US Federal Prosecutions For Financial Fraud In the Obama Administration Fall to 20 Year Lows

The declines in US Federal prosecutions for financial fraud  that began under G.W. Bush have followed that down trend that in the first three years of the Obama Administration. That might make more sense if Obama had not been elected as a reform president in response to one of the greatest financial frauds in American history. 

In the first three years of the Obama Administration, federal prosecutions have been running at new highs. Over half of the prosecutions involve illegal immigration. Another 17% are drug related.

Illegal immigrants and drug dealers have the reputation for being notoriously cheap in providing campaign contributions.

Prosecutions for financial fraud however have dropped to the lowest levels in over 20 years.

According to the original study, the primary charges for Federal crimes in the latest figures are as follows.

"The single largest number of prosecutions of these matters through August 2011 was for Immigration, accounting for 50.7 percent of prosecutions.  The second largest number of matters were Prosecutions filed under the program area of Narcotics/Drugs  (17.3%)."

In defense of Obama, GW Bush had the unearned benefit of Eliot Spitzer leading the charge for the Feds on financial fraud from his office as the Democratic NY Attorney General. Of course Eliot got taken out by the Feds himself in 2008 as the result of an intensive ad hoc investigation into $5,000-a-night hookers from New Jersey named Ashley. I wonder what category that falls under.  She should have waited for the reality show - it has better residuals.

Don't get me wrong.  I am not trying to pick on BHO.  I am disappointed with his performance to say the least, and that set in around day 50 when he unrolled his appointments, so you can't blame it all on the obviously obstructionist opposition.  The people voted for Franklin Roosevelt and they got a Herbert Hoover.

Whenever you might say, "I don't really like Obama's ineffectiveness as a reformer" or "Although he seems decent and has many effective postions, I am uncomfortable with Ron Paul because of his ideological opposition to civil rights legislation and equal protection laws" at some point you usually hear: "Well who do YOU like?" Life imitates high school.

I don' t like any of them, or should I say like like? And a few are borderline frightening. And most people seem to feel the same way. I cannot believe that in the world's superpower, with about 300 million residents, this motley collection has risen as the cream of the crop.

NY Times
Prosecutions for Bank Fraud Fall Sharply
By CATHERINE RAMPELL

Federal prosecutions for financial institution fraud have tumbled over the last decade, despite the recent troubles in the banking sector, according to a new analysis of Justice Department data by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University.

This category can refer to crimes committed both within and against banks. Defendants include bank executives who mislead regulators, mortgage brokers who falsify loan documents, and consumers who write bad checks.

During the first 11 months of the 2011 fiscal year, the federal government filed 1,251 new prosecutions for financial institution fraud. If that pace continues, TRAC projects a total of 1,365 prosecutions for the fiscal year. That’s less than half the total a decade ago.

The decline in these new cases stands in contrast to the government’s broader approach to federal criminal prosecutions. Federal prosecutions for other crimes have grown tremendously, with the number of total new prosecutions filed for all federal crimes nearly doubling over the last decade.

Read the rest of the NY Times article here.

All Federal Prosecutions



Federal Prosecutions for Financial Fraud

CFTC Commissioner O'Malia Warns of 'Rash Reforms' - "Isolated Incident" - Opposes Position Limits

The CFTC must make haste to prove to the public that MF Global was an isolated incident. It should not become involved in the issues of returning customer funds.

Oh, such wiles are hidden in the voice of reason and 'free market' ideology. Let's not be hasty. After all, it is only customer money, and we are just the regulators responsible for making sure it didn't happen in the first place.

Commissioner O'Malia has also actively opposed 'position limits' on silver and other reforms in commodity trading designed to curtail manipulation.

"O'Malia said the agency had overreached its mandate and echoed the industry's argument that there was no "empirical evidence" to substantiate the rule."

In his opening statement on position limits he said:

"...in addition to failing to detail costs, the two final rulemakings fail to articulate a convincing rationale for eliminating our current regime of principles-based regulation and substituting in its stead a prescriptive “government-knows-best” regime."

Principles based regulation. Unfortunately the principles are being written and administered by the brokerage firm of Dewey, Cheatum and Howe & Assoc.

Let's make haste to show this is an 'isolated incident.' How about making some haste to get the customers' money back, and telling us who took the money and what they are charged with?

How can this possibly be an 'isolated incident?' There's a fine line between an isolated incident and just another episode in a multi-year financial gang bang of the American public by Wall Street's monied interests.

