MF Global Trustee Giddens in 'Substantive Talks with JPM' Over Return of Stolen Customer Funds

It is nice to see that JPM is cooperating with Mr. Giddens, who is investigating their role in the funds that were stolen from MF Global's customers.

It remains to be seen how much, if any, money that they will return.

But it is good news to see that someone is stepping up besides the Commodity Customer Coalition.

It will be interesting to hear what Edith O'Brien will disclose when she testifies, and how it will be received.

Her situation is outlined here: The Big Fix Was In - MFGFacts

The legal rationale for their actions which JPM might take is outlined here: MF Global Warning: The Financial Markets Have Not Been Fixed - MFGFacts

The SIPA Liquidation of MF Global Inc.
James W. Giddens, Trustee

STATUS OF TRUSTEE'S INVESTIGATION OF CHASE
Date: April 4, 2012

The Trustee has conducted an investigation of the actions of JPMorgan Chase Bank, N.A. regarding JPMorgan's activities in connection with MF Global.

JPMorgan has cooperated with the Trustee's investigation, which has included witness interviews and review of extensive documentation by the Trustee's professionals, including attorneys and forensic accountants from Ernst & Young.

The Trustee and JPMorgan are presently engaged in substantive discussions regarding the resolution of claims.

JPM In Talks Over Missing MF Global Customer Money - New York Times

MF Global: The Awkward Construct of a Dual Bankruptcy and the Two Trustees

I outlined the somewhat adversarial relationship between the two trustees due to the odd and awkward construct of the bankruptcy a few days ago. Louis Freeh Asks for $25 Million From MF Global Estate to Pay the Defense Costs of Corzine and Execs.

"I am not an attorney and have never been personally involved in a bankruptcy so I am not particularly knowledgeable in the finer points of US corporate bankruptcy practices. It almost appears more like a divorce than a bankruptcy. The duality of it with the two trustees is fascinating. And the primacy of Mr. Freeh over federal investigators was a bit surprising.

It seems odd to have dual trustees, one for the Chapter 7 brokerage, and another in the Chapter 11 representing the interests of MF Global Holdings management and the banking creditors. Every time a headline says 'the Trustee' I have to look to see if it is Mr. Giddens or Mr. Freeh. I understand the rationale for the two forms of bankruptcy, but the structure of having two trustees answering to competing interests is awkward. Were there two trustees for Lehman and Bear Stearns?

As you may recall, Mr. Freeh had recommended paying bonuses to the executives earlier this year. He also had refused to turn over MF Global emails and documents regarding the accounts and transfers of money to federal investigators, claiming attorney client privilege between himself and MF Global, until his own people had a chance to look them all over.

Is this perhaps why it is so hard to obtain indictments in financial cases? The firms do not have to hand over any evidence until they and their attorneys have had a chance to go through everything first, and then decide what they wish to hand over to investigators?

...Just as this case may provoke some activity in the regulatory area, so one might think that in addition to making an interesting case study for law schools, it could involve some changes and streamlining in the bankruptcy practices in which companies like banks and brokers are holding customer money in trust, in addition to the standard classes of creditors. Certainly there is plenty of room for clarification."

Even under the best of circumstances there is a natural tendency for confusion to occur when there is an apparent cover up by the company's management. After all, everyone claims complete ignorance of what happened to a huge amount of customer money, except for the assistant Treasurer, who at this point is pre-occupied with making a deal for immunity from prosecution in return for her testimony.

If the money 'simply vaporized' what is she seeking immunity from? Practicing magic without a license?

And perhaps in the future, in addition to streamlining the bankruptcy process, there might be some consideration to giving the appropriate law enforcement the primary control over the company records from day one when customer money has been stolen, and not leaving it up to the management of the company and their attorneys to decide how they wish to manage the dispostion of critical information, otherwise known as 'evidence.'

I understand that this may not have become an issue in the past, when brokerages went bankrupt, and the primacy of customer claims was upheld. And I admit to being a touch Socratic here. If these things were not a problem in the past, why are they such a heartache and stumbling block now?

Sometimes TBTF banks and TCTP (Too Connected To Prosecute) financiers flout the law and use their influence to twist the existing laws and the compliant legal system to suit their purposes. And that is a symptom of a much greater problem.

JPM To Pay 'Wristslap Fine' in Misuse of Customer Segregated Funds at Lehman Brothers

JPM extended a significant amount of credit to Lehman Brothers prior to their collapse.

In extending the credit, JPM assumed that the customer money that was being held by Lehman Brothers could be freely used by the firm, and therefore was a legitimate part of its valuation. The comparison to MF Global is obvious.

In other words, if MF Global had not failed to meet its margin call and gone bust, they might have been fined $20 million in four or five years, while taking in billions in profit and bonuses. What a deterrent!

Although using customer segregated funds to calculate the value of a company is not nearly as egregious as actually stealing them, it does betray a certain mindset on Wall Street that seems to have prevailed in the last ten years or so.

'This land is our land, their money is our money.'

Or perhaps there was an outbreak of sloppy book-keeping on Wall Street as the Fed induced credit bubble reached its apogee in the fraudulent securities packaging market. Who could blame them?

The $20 million fine is incidental to JPM and the violations which occurred over four years ago.  And I am sure that as part of settlement, JPM will agree not to do it again, while admitting no guilt.

Perhaps this action by the CFTC is more symbolic than effective. The question I have is what does it really mean?

The $20 million is nothing to JPM, but the CFTC could certainly put it to good use. Perhaps they could use it to move along their study exposing the outrageous manipulation in the silver market by one or two banks that has been slowly moving along for the past four years. Now that is a symbol that we might believe in.

Bloomberg
JPMorgan Pays $20 Million to Settle CFTC Segregated-Fund Claims By Gregory Mott Apr 4, 2012

JPMorgan Chase & Co. (JPM) will pay $20 million to resolve U.S. Commodity Futures Trading Commission claims that the bank mishandled customer segregated funds from Lehman Brothers Holdings Inc. from 2006 to 2008.

