[ by Howard Haykin ] Peregrine Financial Group was hosting Senator Charles Grassley (R-Iowa) and state lawmakers in its gleaming new, state-of-the-art headquarters in Cedar Falls, Iowa. Perfection.  A triumph.  "Impressive, this is a company that's on the top of things," the Senator added. Yes, There's A Lot One Can Do With Other People's Money! Take Bernie Madoff, who used his clients funds to build and buy the state-of-the-art OTC trading facility.  Head traders at rival firms admired the technology while asking themselves "how could Bernie & Co. afford all that when our firm surely can't?" And you can take Peregrine founder Russell Wasendorf, during the 2009 tour of his firm's headquarters.  Impressive stuff for the heart of the country.  Today, the only impressive thing about Peregrine is the depth of its problems.  Wasendorf's failed attempt at suicide wasn't impressive, considering how successful he was at "knocking off" some $215 million in customer funds over a 20-year period. The CFTC filed a lawsuit charging fraud. And criminal authorities are investigating.  But that's all in the present.  Where were the authorities when Wasendorf's crimes were still in the work-in-progress phase? Peregrine's angry customers are asking: "How could futures industry regulators have missed another potential fraud – and just months after MF Global, the defunct futures brokerage firm, lost more than $1 billion in clients' money. Perhaps Peregrine's Red Flags (¶'s) Were Flying at Half-Mast for Years. (¶) In 2004, a Peregrine client sent a letter to the NFA - National Futures Association, the firm's primary regulator - and the CFTC, asking it to intervene to prevent the firm from misusing its customers' money.  That's according to a person with knowledge of the correspondence and a copy of the letter obtained by The NYTimes. (¶) Then, in 2009, a tipster wrote to the NFA asking it to review Peregrine's bank account information for accuracy, according to an anonymous source.  The tip also was anonymous, and it's unclear how seriously the NFA took it. (¶) How about the fact that the auditor for Peregrine was a one-person shop run out of the accountant's home in Glendale Heights, Ill., a Chicago suburb.  [C-I Note: Wasendorf must have consulted Bernie Madoff on that one.]  Part of the CFTC  investigation will deal with determining the role of the CPA.  Good luck - the auditor will probably say he or she knew nothing and will attribute his or her failure to catching red flags over such a long stretch of years to his or her deficiencies as an auditor, or that it's difficult to catch fraud when the client worked so hard at covering up his tracks. Following the MF Global Collapse. Late last year, after the problems at MF Global went disclosed, the CFTC ordered a review of all futures firms to ensure the safety of customer money.  (¶) The NFA - where Wasendorf serves on an advisory committee - gave Peregrine a clean bill of health in January.

[C-I Note: How comforting is that?  First-year accountants at big accounting firms - commonly referred to as a "Pinheads" - typically start off auditing the "Cash" account on a firm's general ledger.  It doesn't involve rocket science.  We also did zillions of bank account reconciliations.  Anyway, Step One in the Audit Program for "General Ledger 'Cash' Account' is mail out (yourself) and obtain independent confirmations for all banks and financial institutions holding firm funds or funds belonging to firm customers.  It is that simple and it worked.

Which makes the regulators' next investigation procedure (see immediately below) so inane - who cares what documentation the firm had on file.  A document supposedly issued by an outside entity that is in a company's file should always be viewed as less reliable than a document that one can obtain directly from the outside entity - after all, clients have been known to "doctor up" such documents - or create their own versions which can look awfully authentic.]

(¶) Government regulators currently are examining whether Wasendorf doctored bank statements provided to the NFA, according to people briefed on the matter who were not authorized to speak publicly because of the investigation.  Authorities are also expected to question officials at U.S. Bank, which held the client's money. "The entire industry is outraged that it happened the first time, let alone a second time," said Michael V. Dunn, a former commissioner of the CFTC, referring to the collapse of two brokerages.  "We need to do something about this." Meanwhile, the NFA was in the middle of changing ... part of its audit process to an online platform, where bank statement information would feed directly to the regulator.  This month, Peregrine was facing its first audit under the new system, called confirmation.com, and Wasendorf was opposed to the system, according to people with knowledge of the matter. Wasendorf fought the directive for several days, the person said, until relenting on Sunday.  The NFA started getting confirmations through the system Monday morning. On Thursday, Mr. Grassley asked his colleagues on the Senate's agriculture committee to address the Peregrine scandal at a hearing next month.  He also requested that the CFTC provide information on what it did in response to red flags at Peregrine. "People need to have confidence in our commodity trading system in order for it to work for farmers and investors the way it's intended," Mr. Grassley said. For further details, go to: [Dealbook, 7/12/12].