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The Untold Story: Does Knowledge of the Illegal Asset Transfer Go Beyond Edith O'Brien?

Thursday, December 13, 2012

If participants are comfortable a "real" investigation is underway, will additional witnesses provide testimony regarding criminal behavior during MF Global's final days?

By Mark Melin

It is documented that JP Morgan had significantly questioned the illegal asset transfer with MF Global executives, but what happened inside MF Global?

What has been documented is Edith O'Brien made an asset transfer. It would be almost unheard of for Ms O'Brien to make such a transfer of her own volition. When the transfer request was made, Ms. O'Brien received authorization from supervisors, which occurred in less than one minute. But who authorized this transaction on MF Global's side? This is yet bo be revealed. Speculation is the approval source of this asset transfer could also point directly to MF Global executives because the authorization is most likely to have come from the New York executive suite and may have involved Laurie Ferber, MF Global's chief legal counsel, at some level. You will recall Ms. Ferber was the one given the direct order by regulators not to transfer customer assets in the first place. Evidence suggests she was deeply involved in events surrounding the asset transfer on several levels, including what occurred on November 1, 2011.

The week of the asset transfer in question, Chicago regulatory staff was essentially cleared out of the office, leaving Ms. O'Brien to work directly with control persons at MF Global executive offices in New York. Ms. Ferber, in fact, has been at the center of the illegal asset transfer, having been given documented instructions from regulators not to transfer assets and being the apparent funnel for communication between MF Global and JP Morgan regarding the illegal asset transfer. Ms Ferber has been acknowledged among the brightest and most influential in the derivatives legal community, characterized by this writer as a "regulatory shark." One would find it highly unlikely - and a violation of regulatory protocol - that a known illegal asset transfer from customer segregated accounts would not involve the MF Global legal department.

Regardless of who approved the asset transfer, it is also unlikely that Ms. O'Brien was the only person in the Chicago office with knowledge of circumstances surrounding the illegal behavior. Speculation is the asset transfer involved at least four MF Global employees and at least six JP Morgan employees. The asset transfer is documented to have included Mr. Corzine and Ms. Ferber, who were actively engaged with JP Morgan regarding the issue. The asset transfer is documented to involve Ms. O'Brien, but speculation is at least one if not three people inside MF Global had knowledge of the situation. Speculation is at least one person in the Chicago office, likely the MF Global Treasury Department, has knowledge of the situation and can corroborate Ms. O'Brien's testimony.

"...an MF Global employee gave three computer discs to a CFTC employee which contained information about MFGI's customer segregated accounts."

Congressional Report on MF Global

Again, the Congressional Report on MF Global provides evidence that MF Global employees were providing the CFTC information regarding illegal asset transfers:

(Page 63): On October 28, 2011 at 5:30 p.m. an MF Global employee gave three computer discs to a CFTC employee which contained information about MFGI's customer segregated accounts. The CFTC did not comprehensively review the disks when it received them. A subsequent review of the discs by the CFTC determined that the data revealed that there was a deficiency in customer funds in segregated accounts as of Wednesday, October 26, 2011.

Sources say numerous potential witnesses exist inside MF Global, but they could be skeptical regarding the validity of the formal investigation and the lenient treatment of the known suspects. It is speculated that if Ms. O'Brien is allowed to testify, she can identify specific points at which Mr. Corzine was made aware of the illegal nature of the asset transfers, but her exact testimony remains unknown as she is seeking immunity.

"What is needed -- at the very least to help restore some level of investor confidence -- is testimony from O'Brien and all third party banks involved with MF Global's customer segregated accounts," noted Mr. Schmeltz, considered a legal specialist in the subject matter.

Opinion: How to Convict Jon Corzine and Laurie Ferber

By Mark Melin

Informed speculation is career investigators involved in the MF Global case are aware of high probability methods to convict Jon Corzine and Laurie Ferber. At a minimum, significant evidence exists in the public domain alone to unleash a full and unfettered investigation which should lead to an indictment.

  1. Speculation is that JP Morgan can provide evidence that Mr. Corzine and Ms. Ferber were aware of the improper nature of the asset transfer. JP Morgan was the bank custodian charged with protecting segregated funds and can be instrumental in a criminal court case. This could include documenting warnings, clearly understood by industry professionals, given to MF Global at several levels and through several channels.

  2. The falsified segregation report could involve a significant penalty for those involved, including hard prison time where membership in a Wall Street gang doesn't provide the same protection. Those involved in the report falsification can provide testimony that leads to Mr. Corzine and Ms. Ferber is one obvious conclusion being drawn. At minimum those involved in the falsified report were likely aware of the criminal events taking place around them and may corroborate the testimony of Edith O'Brien.