The CFTC announced the settlement with JPMorgan in a statement today. Mary Sedarat, a spokeswoman for New York-based JPMorgan, wasn’t immediately available for comment.

More Evidence of Fraud: MF Global's Inscrutable Accounting Error - Who Shot Jon?

"The theory is that someone at the firm overrode internal controls that safeguarded customer funds and transferred money out of them to shore up the company's global liquidity position. Congress and federal investigators are particularly focused on the role of Jon Corzine, the former CEO of Goldman Sachs and governor of New Jersey, and whether he purposely directed his treasury department to use customer funds."

CFO.com


"Oh what a tangled web we weave,
When first we practise to deceive."

Sir Walter Scott

Like the WMD's in Iraq, the financial people at MF Global spent three days looking for an accounting error to explain how $1.6 billion in customer money went missing. And like the WMD's in Iraq, the chimerical accounting error never existed. The reason for the missing money was a deception with a purpose.

Edith O'Brien has the answers, certainly to at least the first phase of the fraud, which involved taking customer money from segregated accounts to meet margin calls.

The second phase of this scandal is external, involving the parties who hid the stolen customer money, most likely manipulated the post-collapse bankruptcy process to favor themselves over the victims, and may possibly have been involved in the takedown of MF Global in the first place.

 I wonder if there were CDS and stock options that paid off with their bankruptcy. Who benefited from the failure of one of the larger clearing brokers serving the retail customer? Who held the other side of MF Global's trades?

Besides Edith O'Brien and Jon Corzine, the parties with the greatest insight into MF Global's positions and financial structure were JP Morgan and Goldman Sachs based on the reports that I have read. As Francine McKenna has said, JPM knew MF Global 'all too well.'

This analysis by CFO.com helps to highlight the key issues in the first phase.

The spin that these were just simple 'accounting errors' and that the money 'simply vaporized' is pure fantasy, repeated by a servile and unambitious mainstream media, and the Wall Street demimonde of enablers and attendants.

Janet Tavakoli has produced a rather nice summary of the key facts and issues in the MF Global scandal provocatively titled, "MF Global: JPM Produces Smoking Gun."

It is not quite a smoking gun, in the irrefutable legal sense of evidence, but it certainly helps to narrow the possibilities in a system of discovery and justice. Oh that we still had one.

The more that I think on this whole situation, the more that I suspect, as a personal theory, that the genesis of the MF Global collapse resides in an attempt by a few financial industry participants, with some insider knowledge of the firm, to break Cozine's Euro debt trade by increasing his margin demands on an overleveraged 'sure thing' against an overly thin wallet.

The goal was to force Corzine to settle what ought to have been a good trade at a loss, and perhaps to be forced to surrender the firm, and in particular their important positions in the metals exchanges, in addition to a not insubstantial amount of bullion, to an acquisition at a very modest price to value in order to provide the liquidity. Instead, Corzine dipped into customer funds, and took it to a whole new level, spoiling any further thoughts of an easy acquisition. This of course does not absolve Corzine for his highly risky trade, even though he may have been privately assured that the European debt would be made good.

I might have to give too much credit to say it was like burning the farms and buildings before Stalingrad. Instead the whole city itself was burned and rendered uninhabitable.

But this theory may be a bit labored. Still, this is a well worn trading gambit on the Street of Thieves.

CFO.com
MF Global’s Inscrutable Accounting Error
By Vincent Ryan
April 03, 2012

The securities dealer’s finance department and its regulators were busy looking for a mysterious reporting glitch during the company’s final days – one they never found.

MF Global’s general counsel and the CFO of its broker-dealer unit appear to never have had any evidence that faulty reporting had caused a deficit in customer-segregated accounts. But they persisted in their belief for as long as three days, according to a timeline of the firm’s final days constructed by the Chicago Mercantile Exchange. The reason? The amount was so large “it was too big to be anything else.”


In turn, early on, the CME and the Commodity Futures Trading Commission were prevented from conducting a full audit of customer-account statements because they didn’t have all the necessary documentation from MF Global. The three-day delay in confirming the customer-account shortfalls combined with the inability of regulators to get timely information from MF Global personnel may have contributed to the “loss” of $1.6 billion in customer funds and the firm’s eventual demise.

The bankruptcy has stirred up a firestorm in the securities industry and among regulators because many of the customers who lost money were farmers and ranchers who used futures in nonspeculative ways to hedge against price volatility. The firm went from reporting a $192 million quarterly loss on October 24, 2011, to filing Chapter 11 on October 31.

The theory is that someone at the firm overrode internal controls that safeguarded customer funds and transferred money out of them to shore up the company's global liquidity position. Congress and federal investigators are particularly focused on the role of Jon Corzine, the former CEO of Goldman Sachs and governor of New Jersey, and whether he purposely directed his treasury department to use customer funds...

Read the rest here.

McKenna: JP Morgan Chase Knew MF Global 'All Too Well'

"JPM had a history with Dennis Klejna. He was the head of compliance at Refco when that firm failed. JPM was one of the underwriters of the Refco IPO and agreed in April 2010 to pay $49.5 million to settle a shareholder lawsuit over that firm's collapse less than two months after going public in 2005...

Klejna was not criminally charged over his involvement in the Refco fraud, but he did sign a consent order with the Department of Justice and paid $1.25 million in disgorgement of his IPO gains. Then he went to work in the same job for MF Global."

Francine McKenna once again brings clarity and common sense to bear on the MF Global case in her guest blog for American Banker. It is very refreshing.

She also has a blog called Re: The Auditors.

AmericanBanker
JPMorgan Chase Knew MF Global All Too Well
By Francine McKenna
APR 2, 2012

I suspect that JPMorgan Chase (JPM) knows a lot more about MF Global than the bank's in-house lawyer let on in her Congressional testimony last week.

Diane Genova, deputy general counsel for JPM's investment bank, mostly answered lawmakers' questions about a much-discussed $200 million overdraft on a London account that MF Global allegedly used customer funds to cover. But JPM had an extensive relationship with Jon Corzine's brokerage, giving the megabank a bird's-eye view of the firm’s finances before and after it failed.

