PFGBest Update: 16 Questions for the NFA’s Dan Roth

Last week, we posted about the three ring circus masquerading as a Congressional hearing in front of the House Committee on Agriculture. We had hoped, sincerely, that the Senate hearing would be different.

In some ways, it was. John Roe of Roe Capital and the Commodity Customer Coalition hit it out of the park in his testimony- providing straight forward, insightful advocacy for the futures industry as a whole that kept the client in focus. An insurance fund for investors was given hefty consideration by both panelists and the committee members.

But outside of that, let’s just say we’re a little sick to our stomachs. See, ahead of this hearing, we reached out to the offices of EVERY SINGLE SENATOR ON THAT COMMITTEE. We created a brief to help provide context to the NFA failings in the PFGBest case and the structural issues within the organization, along with a series of detailed questions for NFA President Dan Roth. We were sent to voicemail in 6 of the offices contacted with no response. We spoke directly with representatives in 8 offices, and were given email addresses for contacts in another 7 offices. Those 15 offices were sent the prepared brief and question list. Of those offices, only three responded in any way, shape, or form.

By the time the second panel came around- which, arguably, had people far more involved in the PFGBest case testifying- only two senators remained to consider their thoughts and ask questions. TWO.

To be fair, several of the issues raised in these questions were brought up, albeit briefly. Senator Grassley, explicitly, referenced some of our concerns. Mr. Roth offered to provide a response to the reported missed flags in a formal statement. We’re not sure why, given how long they’ve been public, Mr. Roth could not respond to these allegations any further, but we’re going to guess he didn’t want to put his foot in his mouth the way he did on CNBC.

That being said, it is not enough to hope that Mr. Roth hits on all the issues, and apparently, Congress isn’t about to ask the questions that need answering.  We don’t know why Congress won’t push Roth on these matters, but if they won’t ask them, we will.

Why bother with these questions at all? Accountability is crucial in this case. After MFGlobal, the majority of the rhetoric focused on solutions moving forward. We’re seeing the same thing in the wake of the PFGBest scandal. While we believe implementing new solutions is an important step the industry must take, new regulations without assessment of the efficacy of those charged with enforcing them is akin to putting a new coat of paint on a vehicle with a blown transmission- either way, you’re not moving forward. We need to restore investor confidence in the integrity of the futures markets, and the only way we get there is if the vehicles they rely on are in working condition.

So here it is- our list of questions for Mr. Dan Roth. We eagerly await your response, sir.

Click through to see the full list of questions.

1. The New York Times reported that you received tips related to potential segregated account issues at PFGBest as early as 2004, and that they have copies of said correspondence. What steps were taken then to investigate the matter? If none, why was no action taken?

2. The Wall Street Journal reports today that, last year, the NFA received an email from U.S. Bank which demonstrated a massive shortfall in customer funds, which was rectified by a fax received three days later, from an unconfirmed number, bearing a handwritten balance confirmation. That brings up several questions:

a. Why did the reported shortfall not result in an immediate freezing of the firm’s assets and further investigation, as the note from Wasendorf spurred?

b. Why would the NFA accept a handwritten correction of the shortfall in light of the implications of such fund deficits?

c. The article explains that a single internet search revealed the fax number to be owned by Russ Wassendorf, Sr.- why was this number never verified?

3. The NFA has repeatedly stated that the fraud committed at PFGBest was “sophisticated,” despite the simplicity of the tools used. Given that the NFA has repeatedly seen cases, albeit smaller in nature, that used similar tactics over the past decade- including the recent case of Trevor Cook in Minnesota, which led to a subsequent fine for PFGBest for failure to supervise- why did NFA audit standards not evolve to take into consideration that risk?

4. Your website states that you conduct “financial surveillance” on your member firms. What, exactly, is that surveillance, outside of taking the word of those you monitor?

5. There have been significant concerns raised regarding the competence and experience of your auditing staff. You have publicly stated that the average experience in your Compliance Department is 6 years, but that does not answer the concerns.

The NFA, in the wake of the PFGBest scandal, has removed the formal description of the requirements for being considered for a staff auditor position. However, our research has unearthed descriptions on their organization’s Facebook page and within other documents which indicate much lower thresholds than what the NFA has publicly admitted to. The official NFA Facebook page contained a note related to recruiting for Staff Auditors (we’ve got screenshots if they take it down), which stated:

What are my opportunities with NFA as a graduate?

Each Fall, NFA recruits on-campus for the Staff Auditor position. We have two training classes; one in January and one in June. In order to be considered, you must be a business major and have a minimum cumulative GPA of 3.0 (out of 4.0) from an accredited college or university. Applicants must also have 9 hours of accounting including an intermediate level course. We do not require candidates to sit for the CPA; however, it’s an added benefit and we will reimburse you for it!

With this in mind, several questions require consideration:

a. What is the average experience of a staff auditor with the NFA- exclusive of all supervisors, management, etc.?

b. Our research has revealed that most of your auditors are given two weeks of training before being sent into  the field, and are not assessed on what they have learned upon completion of their training. Here’s your chance to set the record straight- what kind of training do the staff auditors receive prior to being sent into the field? Is there any form of formal test that must be passed prior to being sent in?

c. Each audit team is assigned a supervisor, but allegations have surfaced which state that these supervisors are rarely, if ever, on site for the actual audits. Given the relative inexperience of your actual auditing staff, can you tell us how frequently the supervisors are on site, and provide supporting data for your claim?

6. How much money does the NFA take in through penalties, membership fees and fees per trade each year?

8. It has been reported that, each year, you earn are paid nearly four times more than CFTC Chairman Gensler, with compensation over $680,000 annually (including bonuses and benefits). Assuming this report is correct, in 2010, your salary represented 3.7% of the total fees collected on every futures trade. Do you believe this is an appropriate level of compensation, commensurate with both NFA performance and your own- especially in light of regulatory failings with MFGlobal and PFGBest?

9.  Throughout this investigation of PFGBest, it has been reported that Mr. Wasendorf used client funds to pay the $700,000 fine assessed on his firm earlier this year. Given that this money was not his to give, will the NFA be returning it to the asset pool in the bankruptcy case?

10.  Given the NFA’s admitted failings in catching a simplistic fraud that spanned over two decades, what is the NFA doing to help make clients whole who have been hurt by their shortcomings?

11. Given the severity of the NFA’s failings in this case, there is an increasingly loud group that is calling for consideration of the revocation of the NFA’s charter, and for your resignation. Do you think such calls have merit?

12. Do you believe the NFA should be held liable for their failings? Why not?

13. In the MFGlobal case, their DSRO, the CME, stepped up to the plate by offering a guarantee of funds in order to speed up the distribution process for clients. The NFA has a reserve of funds available to them- why have they not used it in a similar manner here?

14. There have been significant concerns raised related to the NFA’s handling of voiced member concerns. What is the standard process used for handling such concerns?

15. What if there is a concern expressed that specifically relates to a member of the staff? What steps will the NFA take, aside from discussing the matter with the individual at hand and their supervisor, both of whom have a vested interest in protecting the staff member in question?

16. Why did the NFA hire a legal team instead of an accounting firm to conduct a review of their audit practices?

These are the questions that WE want him to answer. If you agree with us, use the form below to send the questions to him yourself. Click here, or form your own email to send to droth@nfa.futures.org.

Let’s fill his inbox. Be sure to share any responses you receive!

And if you haven’t already, be sure to lend your voice to our call for a full investigation of the NFA by signing our petition.