Daniel Lubetzky

This article illustrates that the MF Global scandal is outrageous primarily because of the firm’s leaders’ illegal actions and refusal to admit responsibility.  Moreover, there has been failure to aggressively investigate the responsible parties and if this crime goes unpunished, this incident will further undermine the financial system.

Spotted by Daniel Lubetzky, by Adeena Schlussel

chicagotribune.com

MF Global mess is costing more than just $1.6 billion

Phil Rosenthal

March 31, 2012

For the $1.6 billion that’s missing from the supposedly sacrosanct accounts of farmers, ranchers and other customers of now-bankrupt MF Global, it would be nice to think we all got something more valuable than the lousy metaphor of a T-shirt that says, "I’m With Stupid."
Yet here we are, five months after the collapse of the trading firm headed by former U.S. Sen. Jon Corzine, and its leaders have revealed little but a knack for convoluted answers and jarring a lack of knowledge of relevant details. We still don’t know nearly enough about how this corruption of client funds could occur.

It may pay for these executives to be ignorant for now, with legislators, regulators and a federal grand jury in Chicago all looking into the matter. But the lack of black-box data on the disaster costs everyone else confidence that subverted regulators — such as Chicago’s CME Group, which has primary oversight of MF Global — can prevent the next fiasco better than they thwarted this one.
Nowhere was this more frustratingly obvious than in Washington last week. Under siege from a House Financial Services oversight subcommittee that was lobbing grenades in a bid to unearth how the customer money vanished, top MF Global executives responded with a jaw-dropping display of Shock and Duh.

Rep. Steve Pearce (R-N.M.) finally lost it when MF Global Holdings general counsel Laurie Ferber balked when asked if she felt improperly tapped customers have been stolen from or robbed.

"This is magnificent, one of the highest-paid lawyers in the damn country," Pearce said. "Bonnie and Clyde, they were chumps. They drove around. They used gas money to go out. You guys had people send things electronically to you, and nobody’s responsible? You can’t even declare that it was robbed or stolen from? What chumps those old-style bandits were."

According to written testimony for the subcommittee from Diane Genova, deputy counsel for JPMorgan Chase & Co., her bank on Oct. 28, three days before MF Global’s bankruptcy, noticed that the firm had moved funds around to cover its London overdrafts.
"The first was a transfer of $200 million from an MF Global account in the U.S. designated as a customer segregated account to an MF Global account in the U.S. designated for MF Global’s own funds," Genova wrote. "The second was a transfer of $175 million from that MF Global account in the U.S. to another MF Global account in London also designated for MF Global’s own funds."

A brokerage might put its own money into an account holding segregated customer funds, but it’s never supposed to touch the clients holdings. JPMorgan Chase sought written assurance MF Global had not done so, but Genova said it never received an executed document back.
Ironically, a CME spot audit of MF Global’s segregated accounts on Oct. 27 had found they had $116 million in excess funds as of the close of business of the 26th.

Edith O’Brien, MF Global’s Chicago-based assistant treasurer when the company went bankrupt, may be able to shed some light in that she was in charge of directing money movements and ought to know how the $200 million in customer funds came to be pulled from the segregated accounts of those investing with — not in — her firm in the finals days, when it was trying desperately to prop itself up.

Rep. Michael Capuano (D-Mass.) noted she was unlikely to have ranked high enough in the organization to have had final say on such a transfer. But a revelation as to whether she got orders from above, and just how far above, will have to wait.

O’Brien earned a quick dismissal from the hearing after pleading the Fifth Amendment to an opening inquiry concerning the transfers and a subsequent question about reports her lawyers are working with federal investigators on a possible immunity deal. That left Ferber, MF Global Chief Financial Officer Henri Steenkamp and Christine Serwinski, its North America CFO, to zig and zag without her, and none too subtly.
"Ms. O’Brien’s declaration of the Fifth Amendment was more helpful to this committee than any of your answers," Rep. Stephen Lynch (D-Mass.) finally told them. "I don’t want you going off on any long explanation because, based on everything else that has come out of your mouths, all three of you, (no one) has owned up to the responsibility for any of the stuff that’s gone on here, even though you’re all three in major positions of responsibility."

Nearly a quarter of MF Global customer funds vanished, and no one knows how or where. This just doesn’t happen. Even when Bear Stearns went down, its clients funds were safe and secure.

"This is a central core responsibility," Lynch said. "This isn’t some esoteric rule. This isn’t some, you know, accounting error. … This goes to the very trust that your firm relies upon, and that the whole market relies upon in order to function. We have $1.6 billion of customer money take a walk, and none of you know anything about it.

"It is disgraceful not only for MF Global, but I think for anybody in your industry, because it is such a central principle in protecting clients, and hard-working farmers and grain operators, families that invested their savings," he said. "This industry is supposed to protect their interests, and they were robbed."

CME Group has said it continues to work closely with the Commodity Futures Trading Commission’s investigation to determine what went haywire "so appropriate recommendations can be made to enhance customer protections at the firm level." And Richard Repetto, who tracks exchanges as a principal with Sandler O’Neill and Partners, said in an interview that it’s possible the CME did everything it could have done.

Nonetheless, CME Group Chief Operating Officer Bryan Durkin earlier this year acknowledged the need to restore confidence in the system in a speech to the National Cattlemen’s Beef Association. "This has been an industry-wide blow to the heart of commodities markets — agricultural producers, processors and distributors — and that blow was dealt by the violations committed by MF Global," he said.

Daniel Roth, president and CEO of the Chicago-based National Futures Association, the U.S. futures industry’s self-regulatory organization, said in an interview after testifying before the House subcommittee that despite the many unknowns of the MF Global scandal, "We do know this: There’s a damn shortfall in customer segregated funds.

"We don’t know the full details of what went wrong at MF Global," Roth said. "But we know enough of what went wrong to try to figure out a smarter way (to enforce) compliance and that’s what we’re trying to do."
For now, MF Global is giving everyone the runaround, as if its leaders can’t quite solve the mystery either. But someone must know something, and though silence might seems golden, the missing $1.6 billion isn’t chump change. Someone inevitably will crack.

"Here’s what you should be concerned with … the people sitting next to you," Rep. Capuano told the MF Global executives, comparing their situation to that of the people who ran Enron. "Somebody is going to say something to the appropriate investigators, say this is the person who had final responsibility, and when that happens there are going to be problems for (some) individuals."