Cyber Safety Month: How Easy is Major Financial Fraud? (Part 2)

Last week, we began investigating the July 2012 case of Peregrine Financial’s CEO Russ Wasendorf Sr., and the methods he used to defraud customers for 19 years. As part of our continued commitment to security, compliance, and infrastructure improvements in the financial industry, we’ll be exploring some of Wall Street Journal’s commentary and investigation on the event.

Ineffective Accounting Firms

Peregrine Financial was a large business, compared to most. It may come as a surprise, then, that the firm’s accounting was handled by “a single-proprietor business operating from a Chicago suburb…” As it turns out, this is a common theme in this type of fraud. A smaller accountant means fewer eyes on the money, and more room for minor errors to slip through the cracks. With proper education and research, this would have been a red flag for Peregrine’s customers.

It’s a familiar pattern: Wasendorf’s auditor was a single-proprietor business operating from a Chicago suburb; R. Allen Stanford used a small firm in Antigua; Madoff employed a small shop in a New York City suburb; and Bayou Hedge Fund Group created its own accounting firm to hide its fraud.

Springer said investors and customers should look at whether a firm’s accountant measures up to the size and complexity of its business. “That’s a basic question you should be asking,” he said.

Taking Advantage of Perceived Responsibility.

To outsiders, Wasendorf was a “business kingpin and philanthropist.” He was seen as a hero in Antigua – the initial home of Peregrine – and as a model citizen in Cedar Falls, Iowa. As icing on the cake, Wasendorf “sat on an advisory committee at the National Futures Association, the body responsible for oversight of firms such as his own.”

It is this “hide in plain sight” strategy that so often conceals the most successful frauds and criminals. After all, to a new customer walking in the door, the fact that Wasendorf sat on a board responsible for financial regulation was likely a comforting bonus.

Again, suspicion and distrust should not be your first reaction when dealing with someone that will be handling money. However, it is important to keep in mind that a position of power, or an idyllic outward appearance, is not automatically proof of a clean conscience.

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