More news on how badly botched the verification of segregated accounts appeared to be at PFGBest in the Wall Street Journal:

Officials of the National Futures Association, an industry self-regulator, reached out to U.S. Bank in early 2011 seeking to confirm that PFGBest’s customer-account figures matched the bank’s own account, according to a person familiar with the investigation. The regulator received a response showing that the client-fund account held less than $10 million, which was far below what it was supposed to contain.

Peregrine Financial Group filed to liquidate in bankruptcy on Tuesday, after regulators sued the futures brokerage for about $215 million of client funds allegedly missing from the firm. Jerry Dicolo reports.

The NFA a few days later received a fax purporting to be from U.S. Bank that showed that the account was whole, with more than $200 million, according to this person, who added that investigators now believe the fax came from a number controlled by Mr. Wasendorf. It isn’t clear whether the NFA followed up on the original report that the account was dramatically underfunded.

If this is true, it is simply unbelievable.  How in the world is a red flag THAT big missed? Let’s take a look at the series of events. You speak with the bank, and you find out there’s a shortfall in segregated funds. Shortly thereafter, you receive a fax that negates the news you had previously received directly from the bank. You don’t call the bank back? You don’t check the number it was sent from? You don’t launch one of your legendary surprise audits? You just assume this magical fax is legit? It isn’t like the account was underfunded by a couple of bucks. This was a massive shortfall.

Forget red flag- this was a flashing neon sign that spelled fraud.