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Attached is a letter being sent by customers of MF Global to their Congressional representatives and the CFTC.
Here is the court filing that caused such consternation.
It is hard not to assume as some have already suggested that this Bank which filed this motion with the court was the recipient of the customer accounts in what appears at least on the surface to be a fraudulent conveyance of assets to a creditor just prior to a filing of bankruptcy, while at the same time they were paying bonuses to their London traders. But let's wait to see what the regulators and Justice Department find. The cloak of secrecy cast over this entire event is troubling to say the least.
The example of the Iowa farmer, while legitimate, is a bit labored in that many of the customers were average people like ourselves who were engaged in trading and various forms of investment. I was a trader on the futures exchanges myself for many years.
The point is that if there is such a callous disregard for the rights and protection of retail customers in the US financial system, then no one and nothing is safe from Wall Street in any of their accounts. Although fairly well protected, I am taking even further steps to protect myself from this sort of unconscionable default by the US financial system. I am stunned by the callous nature of this theft and the official response to such a blatant fraud.
What is next, the IRA's and 401K's?
Dear xx,
As you well know, MF Global, Inc. recently declared bankruptcy. Despite its obligation as a commodity broker to keep its customer funds completely segregated from the firm’s own assets, about 11.6% of the segregated client funds have yet to be accounted for—approximately $633 million.
However, 88.4% of the segregated client funds have been accounted for, and have not been returned to the clients. There is no reason, whatsoever, that these funds should not be immediately returned to their rightful owners.
Commodity futures markets are very different from securities markets—futures traders are more interested in price movements rather than owning financial instruments. Thus, the effect of freezing funds in a futures market is many times more devastating than in a securities market. A delay in “un-freezing” and returning funds can destroy the entire futures industry. For this reason, the portion of segregated client funds that have been accounted for must be returned to clients immediately.
Keep in mind that commodity futures are used not just by financial firms, but also by farmers, airlines, oil producers, and any business that deals with commodities. They use commodity futures to ensure that they receive and/or pay a fair price for the commodities that they sell and/or use and are not held hostage by price fluctuations that may affect their future sales and/or consumption.
For example, farmers who have crops in the field need to sell futures in commodity markets so they can lock in prices for their future yields today, instead of taking on market risk as they would otherwise be exposed to volatile price swings. Large corporations like Coca-Cola that make money in foreign markets do not want to lose money when they repatriate revenue earned in foreign currency. They have to be able to forecast future expenses and profits accurately in the currency of their domicile and hedge currency price risks in futures markets accordingly.
I fear that the SIPC Trustee overseeing the bankruptcy is not acting in the best interests of commodity futures clients. SIPC, or Securities Investor Protection Corporation, was created by the Securities Investment Protection Act of 1970 and was designed to protect securities in a similar way to how the FDIC protects bank depositories. (Commodities remained unprotected simply because commodities trading was too new and uncommon when SIPA was passed.) As a securities insurance regulator, the Trustee’s actions thus far demonstrate an almost total ignorance of how commodity futures markets operate.
To insist on the completion of a months-long investigation into the missing 11.6% of client funds before returning any of the 88.4% of funds that have been accounted for is patently ridiculous. If customers do not have additional collateral to post for trading purposes, they will lose their positions and will face bankruptcy as they are unable to do business.
For example, farmers whose collateral is locked up may have to sell their land and equipment to post new collateral so they can hedge their crops—or face financial ruin through exposure to volatile price swings in the market. Furthermore, while this collateral is locked up, those price swings will become worse as volume dries up in smaller markets—which, according to the Wall Street Journal, is already happening.
Note that the most recent bankruptcy of a major commodities clearing firm, Refco, Inc., involved no freezing of assets and no cessation of trading for any customer.
Even worse, the Trustee is already putting it out in the media that customers of MF Global may have to share in the loss of segregated client funds pro rata with other creditors. By subordinating customers with collateral in segregated client funds to creditors of MF Global’s estate, the Trustee is essentially subordinating the claims of an Iowa farmer who was supposed to be protected by segregation of client funds to the claims of JP Morgan, an unsecured creditor currently seeking a motion in court 1) to place itself first in line for MF Global assets, before commodity clients who must share in the loss of $633 million of customer funds; and 2) to disallow all investor claw-back lawsuits so that it may keep millions of dollars it withdrew from MF Global’s accounts within the last 90 days.
Paying such a creditor’s claim with an Iowa farmer’s money is not only morally and legally wrong, it risks the future of the American economic model. Segregation of customer funds is the cornerstone that assures the financial integrity of our markets and any violation of these segregation requirements cannot be tolerated.
