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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CyberSecurity Month: How Easy is Major Financial Fraud?

An unfortunate truth of the financial industry seems to be that if someone can commit fraud, someone probably will. And, as technology continues to improve, the possibility of getting away with it is increasing.  Peregrine Financial made headlines this July when their CEO confessed to defrauding customers for over 19 years.

Shortly after the story broke, Wall Street Journal released an investigation into the series of crimes. “Financial frauds are shocking when they come to light and one of the first questions usually raised is ‘why couldn’t investors/regulators have seen this?’” We decided to look at what they found, and explore how similar crimes can be avoided.

Attention to Detail

Russ Wasendorf Sr., CEO of Peregrine Financial, continually defrauded customers using techniques as simple as “[forging] bank statements and bank correspondence using Adobe Photoshop, scanners, Excel and printers…” These home-made forgeries were simple and easy to produce, but were more than enough to fool financial regulators for almost two decades.

Regulators are likely to face tough questioning from lawmakers on Wednesday [July 25^th] how the fraud went on so long without being detected.

"Who is minding the store,?" House Agriculture Chairman Frank Lucas plans to ask in an opening statement. "What we need is regulators doing their job."

How could this have been avoided? Both Reuters and WSJ attest that regulators were following all of the standard requirements and regulations for approving these forged statements. Unfortunately, the problem seems to lie in the fact that those regulations aren’t written with fraud in mind. We’re not saying that every financial regulator should assume they are being duped, but greater attention to detail would not necessarily be a bad thing.

Next week, we'll continue looking at the major factors in this case.

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Merrill Corporation is proud to offer XBRL Complete, a suite of services that meets - and has options to exceed – the mandated requirements for XBRL for mutual funds. For more information, please click here or call 866-367-9110.

Cyber Safety Month: CyberSecurity Bill Fails in Senate

This past month, a bill that would establish voluntary cybersecurity standards across all US companies failed to meet the required 2/3 majority Senate vote for approval. The bill was originally designed to protect critical US infrastructure from external cyber threats through mandatory ‘best practices’ requirements. In an effort to push the bill through the senate, it was reworked into a voluntary measure.

The electrical grid, internet communication, and water supply were some examples of the infrastructure to be protected. In the end, the bill failed to win enough votes from critics who stated “…that any cybersecurity standards — whether mandatory or voluntary — would place a financial strain on private companies. They say government intervention is not necessary on this issue”

Supporters of the bill believe that private companies and infrastructure in the United States is facing a threat too large to be handled on an individual basis.

“This is one of those days when I fear for our country, and I’m not proud of the United States Senate,” Sen. Joseph I. Lieberman (I-Conn.), one of the bill’s chief sponsors, said before the vote. “We’ve got a crisis, and it’s one that we all acknowledge. It’s not just that there’s a theoretical or speculative threat of cyberattack against our country — it’s real.”

Opposition to the bill was so strong, the U.S. Chamber of Commerce “threatened to track how lawmakers voted on the measure in its influential annual assessments.”

At the end of the day, the nation’s cyber security is only as strong as its weakest link, and only time will tell how strong that link is.

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Merrill Corporation is proud to offer XBRL Complete, a suite of services that meets - and has options to exceed – the mandated requirements for XBRL for mutual funds. For more information, please click here or call 866-367-9110.