Peregrine Financial: The $200 Million Fraud Nobody Checked

Cedar Falls, Iowa

0:03This is Cedar Falls, Iowa.

0:08Not where you would expect to find a brokerage holding money for tens of thousands of people around the world.

0:12In a building on a street like this one, in the early nineteen nineties, a crime is about to be committed.

0:21It will not be discovered for twenty years.

0:28Inside, a man named Russell Wasendorf Senior had a problem that had a number attached to it.

0:32His partner in the futures brokerage they ran together had taken his money out of the business. Without it, the firm could not keep going.

0:36So Wasendorf took at least two hundred and fifty thousand dollars that belonged to the firm's customers.

0:44Then he walked to a copy machine and made a phony bank statement.

0:50One sheet of paper, showing money that was no longer in the account.

0:50He sent it on. Nobody asked about it. And a month later, when the real statement arrived and the hole was still there, he made another one.

0:59He made one every month, and then he kept making them.

1:07In that time the firm around him grew into a brokerage with customers around the world, and a headquarters in Cedar Falls that cost twenty million dollars to build.

1:15By July of two thousand and twelve, Peregrine Financial Group was telling its regulator it held more than two hundred and twenty million dollars of customer money.

1:22It held five point one million.

1:27In those years the firm filed reports with its regulators every month. It was examined by the body that polices futures firms twenty seven times. It was audited from outside as well.

1:36Not one of them found it.

1:36This is the story of the twenty years in which nobody turned the paper over.

Act One: The Promise

1:53Russell Wasendorf Senior founded Peregrine Financial Group. In his own account, written later, it grew out of a one man shop he started in the basement of his home.

2:01For a town that size the headquarters was a landmark. The man who built it was a local success story of the most legible kind, and the growth of his company was itself the evidence that nothing was wrong with it.

2:09Peregrine was what the industry calls a futures commission merchant. When you trade futures, you do not hold the money yourself. You send it to a firm, and the firm holds it while you trade.

2:22That money never becomes the firm's money. It cannot be lent. It cannot be invested. It cannot be spent, or borrowed against. By law it sits in a separate account, apart from everything else the business owns.

2:32The industry word for this is segregation. Your funds are segregated. Held apart.

2:36On the third of August nineteen ninety two, Peregrine opened exactly such an account at a bank in Cedar Falls that would later become part of U.S. Bank. On the paperwork it was designated, in writing, a Peregrine Financial Group Customer Segregated Account.

2:54The bank wrote back. Twice. Two letters, acknowledging that the account contained customer money, that it would be properly segregated, and that it would be maintained in accordance with the Commodity Exchange Act.

3:08So the promise was written down, and signed, by both sides, in nineteen ninety two.

3:12That promise is not a courtesy. It is the thing that makes the whole business possible. A futures brokerage is not a place you invest. It is a place you leave your money on the way to somewhere else, and the only reason anybody does that is the certainty that it will still be there.

3:25Which is why nobody was relying on Wasendorf's good intentions.

3:28In nineteen seventy four, Congress created the Commodity Futures Trading Commission, a federal agency with authority over futures trading. It also authorised the industry to form a self regulatory body underneath it. That body is the National Futures Association. It began work in nineteen eighty two.

3:45For a firm like Peregrine, the Association was the front line. Its job was to monitor and audit member firms for compliance with the minimum financial and reporting requirements.

3:54So there was a federal agency above, an industry regulator with its own auditors, an outside accounting firm, and a set of filings due every single month.

4:02Between nineteen ninety five and two thousand and twelve, the National Futures Association audited Peregrine twenty seven times. Seventeen of those were unannounced annual audits, arriving every nine to fifteen months.

4:15After it was over, the Association commissioned an outside firm to investigate its own conduct. That investigation read more than one hundred and ninety thousand documents, running to over three million pages. It read a hundred and sixty six thousand emails sent and received by the Association's own staff. It interviewed thirty two people, including Wasendorf himself.

