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Opalesque Futures Intelligence

The Untold Story

Thursday, July 25, 2013

By Mark Melin

On June 27 the Commodity Futures Trading Commission (CFTC) filed civil charges against MF Global's CEO Jon Corzine and assistant treasurer Edith O'Brien in what can only be considered an increasingly bizarre incident.

Citing a lack of appropriate supervision, the CFTC suit most importantly points to what knowledge, if any, Mr. Corzine and Ms. O'Brien had regarding asset questionable transfers that are documented to have come from customer segregated accounts.  If knowledge of illegal asset transfers can be proven and the case is criminally prosecuted the actions could be punishable by up to ten years in jail. Without re-iterating fine detailed work of NFA board member and Commodity Customer Coalition founder John Roe, the essential concept is pretty simple.

Mr. Corzine asked if the questionable fund transfers were "enough to be in compliance" and Corzine received a "no" answer.

The height of CFTC evidence against Mr. Corzine may center on a recorded phone call between Mr. Corzine and an un-named MF Global treasury employee.  To paraphrase, Mr. Corzine asked if the questionable fund transfers were "enough to be in compliance" and Corzine received a "no" answer.

In another recorded conversation, Mr. Corzine appeared to display knowledge of the asset transfers and their origin from customer accounts, according to published reports.   "We have a money management account at Chase, if my memory serves me," Mr. Corzine told the employee. "Yeah, it's the JP Morgan Trust account, but that's cash seg for clients -- it has nothing to do with greasing our wheels for Chase to move," the employee said, referring to the customer segregated funds.

In addition to recorded conversations making the case clear, there is documented evidence, both in the public domain and yet to be published, that show warnings were given regarding the questionable if not illegal nature of the asset transfers.

Later in Congressional testimony Mr. Corzine said he did not involve himself with asset transfers and claimed repeatedly not to know where the money went.  US Congressman Michael Grimm (R-NY), a former FBI Financial Fraud investigator, has called on the Department of Justice to charge Mr. Corzine with perjury.

Will criminal charges be filed against MF Global executives?

DoJ Charges Not Forthcoming According to Press Leaks

Throughout the investigation, curious press leaks occurred from those close to or directly involved in the DoJ investigation. As former Futures Magazine editor, Dan Collins notes just as the heat was turning up against Mr. Corzine leaks from investigative sources quickly claimed "There is no evidence of criminal wrong doing."

Leaks from those close to the DoJ investigation began occurring as early four months after the MF Global incident and appeared to serve the purpose of diminishing the public demand for an investigation.  National mainstream media reports seldom questioned the leakers despite documented criminal evidence to the contrary in the public realm.

"I find this anonymously sourced article to be one which lacks an appropriate level of professional skepticism," Hilary Till, a policy advisor at the Heartland Institute, said in a statement.  Editors at several national media outlets are documented to have withheld reporting damming information in the MF Global incident. "An informed observer would have preferred for (the article) to also have explored the credible evidence that Mr. Corzine perjured himself before multiple House and Senate Committees as evidenced by numerous recorded phone calls prior to MF Global's bankruptcy referenced in the civil complaint by the CFTC, and as summarized by Rep. Michael Grimm (R-N.Y.).  Of note is that Rep. Grimm is a former FBI agent who had been tasked with investigating financial crimes and a current member of the House Financial Services' Committee."

DoJ's criminal division did not respond when asked if an investigation would take place surrounding leaks in a purportedly highly confidential criminal case.

Congressman Grimm's call for DoJ perjury prosecution, as well as other troubling MF Global issues impacting the stability of markets and the US economy, has yet to be reported by certain mainstream media.  These include questionable manipulation of the SEC's Edgar database that appears not to be properly investigated and hid risk in MF Globlal's bond offering, according to public documentation.  Throughout the MF Global case documented information of a potentially criminal nature was in the public domain and admitted into the Congressional record; a CFTC commissioner called for an investigation into certain issues on national TV, yet no known investigation of the issues has occured and the major media remained mostly silent.  When the media fails to report interesting issues brought up by a former FBI Fraud Investigator turned Congressman and CFTC commissioners who consistently spoke out on lack of investigations and potentially criminal behavior damaging US markets, it weakens the brave efforts of well-meaning regulators, politicians and law enforcement officials.  Or is that the point?

What Is The Holdup at DoJ?

With leaks from official sources involved in the investigation claiming the "case was cold" as early as 4 months after the crime scene was established, one might wonder why, approaching three years after the incident occurred, DoJ has yet to close the case?  "All the relevant information is well known and documented," said one source with knowledge of the asset transfers, speculating the DoJ could simply let the statute of limitations expire in 2015 rather than issue a legal opinion that would require it to ignore key facts in the case.