Commissioner O'Malia was appointed by Barack Obama in 2009 according to Huffington Post: Scott O'Malia: Obama Appoints Ex-Lobbyist For Enron-Like Company To Top Regulator Position

Obama's failure to fulfill his electoral mandate, for whatever reasons, is one of the greatest flops since Plan 9 From Outer Space.

Credibility trap. Regulatory capture. Corporate "News." Judas goat reformers.

I fear the truth, and financial reform, will be led down a blind alley, and strangled. The best I can hope for is that the customers' money will be returned out of shame and fear, if not justice and wisdom.

CFTC Chairman Gensler is apparently asking for a December 5 vote to restrict the manner in which brokerages can use customer funds. Hence Commissioner O'Malia's warning on making changes to the status quo, and the new threat from the Congress to pass deep cuts in CFTC funding.

And next year the American public will be given Morton's fork opportunity to choose between two flavors of corporate extrusion, Tweedleflip and Tweedleflop. And so they will hold their noses, and most likely cast their joyless votes.

CFTC official warns about rash reforms post-MF Global
By Christopher Doering
Wed Nov 16, 2011 10:46am EST

WASHINGTON, Nov 16 (Reuters) - A U.S. futures regulator on Wednesday pushed for immediate action in the wake of collapsed brokerage MF Global, including a requirement that all intermediaries should hire an independent party to make sure customers funds are kept separate from the firm's own money.

Scott O'Malia, a Republican commissioner at the U.S. Commodity Futures Trading Commission, said in order to show the public that segregation works and that MF Global was an isolated incident, it must act quickly.

However, he warned about going too far with reforms without full knowledge of what happened at the failed brokerage.

"Many have said that the failure of MF Global was not systemic and that we are lucky. I don't view it in the same light," O' Malia said in a statement laying out the "next
steps" in dealing with the mess MF Global left behind.

MF Global filed for bankruptcy on Oct. 31 after investors and counterparties balked at revelations about the firm's bets on risky European sovereign debt.

Roughly $600 million is missing in customer accounts of the company's brokerage, and the CFTC is among the authorities investigating whether MF Global may have improperly mixed that money with its own funds.

O'Malia said the CFTC must ensure that all intermediaries are in compliance with segregation requirements. The agency also must reconsider rules it is crafting to implement the Dodd-Frank financial reform law.

In the three-page statement, O'Malia said it's too early to hail a proposal that would limit investments of segregated customer funds "as the solution to the MF Global problem."

He also warned against a plan that would have the CFTC intervene in insolvency proceedings to facilitate transfer of customer positions and collateral in the face of a shortfall.  "The Commission has not actively intervened in such a manner in MF Global, and so it is questionable whether the Commission would so intervene in the future," O'Malia said.

In light of MF Global's demise, O'Malia said the CFTC should ensure that clearing organizations are able to diversify their membership without introducing risk.

MF Global Customers to Propose Faster Distribution of Funds Than SIPC Trustee

Commodity Customer Coalition
190 South La Salle Street, Suite 3000
Chicago, IL 60603
www.commoditycustomercoalition.org
info@commoditycustomercoalition.org

November 16, 2011 FOR IMMEDIATE RELEASE

CONTACT: John L. Roe (jroe@btrtrading.com) 312-933-6564

Commodity Customer Coalition to Object to SIPC Trustee’s Claims Process for MF Global Bankruptcy, Propose Faster Alternative Claims Process

In response to the SIPC Trustee’s expedited application for an order from the court to put both securities and commodities customers of MF Global through the same claims process, the Commodity Customer Coalition (“CCC”) is filing an emergency objection to that application and proposing a faster, more efficient claims process to immediately release a majority of customer funds. The CCC issued the following statement:

The Commodity Customer Coalition applauds the Trustee’s recent motion to release 60% of assets held in cash on October 31, 2011. However, that simply isn’t good enough. This only represents a very small portion of the total assets frozen in the bankruptcy. Additionally, the Trustee has proposed a snail mail approach to collecting claims.

He says they cannot use the books of MF Global to verify customer claims, but his process will only result in customers mailing him statements based on those books and it will do so over a period of months. Our proposal will streamline this process with a more commonsense approach, affirm the primacy of customer property over the claims of creditors and return funds to their rightful owners in a matter of days, not months.

