A University of Washington law professor who has been following the MF Global closer than most expresses dismay at the apparent lack of rigorous investigation in the case.
By Mark Melin
For those familiar with the inside circumstances surrounding the eighth largest bankruptcy in history, a criminal event obfuscated by claims of "chaos and confusion," the facts that matter have always been clear:
MF Global used customer segregated funds to to fund business opereations. Evidence suggests certain executives in the firm, including Jon Corzine, were aware the asset transfers were improper. Mr. Corzine is the former Senator for and Governor of New Jersey, a former trader and president at an investment bank until he was removed from that position. He testified under oath he was unaware of the funds transfer.
Prior to what is documented to be an illegal asset transfer, MF Global executives were instructed by regulators not to transfer assets from customer segregated accounts. The next day assets were transferred out of segregated accounts in a documented violation of the Commodity Exchange Act (Rule 1.20). This activity was hidden from regulators on the scene because reports relied upon to monitor asset transfers contained false and misleading information, which was submitted by MF Global employees without backup.
"I think the false report could be a critical issue," said Anita Krug, who teaches securities law at the University of Washington in Seattle.
Sources on Capitol Hill close to the investigation say that when investigators interviewed Matthew Hughey, Controller in MF Global's Financial Regulatory Group, about the falisified reports, he claimed there were no illegal issues. This stands in contrast to Bankruptcy Trustee Giddens report on the matter, which noted suspicion.
Attorney, managed futures fund manager and Commodity Customer Collation (CCC) co-founder James Koutoulas notes that changes to segregated funds reports must include back up. Mr. Koutoulas and the CCC are scheduled to appear in court asking permission to subpoena MF Global executives.
When told investigators were relying on statements from Mr. Hughey that there was no criminal behavior in the falsification of reports, a question was flatly fired back: "How can investigators base their decision regarding guilt on a conversation from one individual who was involved?" There was no response to this question.
A CFTC official told MF Global "... the lack of data and supporting documentation was driving adverse inferences." CFTC's Chief Counsel wrote to colleagues, "This is NOT good."
Congressional Report on MF Global
The Congressional Report on MF Global notes concern by career CFTC career employees regarding the falsified statements:
(Page 68): On October 30, 2011 the CFTC insisted that MF Global submit information on the segregated statement by 3:00 p.m. and MF did not produce the required documentation on time. The CFTC's Chief Counsel for Clearing and Risk e-mailed MF Global's offices of Treasury and General Counsel stating that the lack of data and supporting documentation was driving adverse inferences. Separately, the CFTC's Chief Counsel wrote to colleagues, "This is NOT good."
"(The falsified report) strikes me as questionable," Professor Krug commented. "Presumably a firm must have backup for what it is reporting to regulators, but, if the report was false, the backup couldn't have been there."
"These are really strange facts," Ms. Krug said. In fraud cases there is rarely a smoking gun-such as a statement to the effect that 'I am going to commit fraud by falsifying the segregation report.' So, fraud cases often come down to circumstantial evidence, including facts showing a high probability that a person had a particular state of mind or was willfully ignorant." Those thoughts are echoed by both legal professionals and industry participants. "It's possible the report was prepared in good faith, and the misreporting was unintentional, but the circumstances are troubling."
MF Global Reports to the Court "All Funds Are Accounted For..."After funds were illegally transferred from customer segregated accounts, MF Global filed for bankruptcy. At this court pleading an MF Global legal representative, said to be operating on instructions MF Global legal department, told the court that "all funds were accounted for ..." . While the exact wordplay is an attempt to confuse the issue, the core principal remains.
"You can't lie to the court," Professor Krug said. "That is clearly a problem."
"You can't lie to the court," Professor Krug said. "That is clearly a problem." Professor Krug has been following the case from a distance, noting the "unusual" legal issues.
"What I find horribly disturbing is what happened on November 1, 2011 (when MF Global testified to the court all funds were accounted for). Without suggesting anything about whether MF Global's statement was or was not made in good faith, I think it is troubling that attorneys for regulators were apparently in the room but didn't pipe up."
Curiosity centers on why MF Global would engage in such a risky legal maneuver as obvious as submitting false information to the court? Could it be because had facts been known a fraud investigation and lockdown of the company might ensue? Without a fraud investigation a resulting beneficial bankruptcy process ensued and MF Global executives remained in control of the company, transferring assets and working with evidence.
"(MF Global's) statement that all funds were accounted for arguably influenced how the bankruptcy was structured," Professor Krug said. "It may have meant no immediate appointment of a trustee or examiner and putting MF Global straight into chapter 11 rather than into a different type of proceeding. However, it is difficult to say how an alternative proceeding might have affected customer rights and priority, given MF Global's legal structure."
Like many informed of the documented facts surrounding MF Global, Professor Krug is curious about Edith O'Brien.
Sources on Capitol Hill close the investigation have indicated that providing Ms. O'Brien immunity and mounting a legal challenge against Mr. Corzine may result in a "he-said, she said" legal battle that wouldn't result in a conviction.
"I would not think the DOJ could dismiss the argument as a 'he said, she said' situation unless they have heard from O'Brien."
"I would not think the DOJ could dismiss the argument as a 'he said, she said' situation unless they have heard from O'Brien," Professor Krug said. "Giving O'Brien immunity, which apparently is the only way she is going to speak, would enhance the credibility of her statements. That's the beauty of immunity--it helps mitigate concerns about adverse incentives, alleviating a little of the 'he said, she said' aspect of the argument.
Forces preventing Ms. O'Brien from obtaining immunity has always been a hotly discussed topic among those with deep knowledge of the situation. Ms. O'Brien's lawyer is said to be close friends with US Attorney General Eric Holder. It is unknown who is paying for Ms. O'Brien's legal fees.
"I don't understand not pursuing O'Brien testimony if it is the case that the DOJ wants to get Corzine," Professor Krug said. "If you really want Corzine that badly, you figure out a way to give O'Brien immunity and let her speak."
"Case is Cold" Claims Before Interviewing MF Global Executives
Those observing criminal behavior damaging the integrity of the US financial system have always noted with curiosity "official sources" quoted in major media. Throughout the investigation, curious reports from officials associated affiliated with the investigation appeared in the New York Times claiming the "case was cold" before interviews with MF Global executives took place. After this media reports quoted official sources saying that funds simply "vaporized" and repeated the "case is cold" claims. Much of the documented public evidence suggesting criminal wrongdoing has not been discussed in the mainstream media.
"It strikes me as strange that news reports claimed the case was cold before investigators had interviewed all relevant parties," Professor Krug said.
The "case is cold" claim was one of many issues that gave reason to question the validity of the investigation. It wasn't until six months after the illegal asset transfer occurred that investigators questioned MF Global executives, including Mr. Corzine. "I would think investigators typically would question the "control persons" early on, rather than wait until toward the end of their investigation," Professor Krug speculated.
"If the crimes committed in this case are allowed to go unpunished, the invariable result will be a permanent diminution in investor confidence in the safety of the U.S. financial system," said Mr. Haar. "This will only serve to reinforce the widespread perception of pervasive cronyism and corruption in Washington D.C."
This is MF Global and these are some of the issues surrounding a criminal event that has damaged the integrity of the regulated derivatives industry more than any other in history.