"The CFTC was tired of waiting for DoJ to act," a high ranking regulatory official was quoted as saying.

"The CFTC was tired of waiting for DoJ to act," a well known Wall Street journalistic source told me, quoting a high level regulatory official in a remark that failed to make the published story.  (Both sources have independently confirmed these statements via e-mail but their identities will remain confidential.)

"In light of all of the other scandals in this administration, dropping charges against Mr. Corzine) does raise a question about tainted prosecutorial discretion for this former Democrat governor of New Jersey," said Michael Warder, Vice Chancellor of Pepperdine University.  "Attorney General Eric Holder adds to a growing list of, at the very least, politicized judgments."  Mr. Warder himself joins a list of three legal professors, one a former SEC enforcement attorney, to question the lack of DoJ prosecution and investigation.  As best can be determined, comments from these highly respected legal minds has yet to appear in any mainstream business publication or on any traditional US television network.

Corzine Responds

Mr. Corzine's attorney, Andrew Levander of Dechert LLP, called the lawsuit "unprecedented."
In regards to the "unprecedented" claim made by Mr. Corzine's attorney, author and Bloomberg View Columnist William Cohan points out in an article titled The Wall Street Spin Machine Mobilizes for Corzine the charges were not unprecedented.  In 1988 the CFTC charged former CME chairman Brian Monieson with failure to supervise.  It is unknown if Mr. Levander really meant to say charges had never been filed against the Wall Street political elite and thus were "unprecedented."  When asked to clarify his position Mr. Levander's office did not respond.

MF Global Legal Connections

In addition to retaining Dechert, while Mr. Corzine was CEO at MF Global the firm was a client of Covington and Burling prior to the October 31 bankruptcy.  Additionally Covington and Burling was appointed for involvement in insurance matters by the MF Global debtor's bankruptcy trustee, former FBI director Louis Freeh, on April 12, 2012. .

At Covington and Burling white collar defense lawyers included  US Attorney General Eric Holder and former DoJ criminal division head Lanny Breuer, but Mr. Corzine was not an individual client of the law firm.

After exiting DoJ Mr. Breuer returned to work at Covington and Burling where he embraced his role in white collar criminal defense, listing as a legal specialty navigating "corporate crisis" and "Congressional investigations." Following the financial crisis of 2008, questions were raised regarding Mr. Breuer's criminal division and its investigation of MF Global and Wall Street's political elite when important markets and the economy at large have been damaged. Members of Congress called for an independent prosecutor in the MF Global investigation.  Mr. Breuer was subject of journalistic reports that led to questioning a lack of Wall Street investigations at the DoJ.  This includes a PBS Frontline report where, answering critics, Mr. Breuer was quoted as saying concerns regarding the economic impact of prosecuting powerful banks played a hand in prosecution decisions and not simply pursuing justice.  Further, a CBS News / 60 Minutes piece revealed the DoJ failed to question several bank executives in the 2008 derivatives led stock market crash, including the Countrywide Financial chief fraud investigator said to have information on fraud at the firm.  Mr. Breuer resigned from the DoJ after appearing in the Frontline piece and was head of the DoJ criminal division during the MF Global investigation.

The timing of Mr. Breuer's resignation, already the longest serving head of the criminal division after four years, was not relevant to the Frontline piece airing, according to a source close Mr. Breuer.  "It is patently absurd to assume there was a connection between Mr. Breuer's resignation and the Frontline piece," said the source.  "Mr. Breuer had been preparing to leave DoJ for months and the timing was purely coincidental. It is common for top administrative officials to leave after one presidential term in the White House and a start of a second term."

The source close to Mr. Breuer speculated that it was the US Attorney's Office in the Northern District of Illinois (Chicago) who was in charge of investigating Mr. Corzine and not DoJ's criminal division, citing this article in Futures Magazine.   Although different sources close to the DoJ investigation had indicated it was the US Attorney's office in the Southern District of New York (New York City) that ran the investigation of Mr. Corzine and a separate source had indicated former US Attorney in Chicago Patrick Fitzgerald was "uncomfortable" with the DoJ investigation.

Defenders of Mr. Breuer say he was tough on corporate crime.  During his tenure at DoJ the agency recovered almost $2 billion in resolutions regarding interest rate manipulation of the London Interbank Offering Rate (LIBOR) with UK-based Barclays; millions in resolutions with Swiss-based UBS ; the $4 billion fine against UK-based British Petroleum; the most Medicare fraud "takedowns" in US history and the most extraditions from Mexico in a single year.  While the source cited the $1.25 billion fine paid by the UK-based bank HSBC for laundering drug money for cartels and Iran, critics have called this settlement weak in light of the fine represented a small portion of the bank's yearly profits and the damaging nature of the money laundering clients.  There are no documented criminal cases brought by DoJ against senior executives at powerful US financial institutions involved in the 2008 market collapse despite the significant negative societal impact.