4:31And it was published.

4:38Three million pages, to reconstruct what one man had done with a copy machine.

4:38In seven of those seventeen annual audits, the auditors sent a written confirmation request to U.S. Bank, asking the bank directly how much money was in the account.

4:50Seven times in seventeen years, somebody wrote to the bank and asked.

Act Two: The Machine

4:58None of those audits found it.

5:08Go back to the beginning, because the beginning is much smaller than the end.

5:12Wasendorf's partner withdrew his money from the operation. That is an ordinary business event. Partners leave. What made it dangerous was that the firm did not have the funds to continue without him.

5:21He took at least two hundred and fifty thousand dollars of Peregrine's customer funds, out of the account at the outside bank.

5:29Two hundred and fifty thousand dollars. Against what this becomes, it is almost nothing. It is what a mid sized business might spend on a bad year of rent.

5:37And at that moment it was still recoverable. A firm short two hundred and fifty thousand dollars has options. Difficult ones. Humiliating ones. But options.

5:46He chose a different one. To conceal the theft, he used a copy machine to fabricate a phony bank statement.

5:50A real statement. A machine. A sheet that would survive being glanced at by somebody with no particular reason to doubt it. He put the real one on the glass, and he produced one that showed a balance that was not there.

6:02Then he sent it on into his own company.

6:07A month later, the next statement arrived, and the hole had not closed. So there had to be a second phony statement. And then a third.

6:11This is the part of long frauds that people find hardest to believe, and it is the part that is most consistently true. Nobody sets out to run a twenty year deception. They solve one month. And in solving it they take on an obligation to solve every month that follows, for ever, because the only thing standing between them and a courtroom is the next sheet of paper.

6:32He was not executing a plan. He was patching a hole.

6:32And then the patch acquired a calendar.

6:37Once a month, indefinitely, a specific piece of work had to be done, to a deadline set by the arrival of the next statement. It could not be delegated. It could not be skipped. Nobody could ever be asked to help with it.

6:50Most people cannot sustain a gym membership for twenty years.

6:56By the end, what he was running was not a lie any more. It was a system, and it had three parts. He described much of it himself, in a statement he signed in July two thousand and twelve. And he described why it worked. When online banking became prevalent, he wrote, he learned how to falsify online bank statements. And the regulators accepted them without question.

7:19Bank statements arrive in the post. At a firm of any size they reach a mail room, get opened by an administrator, and travel to accounting, and along the way several people see them who know roughly what number to expect.

7:28Wasendorf instructed his own staff that the bank statements were to be delivered to him. Unopened.

7:32In his signed statement he explained why, in his own words: so that no one was able to examine an actual bank statement.

7:40He went further. He was the only person at Peregrine with online access to the account. And he told the bank that he was the only person there they should deal with.

7:47If anyone questioned his authority, he wrote, he would simply point out that he was the sole shareholder. He described the whole arrangement as management. He established rules and procedures, he said, as each new situation arose.

8:04Taken one at a time, none of those instructions is strange. Plenty of founders want to see the bank statements. Plenty of small firms have one person with the online banking login, because it started as one person. Plenty of banks have a single point of contact at a client and prefer it that way.

8:17Not one of them is a red flag on its own. Together, they are the entire fraud.

8:21He did not have to defeat the controls at Peregrine. He only had to be the one person standing between those controls and the truth, and he built that position out of ordinary decisions any reasonable colleague would have waved through.

8:39Once the real statement reached his desk, he made a false one to put in its place. He used a copy machine, and in later years computer software, to create phony monthly statements.

8:48Those fabricated statements went to Peregrine's own accounting department.

8:52The accounting staff were not accomplices. They were handed documents by the owner of the company and they did their jobs properly. They took those statements and used them to build the reports the Commodity Futures Trading Commission and the National Futures Association required.

9:09Every regulatory filing Peregrine ever made was assembled honestly, by people acting in good faith, out of a document that was false before it reached them.

