Reference no: EM13886472
Refer to the Professional Judgment in Context feature at the begin- ning of the chapter. Additional details on PFG and Wasendorf are presented below. On July 14, 2012, Russell Wasendorf, Sr. attempted to commit suicide inside his vehicle in the parking lot of Peregrine Financial Group, Inc.'s (PFG) corporate offices, leaving a remarkable suicide note in his vehicle detailing a fraud scheme in which he embezzled over $200 million from PFG's brokerage cli- ents over a 20-year period. Wasendorf led a very interesting and affluent lifestyle and ran the business in some unusual ways. Exam- ples include the following:
? In addition to owning PFG, he also owned an Italian restaurant My Verona in Cedar Rapids, Iowa, along with publishing com- panies (SFO Magazine and W&A Publishing/Trader's Press) and a real estate operation in Bucharest, Romania.
? He married his fiancée, who works at My Verona, in the Bella- gio Hotel in Las Vegas on June 30, 2012.
? His son, Russell Wasendorf, Jr., ran the operations of PFG and was the president and chief operating officer of the company, but did not have detailed access to important financial records of the company. Instead, Russell Wasendorf, Sr., had sole con- trol of the company's bank accounts.
? He flew his private jet to Chicago often for business, but was also known to take the jet all around the world to attend Lady Gaga concerts.
? He recently pledged a $2 million donation to the Athletic Department at the University of Northern Iowa.
? He attempted, but failed, to commit suicide by hooking up a tube to his car's tailpipe when suspicions of the fraud were revealed. An empty bottle of vodka was found next to his body. He was subsequently hospitalized at the University of Iowa Hospitals and Clinics in Iowa City, and was removed from his hospital bed by FBI agents while simultaneously speaking to his Chicago-based lawyer, Thomas Breen. Later that day, he appeared in federal court related to charges of lying to federal regulators and was considered a flight risk.
Below are quotes from Wasendorf's suicide note:
I have committed fraud. For this I feel constant and intense guilt. I am remorseful that my greatest transgressions have been to my fellow man. Through a scheme of using false bank statements I have been able to embezzle millions of dollars from customer accounts at Pere- grine Financial Group, Inc. The forgeries started nearly twenty years ago and have gone undetected until now. I was able to conceal my crime of forgery by being the sole individual with access to the US Bank accounts held by PFG. No one else in the company ever saw an actual US Bank statement. The Bank statements were always delivered directly to me when they arrived in the mail. I made counterfeit state- ments within a few hours of receiving the actual statements and gave the forgeries to the accounting department.
I had no access to additional capital and I was forced into a diffi- cult decision: Should I go out of business or cheat? I guess my ego was too big to admit failure. So I cheated, I falsified the very core of the financial documents of PFG, the Bank Statements. At first I had to make forgeries of both the Firstar Bank Statements and the Harris Bank Statements. When I chose to close the Harris Account I only had to falsify the Firstar statements. [Note: Firstar eventually became U.S. Bank.] I also made forgeries of official letters and correspondence from the bank, as well as transaction confirmation statements.
Using a combination of PhotoShop, Excel, scanners, and both laser and ink jet printers I was able to make very convincing forgeries of nearly every document that came from the Bank. I could create forgeries very quickly so no one suspected that my forgeries were not the real thing that had just arrived in the mail.
With careful concealment and blunt authority I was able to hide my fraud from others at PFG. PFG grew out of a one man shop, a business I started in the basement of my home. As I added people to the company everyone knew I was the guy in charge. If anyone ques- tioned my authority I would simply point out that I was the sole shareholder. I established rules and procedures as each new situation arose. I ordered that US Bank statements were to be delivered directly to me unopened, to make sure no one was able to examine an actual US Bank Statement. I was also the only person with online access to PFG's account using US Bank's online portal. On US Bank side, I told representatives at the Bank that I was the only person they should interface with at PFG.
When it became common practice for Certified Auditors and the Field Auditors of the Regulators to mail Balance Confirmation Forms to Banks and other entities holding customer funds I opened a post office box. The box was originally in the name of Firstar Bank but was eventually changed to US Bank. I put the address "PO Box 706, Cedar Falls, IA 50613-0030" on the counterfeit Bank Statements.
