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Who Decided There Are No Crimes in MF Global Collapse?

2:33 pm in Uncategorized by masaccio

Jon Corzine didn’t ask where the money came from and didn’t do anything else about it.

The New York Post reports that there will be no criminal charges against Jon Corzine over the billion dollars of customer money used to keep MF Global afloat for a few extra days. The Post quotes “federal investigators” as saying there is no evidence of lawbreaking. Some of the evidence is detailed in the complaint filed by the CFTC recently, which you can read here.

The complaint says what happened to the money. It says that Edith O’Brien took the money out of customer accounts, knowing that this was unlawful. ¶ 62(d) For months, these federal investigators were saying that the big problem was foul-ups and mistakes in a mad rush in the back office. That is now inoperative.

The Complaint explains that Corzine knew that the firm was “undersegregated”, meaning it was using for its own business money belonging to customers that the law requires to be segregated. The Complaint says that on Thursday, October 27, 2011 Corzine and O’Brien received documents showing that the firm was undersegregated. ¶ 63(f)

Actually, the true customer segregated balances were even lower than reflected on the documents sent to Corzine and O’Brien, because $415 million in wire transfers from customer segregated accounts had not been properly recorded on Wednesday, which meant that MF Global’s customer segregated accounts, in fact, were under-segregated by more than $298 million. ¶63(f)

The complaint says that the firm filed false segregated funds reports with the CFTC on Friday, October 28, but it doesn’t say who signed off on the reports. Early in that day, Corzine told O’Brien to pay off $134 million in overdrafts to JPMorgan, MF Global’s lender. O’Brien made the payment by transferring money from customer accounts at JPMorgan to a proprietary account at JPMorgan, and then transferring the money from the proprietary account to pay JPMorgan. The Chief Risk Officer at JPMorgan told Corzine that this had happened, and asked for assurances that it was legal. O’Brien responded to an inquiry by Corzine by showing the second transaction. ¶64(k). Corzine didn’t ask where the money came from and didn’t do anything else about it. The Complaint says that:

Corzine also failed to halt multiple subsequent transfers of funds from customer segregated accounts that were made for proprietary purposes. Corzine failed to implement any controls or take any steps to ensure that customer segregated funds were not and would not be unlawfully used. ¶64q

And then there’s this:

Corzine knew on Friday morning that MF Global had transferred $175 million to MFGUK even though he thought MF Global had immediate access to only $82 million in proprietary cash. He further learned from JPM shortly before 2:00 p.m. ET on Friday that the funds were used to pay the overdraft referred to in paragraph 64 above and were in fact transferred from a customer segregated account.

I’m sure there is some reasonable explanation as to why responsible officials do not think any crime was committed. Perhaps I have misread the facts, or maybe whatever happened doesn’t constitute a crime, or something else. Somebody who knows should come forward and provide that explanation. It isn’t enough to send a couple of “federal investigators” out to leak this story.

Where is Preet Bharara, the US Attorney for the Southern District of New York?

Where is Eric Holder, the Attorney General?

Where are Gary Gensler and Bart Chilton, two CFTC commissioners?

If this isn’t a crime, then you need to say why and suggest statutory amendments. If you stay silent, people will just assume you are part of Wall Street corruption. Read the rest of this entry →

MF Global Was Just Following The Law Sort Of

6:52 am in Financial Fraud by masaccio

There has been a lot of loud outrage about MF Global, but the civil suit filed by the Commodity Futures Trading Commission drew the usual ho-hum from people who know the fix is in for rich Wall Streeters in an administration that took two years to fire this popgun. The big argument was that MF Global stole money from customer accounts, an allegation that seems to be confirmed by the CFTC’s Complaint. Among others, the Dealbook blog at the New York Times says that investigators concluded that “… porous risk controls at the firm, rather than fraud, allowed the customer money to disappear….” That’s not what the complaint says, though.

