of the issues highlighted in BRG’s recommendations,” said NFA president, Dan Roth, adding that it will now thoroughly review the report and develop a plan to implement its recommendations,, which will be presented to the NFA board in the near future.

“We are confident that the actions already taken by NFA and other regulators, along with the recommendations proposed by BRG, will help us to create a stronger regulatory environment and a better industry,” he said.