Episode Details

In July 2012, Russell Wasendorf Senior sat in his car with a confession in his pocket. It began: "I have committed fraud. For this I feel constant and intense guilt." The fraud had been running for twenty years. Two hundred million dollars in client funds were missing. The mechanism was a scanner, Microsoft Paint, and a post office box he had rented under a name that resembled US Bank's address — so that any NFA correspondence directed to the bank would be intercepted by him before it arrived. The National Futures Association examined Peregrine Financial Group regularly for two decades. Two hundred sequential examinations. Each one reviewed the bank statements Wasendorf provided and confirmed the reported balance matched the statement

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Each confirmation was accurate — the two numbers matched, because Wasendorf had set both of them. Neither number was real. The fraud ended in forty-eight hours when the NFA migrated to electronic verification and sent a balance request directly to US Bank through a channel Wasendorf could not intercept. US Bank responded with the real balance: approximately five million dollars. The segregation report showed approximately two hundred and twenty million. This episode dissects the simplest version of a principle that runs through the Allied Irish Banks and MF Global episodes: a verification process that accepts evidence from the entity being verified cannot detect fabrication by that entity. The complexity of the fraud is irrelevant. What matters is whether the verifier controls at least one input the fraudster cannot.