The Financial Times reported that many industry professionals were resigned to the idea that there would be no criminal charges in the matter of massive misuse of so-called segregated customer funds by MF Global. According to the article, MF Global's Trustee, James Giddens, is trying to sell the story that sloppy bookkeeping in chaotic final hours prior to the firm's bankruptcy was the problem. You see, according to Giddens, it was unintentional. Former MF Global customers are not buying that story. This is the computer age, and any adequate control system can more than keep up. Moreover, MF Global's officers attested that the firm's internal controls were adequate. At the very minimum it seems they should face a Sarbanes-Oxley lawsuit, and it looks as if there's even more to it than that.
Behavior that Giddens is trying to pass off as sloppy bookkeeping is fraud's identical twin and a serious violation of U.S. rules. Early estimates of $600 million of impermissibly transferred customer money later climbed to $1.2 billion.
President Obama's Campaign Appears to Embrace Jon Corzine, a Top Bundler
Up until now, President Obama's campaign has given the appearance of an endorsement of Jon Corzine, the former CEO of MF Global, a former New Jersey governor, a former New Jersey U.S. senator and major campaign contribution bundler for President Obama. At least this is the interpretation of many who viewed the list (as of April 30, 2012) of President Obama's money raisers through the first quarter of 2012. With no clarification or footnote, Jon Corzine is shown as having raised more than $500 thousand in the roster of 2012 Volunteer Fundraisers. The re-election campaign has not disclosed the exact number. I requested further information from the campaign and received this response:
"Corzine's money was returned but the money he raised a year ago was not and thus it qualifies him to be on the bundler list. He is not part of the campaign any longer, this [Obama for America and Obama Victory Fund 2012 Volunteer Fundraisers] list is cumulative."
That may be. The campaign responded it told the press this in January, and the press has forgotten. Really? It told the press in January and now the campaign is blaming the press for its interpretation of a list released in April titled "2012 Volunteer Fundraisers." If the campaign wants to eliminate ambiguity, it can put it's assertion that Corzine "is not a part of the campaign any longer" on the list in writing for all to see. But that would make it clear it is distancing itself from Corzine. It seems to me that President Obama's campaign is trying to have it both ways: deniability as it gives the appearance of support for Jon Corzine. Both President Obama and Vice President Biden have publicly praised Corzine during Corzine's previous campaigns:
Vice President Biden Praising Jon Corzine
As a mere freshman senator, Jon Corzine became the chairman of the Democratic Senatorial Campaign Committee (DSCC) in 2004. Senator Debbie Stabenow (D. Mich.) was the vice-chairman of the DSCC while Corzine was chairman. The DSCC raised money for the campaign of a hopeful who would become Senator Barack Obama (D., IL).
Jon Corzine, Chair of 2004 DSCC, Senator Debbie Stabenow, Vice Chair
Farmers' money (along with other customers' money) was impermissibly transferred from MF Global. Senator Stabenow is the Senate Agriculture Committee Chairwoman who lobbed soft-ball questions at Corzine during hearings. If you don't look for fraud, you don't find it. She kept asking "where is the money?" but that is what the investigation is supposed to uncover. Corzine claimed he didn't know. If Senator Stabenow wanted to ask a sensible question to pin down Corzine and get to the bottom of matters, it would have gone something like this: "To the best of your recollection, to which financial institutions was money of any kind transferred from MF Global the week before the bankruptcy? Can't remember? Then please name one."
For example, it later came out that Corzine knew of a $175 million transfer to JPMorgan and still later it was revealed that the source of funds was "segregated" customer accounts. This gives the appearance that the Agricultural Committee hearing was cheesy theater instead of a genuine attempt to hold Corzine accountable under Sarbanes-Oxley rules and the rules of the entities that regulated MF Global.
[After Stabenow's shameful performance, she can be thankful that her Republican opponent this election cycle is Pete Hoekstra, who approved a bizarre campaign ad that helped tank his lower poll numbers even further. Are these two the best people Michigan can find to run for that senate seat?]