Therefore, as I see it, it is flagrantly unreasonable that MF Global’s clients have no representation on the Creditor’s Committee, but big banks do. Without intervention on behalf of MF Global’s commodity futures clients (and not the kind of intervention contemplated by SIPC and its Trustee—freezing and investigating client funds for months whilst client positions are liquidated for lack of collateral), I am afraid that the future of commodities trading is sunk.
For all these reasons, please support the immediate release of 88.4% of segregated client funds and the addition to the Creditor’s Committee of a representative for commodity clients and brokers. The futures industry depends upon this action.
Sincerely,
[Your Name]
"Once you have their money, never give it back."
Ferengi, First Rule of Acquisition
There are also claims, not substantiated as far as I can tell, that the positions and assets that were taken from customers were liquidated in a manner so as to maximize the gains to other market participants with advantageous knowledge of those positions. That is a serious charge that I don't quite understand. I hope the regulators will look into the transfer of customers assets and exactly how they were treated.
I hope that the regulators and the Justice Department can sort this out quickly, and prevent any further loss of confidence in the exchanges and financial system on the part of their customers.
I think it is fair to say that this entire situation has been handled badly. Some of the early suggestions that customers would have to take haircuts to 'share' the loss with each other, that the funds would be frozen for years, and the general secrecy that has blanketed this has contributed greatly to the anxiety felt by the more aware among investing public at large.
This is of concern even to those who have no funds involved in this, and have nothing to gain or lose from it personally. It should give a chill feeling to all customers, as it seems to be a shocking breach of fiduciary responsibility. It is not wise to wait until one's own funds and assets are confiscated before asking questions and demanding answers.
As someone else has said, if a brokerage can take customer funds and assets at will, and use them for their own undisclosed speculation, and defy all guarantees, and neither they nor their accomplices are held accountable, then nothing is safe.
This white paper is obviously being told from the perspective of the customers and their attorneys.
I would be interested to hear the story or the party who received the customer assets. But as far as I know, they are silent, and their very identity remains a carefully guarded secret.
WHITE PAPER:
Background, Impacts & Solutions to MF Global's Demise
By John L. Roe & James L. Koutoulas, Esq.
November 10, 2011
The failure of MF Global has wide ranging consequences for the American economy and its bankruptcy is being handled in a manner that is making these consequences much worse than they need to be. The freezing of customer segregated funds is having a chilling effect on global financial markets. It also has a less obvious but significant impact on the day-to-day operations of farmers, mining operators, ranchers, and other commodity consumers and producers...
In fact, the only person served by the current bankruptcy process is the Trustee who has already submitted bills to the MF Global estate at $891/hour for his time and an average of approximately $500/hour for his staff. This is the same Trustee that spent 3 years working on the Lehman bankruptcy and billed the estate over $160 million dollars despite not returning any customer funds.
If this bankruptcy is managed the same way as Lehman's, it will be the end of the United States as a viable jurisdiction for commodity trading. Congress should use whatever power it has to prevent this from happening...
By subordinating customers with collateral in segregated funds to creditors of MF Global's estate, the Trustee is essentially making the creditors the beneficiary of a criminal act. If MF Global comingled segregated funds with corporate assets, it was a criminal act. Paying such a creditor's claim with a portion of those comingled funds would make them a beneficiary of that crime.
Paying JP Morgan with an Iowa farmer's money is not only morally and legally wrong, it risks the future of the American economic model. Who would want to hold a commodities account in the United States ever again? Considering the MF Global's clients have no representation on the creditors committee, but the big banks do (like JP Morgan and Bank of America), that is exactly what will happen without intervention.
Industry groups and regulators argue that the commodities trading industry is able to function with lighter regulations than securities trading because customer accounts are segregated from firm assets. However, in the MF Global case, there is $633M in these segregated client funds that are unaccounted for, either due to sloppy accounting or nefarious activity conducted by the firm. This has resulted in a compromise of the integrity of the segregated accounts system, and a complication of the bankruptcy proceeding by involving a number of parties with little to no experience in commodities.
The bankruptcy process has been delegated to SIPC, the securities insurance regulator, after it petitioned the bankruptcy court to begin a liquidation proceeding of MF Global’s broker-dealer. SIPC stands for “Securities Investor Protection Corporation.” It was created by the Securities Investment Protection Act of 1970 and was designed to protect owners of securities in a similar way to how the FDIC protects bank depositors. However, the vast majority of customer assets affected by this bankruptcy are NOT securities, rather they are cash and commodity futures contracts, and SIPC’s attorneys have limited experience with commodity futures contracts. Despite the fact that about 11.6% of the segregated funds have yet to be accounted for, 88.4% have been. There is no reason, whatsoever, that these funds should not be immediately released to their rightful owners.
Read the rest of this White Paper here.
These dozen Congressmen are just the ones that would brag about it openly to Jack Abramoff.