The basis for the Trustee’s proposal is that he cannot give us an accurate accounting of the shortfall in customer funds. But MF Global’s estate has $1.2 billion in excess equity and the CME has thrown him a life line of $250 million if he sends home too much money. MF Global claimed under oath that only $600 million in funds is missing. So the shortfall in funds is irrelevant; the Trustee has 250% over the shortfall.

That money is supposedly accounted for on a daily basis to the NFA, CFTC and MF’s DSRO, which was the CME. The Trustee has had over two weeks to sort through this and get clients their money. It’s time to truly expedite this process and make customers whole.

Mr. James Koutoulas, Esq. will appear in person tomorrow to argue the CCC motion before the court. He will make himself available to the press immediately following the hearing on the steps of the courthouse.


The Commodity Customer Coalition now represents over 7,000 former MF Global customers whose funds have been frozen by the SIPC Trustee. For more information, or to schedule interviews, please contact John L. Roe
(jroe@btrtrading.com, 312-933-6564).

A CFTC Regulatory Change Opened the Door For MF Global Bankruptcy - And Worse

This is a very good analysis of how regulatory capture and the erosion of regulatory oversight opens the door wide for public loss and the defrauding of investors.

And it is also important to remember that in addition to bad investments, the MF Global scandal apparently involves the use of customer funds to meet margin calls for the firm's positions, which is a scandalous theft of funds.  And when they were going bankrupt they used checks instead of wire transfers to fulfill customer requests for the return of their money, so they could bounce the checks, even while they were paying bonuses to their own London traders. 

The government needs to address this as well and if appropriate bring the charges.  I have suggested that the fraudulent conveyance law has some potential applicability, and possibly RICO statutes depending on the involvement of third parties.  Since Jon Corzine is a high ranking Democrat, a lack of action by the Obama Administration on this would be particularly odious.

History shows that it is never the initial criminal action that brings down a government, but it is always the subsequent coverup and obstruction of justice that destroys careers and cripples administrations and their parties.  In this case it might even be worse, since it involves a more widespread corruption that is caught in a credibility trap.  It cannot be addressed credibly with reform over even honest discussion by those in positions of authority because they have been involved in a crony capitalism that is not limited to a few transactions, but is rather, pervasive. 

And this is why even the Republicans may not use this scandal as an issue, because they may be complicit as well.  And so the failure of the honest regulation of the markets festers, crippling the real economy. 

The ideological fantasy that government is the problem, and simply getting rid of it is the answer, is a great propaganda slogan for white collar criminals to promote, but it makes little sense in the real world of flawed human beings and a persistent rogue element in any society.

For it is the constant weakening of regulations by the banks and their lobbyists that led to the financial crisis and the looting of the public trust.   If the criminals have corrupted the policeman, one does not get rid of the police department as a solution, because that is to fulfil the very intent of the criminal element in the first place.  One reforms what has been corrupted, and prosecutes the criminals more vigorously.

"Turn where we may, within, around, the voice of great events is proclaiming to us, Reform, that you may preserve."

Thomas B. Macaulay

The problem is the weakening of government by corruption. And the solution is reform, not more of what went wrong with the rule of law, replacing it with lawlessness.

The danger is that when, in the name of libertarian reform or some other misguided anarchist movement, the laws are knocked down, and the social fabric is torn, very often the worst of us, the truly ruthless opportunists, put forward their 'strong men' or a 'great leader' to bring back order and act as the law, or merely preside over the law of the jungle.

And then begins the real descent into hell.

Bloomberg
Tiny Rule Change at Heart of MF Global Failure
By William D. Cohan
November 15, 2011, 9:15 PM EST

Nov. 16 (Bloomberg) -- Laurie R. Ferber has quite a resume. She is currently the general counsel of MF Global Holdings Ltd., the New York-based futures and commodities brokerage that filed for bankruptcy on Oct. 31, listing some $40 billion in liabilities....

Before that, she spent more than 20 years at Goldman Sachs Group Inc., where first she was general counsel for J. Aron & Co., a commodities business that Goldman Sachs bought in 1981, and then was the co-general counsel of Goldman’s principal business, known as FICC -- for Fixed Income, Currency and Commodities -- when J. Aron was merged into the rest of Goldman’s fixed-income division.

But at the moment, her greatest significance may be as a long-time advocate for revisions to a little-known and vastly underappreciated Commodities Futures Trading Commission rule called Regulation 1.25.

Before 2000, the rule permitted futures brokers to take money from their customers’ accounts and invest it in a number of approved securities limited to “obligations of the United States and obligations fully guaranteed as to principal and interest by the United States (U.S. government securities), and general obligations of any State or of any political subdivision thereof (municipal securities.)” That is, relatively safe securities with high liquidity.