9:13The fraud never needed a conspiracy. It needed one forged sheet at the top of a chain of competent people who had no reason to look up.

Act Three: Close The Loop

9:29Here is where it should have ended.

9:29Everybody who checks a company eventually has to answer the same question, and it is the simplest question in finance.

9:32How much money is actually in the bank?

9:40There is only one way to answer it that is worth anything. You ask the bank. Not the company. The bank. In writing, directly, with the reply coming back to you and never passing through the hands of the people you are checking.

9:50Auditors are not naive about this. No competent auditor takes a company's word for its own bank balance, because the company's word is the thing under examination. So they write to the bank, and the answer comes back to them, and the company never touches it.

10:06That is the entire point.

10:06Wasendorf changed the address the bank held on file to a post office box that only he could open.

10:16So the confirmation requests from the auditors at the National Futures Association and the Commodity Futures Trading Commission, addressed to Peregrine's bank, went instead to a box controlled by the man they were checking up on.

10:27An auditor fills in a form. It asks one question: how much is in this account. She addresses it to Peregrine's bank, at the address the bank has on file. She posts it.

10:36It arrives at a post office box in Cedar Falls. Box seven zero six.

10:36He had put that address on the counterfeit bank statements himself, so that anyone writing to the bank would write to him.

10:45Wasendorf opens the box. He takes the form out. He types in the amount he needs to show. He signs it as though a bank officer had signed it. And he puts it back in the post, addressed to the auditor who sent it.

11:01She receives exactly what she asked for. The bank's own form. Sent from the bank's address of record. Carrying a figure and a signature.

11:05There was nothing wrong with her procedure. The procedure was correct. She did the right thing, in the right way, and the answer that came back was his.

11:15Control the inbound. Manufacture the replacement. Redirect the one channel that exists specifically to catch you.

11:25And here is what it produced.

11:25By the end, Wasendorf was telling the National Futures Association, and telling Peregrine's outside auditor, that the customer segregated account at U.S. Bank held two hundred million dollars or more.

11:34The average balance in that account, going back to May of two thousand and five, was fifteen point seven million dollars.

11:47For roughly seven years, an account supposed to hold two hundred million dollars held, on average, less than eight percent of that. Every day. And every month a document went out saying otherwise, and every month that document was accepted.

11:59And look at what the machine was made of. A mail instruction. A copy machine. A change of address form.

12:07Every component of a two hundred million dollar fraud was available at a stationery shop.

12:15For twenty years the system worked perfectly. It was just pointed at the wrong address.

Act Four: May 2011

12:29Everything you have heard so far describes a system that was never tested.

12:29It was tested.

12:36Fourteen months before the end, it worked, and he was caught.

12:41In May of two thousand and eleven, the National Futures Association was running its annual audit of Peregrine. The audit team did what audit teams do. They sent a confirmation request to U.S. Bank, asking the bank to state the balance in the customer segregated account.

12:54On Friday the thirteenth of May, an employee at U.S. Bank filled that request in and sent it back.

12:59She gave the real figure.

12:59Seven million, one hundred and eighty one thousand, three hundred and thirty six dollars and thirty six cents.

13:08The bank statement Wasendorf had handed the same auditors, for the same account, showed two hundred and eighteen million, six hundred and fifty thousand, five hundred and fifty dollars and ninety six cents.

13:22Two documents. The same account. A gap of two hundred and eleven million dollars.

13:27On the Monday, the sixteenth of May, a staff auditor at the National Futures Association scanned the confirmations into the audit software.

13:35She compared the seven million dollar confirmation against the bank statement in the file. She saw that they did not match. And she told her field supervisor that the figures did not match.

13:48She caught him.

13:51On an ordinary Monday, at a junior level, she did the exact thing the entire apparatus exists to do.

13:55Wasendorf's own description of that moment, recorded in the investigation that followed, was this.

14:00I am in shock. I'm caught.

14:06He was.

14:06And then, that same day, he walked into the bank.

