The US Commodity Futures Trading Commission today filed and settled an enforcement action against Jeannie Veraja-Snelling, the external certified public accountant responsible for auditing Peregrine Financial Group's year-end financial statements from 2001 through 2011. As part of these audits, Ms. Veraja-Snelling each year issued (1) unqualified opinions stating that Peregrine's financial statements were free from material misstatement, and (2) reports on Peregrine's internal accounting controls concluding that the firm had no material inadequacies, as well as adequate practices and procedures for safeguarding customer funds.
According to the CFTC, Peregrine's 2011 certified financial statement indicated that the firm was holding in excess of US$ 548 Million in customer segregated and secured assets. However that amount was exaggerated by more than US$ 200 Million because Peregrine's Chief Executive Officer, Russell Wasendorf, misappropriated customer funds for personal purposes for at least two decades. Peregrine, at the time a registered futures commission merchant (FCM), filed for bankruptcy during July 2012.
Previously the CFTC has commenced enforcement actions against Peregrine and Mr. Wasendorf, as well as US Bank, NA, related to Mr. Wasensdort's misappropriation and the collapse of Peregrine.
In connection with her settlement, Ms. Vereja-Snelling agreed to cease and desist from violating relevant CFTC rules related to audit standards (CFTC Rule § 1.16(d)) and to a permanent bar from appearing or practicing before the Commission.
Among other things, the CFTC alleges that, during the relevant time, Mr. Wasendorf helped orchestrate his misappropriation by "tightly controlling and limiting access to information concerning the largest account holding customer-segregated funds on Peregrine's books" – a customer account at US Bank. Only he had access to relevant records at US Bank; Peregrine staff prepared relevant segregation records relying on Mr. Wasendorf to provide documents for this customer account.
In conducting her review of Peregrine, says the Commission, Ms. Verona-Snelling:
Moreover, Ms. Veraja-Snelling did not contact US Bank directly to obtain bank statements, but instead relied on Peregrine staff to provide a confirmation request to US Bank, as well as an envelope purportedly addressed to the Bank to obtain relevant bank statements. In fact, the bank address was a post office box controlled by Mr. Wasendorf.
According to the Commission, Ms. Veraja-Snelling's 2011 audit of Peregrine was representative of her prior audits.
In general, says the CFTC, Ms. Veraja-Snelling did not conduct her audits of Peregrine in accordance with Generally Accepted Auditing Standards and, in conducting her audits of Peregrine, "…lacked the required technical proficiency, failed to adequately plan and staff the audit, failed to exercise due professional care, and did not properly confirm account balances." Her work papers reflected that Peregrine had "strong internal controls" when she had information that, claims the CFTC, constituted red flags that something may have been amiss.
This matter is publicized within one week after the Public Company Accounting Oversight Board issued its "Second Report of the Interim Inspection Program Related to Audits of Brokers and Dealers," where it found that of 43 audit firms and portions of 60 audits of SEC registered broker dealers reviewed, deficiencies were present in all the audit firms and 57 out of the 60 audits. Moreover, deficiencies in one third of the audits were found specifically in audit procedures related to (a) capital and customer reserve calculation supporting schedules (i.e., the equivalent of CFTC required segregation computations), (b) the basis for an exemption claimed by certain broker dealers to comply with the SEC's Customer Protection Rule, or (c) the accountant's supplemental report on material inadequacies. (See Bridging the Week: August 19-23 and 26, 2013 on this website for further information regarding this report: http://www.garydewaalandassociates.com/?p=688.)
Moreover, in November 2012, the CFTC proposed various enhancements to its rules to increase customer protection. Among the proposed enhancements included proposed amendments to CFTC Rule § 1.16 related to the qualifications and reports of accountants. In January 2013, the National Futures Association issued the Report of Investigation of Berkeley Research Group, LLC related to NFA's own audits of Peregrine.
This matter does not mark the first time the CFTC has filed an action against an accounting firm for failure to identify material inadequacies of a registrant to the Commission as a result of an audit. On September 30, 1986, the CFTC filed and settled an enforcement action involving Arthur Andersen & Co. related to its failure to report to the Commission certain material inadequacies in the internal controls of ContiCommodity Services, Inc., at the time one of the largest FCMs.
This action against Ms. Veraja-Snelling was filed internally as a CFTC administrative agency action, not in a federal court.
For more information, see
CFTC actions against:
Jeannie Veraja-Snelling (including Settlement):
http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfverajaorder082613.pdf
Peregrine and Wasendorf:
http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfpfgcomplaint071012.pdf
US Bank, NA:
http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfusbankcomplaint060513.pdf
For related matters, see:
CFTC November 2012 proposed enhancements to Customer Protection rules:
http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-26435a.pdf
Report of NFA's Audits by Berkeley Research Group:
http://www.nfa.futures.org/news/BRG/report_of_investigation.pdf
PCAOB Report:
http://pcaobus.org/Inspections/Documents/BD_Interim_Inspection_Program_2013.pdf
The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of August 26, 2013, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.
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