As such, JPM must have at least a clue about the other $1.4 billion of MF Global customer funds that have gone missing.

As MF Global's largest unsecured creditor, for example, JPM was first to the courthouse to protect its rights after the Oct. 31 bankruptcy filing. And as Genova told the House Financial Services Oversight and Investigations Committee on March 28, MF Global maintained a large number of cash demand deposit accounts at JPM. Four of these accounts in the U.S. were designated as customer segregated accounts.

MF Global also cleared agency securities through JPM, Genova said. The brokerage had two revolving credit facilities in which JPM was the administrative agent for a syndicate of other banks. And MF Global had securities lending and repurchase arrangements with JPM, the largest of which involved MF Global borrowing U.S. Treasuries from JPM's securities lending clients and posting agency securities as collateral.

JPMorgan even considered acquiring MF Global. But before anyone else outside of MF Global knew that there was a $1.6 billion hole in customer segregated funds, JPM passed on a deal. Rep. Francisco Canseco (R-Tex.) asked Genova why.

She testified: "After an extensive review, we determined that it was not a good business fit." Why am I not surprised?...

JPM could have been also feeling a bit skittish about being a beneficiary of inappropriate commingling. Its own broker/dealer recently committed the sin of not segregating customer funds in the U.K. JPM and its auditor PricewaterhouseCoopers – also MF Global’s auditor – recently admitted to UK regulators that for at least seven years, about $23 billion of JPM clients' assets had been inappropriately commingled. JPM was fined 33.3 million pounds.

I hope investigators from the FBI, Department of Justice, the regulators and the bankruptcy trustees will continue to dig into what JPM can tell us about the mystery of the missing $1.6 billion.

Read the rest here.

Louis Freeh Asks for $25 Million From MF Global Estate to Pay the Defense Costs of Corzine and Execs

The legal and ethical issues in the MF Global financial collapse and bankruptcy are particularly interesting.

Here we have a company whose management, or at least some parties in that management, based on the evidence at hand, apparently stole a significant amount of money (about $1.6 billion) from their customers. Some of portion of that $1.6 Billion was transferred to at least one large bank in their last week of business. And there has been an effort after the fact to obscure the status of those funds and the details of the transfers.

I had previously thought that the trustee works under the direction of the bankruptcy court and is paid by and accountable to them, but apparently this is not the case at least in this instance.

I am not an attorney and have never been personally involved in a bankruptcy so I am not particularly knowledgeable in the fine points of US corporate bankruptcy practices. It almost appears more like a divorce than a bankruptcy.  The duality of it with the two trustees is fascinating.  And the primacy of Mr. Freeh over federal investigators was a bit surprising.

It seems odd to have dual trustees, one for the Chapter 7 brokerage, and another in the Chapter 11 representing the interests of MF Global Holdings management and the banking creditors.  Every time a headline says 'the Trustee' I have to look to see if it is Mr. Giddens or Mr. Freeh. I understand the rationale for the two forms of bankruptcy, but the structure of having two trustees answering to competing interests is awkward. Were there two trustees for Lehman and Bear Stearns?

As you may recall, Mr. Freeh had recommended paying bonuses to the executives earlier this year. He also had refused to turn over MF Global emails and documents regarding the accounts and transfers of money to federal investigators, claiming attorney client privilege between himself and MF Global, until his own people had a chance to look them all over.

Is this perhaps why it is so hard to obtain indictments in financial cases? The firms do not have to hand over any evidence until they and their attorneys have had a chance to go through everything first, and then decide what they wish to hand over to investigators?

Mr. Freeh is no stranger to federal investigations, having headed up the FBI under the Janet Reno and the Clinton Administration.  You can read more about his career in law enforcement and as a judge here.

Just as this case may provoke some activity in the regulatory area, so one might think that in addition to making an interesting case study for law schools, it could involve some changes and streamlining in the bankruptcy practices in which companies like banks and brokers are holding customer money in trust, in addition to the standard classes of creditors.  Certainly there is plenty of room for clarification.

To think that the MF Global case itself is precedent setting, without further legal clarification and remedy, is almost frightening.

Chicago Tribune
MF Global judge weighs release of insurance money
By Nick Brown and Aruna Viswanatha
April 2, 2012

(Reuters) - An MF Global bankruptcy trustee asked a judge on Monday to release $25 million in insurance money to pay defense costs for Jon Corzine and other former MF Global officers facing civil lawsuits over the broker's October collapse.

If paid out now, the money, part of $375 million in total insurance funds from multiple policies, could save the broker from facing larger claims later, Lorenzo Marinuzzi, an attorney for trustee Louis Freeh, said in U.S. Bankruptcy Court in Manhattan. Freeh is managing the company's assets in bankruptcy.

Customers of MF Global's broker-dealer have argued they are entitled to the funds to help fill an estimated $1.6 billion hole in their trading accounts.

The money is frozen because the company is bankrupt. The debate over the funds raises questions over whether insurance policies are considered part of a bankruptcy estate and who may be able to claim a right to insurance money.

The insurance policies cover liability stemming from wrongful acts of employees, directors and officers, and in some cases the company itself.

Corzine, who resigned on November 4, and other past and present MF Global officials face more than 20 lawsuits over the handling of customer funds ahead of the firm's October 31 collapse.

According to a February report from James Giddens, the trustee in charge of trying to recover customer money, MF Global staff misused customer cash to cover corporate transactions.

Defendants in the lawsuits must be afforded legal costs under the policies or they could sue MF Global for more money later, Marinuzzi said.

"We like to pick on Jon Corzine, who has a lot of money and can probably pay his own defense costs, but if you're a mid-level individual who was named in the suit because you happened to be at the company, you don't have the money and you have to get it," he said.

About $150 million of the insurance money is from policies issued by MFG Assurance Co, MF Global's insurance unit. The rest is from policies issued by U.S. Specialty Insurance Co. Officers have submitted insurance claims for more than $8 million so far, Marinuzzi said.

