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.

Gold Daily and Silver Weekly Charts

“Our public credit is good, but the abundance of paper has produced a spirit of gambling in the funds, which has laid up our ships at the wharves as too slow instruments of profit, and has even disarmed the hand of the tailor of his needle and thimble. They say the evil will cure itself. I wish it may; but I have rarely seen a gamester cured, even by the disasters of his vocation.”

Thomas Jefferson, Letter to Gouverneur Morris, 1791

SP 500 and NDX Futures Daily Charts - Biderman's Outlook for April

The light volume ramps higher continue on.

FOMC minutes tomorrow and the Jobs Report at the end of the week.

According to this the Fed is buying 61% of US debt. That leaves quite a bit of hot money looking for beta in the equity and junk markets.

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.