Forward-looking regulation openly perpetuates financial crimes

July 16, 2012

The following sequence of events shines a bright light on the outright sham of forward-looking regulatory measures, which being used (1) instead of backward-looking criminal prosecutions (2) in order to sweep crimes under the rug to protect criminal looters.

In November 2011, after $1.6 billion in segregated customer accounts disappeared at MF Global, regulators “ordered an audit of all registered Futures Commission Merchants (‘FCMs’) to ensure that customer money is protected.” Specifically, the CFTC required “proof that futures trading firms are properly segregating consumer funds from their own accounts.”

And yet somehow, the CFTC’s audit failed to detect the jaw-dropping fact that PFG Best accounts that were supposedly flush with $225 million actually had $5 million.

Clearly, the regulators’ audit—a forward-looking measure supposedly to guard against another MFG-type fraud—failed completely. If even the most casual of audits had actually been conducted, PFG Best’s outright accounting fraud could not have occurred.

So what are the ingenious regulators doing this time to ensure that another MF Global and another PFG Best will not happen again? That’s right: tell the public that “another useless audit” will be conducted.

Today, regulators “announced a full review of its audit division to answer fierce criticism that it missed two decades of fraud at failed Iowa brokerage Peregrine Financial.”

By their very nature, forward-looking regulatory measures neither punish criminals nor compensate the victims of financial crimes.

But what’s going on here is far more. Forward-looking regulatory measures are being used not only to shield criminals like MF Global’s Jon Corzine, but to ensure that these same criminals will perpetrate their frauds, in the bright light of day, over and over and over and over again. PFG Best is merely the latest case in point.

At this point, the reality should be clear to anyone who's not a mark in the shell game: not only are regulators accessories to the financial crimes, they are ensuring that these financial crimes will grow until honest people have nothing left to steal.