  3. What occurred on November 1, 2011 appears as an easy case, say sources. MF Global provided instruction to their legal representative relative to false information provided in court. Those orders only came from one place, and this can be documented. Ms. Ferber, MF Global's chief legal counsel with a reputation as a regulatory shark, hired the legal representative and was first questioned April 6, 2011 - well after officials investigatory sources were quoted in the New York Times as saying the case was cold. If that questioning was on point, it should have identified key inaccuracies. Particularly, questioning should have focused on warnings received and knowledge of the illegal nature of the asset transfer.

  4. Investigators should identify anyone and everyone that can provide documentation relative to destruction of evidence and illuminate those who had criminal knowledge in the MF Global case. Provide these people as much protection as possible, including complete immunity. A criminal force has been at work covering up a crime scene in broad daylight. There are many within MF Global and JP Morgan that can identify where the fraud was and where evidence exists. Some of this evidence could have been destroyed, which would provide further leverage for investigators. Allow anyone willing to talk, who wasn't involved in the manipulative plan, the ability to provide testimony against the criminal behavior. In other words, pawns should not take the punishment of kings.

  5. "Official sources" need to send a clear message to industry participants that a real investigation is underway. The investigation was suspect from the start, when back office pawns were hard questioned five times while MF Global executives were never questioned, and incredulous as it may seem, executives continued to operate the company, manage evidence and transfer assets after the bankruptcy. Announcing this investigation might take the form of providing the New York Times a note that "the case is no longer cold. It appears the individuals involved in ordering the asset transfer were aware of the criminal nature. Cases are never cold until the primary suspects are interviewed. That deception came from the political side of the organization. Career investigators are all over this one... Or perhaps they could provide the scoop to the Wall Street Journal that "funds didn't vaporize. That was just a joke. Funds were illegally transferred and those involved in the transfer appear to be aware. We've got this one."

New Information Released in Congressional Report

By Mark Melin

On November 15, 2012, Congressional Republicans released a Congressional report on MF Global that contained significant new information.  This includes:

Disclosures to Investors

  • Privately, senior executives at MF Global were concerned about the company's liquidity in the period before MF Global's collapse. On October 6, 2011, Chief Financial Officer Henri Steenkamp informed CEO Jon Corzine that one of MF Global's affiliates was again undergoing significant liquidity stress after having experienced a couple of "better days" in the first week of October:

    • "There remains a significant stress on liquidity-this week, after a couple of better days since quarter-end [on September 30, 2011], the stresses have returned"  (84)
    • "Of most concern, is the sustained levels of stress and the lack of signs this will reduce soon.  It makes drawdowns of the revolver [revolving credit facility] more challenging, as we cannot guarantee certainty of immediate repayment.  The revolver is not meant as a source of permanent liquidity" (84)
  • But in public statements made to investors and other stakeholders MF Global painted an optimistic picture of the company's liquidity:
    • On an October 25, 2011 earnings call, Steenkamp and Corzine discussed MF Global's overall financial condition for the fiscal quarter ended September 30.  Steenkamp described the ways in which MF Global had "improved [its] capital and liquidity positions" that quarter and expressed his optimism that despite "uncertain and volatile times, we feel good about [MF Global's] capital structure and liquidity positions."  Corzine backed Steenkamp's claim by stating that MF Global's actions had put the firm in a "much, much stronger liquidity position" as of September 30.  (84-85)

    Corzine's Role in Collapse of MF Global

  • In November 2010 Corzine changed the reporting structure for Chief Risk Officer (CRO) so that the position would report to Chief Operating Officer (COO) instead of Chief Executive Officer. This was done after then CRO Michael Roseman lobbied to limit MF Global's European RTM investments to $4 billion. (76)

  • Replacement CRO Michael Stockman warned in July 2011 of the risks of the European RTM trades. Stockman advised that "Europe could get worse before it gets better," and requested that Corzine enter into hedges to offset the risk the RTM trades. Corzine rejected this proposal. (39)

  • Twice in 2011 Corzine stated that if MF Global's board of directors didn't stand behind his decisions then he would leave the company:
    • June 2011: When the board asked to meet without management present, Corzine said, outside the board's presence, that if the board didn't think he was the "right guy," maybe they "should find someone else [to run the company]." (42)
    • August 2011: At the board's August 11 meeting, Corzine stated - this time in the presence of directors - that the board should consider replacing him as CEO if it no longer had confidence in his ability to run the company. (43)
  • Shortly after MF Global began its European RTM trades, the company's independent auditor began urging the firm to enhance its disclosures of the European RTMs. (42-3)

  • In December 2010 Corzine fought with MF Global's independent auditor over the disclosure of the RTM investments. According to staff of MF Global's independent auditor Corzine felt "ambushed" and "bushwhacked" by the independent auditor's assertion that MF Global would have to report changes in the value of a derivative associated with the European RTM investments. (43)

