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It’s Official: Wall Street Firms May Legally Steal From Their Customers

ilene's picture




 

It’s Official: Wall Street Firms May Legally Steal From Their Customers - Rationalizations to Follow 

Courtesy of Jesse's Cafe Americain

...and they may not have to pay them back, even when they are caught. The customers will be expected to 'take one for the team,' and for the good of the system. Confidence and all that. 

“This means they can take segregated funds and leverage them to kingdom come. It means nothing is safe.”

Andy Abraham

If you have a commodity account with Wall Street, they may gamble with your money, with your assets, the rule on segregated accounts be damned. If they lose the money you might be reimbursed, or not. The losses may have to be 'socialized' and haircuts received.

This is most likely a distortion of the principle known as 'rehypothecation' in which a broker can use customer positions and holdings as collateral pledged for a margin loan for the purpose of securing funding from a third party to service that loan. 

The principle at play here may be closer to a type of droit du seigneur, in which any assets you have posted at a futures brokerage may be used at will by the broker for their own purposes without regard to any customer obligations. It depends on the extent to which MF took customer assets and leveraged them.

In a way it is just making the unbalanced relationship between Wall Street and its customers official. 

It means that customers are bearing hidden counterparty risks on assets to which they thought they had a clear title, such as Treasuries, and foreign currencies, and warehouse receipts for precious metals.   

It means that brokers can go beyond the mere provision of funding for loss, and use customer accounts to fund their own leveraged speculation under exemptions duly granted by their 'regulators.'  

This sort of systemic abuse is typically exposed when there is a market dislocation. It is what finally exposed Madoff, for example, despite the many years that the regulators were turning a blind eye to his scheme.

This sort of arbitrary distribution of gains and losses occurs more frequently than you might imagine on Wall Street, at least from what I have seen and heard, and not just with commodity brokers. I have even heard of specially privileged customers who can make $100,000 in a few trading days without even having any knowledge of the markets in which they have 'traded.'

I stopped trading on the futures exchanges a few years ago when I experienced enough one-sided 'rule changes' to persuade myself at least that it was becoming an insiders' game with slim odds of success for the 'outsider.' Or perhaps I was just becoming aware of it had already become, or had always been.

Unfortunately it is hard to escape inefficiency in markets, because despite all that has happened, these fellows still set the prices for much of the world's food, energy, and basic materials, at least on the official exchanges.

The CFTC has been disgracefully negligent, and given to cronyism, but in the spirit of modern American management practice it may just hide behind a claim of incompetence. They granted some exemptions to influential insiders, and the markets proved that the exceptions were loopholes for fraudulent abuse of the public trust.

The Justice Department is investigating the case of MF Global for any violation of the laws. I suggest they pay special attention to the laws regarding 'fraudulent conveyance' in the posting of the customer assets as collateral with MF's creditors, even as the firm was paying its employees bonuses, knowing that it was insolvent.

Actual fraud typically involves a debtor who as part of an asset protection scheme donates his assets, usually to an "insider", and leaves himself nothing to pay his creditors. Constructive fraud does not relate to fraudulent intent, but rather to the underlying economics of the transaction, if it took place for less than reasonably equivalent value at a time when the debtor was in a distressed financial condition.

For example, where the debtor has simply been more generous than they should have or, in business transactions, the business should have ceased trading earlier to avoid giving certain business creditors an unfair preference (see generally, wrongful trading).

Obama should bring meaningful reforms to the regulatory agencies and the financial markets after the shocking abuses of the past twenty years. But I doubt he will bite the hand that feeds him. He will likely hide behind committees and a building of 'consensus' with the unabashed servants of the monied interests. It's in the nature of a credibility trap that reform will not come until the system finally seizes, and crashes, and there is an opportunity to hide their crimes in the rubble.

Forbes
MF Global May Have Used Customer Funds In The Losing $6.3 Billion Trade Without Informing Clients
By Robert Lenzner

After an intense day of investigation, I have just discovered that a CFTC rule (1.29) allowed Jon Corzine’s MF Global to use the margin and cash in customers heretofore segregated accounts to amass a risky $6.3 billion investment in European sovereign debt that backfired. Nor did Corzine have the obligation to inform any of these customers he was gambling with their money. Or that he was intending to keep all the profits for himself and his troubled firm. Nothing for the customers.

The language of Rule 1.29 allows “The investment of customer funds in instruments described in 1.29 shall not prevent the futures commission merchant (MF Global) or clearing organization so investing such funds and retaining as its own any increment or interest resulting therefrom.” Increment refers to any trading profits or gains.

The criminal division of the Justice Department in New York — as well as the SEC and the CFTC and members of Congress– are investigating whether any laws were violated and if so, whether any criminal charges can be brought. As of 3 pm today, there has been no sign of the missing $633 million. My sources believe it was probably grabbed by the institutions that made the margin calls on MF Global as the European bonds sank in value.

