Will the DOJ Investigate if JP Morgan Used LCH.Clearnet As a Front to Tank MF Global and Take Customer Money?

EB's picture

Submitted by EconomicPolicyJournal.com

It looks like Eric Holder's dogs at the Department of Justice are doing the CME Group a favor by investigating their largest derivatives swaps competitor, LCH.Clearnet, under Federal antitrust provisions.  But are they also going after the large banks, and JP Morgan in particular, in roundabout fashion?  And just where does the omnipresent MF global connection fit in?  From Reuters today:

LCH.Clearnet, the largest clearinghouse in the $400 trillion interest rate derivatives market and also a credit derivatives clearing service, is owned by its members including banks such as JPMorgan Chase, Goldman Sachs and Deutsche Bank. A spokeswoman for the firm declined to comment. 

The Justice Department is concerned that a small group of the world's largest banks can use their ownership and influence over key market infrastructure including clearinghouses, trading platforms and data services to impede competition. 

Justice Department spokeswoman Alisa Finelli declined to comment on specific details of the probe, or the firms involved. But she did outline three areas the DOJ is focused on.

"The Antitrust Division is investigating the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries," she said.

The Role of LCH.Clearnet


As followers of the MF Global saga may recall, it was LCH (among others) who delivered crushing margin calls on MF Global during its final week, $211 million of which in cash and securities was ponied up to LCH alone.  However, it was the final $310 million call that sent its UK affiliate into Special Administration (similar to US bankruptcy), since it was also on the hook for collateral calls on these trades.  From Trustee Giddens' June 6, 2012 report:


On many occasions, we've thrown out the fact that LCH is owned and operated by the large banks, including JP Morgan, but the DOJ investigation is one of the few media generating stories that highlights this fact.  The LCH bank syndicate also participates in revenue streams from its multi-trillion dollar SwapClear platform, as we noted here.  Finally, based on court transcripts, JP Morgan seems to have exerted influence over the bankruptcy structure and content of the first day motions.  


Lies Before the Bankruptcy Court


As Daniel Collins writes for Futures Mag (disclosure: quoting our own work):

[T]he original sin in the MF Global debacle is how the firm was allowed to be split — the futures commission merchant/broker dealer (FCM/BD) MF Global Inc. (MFGI) into a SIPC liquidation and the parent MF Global Holdings Ltd. (MFGH) into a Chapter 11 proceeding — with a shortfall in customer segregated accounts. 

It has been pointed out that this was aided by an attorney for MFGH telling a whopper to Bankruptcy Judge Martin Glenn at the initial hearing on Nov. 1.  Attorney Kenneth Ziman of Skadden Arps when asked about press reports of a shortfall told the judge, “I think, to the best knowledge of management, there are no shortfalls, Your Honor. All funds are accounted for, and I’m talking about the broker-dealer. That’s to the best knowledge. All funds can be accounted for.

No one seemed to jump in to correct the record even though attorneys for the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) attended that hearing and Laurie Ferber, General Counsel for MF Global, acknowledged the day before that indeed there was a shortfall in customer funds. 

The Judge asked about this specifically so there is a chance he may have acted differently if he was given an honest answer. 

Several interested parties have stated that the appropriate action — one perhaps more likely to have occurred had the facts of the situation been clearly presented — was for a judge to place the entire entity in receivershipA receiver would have more power to pursue leads and claw back money and perhaps more importantly, a company that operated as one entity would not have been able to divorce itself from its responsibility of having to segregate customer funds and the priority of those customers’ property over general creditors would have been maintained. That is what happened in this case with MFGH and its main creditor JP Morgan attempted to jump in front of customers.


Just Who Was the Ultimate Counterparty to the Corzine Trade?


While the broker unit Trustee and prior press reports have cast LCH's role in the repo-to-maturity trades as that of simple clearing agent, a February 2012 London court filing by MF Global UK's Special Administrator, KPMG, gives a tantalizing clue that it might just have been LCH affiliates themselves who were the ultimate counterparties (thus, the trades would have been prop, not flow, as has been assumed [1]).  From the filing:

The Repo to Maturity claim (“RTM Claim”) 

81 From September 2010 onwards, the Company entered into a number of RTM transactions with MFG Inc involving European sovereign bonds.  Under the RTMs, MFG Inc would repo the bonds to the Company [MF Global UK] and the Company would enter into a corresponding repo of the same bonds with a market counterparty of which the most significant were London Clearing House entities MFG Inc has since submitted a creditor claim for $519,044,608 (£321,569,053) against the Company in connection with the RTM transactions. 