Judge Martin Glenn did not rule on the matter, but pressed Marinuzzi on whether customers may have a right to it.

"If the commodity customers, for example, have tort claims against the parent company, the pot is reduced if you pay out on the insurance policies," Glenn said. "Every dollar paid under the policies is one dollar less that's available for them."

Giddens may also argue that customers have a right to the funds, his lawyer said. "We may have an interest in these policies and insurance proceeds someday," attorney James Kobak said. "We're anxious that as much as possible be preserved and not be spent..."

Read the rest here.

More Evidence of Fraud at MF Global and the Intent to Commit Fraud - Hunger Games

"As flies to wanton boys are we to the gods,
They kill us for their sport."

William Shakespeare, King Lear

I noted reports on this from account holders last year, who had their requests for wire transfers, which are the customary manner of moving large sums from bank to bank, denied and instead were issued checks at a much slower pace. The checks of course bounced when they were received and the firm declared bankruptcy.

I also reported at least one instance of a customer who did have a wire transfer that was 'reversed.' I have not subsequently heard about that.

The point here is that the Customer Commodity Coalition is concerned about the continuing statements being put forward, and parroted by the mainstream media, that MF Global was merely engaged in 'sloppy bookkeeping' and their failure to segregate customer money was inadvertent.

For example, here is a quote from yesterday's New York Times:

"While clients of MF Global say that it was unprecedented for the firm to abandon a longstanding business practice to wire money to customers who were closing accounts, the documents are not definite proof of wrongdoing. In recent weeks, federal authorities have come to suspect that MF Global’s actions amount to sloppy record-keeping, rather than criminal fraud."

As I said in November, there will be a concerted effort to sweep this one under the rug.

Check-kiting is a crime. And this deviation from standard procedures and legitimate customer requests shows a clear intent to place the customers at risk because of the firm's own liquidity circumstances. Their money was being sent to banks in London while they were being promised its rightful return.

It also indicates that the management of MF Global was keenly aware of the low levels of cash in their customer seg accounts. One can choose whom to pay among creditors, but they cannot do so fraudulently denying fair claims through fraudulent means in order to conceal the facts of their firm's true status.

I doubt justice will be done in this case because of who is involved. But I do hope to see the customer money returned, and the perpetrators made aware that such theft will not pass unremarked in the future. And there is some small hope that the regulators will be shamed into doing their jobs.

And at the very least, all retail customers should be aware of the fraudulent taint in the US financial system, and that leaving your money in their slimy hands may be hazardous to your wealth.    Perhaps you feel as though you can take your chances in the system, that this cannot happen to you.

May the odds be ever in your favor.

Futures
Evidence of fraud at MF Global
By Daniel P. Collins
April 2, 2012

The Commodity Customer Coalition delivered a memo to U.S. Attorney General Eric Holder as well as U.S. attorneys from New York and Chicago and members of Congress stating that there is clear evidence of intent to commit fraud by MF Global.

In the early days of the MF Global bankruptcy one of the red flags that something was incredibly wrong at the firm were reports from multiple customers that MF Global had told them that they would no longer wire transfer money to them and instead cut them checks.

This was disturbing to customers used to moving money by wire at a moment’s notice. Worse yet is that many of these checks—perhaps thanks to the delay—ended up bouncing. After last week’s hearing when it became clear that money was transferred out of customer segregated accounts the fact that MF Global purposely slowed down payment to customers is evidence of intent to commit fraud according to the CCC memo. “When you have abrupt changes in standard business practices that is a “badge of fraud,”” says CCC co-founder John Roe.

The memo includes account statements from Steven N. Kaplan a client of Roe’s firm BTR Trading. Kaplan had requested a wire transfer of customer funds but instead received a check, which was co-signed by Edith O’Brien and Christy Vavra, that later bounced.

The memo states, “The decision to stop sending wires to customers from the segregated accounts demonstrates that MF Global was concerned with preserving liquidity. This may have been done to bolster the prospects of selling the firm to Interactive Brokers or because they were concerned that the draining of this account would reveal that customer funds had already been commingled to stave off MF Global’ s bankruptcy.”

The CCC is concerned press reports citing unnamed sources claiming that no actual crimes have been committed in the MF Global bankruptcy would hurt customers’ chances of being made whole. The memo states, “we believe that sufficient evidence exists of intent to commit an actual fraud to support probable cause to arrest one or more employees of MF Global for several state and federal financial crimes.”

Read the rest here.

Stanley Haar Reviews the Latest Developments on MF Global - Edith O'Brien's Gioconda Smile

Edith O'Brien, 46 year old Assistant Treasurer at MF Global, smiles enigmatically throughout her Congressional
appearance during which she pled the Fifth Amendment to every question.

I am given to understand that Edith has been working for the MF Global Bankruptcy Trustee.
I hope she is not counting on a bonus.

MF Global's Edith O'Brien Talking Deal with Justice.

Edith O'Brien's profile at LinkedIn.

Little Known Rule Gives Wall Street Ability To Misuse Overseas Customer Money

The wall of spin shifts and ebbs with every day, retreated and advancing, always to hide the truth.

Professionals in the industry read these things and either laugh themselves silly, or continue to make moves to safeguard their own funds. And I have told you that is what I have done for myself.

I did forecast about four or five years ago that when things started to fall apart, the foreign funds in the US would be the most vulnerable.

And that includes assets held on deposit, even with receipts, including gold and silver. If the Constitution is 'just a goddam piece of paper' what is a receipt?

On a related topic the FASB Acts To Reform 'MF Global Accounting.' The US accounting industry is a disgraced profession right along with economics, perhaps moreso.

As another story from Reuters makes more clear, when word leaked out that the customer funds had been tapped, and that the proposed acquisition of MF Global had fallen apart, the banks started freezing its funds.

This story is spin, but it can be made to stick. If justice is done, I will be astonished. I would just like to see the customers get their money back.

Warning Flags Were Raised in MF Global Transfers
By BEN PROTESS and AZAM AHMED
March 27, 2012

...The misuse of customer money is expected to be a focus of the hearing before the oversight panel of the House Financial Services Committee. It will feature testimony from central figures at MF Global, including Laurie Ferber, its general counsel, and Ms. Serwinski, the chief financial officer for North America...

