PFG freezes accounts, CEO attempts suicide

[justrading]

Quote from logic_man:

What do you investigate them for? Not being able to anticipate how someone could use a process loophole to commit fraud?

I suppose that is some kind of negligence, but other than fixing it after the fact (it appears they were in the midst of fixing it with the electronic confirmations), what can be done? Hundreds of other companies used the same process and didn't commit fraud (it would appear), so can you really blame the process?

I'm not defending the NFA, although I'm sure their defense would start off with a statement along these lines.

The only way the NFA could have sent the documents addressed to the bank to a PO box that had nothing to do with the bank is for someone involved in the fraud to have provided them the address.

The dummy PO box was most certainly not listed on the banks website. Doesn't reasonable due diligence require that the NFA get the bank's address either directly or from the banks website?

And if the official arrangement was for all said documents to be channeled to the bank via PFG, that violates one of the most basic rules of verification.

Any way you look at it, it stinks.

If it is true, of course.

 

[Trendytrader]

The question is what happened to the ~ $200M how and where did it get siphoned off to?

and how many more crooked CEO's are out there?

 

[logic_man]

Quote from justrading:

The only way the NFA could have sent the documents addressed to the bank to a PO box that had nothing to do with the bank is for someone involved in the fraud to have provided them the address.

The dummy PO box was most certainly not listed on the banks website. Doesn't reasonable due diligence require that the NFA get the bank's address either directly or from the banks website?

And if the official arrangement was for all said documents to be channeled to the bank via PFG, that violates one of the most basic rules of verification.

Any way you look at it, it stinks.

If it is true, of course.

There probably should have been a step to verify with the banks. BUT, if the NFA member is providing the NFA the bank's contact information, there is still the opportunity to provide a fraudulent contact. If I tell the NFA to call so-and-so to verify the bank address and that person is in on the fraud, how would the NFA know?

A big bank like U.S. Bank isn't going to have every address on its website, either, so I'm not sure you could necessarily verify it that way.

Definitely agree with you that if they were sending docs to PFG to send to the bank, that's ridiculously flawed.

 

[justrading]

Quote from logic_man:

There probably should have been a step to verify with the banks. BUT, if the NFA member is providing the NFA the bank's contact information, there is still the opportunity to provide a fraudulent contact. If I tell the NFA to call so-and-so to verify the bank address and that person is in on the fraud, how would the NFA know?

A big bank like U.S. Bank isn't going to have every address on its website, either, so I'm not sure you could necessarily verify it that way.

Definitely agree with you that if they were sending docs to PFG to send to the bank, that's ridiculously flawed.

Google "U.S. bank cedar falls Iowa" and you will see a listing that gives all 6 locations.

Perhaps auditors work differently in the States. My experience across Asia is that external auditors will ask that the authorised signatories for bank accounts sign and stamp a standard authorisation letter requesting the bank release account details to the auditors. The auditors then deal directly with the banks.

Account numbers and bank branch details are obtained by the auditors from the bank statements and correspondence at the audit location

This is in 3rd world and developing countries of course. Developed countries may do things differently.

 

[MKTrader]

Quote from bone:

Why should taxpayers subsidize more government incompetence when you have a $120K per year government accountant with a ridiculous pension and benefits plan that is too lazy or inept to check the FCM's figures against the bank account balance ?

+1

 

[bone]

How is it that the auditing accountants at the CME, ICE, NYSE-Euronext, Eurex, etc. etc. [ ie, all of the futures exchanges who audit their FCMs and General Clearing Members routinely as a condition for Membership ]; the auditing accountants at the CFTC [ the ultimate authority who is charged with enforcing the law ]; and the auditing accountants at the NFA [ the industry's self regulator authority ] - all missed speaking with the custodial bank directly and independent of the regulated entity...

Is this a chronic disease that Accountants just take the regulated entity's word that the money is there ? WTF ?

Again, what is so difficult about contacting the custodial bank directly ? Is it beneath the level of a Certified Public Accountant to actually do the physical verification ?

Problem Identified: Accountants are lazy dolts not to be trusted when it comes to verification.

 

[denner]

Quote from logic_man:

There probably should have been a step to verify with the banks. BUT, if the NFA member is providing the NFA the bank's contact information, there is still the opportunity to provide a fraudulent contact. If I tell the NFA to call so-and-so to verify the bank address and that person is in on the fraud, how would the NFA know?

A big bank like U.S. Bank isn't going to have every address on its website, either, so I'm not sure you could necessarily verify it that way.

Definitely agree with you that if they were sending docs to PFG to send to the bank, that's ridiculously flawed.