Trading in insider information amongst the Congress and their staffs is a form of soft bribery that undermines the character of the legislation, and is a relative side dish compared to the huge amounts of lobbying funds being thrown around by corporate special interests. And both parties are in on it to varying degrees.
It can seem an odd corruption to the average person, given the lavish benefits and pensions granted to members of Congress. What is shocking is not that officials sell themselves, but rather, that they sell themselves so brazenly and often for so little. But it makes sense if one understands the attitude of privilege and the insatiable nature of greed.
Corruption of public officials is not news. But when it becomes epidemic, and when powerful interests can use even relatively petty offenses to blackmail representatives, when lobbyists write the legislation designed to reform their industry, and when enormous financial frauds result in show investigations and big talk but no prosecutions, then it is news. And it is a shame and the decline of the rule of law.
Big corruption starts to crowd out petty corruption, which is its seedbed. Once corruption becomes institutionalized, the morally ambivalent all aspire to be in the one percent club, as a symbol of status and power. If this is the age of greed, then not to be corrupt is to be out of step with fashion, because greed is inherently corrupting. Reformers and progressives are out of touch, and tedious. Squares.
As is so often the case amongst men in crowds, life imitates high school.
And this distortion of values becomes a self-perpetuating credibility trap, which is what the US is caught in today.
But when the status quo has lost its creative energy, is dwindling, and even become dead wood, there is always hope in the relative outsiders and the young. Life awaits the coming of Spring. Fashions change, and honor and liberty are renewed. And this may be the significance of the protests that are springing up around the country, and the world, today.
The invisible community of the mind and the spirit is resilient. Rising and falling in cycles, it sometimes hides underground beneath the surface, as the seeds of growth and freedom, ready to rise up once again. Over and over. Always.
CNBC
Congress Members Took Part in Insider Trading: Abramoff
By Eamon Javers
Friday, 11 Nov 2011
As many as a dozen members of Congress and their aides took part in insider trading based on foreknowledge of market moving information on Capitol Hill, disgraced Washington lobbyist Jack Abramoff told CNBC in an interview.
Abramoff, who was once one of the wealthiest and most powerful lobbyists in Washington before a corruption scandal sent him to federal prison for more than three years, said that many of those members of Congress bragged to him about their stock trading prowess while dining at the exclusive restaurant he owned on Pennsylvania Avenue.
But Abramoff, whose black trench coat and fedora became one of the most notorious images in recent Washington history after his fall from grace, said he didn't play the stock market himself — he considered it an inherently unfair "casino" in which the house had far more information than the players. Abramoff made most of his fortune representing — and, as it turned out, duping — Native American tribes rich with cash from casino operations.
The former lobbyist said the amounts members of Congress earned trading off their inside knowledge ranged from as little as $2,000 to, as much as "several hundred thousand dollars," that was claimed by one member of Congress.
Abramoff declined to name the members of Congress.
"It was more, 'Look at me, I'm a real great stock trader,'" Abramoff told CNBC of the congressional bragging. "All of a sudden somebody from a background maybe in law, maybe in some other unrelated business area, all of a sudden is picking winners and losers in the market."
"I was making far more money than they were," Abramoff recalled. "So I wasn't as impressed as perhaps they thought I'd be."
At the time, Abramoff, who was involved in an extensive corruption ring, didn't think much of it. But after years in prison to reflect on the culture of corruption in Washington, Abramoff says he thinks trading based on inside Congressional knowledge is wrong.
"These people should not be using whatever information they gain as public servants to benefit themselves, any more than they should be taking bribes," he said.
Generally, however, legal analysts say that Wall Street insider trading laws do not apply to Congress. As an open and public institution, the legal assumption has long been that any member of the public can have access to information about how Congress works. In practice, though, that's simply not true, as powerful members of Congress come into contact daily with market-moving tidbits. That gap between the law and the reality has made Capitol Hill a virtual free-fire zone for insider trading. Over the years, academic studies have found that members of the House of Representatives beat the market by as much as six percent per year and members of the Senate do even better than that...
"In this serious hour in our Nation's history when we are confronted with grave crises in Berlin and Southeast Asia, when we are devoting our energies to economic recovery and stability, when we are asking reservists to leave their homes and their families for months on end and servicemen to risk their lives--and four were killed in the last two days in Viet Nam--and asking union members to hold down their wage requests at a time when restraint and sacrifice are being asked of every citizen, the American people will find it hard, as I do, to accept a situation in which a tiny handful of steel executives whose pursuit of private power and profit exceeds their sense of public responsibility can show such utter contempt for the interests of 185 million Americans."
John F. Kennedy, April 11, 1962
"If a free society cannot help the many who are poor, it cannot save the few who are rich."
John F. Kennedy, January 20, 1961
I am glad for any relief that might be coming for the customers of MF Global whose funds are frozen and at risk.