It would appear that "entities" denotes affiliation because, had KPMG meant the various hedge funds and banks that conduct clearing business through LCH, it would be more appropriate to call them "members" or "customers."


Soros Profits, Customers Lose


Further, it's instructive to recall that LCH, with permission from KPMG, liquidated the $14.7 billion gross portfolio at reportedly below market prices to George Soros and others.  From the Giddens' report:

After the SIPA proceeding commenced, information came to light that LCH had liquidated the positions in European sovereign debt that MFGUK maintained from MFGI. In a November 29, 2011 press release, LCH reported selling “MF Global’s fixed income positions, which had a combined nominal value of [Euro] 14.7 billion . . . with no recourse to the default fund.” According to some press reports, LCH sold the RTM positions at a discount from current market value to George Soros and others. Because these transactions took place at the LCH, the Trustee has not had full transparency into the these transactions or the amounts that might be owing to MFGI. The Trustee continues to pursue a full accounting from the MFGUK Joint Special Administrators on this and other issues.

Yet we know from KPMG reports that the margin that the US broker entity paid, and which ended up at LCH, was used to cover the loss on the firesale of the portfolio, per UK laws that are similar to US bankruptcy laws.


Now that the Department of Justice is involved, we would urge them to consider if LCH.Clearnet, acting under the sizable influence of JP Morgan, was simply a front for a scheme to defraud MF Global customers of their money in the final (and, lest we forget, "chaotic") days of the firm.


* * *


[1] We received a note shortly after original publication by Francine McKenna of ReTheAuditors, who said she had contacted several sources who advised that LCH.Clearnet does not engage in proprietary trading.  If that is indeed the case, then KPMG flubbed the disclosure and the ultimate RTM counterparties remain at large.  LCH.Clearnet did not respond to McKenna's inquiry regarding ultimate counterparties.


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BeetleBailey's picture


Eric Hold His Sac is as crooked as a dawg's hind leg. His DOJ makes Gonzales' tenure look brilliant - and that's saying something when that turd outshines you.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

"The Justice Department is concerned that a small group of the world's largest banks can use their ownership and influence over key market infrastructure including clearinghouses, trading platforms and data services to impede competition."

Yes, and the towers were taken down by cave dwellers in Western Pakistan!



shovelhead's picture

The mailroom guy probably just dropped the envelope with the money in it and it got kicked under a desk somewhere...

I'm sure it will turn up someday. We'll keep looking and keep you posted.

Bansters-in-my- feces's picture

U.S.A. HAS A Department of Justice...???
Ha ahhhhaaa haaa haa haaaaa laugh my ass off too funny.
Maybe they should use it somtime on bankers....
Or are do they have immunity...????
Ps....Free Jon Corzine...!!!

realitybiter's picture

Diddling Our Junk


Holder is the Master Diddler

Atlantis Consigliore's picture

I smell blood in the water  (MS)   lets go  f****k something...


Whos Next?   so we can go out and f***k someone.............wanna front run shorting it like the big guns on fraud street.......


any candidates?....ahead of regulatory intervention, in the mkts.....

insanelysane's picture

JPM to MFG:  We can't accept the money you just sent us without signatures stating it is legit.

MFG to JPM:  We can't sign that.

JPM to MFG:  Can you sign this revise one?  because we can't accept the money with out it.

MFG to JPM:  <crickets>

JPM to MFG:  On second thought, we'll just keep the money, thanks.

riley martini's picture

 No ! Retorical question anyone who con read knows the DOJ is corrupt all prosecutions are political. The best hope for the American people is to change the ownership of the federal reserve to the citizen with direct elections of board members and governors .

Joebloinvestor's picture

What do you expect from a country whose sole product is "financial services"?