Internal Repo Allowed

The banks, however, pushed the CFTC to expand the investment options that would allow firms to practice “internal repo.” In this scheme, money is taken from customer accounts and invested short-term in a variety of securities, with the futures brokers reaping the not- insignificant financial rewards from their customers’ money.

And, lo and behold, such efforts were successful. In December 2000, the CFTC agreed to amend Regulation 1.25 “to permit investments in general obligations issued by any enterprise sponsored by the United States, bank certificates of deposit, commercial paper, corporate notes, general obligations of a sovereign nation, and interests in money market mutual funds” -- in other words, riskier investments that could make more money for Wall Street.

Then, in February 2004 and May 2005, Regulation 1.25 was further amended and refined to the liking of Ferber and the banks. In the end, the door was opened for firms such as MF Global to do internal repos of customers’ deposits and invest the funds in the “general obligations of a sovereign nation.”

This practice, of course, may well be the centerpiece of the MF Global disaster. We now know that Corzine -- who was CEO of Goldman Sachs from 1994 to 1999 -- bet $6.3 billion on the distressed long-term bonds of countries such as Italy and Spain, although it’s unclear if clients’ funds were used. Bart Chilton, a CFTC commissioner, told Bloomberg News on Nov. 10 the loss to customers’ accounts may have resulted from a “massive hide-and-seek ploy.”

While the CFTC’s and the Federal Bureau of Investigation’s probes into the missing money continue, it isn’t too soon to pass judgment on how the too-close relationship between Wall Street and Washington can lead to seemingly innocuous changes in the obscure rules governing the securities industry, which, in turn, can result in financial disaster.

Hands on Keyboards

This danger is especially relevant now as hundreds of new regulations are being written that will govern the way Wall Street operates in post-crisis, post-Dodd-Frank world. Needless to say, Wall Street’s lobbyists are looking to place a heavy hand on the regulators’ keyboards and make sure the new rules are rewritten the way they want them to be.

This is nothing new, of course. For years, the finance industry has been influencing the regulations that govern it, often with devastating consequences. For instance, in June 2004, the Securities and Exchange Commission -- then the chief Wall Street regulator -- without much fanfare agreed to allow securities firms to vastly increase the amount of leverage they could use in their businesses.

So authorized, the financial institutions went to town, levering up their balance sheets on the order of 50- to-1 intra-quarter, and then lowering the leverage to around 35-to-1 by the end of the quarter when it came time to report their financial condition. As a result, a mere 2 percent or 3 percent decline in the value of the assets on their books could wipe out a firm’s equity.

As anyone who has closely studied what happened to Wall Street in 2008 knows, the value of many of the assets that firms such as Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. jammed onto their balance sheets declined significantly -- causing huge losses, wiping out their equity and causing them to be virtually or actually bankrupt. (The same thing happened to MF Global of course, which was leveraged by some 40-to-1 at the end.)

We’ll see if MF Global will claim that the changes to Regulation 1.25 during the past decade gave it cover for its actions. It now seems clear that investing customer money in the risky, distressed long-term bonds of European countries shouldn’t have been permitted. Then again, it’s more than a little amazing that the CFTC allowed futures brokers like MF Global to do internal repos with client funds under any circumstances.

Reform Went Nowhere

In a nifty bit of Washington irony, about a year ago, shortly after the Dodd-Frank Bill was passed, the CFTC proposed vastly restricting the way customer money could be invested. One of the proposed changes was to eliminate the possibility of investing in the sovereign debt of other countries. “The Commission seeks to simplify Regulation 1.25 by narrowing the scope of investment choices in order to eliminate the potential use of instruments that may pose an unacceptable level of risk,” read the CFTC proposal.

Unsurprisingly, the reform effort went nowhere. Equally unsurprisingly, one the many comment letters from financial professionals to urge the CFTC to keep the status quo came from Laurie Ferber.

Now, MF Global is gone, along with thousands of jobs and billions of dollars in creditor money -- to say nothing of the still missing $593 million. “I believe we have to tighten how investor funds can be used,” Gary Gensler, the CFTC chairman and another former Goldman Sachs executive, said on Nov. 7. “They’re segregated and must be segregated at every minute of every day. And then if they are invested, they should be invested with good collateral with outside parties.” That’s the right idea; I hope this time the commission means it.