Yes, we get it...and that's why I said this is the type of crime that I could see happening 20-30 years ago as oppossed to the present time. How in the hell the NFA, CFTC doesn't electronically verify the funds is beyond me. There is absolutely no reason for this go-between at the P.O. Box; in fact it adds costs to the process of auditing these FCM's.

The altering of account statements/bank statements is something umpteen hedge funds have been caught doing which has led to billions of dollars lost in client assets. The regulators are put in place to act as an objective third party and to verify that the funds are where they are supposed to be and the totals check out. Directly to the banks website is obviously best practice...as evidenced also by the fact that this whole sham didn't unravel until the auditors finally wised up and demanded an electronic verification.

So why exactly are we arguing about this again?

 

[logic_man]

Quote from denner:

Yes, we get it...and that's why I said this is the type of crime that I could see happening 20-30 years ago as oppossed to the present time. How in the hell the NFA, CFTC doesn't electronically verify the funds is beyond me. There is absolutely no reason for this go-between at the P.O. Box; in fact it adds costs to the process of auditing these FCM's.

The altering of account statements/bank statements is something umpteen hedge funds have been caught doing which has led to billions of dollars lost in client assets. The regulators are put in place to act as an objective third party and to verify that the funds are where they are supposed to be and the totals check out. Directly to the banks website is obviously best practice...as evidenced also by the fact that this whole sham didn't unravel until the auditors finally wised up and demanded an electronic verification.

So why exactly are we arguing about this again?

When I come across stories like this, I try to anticipate what a defense lawyer would say if it came to pass that there was a trial or some type of liability hearing.

That said, I'm not arguing on behalf of the NFA or auditors except to the extent that they can say:

1. No verification process is flawless and each additional layer of verification increases costs for decreasing marginal benefit

2. 99.9% (or whatever) of customer assets are where the FCM's claim they are

From the story, it wasn't clear what the NFA knew about the P.O. Box. I would speculate that the person responsible for the sending of those documents just saw a P.O. Box and figured it was the right place to send them or the PFG CEO submitted the address documentation as if the P.O. Box was the bank's. Yes, that's wrong, but when you haven't had a problem with this kind of fraud in the past, it just doesn't register that someone would do that. Obviously, if this kind of interception of documents meant for the bank holding the segregated accounts has happened before and the process was the same, it's even worse.

I definitely feel bad for those impacted. I know that I would be freaking out right now if I were an account holder there. But, like I said, I just try to figure out how someone on the other side of the table would try to defend themselves.

 

[denner]

Quote from logic_man:

When I come across stories like this, I try to anticipate what a defense lawyer would say if it came to pass that there was a trial or some type of liability hearing.

That said, I'm not arguing on behalf of the NFA or auditors except to the extent that they can say:

1. No verification process is flawless and each additional layer of verification increases costs for decreasing marginal benefit

2. 99.9% (or whatever) of customer assets are where the FCM's claim they are

From the story, it wasn't clear what the NFA knew about the P.O. Box. I would speculate that the person responsible for the sending of those documents just saw a P.O. Box and figured it was the right place to send them or the PFG CEO submitted the address documentation as if the P.O. Box was the bank's. Yes, that's wrong, but when you haven't had a problem with this kind of fraud in the past, it just doesn't register that someone would do that. Obviously, if this kind of interception of documents meant for the bank holding the segregated accounts has happened before and the process was the same, it's even worse.

I definitely feel bad for those impacted. I know that I would be freaking out right now if I were an account holder there. But, like I said, I just try to figure out how someone on the other side of the table would try to defend themselves.

Those are valid points, but I have to disagree with your claim that there would be additional costs in the process of e-verification. In fact, I think that the NFA/CFTC made a mis-step when they revealed that this entire fraud was unconvered as a result of demanding an e-verification...It almost sounded as if this was standard practice for other FCM's and that the Principal of the firm oppossed it, for obvious reasons, because it would reveal the siphoning of the customer funds.

It's just hard for me to believe that the regulators would just be "getting around to" e-verification in the middle of 2012. This is something that should have been implemented at least 10 years ago.

 

[achilles28]

Quote from austinp:

Robbins Trading has been a division of PFG for several years now... they sold to PFG some time ago.

People often ask me why I demand day-trade margin in my trading accounts, why I would never trade thru any IB that doesn't offer $500 for eminis or $1000 for CL intraday margins.

This is exactly why. I want the least possible capital working inside any brokerage account to handle trade size. Non-trading morons like emg with his $100,000 per one (1) ES contract nonsense is just false rhetoric that plants the wrong seed inside impressionable minds.

I clear mainly thru Dorman and have no reason to think they are anything other than rock-solid... but I've seen enough in my 12 years at this game to want minimum possible cash exposed for leveraged use.

Well said. Re: PFG, Corzine, Madoff, wtf is wrong with these people