They are not going to shoot holes in the bottom of that row boat.

You want the truth?, remember you are dealing with BANKERS.

myshadow's picture

'What do you expect from a country whose sole product is "financial services"?'


absolutely true and worth saying again. 42% of GDP, that though is horrifying.

Dingleberry's picture

Use to be "all roads lead to Rome"

Nowadays, it's "all roads lead to London"

I am now officially crazy, as I must agree with Larouche in his view of the London financial cabal. It truly runs the world, and is utterly without laws, morals or restraint.

Bansters-in-my- feces's picture

All hail the "Red Shield"... Here,here.

rosiescenario's picture

The Brits have the patina of 'fair play'...'being cricket'...etc. Just bear in mind their history of using opium to enslave China.....

tony bonn's picture

excellent reporting.....i still believe that jpm plundered mfg for margin calls on its disasterous whale trades and that the gold cartel wanted mf global out of the way killing two birds with one stone....

please keep us updated on the mf global story.

sabra1's picture

hey Holder! my mexican buds are still waiting for our shipment of tommy guns! if not delivered by friday, we're all gonna eat 10 buritos each, and fart in your general direction! 

slewie the pi-rat's picture

thxz for all this

buncha stinkin fukin liars playing boilerplate "gotcha" in NY & theCity

banks and companies like GE which were being "built" before and especially after LTCM and the ensuing repeal of glass/steagall are now possibly monoplistic?

hut! hut! hut!

dickens write this? 


Lost Wages's picture

Maybe they will have to throw Corzine under the bus to hide the truth about bigger fish like Dimon.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

"Or" throw him under an "SUV", as he has a penchant for wrecking those san seatbelt.  Look out Lucifer one more on the way!:)



Debt-Is-Not-Money's picture



"Maybe they will have to throw Corzine under the bus to hide the truth about bigger fish like Dimon."

Corzine should not travel on the roads as "they" will get him this time!

riley martini's picture

 Corzine should not take any invitations to deer hunting in Minnisota complete with antler camoflage.

Benjamin Glutton's picture

of course JPMugger intentionally assassinated MFGlobal...this fact was obvious very early.


MFG on the other hand was naive at best for playing high stakes poker with a psychopathic predator who could see every card in their hand.

Cognitive Dissonance's picture

But....but...but it was Corzine the exalted genius who was running MF Global. He wouldn't have taken such a sucker's bet unless.....unless.....

Wait, what did I just say?

EB's picture

Hey, CD, good to see you around these parts.

It's time Roger Lowenstein writes part II to the financial panic saga: "When genius failed [to get off the ground]: The fall and plummet of Jon Corzine."

I'd say by next year, we could have a trilogy plus three prequels. 

Who wants to make the hats?

GeneMarchbanks's picture

Great post. McKenna was on Keiser speaking about much of this but this latest bit.


Chief KnocAHoma's picture

That headline too funny! Will Eric Holder investigate MF Global, Corzine, JPM and Dimon?

My side hurts from laughing so hard at the thought of it! 

Look Holder is too busy lieing about Fast and Furious, and fighting with Arizona over just who should be running that state (him or the citizens of Arizona) to do anything to anyone that might embarass Obama.


Dburn's picture

When we need poker sites taken down, we know who to call. It's handy to have the DOJ help those in the Club get rid of pesky competitors.

11b40's picture

They are pretty good at busting female clebretities, too.  Just ask Martha Stewart....the ultimate inside trading machine.  Ha Ha.

rosiescenario's picture

....you mean, Fast and Curious....

Benjamin Glutton's picture

have you considered that both teams may appreciate the distraction?

bank guy in Brussels's picture

You can count on the American Injustice Department to cover up for nearly every major crime committed by the politically connected ...

Oh yes, there may be a few prosecutions of small fry, or of people un-connected to the main oligarchs, or imposition of some light penalties ...

In order to help US corporate media continue to sell the hoax that there is 'justice' somewhere in that USA, that keeps over 2.3 million prisoners in a slave labour gulag

janchup's picture

Nothing but the stark ugly truth.

NotApplicable's picture

Wait... JPM has prop flow? UNPOSSIBLE!!!!