While using customer funds was a serious red flag at MF Global, it was not necessarily illegal.

A little known loophole in futures regulations permits firms to spend some money belonging to customers who traded abroad, an exemption that contradicts a cornerstone of the industry to always protect client funds. It also differs from the law policing trading in the United States.

Other employees in the firm’s back office have also told lawyers that they knew of a potential deficit in customer accounts on Oct. 27, according to the people involved in the case. One employee on Oct. 30 told an outside firm that was reviewing MF Global’s books that the brokerage firm was worried about a shortfall earlier in the week, according to one of the people involved in the conversation. Federal authorities are also investigating whether MF Global was improperly using customer money as early as August, one of the people involved in the case said.

It is unclear whether the firm’s top executives were aware of a potential shortfall...

The document showed “a substantial deficit” in the amount of firm money used to protect customer accounts, according to the prepared testimony by Ms. Serwinski, who was planning to leave MF Global. Futures firms typically keep a cushion of cash in customer accounts as a buffer to cover losses in case of volatile market swings.

The deficit did not in and of itself violate federal laws, because of the loophole for extra cash in foreign trading accounts. The loophole dates to 1987, when few American traders kept money overseas, and was intended to add controls to a market that was essentially unregulated...

Read the rest here.

Tavakoli on the Ongoing Fraud in the Financial System 'Epitomized By MF Global'

Janet Tavakoli and Lauren Lyster discuss the widespread control frauds that permeate the US financial system, continuing after the financial crisis and Dodd-Frank, and epitomized by the reckless disregard for the employees and customers at MF Global as led by Jon Corzine.

Tavakoli has one word for the 'CEO defense' being parroted by the mainstream US media in this case. "Nonsense."

She has some fairly hard words for the Congress and the media in their coverage of the financial scandals.

Barofsky: MF Global Still Looks Like a Fraud

I doubt very much justice will be done, unless Edith O'Brien cuts a deal for immunity and has some proof of what was said and known by the executives of MF Global.

The foundations for the cover stories have been well laid already in the press.

NY Times Says They Saw an Email that Says Corzine Did Not Know, Was Apparently Misled

Now it starts to get really interesting.

Of course Jon Corzine did not know. He's only the CEO.

Leak, and counter-leak.

He said.  She said.

Check your closet floor, Edith. What were you wearing that day?

You look like the designated patsy.

One thing that the email seems to indicate, however, is that at least $175 million of the customer money was never missing or vaporized, but was sitting in an account at JPM in London. And they never received back confirmation that the money was NOT customer funds.

That account was MF Global's account. Did JPM seize the money when MF Global went bankrupt? Their rationale would be that it was a settlement, and therefore exempt from laws against fraudulent conveyance based on a 2005 law.

NYT
E-Mail to Corzine Said Transfer Was Not Customer Money
By BEN PROTESS and AZAM AHMED
March 25, 2012

Jon S. Corzine, the former chief executive of MF Global, was told during the brokerage firm’s final day of business that a crucial transfer of $175 million came from the firm’s own money, not from a customer account, according to an internal e-mail.

The e-mail, sent by an executive in MF Global’s Chicago office, showed that the company had transferred $175 million to replenish an overdrawn account at JPMorgan Chase in London. The transfer, the e-mail said, was a “House Wire,” meaning that it came from the firm’s own money. The e-mail, sent at 2:20 p.m. on Oct. 28 to Mr. Corzine and two of his assistants in New York, says the transfer came from a “nonseg” account, industry speak for a noncustomer account.

But the e-mail, a copy of which was reviewed by The New York Times, did not capture the full story behind the wire, which turned out to contain customer money. MF Global employees in Chicago had first transferred $200 million from a customer account to the firm’s house account, people briefed on the matter said. Once it was in the firm’s coffers, the people said, Chicago employees then promptly transferred $175 million of the money to the MF Global account at JPMorgan in London — the account that was overdrawn....

Miloš Kopecký and the mainstream media financial cold war boogie woogie.

Corzine Gave 'Direct Instructions' To Transfer $200 Million From Customers to JPM London

Jamie's crew is probably safe, but it looks like Jon is facing his 'Kenny Boy' Enron moment, although he may find some shelter in the Sargeant Schultz defense. I know nothing. NOTHING.

I guess the fellows who said that they had found nothing incriminating in the emails forget to mention this one.

Edith O'Brien's appearance before the Congress just became potentially more interesting, although she could still plead the Fifth.  I wonder if the email turned up because so did she.

Corzine will almost certainly claim that there was a mix up, and that he merely said to meet the margin call, but did not know it involved customer funds.  He said, she said.   Save the dress.

It also looks like the spin might be that it was a 'mistake' because they were mingling customer funds with 'excess firm funds' in some third account.

And then the Anti-Bernanke of the financial apocalypse vaporized the money and all traces of it. And everyone was happy, except for a few small specs.

No harm, no foul. Just a simple error. Fine and a wristslap and a promise to better when he gets back on his Street feet.

Great job Phil Mattingly of Bloomberg for snagging this Congressional memo and releasing it.  I wonder which staffer slipped it. I'd book on GOP but I never really was a very sophisticated politico.

I still have major doubts for justice being done, but I do wish to see the customers released from their financial hell. Perhaps this will help.

Oh Jonny boy, the pipes, the pipes are calling....

Bloomberg
MF Global’s Corzine Ordered Funds Moved to JPMorgan, Memo Says
By Phil Mattingly and Silla Brush
Mar 23, 2012 4:04 PM ET

Jon S. Corzine, MF Global Holding Ltd. (MFGLQ)’s chief executive officer, gave “direct instructions” to transfer $200 million from a customer fund account to meet an overdraft in one of the brokerage’s JPMorgan Chase & Co. (JPM) accounts in London, according to an e-mail sent by a firm executive.