Yet another Democratic Member of Congress asked tough questions in the matter of MF Global and was accused by other Democratic Members of not being a "good Democrat." But the accusers have a warped definition. Their definition of a so-called good Democrat is at odds with the definition of a good American.
A Classic Situation for Fraud
Terrence Duffy, executive chairman of the CME Group, testified to Congress on December 13, 2011 that a draft report showing a more than $900 million shortfall in required segregation was withheld from regulators. MF Global employees later claimed this was due to an "accounting error," but auditors found no such so-called accounting error. Later, MF Global admitted the shortfall was real and that so-called segregated customer funds had been impermissibly transferred. Lawyers notified Duffy by phone and email that a senior MF Global employee indicated Corzine was aware of "loans" of money from segregated account to MF Global's European affiliate and that at all times the people doing the transfers were under the authority of MF Global management. Duffy's testimony on these matters begins at 17:24 on this C-Span clip:
An Apparent Indication of Intent
Former MF Global Chief Executive Officer Jon Corzine has told lawmakers he "never intended" to break any rules and did not give instructions to misuse customer funds. But Corzine was in charge, rules were thoroughly broken, regulators claim MF Global employees lied to them, and an estimated $1.2 billion in customers' money was impermissibly transferred. Duffy testified that his lawyers informed him that MF Global employees making transfers were under the authority of MF Global management. Moreover, former customers now question Corzine's testimony that he "never intended" to break the rules.
Eagle-eyed customers spotted information in MF Global's crisis plan, the so-called "break the glass document," that suggests intent. This has given wronged customers renewed hope that criminal charges will be filed.
Beginning in January 2011, MF Global worked on a crisis plan, a document called "Stress Scenario Analysis -- Downgrade Potential Impact on MF Global." MF Global worried that it wouldn't have enough cash and liquid assets of its own to meet calls for collateral (margin calls), among other things, in the event of a ratings downgrade. The document poses a critical question:
"How quickly do we want to send cash back to clients, what is the message if we do not send immediately..." (page 11)
Well, now. Isn't that something? In the days before MF Global's collapse, that's exactly what happened. Customers' money that MF global didn't immediately send back was impermissibly transferred from so-called segregated accounts to MF Global's accounts and then on to MF Global's creditors. The following is a review of events the week of the bankruptcy from an earlier post.
Wednesday, Oct 26, and Thursday, Oct 27, 2011: "Substantial Deficit" in Customer Accounts
Christine Serwinski, MF Global's chief financial officer for North America, testified in a March 28, 2012 congressional hearing that she was told on October 27 of a "substantial deficit" in customers' accounts for October 26, the previous day. She was on vacation when she was informed of the shortfall and claims she was told the shortfall was only in the "cushion" that MF Global had in customer accounts. She claimed the deficit didn't violate rules -- which is implausible given other events of that week (see MF Global's check kiting below). Obviously there was a huge problem at MF Global and this would have gone to the top of the house, to CEO Jon Corzine, in a firm that had any sort of reasonable corporate governance. Serwinski further testified that on October 30, she was told of a nearly $1 billion deficit in customer funds. Regulators weren't told of deficits until October 30. The firm collapsed into bankruptcy on October 31. ("MF Global exec cites early worry on risk to funds," AP, March 27, 2012.)
Thursday October 27: MF Global Breaks Custom of Wire Transfers and Writes Rubber Checks Instead
Jon Corzine claims he didn't know about improper transfers of customer funds and of shortfalls in customer accounts until October 30, yet on Thursday, October 27, four days before the bankruptcy and again on Friday, October 28, three days before its bankruptcy, dozens of MF Global customers asked for wire transfers when they closed accounts, and they didn't get them. Instead, MF Global wrote paper checks and sent the checks via snail mail. The checks bounced, since customers received them after MF Global declared bankruptcy on Monday, October 31. ("Clients Raise Questions About MF Global Checks," NY Times Dealbook, April 1, 2012, by Azam Ahmed and Ben Protess, and "MF Global and the Rubber Check," by Matthew Goldstein, Reuters, November 5, 2011.)