When the auditors mailed the Confirmation Forms to the Bank's false address, I would intercept the Form, type in the amount I needed to show, forge a Bank Officer's signature and mail it back to the Regula- tor or Certified Auditor. When online Banking became prevalent I learned how to falsify online Bank Statements and the Regulators accepted them without question.
At about the same time that emergency officials responded to the 911 call in the parking lot of PFG's offices, Russell Wasendorf, Jr. arrived at his office inside the building and found an exact copy of the suicide note. Immediately thereafter, he contacted U.S. Bank and obtained a bank statement with an ending balance as of December 31, 2011, equaling $6,337,628.14. The ending balance reported by his father on the falsified bank statement was $221,770,946.18.
PFG is a futures trading firm. Futures trading firms match buyers and sellers of contracts for commodities like wheat, oil, and aluminum and charge a commission for the service. Companies use futures contracts to protect themselves from price fluctuations. PFG is a privately held entity, so it is not subject to oversight by the SEC or PCAOB. Instead, the U.S. Commodities Futures Trading Com- mission (CFTC) is the regulatory agency responsible for the over- sight of the industry, and the NFA is the industry association that operates under the supervision of the CFTC. The NFA is responsi- ble for monitoring and auditing PFG for compliance with financial reporting requirements of the domestic exchanges, of which PFG was a member. The NFA never required electronic verification of PFG's bank statements.
In 2004, a PFG client complained to the NFA that PFG was misusing customer funds. In 2009, an anonymous complaint was filed with the NFA asking for a review of PFG's bank account information. What, if anything, the NFA did about the complaint was not known. Interestingly, Wasendorf, Sr. serves on an advisory committee of the NFA. Veraja-Snelling Co. is PFG's audit firm. The firm is operated out of a home in Glendale Heights, Illinois. Jeannie Veraja-Snelling is the sole practitioner and has never performed any public company audits, even though she did register her audit firm with the PCAOB in 2010. On the December 31, 2010, financial statements, Veraja-Snelling certified that PFG was in compliance with federal commodities regulations governing the segregation of customer money.
What likely prompted the timing of Wasendorf's attempted sui- cide was the fact that the NFA had just implemented a change to its online system whereby bank statement information would be directed electronically from the banks directly to the NFA (the sys- tem can be viewed at www.confirmation.com). The NFA started receiving confirmations through that system one day before Wasen- dorf's attempted suicide.
PFG filed for bankruptcy almost immediately after Wasendorf's attempted suicide and subsequent arrest. In addition, all the other businesses that Wasendorf ran immediately ceased operations, firing all employees. These businesses began the process of immediate liq- uidation. All customer accounts at PFG have been frozen, so inves- tors have no access to their assets. Because PFG is a futures trading firm, not a traditional brokerage firm, investors do not have access to the protections normally provided by the Securities Investor Pro- tection Corporation, which returns assets held in accounts of tradi- tional brokerage firms that fail.
a. Describe any inherent, fraud, or control risks that are evident from the facts in the case.
b. Comment on your perceptions of the quality of the NFA's oversight of PFG.
c. Do you think it is ethically problematic that Wasendorf served on an advisory committee of the NFA? Why might NFA wanted Wasendorf to serve on its advisory committee? What conflict might that have caused?
d. Comment on your perceptions of the quality of Veraja- Snelling's certification of PFG's compliance status. Is a sole practitioner likely capable of sufficiently overseeing a large, complex entity like PFG? Was it acceptable for Veraja-Snelling to accept a paper copy of the bank confirmation, which she would have believed came directly from U.S. Bank? Why might Veraja-Snelling have lacked professional skepticism for this engagement?
e. Having the CEO personally involved in receiving bank state- ments and in limiting the bank's access to other individuals within the company would be very unusual for a large com- pany such as PFG. Further, U.S. Bank should have expected to receive an auditor's confirmation request annually, but did not because Wasendorf circumvented the process. Using the ethical decision making framework from Chapter 4, comment on whether you think that U.S. Bank is responsible in any way for this fraud. Explain. Recall that the steps are as follows: (1) identify the ethical issue, (2) determine the affected parties and identify their rights, (3) determine the most important rights for each affected party, (4) develop alternative courses of action, (5) determine the likely consequences of each proposed course of action on each affected party, (6) assess the possible conse- quences, and (7) decide on an appropriate course of action.