* NFA president says auditors followed proper procedures
* But says audit steps "not good enough anymore"
* CFTC's Gensler: agency saw red flags beginning in 1990s
* Peregrine hired PricewaterhouseCoopers after CFTC findings
* CFTC saw issues with abilities of other auditor
By Sarah N. Lynch
WASHINGTON, July 25 (Reuters) - The frontline regulator for failed futures brokerage Peregrine Financial Group says the firm's founder "fooled" regulators with his massive fraud, even though the auditors who examined the firm followed all of the proper steps and procedures.
In prepared testimony for a U.S. House Agriculture Committee hearing later on Wednesday, National Futures Association President Daniel Roth stresses the lengths Peregrine Financial Group's founder, Russell Wasendorf Sr., went to in hiding his scheme for roughly two decades.
"The simple fact is that Wasendorf's forgeries fooled us, and fooled us for longer than any of us would like," Roth said.
Wasendorf was arrested earlier this month after admitting to using little more than a rented post office box, Photoshop software and inkjet printers to dupe regulators by intercepting bank confirmation requests in the mail and forging the documents to conceal the missing money.
NFA, which oversees mostly smaller, independent futures operations, says it was its efforts to confirm Peregrine's bank balance electronically that uncovered the fraud.
Peregrine, known as PFGBest, advised clients on July 9 that all funds were on hold because of a suicide attempt by Wasendorf. He left a signed note at the scene that laid out the details of his fraud.
His brokerage filed for bankruptcy the next day, and the Commodity Futures Trading Commission filed a civil case against alleging Wasendorf had misappropriated more than $200 million in customer money.
The collapse of Peregrine, also known as PFGBest, came only nine months after futures customers suffered another shock with the demise of the even larger MF Global brokerage.
An estimated $1.6 billion in customer funds went missing during MF Global's final chaotic days, and regulators are still investigating what happened.
CFTC Chairman Gary Gensler, who will also testify on Wednesday, plans to lay out more details about red flags at Peregrine dating back to the 1990s.
Those problems, he said, included issues with net capital rules and financial controls as well as questions about "the abilities of the firm's auditor," among other things.
He did not name the auditor. Reuters previously reported that for at least 2010 and 2011, PFGBest was using a tiny auditing firm based in a suburban Chicago home.
In response to the various problems, the CFTC in 2000 fined Peregrine $90,000 and forced it to hire a second independent accounting firm. Gensler said Peregrine retained PriceWaterhouseCoopers, one of the Big 4 auditing firms which also served as the outside auditor for MF Global.
The loss of customer money at two future brokers in less than a year has dealt a blow to investor confidence in the futures markets.
Regulators are likely to face tough questioning from lawmakers on Wednesday how the fraud went on so long without being detected.
"Who is minding the store,?" House Agriculture Chairman Frank Lucas plans to ask in an opening statement. "What we need is regulators doing their job."
The collapse of Peregrine and MF Global have also caused some, including Gensler, to call for a fresh review of the self-regulatory system.
Roth, in his written testimony, called Wasendorf's actions an "elaborate fraud" executed by all kinds of forgeries that were not just limited to bank statements.
"Forged external records included bank statements, bank confirmations, print-outs of daily online summary reports of bank balances, cashier's checks, bank acknowledgement letters, bank deposit tickets and bank receipts all purportedly from US Bank," Roth said. "Moreover, Peregrine submitted to NFA false daily segregation reports, monthly financial statements and segregated investment detail reports and annual certified financial statements."
Some critics have questioned why the NFA did not catch the fraud sooner, and pointed to Wasendorf's use of the P.O. box as a potential red flag.
Roth said it is "not at all uncommon" for banks that hold customer money to use P.O. boxes to receive confirmation requests. And he added that the NFA "followed audit steps" that were consistent with CFTC rules and regulations.
Nevertheless, Roth admitted that the NFA's audit steps "are not good enough anymore" and laid out a series of next steps the organization plans to take.
One proposal, set to be presented at the NFA's August board meeting, would require futures brokerages to provide regulators with online, view-only access to bank balances.
Exchange operator CME Group Inc, which was the front-line regulator for MF Global, also plans to adopt the same rule.
In addition, the NFA and the CME plan to perform an immediate confirmation of all customer segregated bank accounts using the new e-confirmation process.
"The completion of this work within the next week or so should help ensure that another Peregrine is not lurking in the industry," Roth said.