October 28: Edith O'Brien writes of Corzine's "Direct Instructions" to transfer $200 million
By now every officer of MF Global should have been on red alert that MF Global was short of cash and was at risk of using customer funds to meet its daily needs, and this is prohibited.
On the morning of Oct. 28, three days before MF Global's bankruptcy, JPMorgan contacted MF Global about an overdraft in London. A Congressional memo circulated March 23, 2012, quoted an email from Vinay Mahajan, MF Global's global treasurer. Vinay wrote JPMorgan was "holding up vital business in the U.S." and called for funding "A.S.A.P." Bloomberg News reported that on October 28, Edith O'Brien, an assistant treasurer for New York-based MF Global, wrote an email saying that a $200 million transfer of funds was "Per JC's direct instructions." It turns out that part of that money was customer money, and the transfer was impermissible. ("MF Global's Corzine Ordered Funds Moved to JPMorgan, Memo Says," by Phil Mattingly and Silla Brush, Bloomberg News, March 23, 2012.)
October 28's Smoking Gun: JPMorgan Doesn't Buy Corzine's Story
Jon Corzine testified before the Senate Agriculture Committee in December: "I never gave any instructions to misuse customer money, never intended to give any instructions or authority to misuse customer funds, and I find it very hard to understand how anyone could misconstrue what I've said as a way to misuse customer money." But that isn't the standard to which Corzine is held. If investigators can show he knew of the risk that customer money might be included in the $200 million transfer he ordered, Corzine faces potential legal liability. ("MF Global's Corzine May be Liable if Customer Risk Known," By Linda Sandler and Phil Mattingly, Bloomberg News, Mar 25, 2012.)
Money went from a U.S. customer account to a U.S. MF Global account, and then it was transferred to a UK account. Even those who wish to claim Corzine slipped through a dubious loophole in the UK are out of luck. The original impermissible transfer of money occurred from a U.S. customer account to a U.S. based MF Global account. In my opinion, Corzine knew or should have known there was a strong probability that customer funds would be transferred. As it happens, they were.
On October 28, JPMorgan didn't buy Corzine's story, either. Having been a risk manager myself, I believe Barry Zubrow, JPMorgan's chief risk officer, did exactly the right thing. He called Jon Corzine to get him to verify that the funds belonged to MF Global and that none of the money was customer money. Zubrow, an outsider, was well aware of the possibility that customer funds had been transferred. It's implausible that Corzine wasn't aware of the potential impermissible transfer of customer funds when he gave the authority to make the transfer. By doing its job, JPMorgan removed Corzine's ability to credibly deny knowledge of the potential problem.
October 28: JPMorgan Asked for Written Assurances and Didn't Get Them
According to the New York Times, Jon S. Corzine, the former chief executive of MF Global, was told during the brokerage firm's final day of business that a crucial transfer of $175 million came from the firm's own money, not from a customer account, according to an internal email. The email, sent by an executive in MF Global's Chicago office, showed that the company had transferred $175 million to replenish an overdrawn account at JPMorgan Chase in London. The transfer, the email said, was a 'House Wire,' meaning that it came from the firm's own money. The email, sent at 2:20 p.m. on Oct. 28 to Mr. Corzine and two of his assistants in New York, says the transfer came from a 'nonseg' account, industry speak for a noncustomer account. ("E-Mail to Corzine Said Transfer Was Not Customer Money," by Ben Protess and Asam Ahmed, NY Times Dealbook, March 25, 2012)
The problem with the NY Times report is that the email never said that the original source of funds wasn't from a customer account, and a 'house wire' just means an internal transfer of funds. The email only verifies that the money was eventually transferred from a 'nonseg' account. It doesn't rule out that money was transferred from a customer account to an MF Global account, which as it happens -- and the NY Times later reports within the same story -- it was.
The New York Times bolloxed up the title of this story, and even within the story it acknowledges: "But it is unclear whether someone at the commodities brokerage firm told Mr. Corzine the origins of the money during a phone call or in person."