14:06He had spent years making himself the only person at Peregrine the bank ever dealt with. They knew him there. As far as the branch was concerned, he was the account.

14:16He told the employee who had sent the real confirmation that it was obviously a mistake, because it did not carry the correct bank address.

14:27It is undisputed that he then prepared a forged confirmation statement.

14:27Later that same afternoon, a fax arrived for the audit team. It appeared to come from the bank. The cover note said that attached was a corrected copy of the bank balance confirmation for the Peregrine account.

14:41The confirmation attached to it showed two hundred and eighteen million, six hundred and fifty thousand, five hundred and fifty dollars and ninety six cents.

14:51The same figure, to the cent, as the statement he had given them in the first place.

14:55The staff auditor uploaded the corrected confirmation into the file. The audit carried on.

14:58The field supervisor would later say she did not recall the staff auditor having any reaction to the seven million dollar confirmation, or any discussion at all among the audit team about it. The other members of the team did not recall seeing it.

15:17He was caught by a system working exactly as designed, and he undid it the same afternoon, with a conversation and one more sheet of paper.

15:21What failed there was not the check.

15:25The check worked. It went to the bank. The bank told the truth. The truth reached an auditor who read it, compared it, understood what she was looking at, and reported it. Every single part of that functioned.

15:34What failed was what happened next. A correction arrived, apparently from the bank, and it was accepted, and the matter closed.

15:46And the reason runs through this entire story. A forged document arriving through an expected channel does not feel like evidence of fraud.

15:50It feels like paperwork.

Act Five: July 2012

16:04Fourteen months later, the audit came round again. And this time one thing about it was different.

16:08For the first time, the National Futures Association's audit of Peregrine used electronic confirmation. Not a letter to an address on file. A request sent through a service, from the auditor to the bank, as data.

16:17There is no post office box for that.

16:21On the second of July two thousand and twelve, the auditors sent an electronic request through that service. Before it could go to the bank, it needed Wasendorf's signature to release it.

16:30For six days, nothing happened.

16:36On the eighth of July, Wasendorf responded to the electronic request and confirmed the balances.

16:45At that moment the system automatically sent the request on to U.S. Bank.

16:45No envelope. No address of record. No post office box. Nothing at all between the question and the only institution that could answer it truthfully.

16:54At forty eight minutes past ten the following morning, the ninth of July, U.S. Bank recorded the balance.

17:03That same day, Russell Wasendorf Senior attempted suicide.

17:03He survived.

17:11Before the confirmation came back from the bank, which would have shown the difference between the figure he had confirmed and the figure the bank confirmed, the auditors learned that he had attempted suicide and had confessed to the fraud.

17:21On the ninth of July the FBI found multiple copies of a signed confessional statement. That is the statement you have been hearing from. He confirmed it afterwards to investigators.

17:29The next day, the tenth of July, the Commodity Futures Trading Commission filed suit in federal court against Peregrine Financial Group and Russell Wasendorf Senior. Fraud. Misappropriation of customer funds. Violation of the customer fund segregation laws. Making false statements.

17:47It asked the court to freeze the assets, appoint a receiver, preserve the records, and order restitution.

17:51The same day, the firm filed for liquidation under Chapter Seven.

17:59A brokerage exists because people believe their money is there. Once that is gone, there is nothing else holding it up.

18:04There was no investigation closing in on him. No journalist with a document. No colleague who finally spoke.

18:09One person had worked it out, fourteen months earlier, and had been answered with a fax.

18:13In the end nothing found him at all. The confirmation simply stopped being made of paper.

18:17The investigation the National Futures Association later commissioned into its own conduct described the service its auditors used in two thousand and twelve in plain terms. It was the thing which resulted in the discovery of the fraud.

18:33Not an investigator. A service.

18:38The check had been running every year for twenty years, correctly, and handing his own numbers back to him with a bank's authority attached. It kept running. It simply arrived, in the end, somewhere he could not reach.