The complaint begins by explaining that brokers can treat customer money differently depending on whether the customer intends to trade on US commodities exchanges or foreign exchanges. For US exchanges, the broker has to have an amount of money in the account sufficient to pay off all customer balances. ¶23. If the customer intended to trade on foreign exchanges, the rules in effect at the time allowed the broker to use some of the customer’s money for its own purposes, and only required a portion of the money to be held in a segregated account. The broker was free to use the rest for its own purposes. ¶24

The amounts due customers changes during the day. A lot of customers borrow money from their broker to pay for their positions. As prices fluctuate during the day, some customers are obligated to post additional collateral, and others do not need as much, so their obligations decline. You need a good internal system to determine the precise amount of funds in segregated customer accounts that belong to the broker and the amount that belongs to the customers at any point in time. Brokers add their own money to the customer segregated account to insure that there are sufficient funds to meet their obligations to customers; these are called “excess segregated funds”. Brokers are free to use excess segregated funds as they see fit.

CFTC rules permit the broker to invest customer segregated funds in a variety of permitted investments. The proceeds belong to the broker. Among those permitted investments were a variety of repo, reverse repo and tri-party repo transactions between the broker and the segregated accounts. That exposed the customers to the risk that the broker couldn’t pay off on the repo transaction.

These lax rules are meant to make sure that every last cent of money can be put to the use of the broker to make more money. Some of these rules were tightened up in proceedings that began before the failure of MF Global.

The complaint says that Corzine was told early in his tenure at MF Global that the internal systems for calculating customer balances were not accurate. He did nothing to fix them. On October 25, 2011, Corzine and O’Brien were told that there was almost $300 million in excess segregated funds available. On October 26, O’Brien and her staff transferred over $500 million from the customer segregated accounts to the MF Global proprietary account, which she knew was illegal. NOte the use of the active voice. O’Brien knew that she was transferring more than the excess segregated funds, which is arguably legal. She did something similar the next day and the day after. The ultimate total of lost customer funds was over $1 billion.

The allegations against Corzine are less clear. He knew there were liquidity problems, and he knew MF Global was transferring money because it was still in business, but apparently the CFTC isn’t willing to allege that he knew what O’Brien was doing.

At approximately 9:00a.m. ET, [October 28] Corzine instructed O’Brien to transfer funds to pay for the overdrafts [due to JPMorgan]. Corzine told O’Brien that it was “the most important thing she can get done that day.” Corzine asked no questions to ascertain how O’Brien would find funds to pay for the overdrafts, notwithstanding his knowledge of the Firm’s extremely limited sources of cash. Nor did Corzine inquire of O’Brien how the Firm would fund its other needs for cash that day. ¶ 64h.

The complaint says that O’Brien knew what she was doing was a violation of the law. ¶ 64t.

As O’Brien explained to a colleague from MFGUK the next day on a recorded telephone line: “the only place I had the 175 million, ok, was in seg.” O’Brien also commented during this conversation that she “move[ s] money all time … from seg over to house and house over to the BD [broker-dealer] .. OK, that’s what we do all the time because we don’t have enough capital. .. ” ¶ 64i

The complaint says that JPMorgan knew this was customer money and knew that MF Global was failing, so it asked Corzine for a letter saying it was legal. Corzine couldn’t find anyone, including O’Brien, who would sign the letter. JPMorgan kept the money. Corzine did nothing to stop further transfers of customer money.

But apparently, the US Attorney for the Southern District of New York, Preet Bahara, and Attorney General Eric Holder can’t find a crime in this. Did the CFTC refer the matter to the Department of Justice for criminal prosecution? No member of the media asked. Do Bharara and Holder think using segregated customer funds for the benefit of a broker isn’t a federal criminal offense? Is that what the CFTC thinks? Do they think they can’t prove it happened? Is there some intent issue? What exactly do they think? We’ll never know.