To be clear, the email in no way exonerates Jon Corzine and it in no way proves that he was unaware that the original source of funds was from a customer account and that the transfer included customer money. The email only suggests that the eventual transfer to the UK was from a U.S.-based MF Global account. But MF Global was short of funds, and the money that seemingly magically appeared in its 'nonseg' account was first transferred from a customer account.
According to his December Congressional testimony, Jon Corzine said he spoke with Ms. O'Brien, who confirmed that the transfer was proper. "I had explicit statements that we were using proper funds, both orally and in writing, to the best of my knowledge." But "proper funds," could just mean funds from a 'nonseg' account that gave the appearance of being proper. Corzine knew or should have known that MF Global's U.S. account only had funds because customer money from a U.S. account had been transferred into it. Ms. O'Brien has asked for, but not yet been granted, immunity. Last week she invoked her Fifth Amendment rights at a Congressional hearing.
As for JPMorgan, it asked Jon Corzine for a signed letter stating that the transfer was legitimate. He reportedly responded: "Send me the letter and we'll have our people look at it." It was disingenuous of Jon Corzine to pass JPMorgan's letter to Edith O'Brien to sign given that it asked for a sign-off that all "past, present and future" transfers complied with the law. Ms. O'Brien would have been asked to take responsibility for all transfers without having the authority over them. Jon Corzine had the broad authority to sign the letter, but by passing it on, he effectively stalled.
JPMorgan sent additional versions of this letter in response to MF Global's requests for revisions, but JPMorgan never received a signed letter back.
On October 31, 2011, MF Global Admitted to Impermissible Transfers
MF Global's officers admitted to federal regulators that before the collapse the firm diverted cash from customers' accounts that were supposed to be segregated:
MF Global Holdings LTD... violated requirements that it keep clients' collateral separate from its own accounts... Craig Donohue, CME Group's chief executive officer, said on a conference call with analysts today that MF Global isn't in compliance with the rules of the exchange and the Commodity Futures Trading Commission.
("MF Global Probe May Involve Hundreds of Millions in Funds," Bloomberg News, November 1, 2011, by Silia Brush and Matthew Leising.)
Yet on November 1, Kenneth Ziman, a lawyer for MF Global, relayed information from MF Global to U.S. Bankruptcy judge Martin Glenn in Manhattan: "To the best knowledge of management, there is no shortfall." If that sounded like a cover-up, it was:
According to a U.S. official, MF Global admitted to federal regulators early Monday [October 31, 2011] that money was missing from customer accounts. MF Global acknowledged a shortfall in a phone call amid mounting questions from regulators as they went through the firm's books.
("MF Global's Collapse Draws FBI Interest," by Devlin Barrett, Scott Patterson, and Mike Spector, Wall Street Journal, November 2, 2011.)
The initial bankruptcy estimate was a shortfall of around $600 million. As of Monday November 21, MF Global's liquidating trustee believed the shortfall may be as much as $1.2 billion and later estimates put the shortfall of customer money at $1.6 billion.
MF Global Debacle Damages a Key Global Market
Even if all of the money is eventually clawed back and recovered, this remains an impermissible act. Moreover, full recovery -- even if it is possible -- is not the same as restitution. People have been denied access to their money, and businesses and reputations have been tarnished.
The futures market is a globally connected market and it is a key mechanism for farmers, metals miners, and metals fabricators (among others) to hedge their risk. Confidence in the futures market has been shaken. No one knows if their money is safe, but what is more disturbing is the appearance of crony capitalism once again giving favored treatment, lax regulation, and absent oversight to a crony capitalist that abused all of these perks to blow up a large financial firm and damage a key global market.
So far, no one has been held accountable.
Endnote: Jane Wollman Rusoff interviewed me for Research Magazine's May cover story, "Finding the Culprits of the Crisis," about the deep monetary connections of Wall Street and Washington and the corrosive effect it has had on the economy and the Republic.