Edith O’Brien, a treasurer for the firm, said in an e-mail sent the afternoon of Oct. 28, three days before the company collapsed, that the transfer of the funds was “Per JC’s direct instructions,” according to a copy of a memo drafted by congressional investigators and obtained by Bloomberg News.

O’Brien’s internal e-mail came as the New York-based broker found intraday credit lines limited by JPMorgan, the firm’s clearing bank as well as one of its custodian banks for segregated customer funds, according to the memo, which was prepared for a March 28 House Financial Services subcommittee hearing on the firm’s collapse. O’Brien is scheduled to testify after being subpoenaed this week.

“Over the course of that week, MF Global (MFGLQ)’s financial position deteriorated, but the firm represented to its regulators and self-regulatory organizations that its customers’ segregated funds were safe,” said the memo, written by Financial Services Committee staff and sent to lawmakers.

Vinay Mahajan, global treasurer of MF Global Holdings, wrote an e-mail on Oct. 28 that said JPMorgan was “holding up vital business in the U.S. as a result” of the overdrawn account, which had to be “fully funded ASAP,” according to the memo...

Read the rest here.

Gold Daily And Silver Weekly Charts - HFT Distorts Commodity Prices

At the close there was breaking news regarding an email at MF Global identifying Jon Corzine as having ordered the customer funds transferred to meet a margin call. There is a more complete discussion and story of that topic above.

Gold and silver bounced back today, but they still finished up below key resistance. We'll have to see if they can continue to gain their footing and move higher next week.

Report Reuters UK: High Frequency Trading Distorts Commodity Prices

Vanity Fair: Jon Corzine's Riskiest Business

This is an interesting article on MF Global and Jon Corzine more broadly.

It is the story of industry wide greed, influence peddling, and the weakening of the regulatory agencies in a combination of powerful persuasion and anti-regulatory ideology aggressively promoted by money from self-serving financial interests.

It is good to remember that attempts to regulate and reform the industry are blocked by a powerful minority at almost every turn, and that the CFTC has two Republican appointees who oppose most of the proposals that Chairman Gensler puts forward.

However, it is not clear at all what support Gary Gensler and his Democratic colleagues were able to obtain from the economic people in the Obama Administration,  the tone of which was set by Tim Geithner and the now departed Larry Summers. The Obama Administration has been particularly hard on whistleblowers and internal dissent, and very quick to compromise on financial matters.

One thing that is lacking in American politics, that I have always admired in the Europeans, is the principled resignation. That is a tall order for a group of leaders who can barely scrape up enough moral fiber to take a principled stand, even on their own elected mandates, unless it is in the service of their rich and powerful benefactors in their ongoing game of thrones.

Vanity Fair
Jon Corzine’s Riskiest Business
By Bryan Burrough, William D. Cohan and Bethany McLean

"...Gary Gensler, a former Goldman colleague of Corzine’s, wanted to restrict the ability of a firm to invest its customers’ assets in sovereign debt and to use its customers’ cash to make loans to itself.

MF Global (along with the rest of the industry) freaked out, writing to the C.F.T.C. that the agency was trying to “fix something that is not broken.”

Corzine personally lobbied each of the C.F.T.C.’s commissioners, and after Gensler realized he didn’t have support from anyone, he was forced to delay a vote that was scheduled for July..."

Read the full article here.

Bill Black on the MF Global Financial Collapse and Aftermath - Obama's Hurricane Katrina

Bill Black is interviewed on the Capital Accounts Show on RT.

I would be glad to show a video of Bill Black discussing important financial matters such as this on a mainstream US video program but there don't seem to be any.

There were a number of disturbing things in Gary Gensler testimony to the Congress about the role of the CFTC in this. Some of these things are discussed here.

I doubt very much that justice will be done at MF Global. The Banks have been getting away with everything they have done so far, up to and including the blatant stealing of funds from customers that were being held on account, and not even subject to active trading margin.

He can try to pass the buck on this, and there is plenty of company in this on both sides of the aisle and in the media. But the ultimate responsibility for the handling of this falls on Barack Obama and his Administration. It happened on his watch, and it was their job to make it right. That is price of leadership.

He can continue to ignore it, plead ignorance, and even make excuses, but at the end of the day he should be ashamed at how this was handled, and the Congress and the media along with him.

I can only imagine what they would be saying if the President was George W. Bush, and Jon Corzine was his leading Republican fund raiser. With a few notable exceptions, largely solitary voices, where are the so-called progressives on this? Hypocrites!

I do not expect to see justice done here. There are too many powerful people and interests involved, and justice, being truth in action and not words, is not en vogue for misdeeds of the TBTF financial sector. We are way beyond that with this generation of vipers that has infested the Beltway for the past twenty years.

I would just like to see the stranded customers made whole for what was taken from them, and their long anxiety ended, which is what has happened promptly in every brokerage failure that I am aware of post WW II, including Lehman Brothers and Bear Stearns. Oh no, you just don't understand. It is different this time.

Yes, because of who is involved. How naive do they think the people are? If the individual customers had not banded together and taken proactive legal measures, the system would have had their way with them. Almost all the good that has come of this wretched affair is due to the actions of the people in the Commodity Customer Coalition, and not those sworn to protect them.

"When bad men combine, the good must associate; else they will fall one by one,
an unpitied sacrifice in a contemptible struggle."

Edmund Burke

And the public relations campaign of spin, leaks, and misinformation that has enveloped this financial scandal since day one is an absolute disgrace and a failure of the greater part of the independent press.

So far they have ignored it. Next they will be ridiculing those who call for reform such as the Occupy Wall Street movement as ignorant and rabble. But reform is inevitable, it will happen, or there will be no sustainable economic recovery, and no peace.

This is Obama's Hurricane Katrina. And viewed not as an isolated incident, but in the context of all that has happened, it is an effect of the credibility trap that grips the nation's leadership, of both financialized political parties.

MF Global's Edith O'Brien Comments on the Safeguards of Customer Segregated Accounts

This is from a transcript of the CFTC Roundtable Discussion of Individual Customer Collateral Protection on Oct. 22, 2010.