John Dillinger would love this business. Read the rest of this entry →

Jury Finds MF Global Not Guilty

9:13 am in Failed government by masaccio

Department of Justice Lawyers on a Picnic, photo by CocteauBoy via Flickr

And by jury, I mean the candy ass prosecutors at the Department of Justice, who have made an in-house decision that it’s just too hard to indict anyone at MF Global, including friend of Barack Jon Corzine, for stealing billions of customer dollars. It’s just impossible that a friend of Eric Holder’s could be found to be criminally responsible for allowing a company to steal money from its customers to give to its bank, especially when the bank is the much-loved JPMorgan Chase. After all, the Department of Eric Holder is made up of peers of the MF Global crowd, so it’s just like a real trial.

These chicken-shits have been telling reporters from the beginning that there were really high hurdles to prosecution, as if this were some sort of Olympic event. They tell the reporters that “chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear”. The billions in losses were beyond human control, and nothing can be done, a phrasing which perfectly mirrors DOJ’s passivity in the face of one of the biggest heists in history.

The reporters, Azam Ahmed and Ben Protess of the Dealbook blog at the New York Times, add their own passivity: “But a lack of charges in the largest Wall Street blowup since 2008 is likely to fuel frustration with the government’s struggle to charge financial executives.”

These guys can’t tell the difference between frustration and anger, between irritation and hostility. Their repetition of talking points helps the Obama Administration fuel the sense of impotency among us mere citizens, a sense that nothing we can do makes a difference, and the certainty that the rich and connected do not face the same justice system as the operators of medical marijuana dispensaries and their pathetic clients.

But look over there, a bright shiny object: civil suits! The government won’t lift a finger to support investors whose money was stolen, so they get to spend vast quantities of their own money in the hope that some civil court staffed by George Bush from the ranks of the Federalist society will eventually, in some future decade, give them a few of their dollars back. Good luck with that.

This is one more confirmation of the findings of Fulmer and Knill:

…accused executives whose firms have contributed to political campaigns via a PAC are banned as an officer for three fewer years, serve probation for five fewer years, prison for six fewer years and are 75% less likely to be given both prison time and an officer ban (the most severe form of criminal and civil penalties)…

OpenSecrets provides the data:

MF Global’s employees gave generously to politicians at the federal level — and almost all of that campaign cash benefited Democrats once former New Jersey Gov. Jon Corzine became chief executive of the company.

According to research by the Center for Responsive Politics, MF Global employees have contributed $408,000 to federal candidates and political parties since 2007. That sum includes $38,000 in donations to President Barack Obama, who is the largest recipient of MF Global employee contributions.

It must be really distressing to the customers of MF Global to see that they are just more roadkill for Wall Street hyenas. They probably thought they were in the protected class because they had a few million dollars, but it turns out they were muppets.

Ain’t No Criminals on Wall Street

2:43 pm in Financial Fraud by masaccio

Flyover Country, photo by benjam1n

Two officers of Sentinel Management, a Chicago firm, were recently indicted in Chicago, Eric Bloom and Charles Mosley. The case was attributed to the phonyFinancial Fraud Enforcement Task Force, though the investigation was underway long before the alleged creation of that group. The case is typical of financial fraud enforcement today; there may be criminals in flyover country but ain’t no criminals on Wall Street.

Sentinel was in the business of investing idle funds held by investors and commodity brokers. Commodities brokers are required to segregate customer assets and are not allowed to use them for any purpose. Of course, that’s a crock, MF Global and now Peregrine Financial Group Inc. and who know how many more companies have stolen billions from their customers. Sentinel entered into agreements with a number of commodity brokers to hold and invest that money for customers in accordance with the CFTC’s rules applicable to commodity brokers.

Commodity brokers also have their own funds, house money, which they invest for their own benefit.

According to the indictment, Sentinel agreed to invest customer funds very conservatively, as required by the rules of the CFTC. It agreed to hold house money in pooled accounts that sought higher returns with higher risk. In both cases, Sentinel was paid a management fee. It sounds like a pretty good business model, but Bloom and Mosley wanted to increase the returns, presumably so they could collect larger management fees.