I wonder how extraordinary these measures referenced in this press release really are, and why they had to be extraordinary given the guarantees presented by SIPC and the regulatory responsibilities of the Exchange in the first place.
As I recall the stated reserves of SIPC are multiples greater than the total customer money said to be at risk. Is the SIPC a legitimate insurance fund acting to secure customer deposits against loss, or a fig leaf? I am therefore struggling with the statement that they required emergency funding from the CME.
Here is the CME's public relations release below. A copy of it is also available here.
I hope that there will be a thorough investigation so that customers will understand what is insured, for how much and by whom, what is regulated and by whom, and how confident they can be that this will not happen again and require such 'extraordinary measures.'
CME is acting in what is clearly self-preservation and not out of some abundance of charity. Customers are viewing these developments with a critical eye, and choosing in some cases to withdraw their funds.
Rather than rely on the kindness of strangers, I think there needs to be a greater transparency and the clarity of law and much more responsible regulation.
The temptation to hide what happened in a smokescreen and sweep it under the rug must be rather strong. But it would be a great mistake. Once confidence is lost, it can only be regained with a long and difficult effort.
This was a systemic failure of the first order and not some odd exception, or infamous 'black swan.'
The system failed.
Extraordinary measures aside, it must be fixed and made sound so that customers are not placed in such significant risk of loss based on malfeasance and 'accounting errors.'
And the public deserves a real explanation of what happened and who was involved. One benchmark for this is a straightforward answer to a simple question:
"When were the customer funds and assets transferred, to whom were they given, for what reason, and on whose authority?"
News Release Issued: November 11, 2011 3:16 PM EST
CME Group and CME Trust to Provide $300M Guarantee to SIPC Trustee to Help Facilitate Release of Customer-Segregated Funds
- Guarantee intended to assist Trustee in making prompt distribution of customer segregated funds and frozen cash balances
- CME Trust to provide its roughly $50 million in assets to CME Group market participants to offset missing customer funds held at MF Global
CHICAGO, Nov. 11, 2011 /PRNewswire/ -- CME Group, the world's leading and most diverse derivatives marketplace, today took extraordinary measures in order to accelerate the return of substantial customer cash and other assets securely held at CME Clearing, other clearing houses and MF Global custodians following the failure of MF Global.
Though CME Clearing does not guarantee FCM-held assets, CME Group is willing to provide a $250 million financial guarantee to the Trustee to give the Trustee greater latitude to make an interim distribution of cash to customers now, given the monumental task he faces to sort through considerable data and claims in order to complete the MF Global liquidation and make distributions to creditors. Additionally, CME Trust will provide $50 million to CME Group market participants in the event there is a shortfall at the conclusion of the Trustee's distribution process.
Until this point, the Trustee has authorized the distribution of $1.45 billion in customer collateral, which permitted the transfer of open positions and avoided greater losses to customers that would have been incurred through liquidation. Cash balances remain frozen. Today's proposal is designed to ensure that customers would have access to a greater percentage of the total customer-segregated funds MF Global accounted for at CME Clearing, other clearing houses and MF Global custodians.
This unprecedented guarantee offered by CME Group would be used by the Trustee in the event that a final accounting determines that the Trustee distributed more property than was permitted by the Bankruptcy Code and CFTC regulations. In addition, if there is a shortfall at the conclusion of the distribution and the $50 million Trust has not been exhausted, the remainder of those funds will be used to restore the other CME Group customer accounts that suffered a shortfall in customer-segregated funds held at MF Global. The Trust was designed to be used in cases such as this if customers lose money due to the failure of a clearing member.
"The failure of MF Global and the firm's mishandling of customer segregated funds is absolutely uncharted territory for this industry, and this extreme measure will help to provide all former MF Global customers access to their account balances that had previously been frozen in the liquidation," said CME Group Executive Chairman Terry Duffy. "Throughout this process, we have been working with the Trustee to help him release securely-held customer property at CME Clearing to customers and transferee clearing members. We have and will continue to advocate on behalf of customers - wherever they cleared or traded."
"CME Group believes it is critical to pursue this option with the Trustee to distribute additional securely-held customer assets," said CME Group CEO Craig Donohue. "Our primary concerns are the protection of our customers at CME Clearing and the integrity of all futures markets. We recognize that the U.S. Bankruptcy Code requires the Trustee to account for all customer assets and claims to ensure a fair, pro-rata distribution of those assets, and we sincerely appreciate how complex this task is for the Trustee.
We believe this extraordinary measure is necessary to ensure that all customers are treated fairly during the unique and challenging circumstances surrounding the failure of MF Global. We continue to work with the Trustee to return all of the remaining segregated funds to customers as soon as possible as allowed by law."
