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Opalesque Futures Intelligence

The Untold Story: MF Global Smoking Gun is Intent and Prior Knowledge

Thursday, December 13, 2012

By Mark Melin

Mr. Corzine's public defense of his role in MF Global criminal behavior has centered on the fact that he did not intend to break the law.  Sources say all the evidence suggests that if Mr. Corzine asked Edith O'Brien to transfer those funds there was, indeed, intent, which is the key word

Prior to this incident sources say Mr. Corzine was well informed of the problems with dipping into that account that also held customer funds.  His own people had explained it to him.  Further, evidence suggests that Mr. Corzine and Ms. Ferber had been given significant warnings from JP Morgan and regulators prior to and just after the asset transfer.  This flys in the face of Corzine's whole defense, which has been that he "did not know where the money went," or he "never intended" to do anything illegal and he had received assurances. This can be proven otherwise.

The Illegal Asset Transfer

While the MF Global mystery has been painted in "chaos and confusion," this has been viewed as nothing more than an attempt to vaporize clarity. 

It is one asset transfer that is the focus of knowledgeable participants.  Essentially, MF Global sent an order to its banker, JP Morgan, to move funds from MF Global's customer 4 D segregated account at the bank to an unrelated account at JP Morgan.  The transfer was a violation of the Commodity Exchange Act in several locations, but specifically section Rule 1.20.  Evidence suggests MF Global executives were told of the illegal nature of this asset transfer.  On the record, JP Morgan had asked MF Global to sign a comfort letter on multiple occasions and confirmed that it had received verbal assurances. While this alone provides evidence the improper nature of the asset transfer was questioned and discussed between JP Morgan and MF Global, what other communication took place between the two firms?

"It is nearly impossible to believe that...  Corzine was not in nearly real-time communication with JP Morgan and the executives in his own treasury department..."

Vincent Schmeltz III, lawyer at Barnes and Thornberg and MF Global legal expert.
"It is nearly impossible to believe that, when MF Global was in the midst of a capital crisis due to a trading strategy on which Corzine had staked his entire professional reputation, Corzine was not in nearly real-time communication with JP Morgan and the executives in his own treasury department, like Edith O'Brien, who were trying to address the crisis," said Vincent (Trace) Schmeltz III, a lawyer with Barnes and Thornburg who has appeared in court, written briefs, and had a number of clients in MF Global legal work, including the CCC. 

Mr. Corzine Was Well Informed of the Consequences

When MF Global North American chief financial officer Christine Zerwinski testified in Congress that she would not have authorized the asset transfer in question, she highlighted what is documented as a legal violation.  Both Ms Zerwinski and MF Global's Chief Financial Officer, Henri Steenkamp, are said to have had documented meetings with Mr. Corzine before the asset transfer and outlined the illegality in utilizing customer segregated funds.  In fact, page 47 of the Congressional report documents the fact that Mr. Corzine ordered Mr. Steenkamp to develop a report on the issue.  Sources say after this report was delivered, Mr. Steenkamp walked Mr. Corzine through the issue in a step by step fashion.  These meetings can be documented through internal logs and calendars, if this evidence has not been destroyed.

Evidence Destroyed?

Sources indicate the potential for MF Global executives to clean the crime scene of critical evidence.  It is unknown to the public exactly what evidence is available.  But sources say documented warnings from JP Morgan to MF Global executives exist [http://www.reuters.com/article/2012/03/28/us-mfglobal-idUSBRE82R0YI20120328] at JP Morgan if they no longer exist at MF Global.  Further, the potential destruction of evidence is another area which could provide problems for those left to manage MF Global after the event took place.  After the MF Global bankruptcy, company executives were left to manage the firm with a relative free reign.  Back office compliance personal who remained to work at MF Global, however, were placed in silos, not allowed communication with one another while activities of MF Global executives were hidden from their purview. 

Does JP Morgan Have the Smoking Gun?

JP Morgan could be a critical component of in the MF Global caper. 
As the bank was an "authorized depository" for segregated accounts, they had legal obligations to handle asset transfers and clearly label the nature of such transfers.  In other words,  JP Morgan had a significant fiduciary responsibility regarding asset transfers.  Thus how they reacted during the historic week carries with it serious legal implications for the proper handling of asset transfers.

 (See related article:)

In order to initially open this "4 D" or "30.7" account, an FCM establishes a relationship with an authorized depositary such as a bank, and that bank hold customer funds, the FCM is required to obtain an acknowledgement letter from the bank clearly stating that the account in question is specifically designated to hold customer segregated funds.  This serves the purpose of highlighting to all involved the legal significance and sanctity of this account, in particular noting the account cannot be co-mingled with the FCM's own funds. Acknowledgement letters are required to be signed and documented, with original files safeguarded at the FCM. But the clear differentiation of account type doesn't end at this legal level.

The very accounts titles are required to have the title acknowledging the special customer segregation designation of the account.  Specific title lines must reflect that the account is either a 1.20 rule (4 D) segregated account or a 30.7 foreign secured amount account.  This documenting of account type and denoting of the customer segregation funds protection is also written into a legally binding acknowledgement letter between the bank and the FCM.

Thus how they reacted during the historic week carries with it serious legal implications for the proper handling of asset transfers.

According to the Trustee's report, by 11:00am ET Friday, October 28, MF Global had transferred enough funds to cover the overdraft in the UK.  But JP Morgan noticed that the transfer was tied to shifting $200 million from a customer-segregated account to an MF Global account in the US. In response, the New York bank determined that due to "the financial stress facing MF Global ... it would be prudent and appropriate to ask MF Global to confirm that these transfers had been made in compliance" with Commodity Futures Trading Commission rules governing customer accounts, according to Genova's testimony.

There are two levels to understand JP Morgan's reaction to the event: that which is in the public realm and that which is their internal compliance process and procedure. 

Public documentation indicates considerable communication took place between JP Morgan and MF Global executives regarding what was now identified as an illegal funds transfer.  What is documented is that JP Morgan requested MF Global sign a comfort letter on three separate occasions attesting the illegal asset transfer did not come from customer segregated funds.  This is an unusual request, one that might only occur a handful of times for an FCM - if ever.  It highlights the issue of the potential illegality of the funds transfer was the topic of significant conversation, and all involved likely aware of illegality, say sources. 

After communications at several levels with MF Global, which included Laurie Ferber and Jon Corzine, JP Morgan was given verbal assurances the fund transfers were appropriate.  It is unknown if JP Morgan was aware a regulator had ordered a halt to funds transfers the previous day.  However, informed speculation is that various channels throughout JP Morgan were aware of the situation - and had communicated this to MF Global on may levels, including informal backchannels.  At the time of the asset transfer, sources indicate JP Morgan was unaware that reports from MF Global to regulators were falsified, hiding the illegal asset transfer.

 



 
This article was published in Opalesque Futures Intelligence.
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