Beginning at least as early as 2004, they started buying low-quality collateralized debt obligations and other esoteric securities (CDOs) and financing the purchases with customer funds and lines of credit. The lines of credit were secured by a pooled group of collateral from all of the different funds managed by Sentinel, including those low-quality CDOs. The CDO market crashed in 2007, and Sentinel was forced into bankruptcy. About 70 clients lost more than $500 million.

And then, there’s this:

… Mosley received substantial personal benefits from Firm 1 and Firm 2 in the form of gifts, vacations, expensive tickets to sporting events, and parties.

Actually, that’s a weak description. The bankruptcy trustee for Sentinel, Frederick Grede, sued four individuals and three investment banks on grounds that sound exactly like the allegations concerning Firm 1 and Firm 2. The defendants moved to dismiss. The Court denied the bulk of the motion in a Memorandum Opinion and Order that gives a better account:

While at KBW, Defendants offered, and Mosleys [sic] accepted, tickets to professional sporting events and a Big 10 football game, expensive dinners, limousine rides, concert tickets, a trip to Florida including lodging, entertainment, limousine rides, and tickets to the Orange Bowl football game (in a luxury sky box), trips to strip clubs (lap dances included), and an expenses-paid trip to New York (hotel included). [After two of the brokers] moved to Cohen, the “gifts” continued, including more tickets to professional sporting events, expensive dinners, limousine rides, the purchase of $600 in Girl Scout Cookies from Mosley’s daughter, and an expenses-paid golf outing in Philadelphia. The complaint is also rife with offers of more event tickets, trips, and the use of vacation homes.

The Trustee identified three firms and four individuals in separate complaints containing similar allegations. The Trustee says that the bribes far exceeded the norms of the brokerage business in the “extent of the debauchery involved in many of the events.”

The Trustee alleges that the individuals knew or should have known all about the business of Sentinel, and knew that the securities they were dumping violated the promises made by Sentinel to its customers.

He also alleges among other things that the defendants lied about the quality of the CDOs, failed to provide copies of the offering materials, told Mosley that the securities were rated when they weren’t, and claimed that their firms would make a market in the CDOs, meaning that the firms would buy back the CDOs, when they knew that they couldn’t.

Two of the sued brokers joined Cohen and Company Securities in 2006, the same year Christopher Ricciardi joined Cohen. Ricciardi saw himself as the Grandfather of CDOs. The Wall Street Journal says he “helped turn Merrill into the Wal-Mart of the CDO industry”. At Cohen and Company, he formed 25 CDOs valued at more than $25 billion. It took a lot of selling to move that stuff in 2006-7, given the fear in the markets.

Other than the Trustee’s lawsuits, there is no evidence of any regulatory or enforcement activity directed at any of the Wall Streeters. We have many examples showing that lying and bribing people to buy crappy securities isn’t a problem. For example, JPMorgan Chase bribed officials in connection with the interest rate swaps that bankrupted Jefferson County, and paid off other brokers not to bid on the swaps.

Maybe prosecutors like Preet Bharara and the SEC/CFTC people just don’t believe their good neighbors on Wall Street acted with the requisite level of intent. It’s a parallel to the Bernie Madoff case, where despite years of hectoring from a whistleblower, the agencies and the prosecutors just wouldn’t investigate, because after all, he’s really respectable and he’s a big market maker on the NASDAQ, and was Chairman of the National Association of Securities Dealers.

Or, maybe it’s that everybody does it, so it’s just fine. Sort of like everybody manipulates LIBOR, so nobody gets indicted.

Or maybe the only prosecutors with backbones are in the heartland. Too bad they aren’t Co-Chairs of the Financial Fraud Enforcement Task Force instead of Eric Schneiderman. Maybe there would at least be a credible investigation.