As you may recall, Edith O'Brien is the Assistant Treasurer of MF Global whom Jon Corzine identified in his own Congressional testimony as the key manager over fund transfers of monies, and who has been recently subpoenaed to appear before the House.

In talking down to the 'myopic' particpants, Edith O'Brien makes the point that there are interconnected layers of protections for customer accounts, making the misuse or misappropriation of customer assets highly unlikely.

This transcript is followed by brief excerpts of the Nov 2011 and Fed 2012 testimony of the CFTC to the Congress about MF Global.

Ms. Edith O'Brien: "That's okay. Thank you all for participating today.

I think that a number of individuals from this table don't have the benefit of the extensive experience of the FCM structure, and I've heard two hours of dialogue about seg customer movements between the clearinghouses and the exchanges, and as the conversations continued, it appears that this is an extraordinarily myopic view of the current safeguard structure that operates in America and has effectively worked, to the best of my knowledge, for years.

This safeguard structure in this financial framework is not just about customer seg money moving from FCMs to exchanges, it is based on layers of partners and components across banking institutions who are approved to be exchange settlement banks, exchanges approved participating FCMs. FCMs do credit reviews of clients.  It's layered. Everybody has a role, some of the roles cross over. There's segregation rules, there's segregation calculation. There's now capital rules. There's now capital calculations. There's rule of 15(c)(3) about what can be done of the firm while FCMs are holding them.

So, as we continue the conversation this afternoon, I want everyone to consider the fact that there's a greater framework at hand here, one that has actually worked extremely well. One of the comments that I've heard over the last couple of weeks is how do we prevent a Lehman from happening here? We did. Lehman happened in the U.K.; it did not happen in America.

So, I think that Bob does want to explore the risk components this afternoon, and I want everyone to consider the wider framework that does effectively work at this time, always looking at ways to enhance this to protect customer funds. There's no question about that. But an enhancement is different than the entire change to an infrastructure."

MR. WASSERMAN: I would just make one note in response.

Certainly, Lehman was an example of how well things worked in the future seg world, (in protecting customer funds in futures accounts) and I am very gratified, one might even say personally gratified at how that happened such that futures customers, I think, things worked well with barely a hiccup. But understand that Lehman was an issue outside of the customer account. This was not due to a fellow customer, this was due to a problem essentially on the prop level and at the parent level.

What we're dealing with here is what happens if there is a problem at the customer level, and while that has been happily very rare in the future space, and very happily so, and that's in large part due to the excellent work that's done by a lot of people over here both at the clearinghouse and at the firms, we're bringing in a new environment here on the OTC, where it would be, I feel, a little bit premature to assume just how well things are going to work.

Obviously, we hope that we are developing a system where things will work as
7 well, but there's some different risks that we're going to be confronting, and, so, there's some different issues out there. With that, I think it's important to talk about what the costs are on the risk level because this absolutely changes the risk environment..."

CFTC Roundtable Discussion: Individual Customer Collateral Protection, Oct 22, 2010, transcript.

The November 2011 testimony of the CFTC's Gary Gensler on the taking of customer money at MF Global.



Testimony of CFTC's Gary Gensler on February 29, 2012

Did the SEC Facilitate the Fraud at MF Global?

I did not treat this particular issue of the MF Global scandal sufficiently when I first became aware of it thinking, perhaps foolishly, that additional facts and information from the financial press and the investigation would be forthcoming.

That does not appear to be the case. So here is the story that suggests that the SEC had been providing MF Global special treatment to mask its financial difficulties while it floated a large bond offering. They betrayed their sworn duty to make the information public, and to act to protect the average account holder by promoting transparency and the symmetrical disclosure of information to maintain the confidence in the system, and quite likely out of a deference to power and influence.

We have seen many examples of the Fed hiding information and stonewalling legitimate disclosure of key financial information to 'protect the system.' The problem is that this merely serves to allow powerful insiders to game the system, and guarantee the system's decline, while reform withers.

Professional investors, through their own sources and resources, became aware of the MF Global problems and began to flee the firm, leaving the small independent investors 'holding the bag' as it were. It is not likely that JPM was unaware of this.

We have seen other instances of this sort of thing, such as the SEC whistleblower who lost his position when attempting to act on strong evidence of insider trading by one of the TBTF titans.

The Street has had it in for Jon Corzine ever since he betrayed them and profited from the Fed enforced LTCM rescue when he was the head of Goldman Sachs. And MF Global appears to have been the payback.

A dirty business, but as I have said, it is not likely that justice will ever be done. Mr. Corzine may not even be banned from dealing again in the financial markets.

I just would like to see people made aware of this, so they might protect themselves from these rapacious sociopaths and their enablers. And of course, to see the monies stolen from the innocent account holders returned.

MF Global is one of the most outrageous scandals in recent financial history, involving one of the principal donors and fund raisers to the Democratic presidential incumbent.

And yet it receives no mention in the debates or from the Republican candidates, and very little mention in the press except for the repetition of spin and slogans and disinformation. Are they planning to use this as an 'October Surprise' or perhaps as a sophisticated form of Wall Street blackmail? Or is just the foolish groupthink that possesses insular groups of powerful insiders when the system that provides their status and extravagant privilege is threatened?

And at least from the outside looking in the 'investigation' has the appearance of a very professional damage control and public relations campaign with all the trappings.

The warning for investors from MF Global is that The Financial Markets Have Not Been Fixed, and therefore the money you have in the markets is not safe.

WAS CRITICAL DISCLOSURE OF MF GLOBAL DOCUMENTS DELAYED, PROVIDED SPECIAL TREATMENT AT SEC?
By ManagedFutures

Why was release of critical disclosure apparently delayed? Why were time stamps suspiciously altered?

Critical documents related to MF Global’s financial condition appear to have been delayed for release by the Securities and Exchange Commission (SEC) at an important time just before a MF Global floated a bond offering to professional investors.

While possibly a coincidence, approximately the same time the documents in question were finally made public, MF Global professional account holders were beginning to flee the company, leading to an eventual liquidity crisis and the firm’s bankruptcy.