The Confusing Case of Edith O'Brien

The CFTC charges brought up issues that are confusing for many inside observers of the case.  In particular, it appears as though MF Global assistant treasurer Edith O'Brien, who was interacting directly with Mr. Corzine on the asset transfers, appears to industry observers to have known the transfers were questionable if not clearly illegal before they were made.

"I don't want to take anyone down with me."

The CFTC suit notes that Ms. O'Brien failed to copy her colleagues on an email with details of one questionable asset transfer because "I don't want to take anyone down with me," she said on a recorded line.  If Mrs. O'Brien assumed the transfers had the potential to take people down, why did she execute what appears as a known illegal asset transfer?  Did she believe the case would not be investigated and she would not be subject to prosecution due to her affiliation with powerful Wall Street political players?

The Real Damage is to the US Financial System

The most significant crimes are those that damage public markets and the world economy.  It may be an old school thought, but the crimes that damage the economy should be investigated hardest.  Currently, however, we have a system in place where those who speak out in defense of markets – regulators, political leaders, law enforcement and journalists --  receive little support or are punished by those official entities entrusted with defending markets and providing a check and balance against powerful players abusing the system.

If one were to plot the demise of the economy, the concept of free markets and democracy, it might start by punishing those who stand in defense of justice and free markets.

Can the Magic of Hope and Change Happen?

While the political winds that have gripped this investigation from the start seem to favor the cover-up route, an optimist might consider that change has been occurring.  The wheels of justice can be slow but might just get it right in the long run. 
The CFTC's move to charge Mr. Corzine was relatively bold.  As a member of a small but powerful Wall Street elite who have operated without any checks and balances, Corzine is at least being logically questioned for the first time by a regulatory agency with a history of standing in defense of markets.  (Think about former CFTC Chairwoman Brooksley Born who bravely confronted the improper derivatives design and lost her job as a result; or former CFTC Chairman William Rainer who fought for logical derivatives regulation in the bruising Enron battle.)

If at trial the CFTC brings out evidence so loud and clear, and the political winds change relative to protecting powerful Wall Street actors ahead of critical markets, then we might see action.  Change doesn't happen overnight.  It was only a few years ago even debate  regarding Glass-Steagall was repressed in DC and certain media circles and now there could be a vote in Senate on the issue.  But perhaps a more significant milestone might be found in recent revelations from the DoJ's RMBS working group. The group is considering fighting sophisticated financial crimes with simple yet effective bank fraud laws against knowingly providing false information to a financial institution.  This is a crime for a reason.  The fact DoJ is looking to more aggressively enforce the law in areas that damage the US economic engine is a post-Lanny Breuer positive that caught the attention of Frontline producer Nick Verbitsky.

As Frontline demonstrates, the media can have a positive role at helping clean up a mess that has generally led to distrust of the system.  Hiding the problem and not reporting significant issues is not a method to engineer confidence, because most cover-ups are eventually discovered.

MF Global In Proper Perspective

The ultimate sin in the brokerage industry is to convert customer funds for the firm's own needs.  PFG's Russ Wasendorf Sr. and fraud at Peregrine Financial Group (PFG), discussed in the , last issue of OFI  illegally converted customer segregated funds for his own purposes and received a harsh 50 year prison sentence.  The week preceding MF Global's October 31, 2011 bankruptcy, the firm is documented to have converted customer funds for its own purpose of covering a house margin call.

Knowingly converting customer funds for the brokerage firm's needs and having a reasonable idea those funds would not come back to customers is clearly illegal, if that is what occurred.  The impact of this violation of the sanctity of the customer segregated funds concept resulted in spinning direct segregated account into the most significant crisis of confidence in derivative industry history.  Resulting changes in regulatory protections from MF Global and PFG requiring confirmation of bank balances, proposals for an insurance fund and a "C level" written sign off for large asset transfers, among other regulatory protections have, ironically, made the segregated account significantly more secure. Yet questions regarding the failure of DoJ to properly investigate and prosecute actions that have so damaged derivatives markets relied on for commodity price stability will likely continue.

"MF Global's unlawful use of customer funds harmed thousands of customers and violated fundamental customer protection laws on an unprecedented scale," said Steve Stanek, a research fellow at the Heartland Institute and managing editor of Budget and Tax News. "Edward Snowden, who recently leaked information on the massive spying being done against Americans by the National Security Agency, is looking for a place to give him asylum. I suggest he seek asylum on Wall Street, where the right business and political connections are enough to stop all criminal prosecutions."

This article was published in Opalesque Futures Intelligence.
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