FBI agents arrested Peregrine Financial Group Inc. Russell Wasendorf Sr. at a local hospital Friday,following his suicide attempt, and he appeared in federal court later in the day on charges of lying tofederal regulators.Early that week authorities found an unresponsive Wasendorf, as well as a suicide note beside him in hiscar outside the company’s headquarters in Cedar Falls, Iowa. In this tell-all note, Wasendorf detailed anelaborate fraud scheme in which he apparently embezzled over $100M from customer accounts byusing false bank statements. Even more, he was able to conceal his crime of forgery for so long by beingthe sole individual with access to the US Bank accounts held by PFG., as well as using computersoftware, scanners and printers to "make very convincing forgeries of nearly every document that camefrom the bank," including statements, letters and other correspondence.In addition, Peregrine Financial Group, which marketed itself as PFGBest, filed for bankruptcy this pastTuesday, coincidentally the same day the industrys top regulator filed civil fraud charges alleging thefirm misused customer money, and falsely claimed a bank account contained more than $220 millionwhen it actually had about $5 million. The money in that account belonged to customers and wassupposed to be kept separate from Peregrines own money. Unfortunately, when Wasendorf’s sonchecked his bank statement, in an account that regulators believed to have $221M, it actually showed abalance of merely $6.3M.According to officials, Wasendorf could face a wide range of additional criminal charges and decades inprison for what the prosecutor has called a $200 million scheme in which Wasendorf embezzledcustomer funds for 20 years.Just like any other fraudulent case, the Wasendorf scheme is a great example of how operational duediligence could have possibly been an important tool to use by an investor. Checking into managementresponsibilities would have been useful in making sure executives were not carrying out financialtransactions or personally writing checks without anyone’s knowledge. Although Wasendorf was able toaccess the bank accounts held by his company, during the operational due diligence review, checking allfinancial transactions on both ends could have revealed discrepancies in the accuracy of what was beingrecorded compared to the bank statement. In addition, an operational due diligence review would alsocheck into the personal background of Wasendorf, including interviewing other employees or friends onhis behavior, and if they noticed anything suspicious. Even looking into his personal bank transactionscould have raised several warning signs for investors after noting various suspicious or unusualtransactions occurring on his account.Furthermore, technology was a big factor in this case, certain software were a key component in howWasendorf was able to carry on his scheme for so successfully, and for so long, without being detected.Although analyzing company software is often an area that risks being overlooked much of the time,during an operational due diligence review the company’s management software and operations wouldbe thoroughly investigated. However, even though looking into a fund’s technology is useful, it is also upto the investor to investigate the firm’s software, as well as to become familiar with certain jargon andvarious system names. In doing this, an investor will be able to understand the risk assessment given on
the company software, instead of getting lost in all the technical terms; ending up wasting potentiallyvalue information. In any event, by deciding to use the operational due diligence process to assess anypotential risks, an investor could avoid making the wrong investment, and possibly avoid a potentiallylife-threatening scandal.