18:45And he was the one who released it.

Act Six: The Other Institution

18:59Where was the bank in all of this.

18:59The money was real once. It went into a real account, and the bank could see exactly what was in that account every day for twenty years. The bank is the only party in this story that never had to be deceived, because the bank was holding the truth.

19:11The Commodity Futures Trading Commission sued U.S. Bank.

19:15In November of two thousand and fourteen a federal court ruled on that case. It found that during the relevant period, no U.S. Bank employee responsible for the account understood that it was a customer segregated account, or understood what that designation meant.

19:28It found the bank had no policies, no procedures and no training specific to customer segregated funds at all.

19:38The Commission's charge was that the bank treated the account like a regular business checking account.

19:42The Commission alleged that between June two thousand and eight and July two thousand and twelve, roughly thirty six million dollars moved out of that account to people and entities who were not Peregrine customers.

19:50Then, in September of two thousand and eight, the bank made two loans.

19:55Six point four million dollars to a company called Wasendorf Construction, to build an office complex in Cedar Falls with Peregrine as its primary tenant.

20:03And three million dollars to Wasendorf and his wife, personally.

20:07Peregrine guaranteed both loans. The guarantee granted the bank a security interest in all Peregrine property that the bank was holding.

20:14The Commission's complaint further alleged that the bank would not have made that loan had Peregrine refused to sign the guarantee, and that customer money went to Wasendorf's private aeroplane, his restaurant, and his divorce settlement.

20:29The Commission alleged that those loan documents recorded, in at least six separate places, that under the Commodity Exchange Act the corporation was required to segregate all balances due to customers. With the regulations cited. And that the documents were reviewed and approved by other U.S. Bank personnel.

20:49That is the allegation. Not that the bank missed it. That it was written down, correctly, in the paperwork, by the people doing the lending.

20:58On one point the court ruled for the bank. Considering the customer funds when it decided whether to make the loans was not, the court held, an improper use of them.

21:07The Commission's case was that the guarantee included the customer segregated account.

21:16Was the loan that built it secured against his customers' money?

21:22The court held that question over. It was the only issue the court left for trial.

21:28The case settled before the trial happened.

Act Seven: The Accounting

21:42On the seventeenth of September two thousand and twelve, Wasendorf pleaded guilty. Four counts. Mail fraud. Embezzlement by a person registered under the Commodity Exchange Act. Two counts of making false statements.

21:51He consented to a forfeiture judgment of one hundred million dollars.

21:56On the twenty third of January two thousand and thirteen, he was sentenced to fifty years in prison.

22:05That sentence was not for the theft. The theft was two hundred and fifty thousand dollars, taken in a bad month in the early nineteen nineties by a man whose partner had just walked out. On its own that is a serious crime and a survivable one.

22:13The fifty years is for the twenty years that came afterwards.

22:18For the instruction that the statements were to arrive unopened. For every month he sat down and produced a document he knew to be false and handed it to his own staff to file with the government. For the change of address that turned an audit into a formality. For the forms he filled in himself and posted back, signed as though they came from a bank. For the afternoon in May two thousand and eleven when he had been found, and talked his way out of it, and went back to work.

22:41Twenty years of monthly statements is roughly two hundred and forty of them.

22:45Two hundred and forty separate occasions on which a man took delivery of a document, read the real number, and decided again to replace it with a false one. None of them forced. Every one of them reversible, right up until the moment it was made.

23:05He was also ordered to pay more than two hundred and fifteen million dollars in restitution.

23:11Restitution to how many people is a question with three official answers, and we are going to show you all three rather than pick the one we prefer.

23:15The Department of Justice ordered restitution to more than thirteen thousand victims.

23:23The Commodity Futures Trading Commission put it at more than twenty four thousand Peregrine clients.

23:26The bankruptcy trustee eventually paid out to more than eight thousand holders of allowed futures customer claims.