The document in question is MF Global’s Annual Audited Report on Form X-17-A-5. What is critical about this report is that it contained information regarding of MF Global’s risky sovereign debt trades, including some subtle, yet important, details that were not available anywhere else. Had professional investors had this information weeks after the May 31, 2011 initial filing date, as is said to be typically the case with such documents, they may have avoided purchasing what ultimately became near worthless MF Global bonds...

To further highlight special treatment, Mr. English points out that the document was held by the SEC concurrent with negotiations that FINRA and the SEC were having with MF Global over foreign sovereign debt exposure, which has now been widely reported after the fact. “It appears as though someone at the SEC may have been holding the document while negotiating with Mr. Corzine over his sovereign debt exposure,” Mr. English speculated, noting that between the May Filing date and September release date FINRA and SEC negotiated with MF Global and finally demanded an increase of capitalization to support Corzin’s sovereign debt trade. He notes that the documents were de-indexed from the SEC database and then reposted–unusual activity given that a sampling of smaller brokerage firms found no instances of missing or amended audits. “Astute industry participants may have been watching for the Annual Audited report of the broker unit,” noted Mr. English. “That report did not surface until September at the earliest. This is clearly out of the norm with respect to how the SEC usually scans and publicly posts these reports...”

When the Annual Audit Report in question was finally released weeks later, knowledgeable professional investors were said to start fleeing the FCM. Contrary to initial reports, this was not a “run on the bank” because these were futures accounts under the auspices of the Commodity Futures Trading Commission (CFTC). This widely assumed investor protection is critical because then the liquidation falls under the auspice of the Commodities Exchange Act (CEA), which assumes a “segregated account priority above all else” legal protection in the case of a bankruptcy through a liquidation process.

Special Privilege Provided Mr. Corzine

The document tampering raises serious questions about the relationship between the SEC and Mr. Corzine, painting a picture of special treatment the firm may have received, according to industry consultant, Elaine Knuth.

“This is really an important story because it goes beyond the SEC messy handling of filings. A filing delay before the bond offering, and during ongoing meetings between the SEC and MF Global, points to coziness, resulting in regulatory failure,” noted Ms. Knuth, who also contributes to the blog at www.MFGFacts.com. “It shows regulators favoring and protecting Wall Street investment bank interests over investor protections...”

Read the rest here.

House Subpoenas MF Global's Assistant Treasurer O'Brien

As the article notes, Edith O'Brien oversaw the fund transfers at MF Global, and almost certainly knows exactly what transpired, and who knew what about the misuse of the customer funds.

Reports have stated that Ms. O'Brien has been refusing to cooperate with investigators unless she is granted immunity from prosecution. And as the article notes, she is likely to plead the Fifth Amendment in her House appearance.

At least we might get a look at her and find out how she came to be in such a position. Information about her has gone largely missing from the web.

But I did find her LinkedIn page in case anyone would like to hire her.

WSJ
House Panel Subpoenas MF Global's Assistant Treasurer
By JULIE STEINBERG And AARON LUCCHETTI
March 21, 2012, 2:31 p.m. ET

An MF Global Holdings Ltd. employee who oversaw fund transfers in the final week before the firm sought bankruptcy protection has been subpoenaed by a U.S. House subcommittee to testify next week about the securities firm's collapse.

The Oversight and Investigations subcommittee of the House's Financial Services Committee voted at about 2 p.m. Wednesday to subpoena Edith O'Brien, the company's assistant treasurer when it filed for Chapter 11 bankruptcy protection Oct. 31.

"Ms. O'Brien has unique, personal knowledge regarding how and why customer funds went missing," said Rep. Randy Neugebauer, the chairman of the subcommittee. "We owe it to the thousands of customers of MF Global—the ranchers, farmers and investors who lost money—to get to the bottom of how this could have happened."

Ms. O'Brien is expected to invoke her constitutional rights against self-incrimination and refuse to answer questions at the hearing next week, according to people familiar with the matter. Ms. O'Brien has so far declined to be interviewed by investigators and members of the committee...

Read the rest here.

Melin and Koutoulas: Did JP Morgan 'Loot Accounts' At Lehman and MF Global As Bankruptcy Tactic

It is one thing for an organization to use its privileged position to seize assets in a firm that it knows is going to go bankrupt. That is certainly a possible crime under the fraudulent conveyance laws, as well any violations of fiduciary responsibility.

If a lawyer, for example, knows that a client is going to go bankrupt because of their privileged view of the situation, do they have the right to seize any and all of their client assets for themselves, to secure any outstanding obligations the customer may have with them? Does this include escrow accounts and assets held on behalf of other parties and creditors?

But beyond this, what compounds the situation is any subsequent obstruction of justice, and racketeering with regard to concealing the discovery of those looted funds and assets that were taken extra-legally under some self-serving rationale, and the perversion of the process of the law as a result of this effort.

Remember, it was the concerted attempt to conceal a 'third rate burglary' that finally brought Nixon crashing down.

But I have to admit, this occurred at a time when the nation and its representatives still had an active conscience, that could be repelled in disgust at the trampling of the Constitution. It is not so clear that the soul of the nation has not been deadened by years of deceit and excess, dulled by propaganda and self-serving relativism.



The powerful always snicker, reveling at the height of their reign. They murder the messengers and prophets, to maintain their delusion. And they abuse justice, and the cries of the oppressed rise to heaven.

And then it may not be man's law but God's justice that prevails, and that will be a terrible chastisement indeed, the inevitable downfall, der untergang, of a group of wealthy people driven mad by the will to power and the illusion of their own exceptionalism. And then they will be broken in default and disgrace, as a sign to the faithful.

"For the oppression of the poor, for the groans of the much abused, now will I arise, says the LORD. I will set them in safety from those that sneer at them. The words of the Lord are pure words: as silver tested in a furnace purified seven times.

You shall keep them safe, O Lord, you shall preserve them from this generation of vipers forever, where the wicked prowl on every side, where vile men are exalted." Psalm 12:5-8