  • MF Global board member Martin Glynn warned incoming Chief Risk Officer Michael Stockman in 2011 that Stockman would "be under tremendous pressure...to approve higher risk limits in non core areas to support earnings weaknesses elsewhere." (38)
  • In summer 2011 Corzine directed CFO Steenkamp to inquire about using customer funds to support MF Global's investments. (47)

  • In August 2011 Corzine actively lobbied the SEC and FINRA to not require a capital charge on MF Global's European RTM investments. When it became apparent that MF Global would have to take a capital charge MF Global tried to bargain with the SEC and FINRA about the size of the charge. (50-51)

  • When Corzine arrived at MF Global in March 2010 he pushed aggressively for the company to become a primary dealer. On his first day as CEO Corzine told reporters that the primary designation was a "major part of his strategy to increase [company] revenue." (28)
  • SEC

  • In an October 30, 2011, email exchange between SEC's Director of the Division of Trading and Markets, Robert Cook, and SEC Chairman Mary Schapiro, the two acknowledged that there were three conference calls between securities and commodities regulators scheduled for 10 a.m.  Chairman Schapiro commented, "Ahhhh, coordination in action!"  To which Cook responded, "If we were really coordinated, we wouldn't have 3 calls at 10am!!"  Chairman Schapiro responded, "Exactly!!" (80)

  • A senior SEC staffer commenting on MF Global collapse stated that the company "used the FCM as an ATM." (79)

  • In an October 30, 2011 e-mail from SEC Chairman Mary Schapiro to Robert Cook, Director of SEC Division of Trading and Markets related CFTC Chairman Gensler's view that MF Global had not been fort[h]coming with the CFTC and that, as a result, "they face enforcement." (68)
  • As early as June 2011 MF Global's "losses and changing business model" had caused "concerns" at the SEC and the SEC held a meeting with the on June 14, 2011 with the firm to discuss these matters.  While the securities SROs were invited to participate, the CFTC and commodities SROs were not invited. (46)

  • In a November 1, 2011 e-mail to Chairman Schapiro and others, the director of the SEC's Division of Trading and Markets related that an SEC staff member had heard from MF Global's General Counsel, Laurie Ferber, that the CFTC had pressured MF Global to make the transfer.   Chairman Schapiro responded, "Without telling us?  That is unacceptable."  (71)

  • CFTC

  • On October 28, 2011 at 5:30 p.m. an MF Global employee gave three computer discs to a CFTC employee which contained information about MFGI's customer segregated accounts. The CFTC did not comprehensively review the disks when it received them. A subsequent review of the discs by the CFTC determined that the data revealed that there was a deficiency in customer funds in segregated accounts as of Wednesday, October 26, 2011. (63)

  • 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." (68)

  • On Sunday, October 30, 2011 CFTC Chairman Gensler was concerned about the adequacy of CFTC's customer protection rules in particular those rules protecting customers trading on foreign exchanges. Chairman Gensler wrote to a colleague that he had spent too much of the weekend focused on gaps in part thirty customer funds.   He stated MF Global gave him "more reasons...to consider proposals to modify part 30 rules," which governed the safekeeping of funds deposited by customers for trading abroad. (67)

  • A CFTC senior staffer informed the O&I Subcommittee that, in hindsight, he wished that FINRA and the SEC had discussed the capital charge with the CFTC sooner. Had they done so, the staffer stated that the CFTC would have learned why FINRA was worried about the valuation of the European bonds for regulatory capital purposes, would have learned more about the nature of RTMs, and would have known in advance that MFGI was going to restate its capital. (79)

  • Risk Management at MF Global

  • When a staff member of MF Global's Regulatory Capital Group attempted to get answers from Assistant Treasurer Edith O'Brien about the apparent shortfall in customer funds he found Ms. O'Brien "aloof" and "non-responsive" on October 29, 2011. (64-65)

  • NY Fed

  • MF Global aggressively positioned to become a primarily dealer with New York Fed. Officials at the New York Fed had found MF Global's Dan-era efforts to secure primary dealer designation "very aggressive (borderline obnoxious)" (28)

  • In 2009 the actions of MF Global's leadership and the concerns about the company's financial health led one New York Fed employee to suggest that his colleagues focus on "well known and respected firms" for primary dealer designation, rather than "spending so much time with MF Global, a firm that clearly brings a high degree of risk to the New York Fed."  (93)

  • Democrats Release Comments
    The Congressional Report was considered generally balanced by many industry participants, if light on pointing a criminal finger.  However, report authors note the primary mission of the report was to point to civil violations, not criminal. 

    Following the Republican backed version of events, Democrats followed suit by issuing their own report. They didn't disagree with the core facts or substance as much as they did with mechanics and it's the report's narrow focus on Jon Corzine, an apparent Republican target.

    This article was published in Opalesque Futures Intelligence.
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