23:35All three are official and none of them is wrong. They are counting different things. Victims with restitution claims, clients on the firm's books, and holders of claims allowed in a bankruptcy are three different units.

23:44You will find each of those figures quoted elsewhere as though it were the number. A story about a man who got away with false figures for twenty years is not the place to be casual about a figure.

23:56Somewhere between thirteen and twenty four thousand people had money at Peregrine.

24:01A restitution order is not a recovery. It is a number a court writes down.

24:07What customers actually got came out of the bankruptcy, and it took a very long time.

24:11Peregrine's Chapter Seven was filed on the tenth of July two thousand and twelve, in the Northern District of Illinois. That October, roughly one hundred and twenty three million dollars of customer funds was transferred in bulk to another firm, Vision Financial Markets, covering about thirteen and a half thousand domestic accounts and a thousand foreign ones.

24:28Then the distributions began.

24:32Customers holding domestic segregated futures accounts received forty nine percent in two thousand and fifteen. Three years after the collapse.

24:36Sixty percent in two thousand and sixteen. Sixty three percent in two thousand and seventeen.

24:45And in March of two thousand and twenty, eight years after the firm failed, a final tranche brought them to seventy two point one six percent.

24:54Run it for one account. A hundred thousand dollars sitting in a segregated account in July two thousand and twelve.

24:59Nothing at all for three years. Then forty nine thousand dollars. Then eleven more. Then three. And then, in the spring of two thousand and twenty, a final nine thousand, and it was over.

25:08They were out twenty eight thousand dollars and eight years.

25:17They had not made a bad trade. They had not taken a risk that went against them. The money was not supposed to be at risk at all. That was the entire point of the account it was sitting in.

25:26Some customers did better. Holders of foreign futures accounts were paid in full.

25:30Some did much worse. Customers trading foreign exchange and metals were not treated as futures customers at all. They argued for that priority in the bankruptcy court and lost. They appealed to the district court and lost again in two thousand and sixteen. They appealed to the Seventh Circuit and lost there in two thousand and seventeen. They went to the back of the line with the general unsecured creditors, and they recovered far less.

25:50Money came from elsewhere. In February of two thousand and fifteen a federal court entered a consent order against U.S. Bank. Eighteen million dollars, not a fine and not a penalty, but a contribution to the Peregrine trustee for return to customers holding domestic futures accounts.

26:08That order is unusual in one respect. There is no clause in it saying the bank neither admits nor denies the findings. The court had already ruled against it in part, and it agreed instead to adopt the court's uncontested facts, and never to publicly deny them.

26:21In the separate lawsuit brought by customers, on behalf of domestic futures customers only, it denied liability and settled for a gross forty four and a half million before fees and costs.

26:35Between two thousand and twenty one and two thousand and twenty two, the trustee went looking for one thousand four hundred and seventy six customers whose cheques had never reached them. Between them they were owed about three point seven million dollars.

26:48Forms went out. Where the forms came back unanswered, the money was deemed abandoned and forfeited.

26:56And the case is not over.

26:56Fourteen years after Peregrine collapsed, the Chapter Seven is still open. The docket shows a status hearing in June of two thousand and twenty six. A trustee's final report has been projected in each of the last three years and has not been filed. There has been no final distribution.

27:10Twenty years of paper took fourteen years to unwind, and the unwinding is still going.

27:20He is still in prison. The Bureau of Prisons expects to release him on the nineteenth of February, two thousand and fifty four.

27:24He would be one hundred and six.

27:30The checks were never skipped. They were carried out every year, in writing, by people doing their jobs properly, exactly the way they are supposed to be.

27:38For twenty years the letters went to a post office box that only one man could open.

27:46Once, one of them reached the bank. The bank answered honestly. A junior auditor read the answer, saw that it was wrong, and said so.

27:56It took him one afternoon and one more sheet of paper.

28:01Every empire is paperwork. This one was built one sheet at a time, and a customer who left a hundred thousand dollars in segregation got seventy two thousand of it back, eight years late.