This shocking loophole, which is available to all commodity traders, whether giant ones like Goldman Sachs or members of commodity exchanges, means that huge risks are being taken with money that does not belong to the trading firms– without the customers having any idea of the danger they are in. As Andy Abraham, a futures trader in Israel put it to me today; “this means they can take segregated funds and leverage them to kingdom come. It means nothing is safe.”

This rule, which has been in effect since 1974, is shocking and highly irregular since it allows any futures dealer to use customers money for its own selfish purposes– and never inform its customers it is doing so. What’s even more unfair is that the dealer (MF Global) gets to keep all the income and the trading profits, if any from a transaction that uses other people’s money– not its own house capital. That is unless some prior arrangement about sharing profits was made privately beforehand with the client. None of the MF Global clients I’ve spoken to today had the foggiest notion about this arrangement– which at minimum is outrageously unfair to the rule that the customer comes first. All losses must be made up by the dealer, which in this case may be totally impossible..."

Read the rest here.

I wonder if they will even disclose the name of the firm that took the $600+ million in customer assets as collateral. 

That will speak volumes in itself.

Here is some additional information from Lenzner at Forbes: Some MF Global Customers Want Corzine "Led Away In Cuffs" 

My most well-informed source, who won’t identify himself tells me my original story was “partially correct in the usage of customer funds.” IE MF Global was allowed under Rule 1.29 of the CFTC, to use segregated customers accounts to invest in “high quality, liquid investments.”

He insists that, “The segregated funds rule prevents the firm from answering margin calls with Seg (segregated) funds for house bets. Lots of people in other trading firms are taking bets on when Corzine will be led away in cuffs.” My source also insists that Corzine was NOT allowed to use these funds for directional bets- and that “customer funds can only generate interest for MFG while they are held separately from house money.”

Lots of excuses will be made for what happened. The status quo has a huge vested interest in covering this up, for their personal benefit and 'the sake of the system.'

For example, the analogy in the above piece by Lenzner about customer banks deposits, and the actions of banks in lending them out to other people. Yes, and you are paid interest for that usage, and you know that they are doing it, and you know that their loan operations and deposits are (at least theoretically) regulated and insured by the government. 

But overall Lenzner is one of the best financial reporters, and he shows remarkable journalistic integrity. Most mainstream reporters won't even touch this one because they are afraid to say something that might involve the sacrosanct monied interests and TBTF. Simon Johnson was not waxing poetic when he said that there had been a financial coup d'etat.

Wall Street has a wonderful way of rationalizing their slimier behaviour. After all, when the tech bubble of fraudulent representations crashed, the financial news anchor said that 'no one had MADE people buy those stocks.' Its not Wall Street's fault that people are uninformed and gullible, right?

"There will always be apologists for the powerful and politically connected who commit crimes." 

Eliot Spitzer

My expectations for reform are remarkably low. I just hope that the customers get their money back, and more people become aware of what is going on. If anything is done about this except to make excuses for it, I will be pleasantly surprised to say the least. 

In the short term, I think the avoidance of the worst neighborhoods in the financial system is a likely reaction by investors. And those seem to be the forex, stock options, and futures markets, with a few of the slimier ETFs that are designed to lose as well. Such de facto boycotts have happened before and will happen again. What else can one do?

Wall Street is trying to organize a boycott of Mario Batali for remarks he made about #OWS and Wall Street.  I think they are showing what they fear the most - a boycott by their own retail customers. 

A credibility trap is not a pretty thing. It smothers goodness and justice with a dark cloak of complicity.  This will not be resolved quickly or easily.

 

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Fri, 11/11/2011 - 15:41 | 1870673 johnjb32
johnjb32's picture

The brazenness with which thefts are occurring now signals an all out looting frenzy shortly with the financiers grabbing everything they can without regard for either the law or morality. As I said in August and September, anyone playing in the markets now is an absolute fool, begging only for the reprieve of Darwinian deselection. -- Michael C. Ruppert

 

http://www.collapsenet.com/154.html

Fri, 11/11/2011 - 12:16 | 1869954 Forgiven
Forgiven's picture

 

 


THE REASON PEOPLE ARE SHOCKED:
********************************

Most Americans still don’t get it!

America has ALREADY been overthrown!

This country has been invaded and taken over by international bankers, who have corrupted every aspect of our government.

The US Federal Government is NO LONGER an American gov’t. It is an Enemy Force Of Occupation that has camouflaged its overthrow of the US Gov’t.

Their design was simple: subvert, subjugate, extract wealth, exterminate.

Essentially this is the largest POW Camp in the world and we are all prisoners and potential disrupters, hence the Dep’t Of Homeland Security (which is actually Homeland Gestapo) has labeled Americans who still think and act like this is the USA and “resist” the occupation as…….. “terrorists.”

Since we ARE technically POW’s, then the Law Of War and the Geneva Convention should apply, and the principles for ALL POW’S to observe is:

It is the Duty of all POW’s to RESIST our captors by every means possible.

To disrupt their designs and actions by any and all means.

To REFUSE to cooperate in any way.  (ie Your own taxes are used against you, yet you still pay them.  Sit aside and Witness the power of not buying frivolous shit).

To Refuse any/all special treatment.

To provide NO information expect name, rank, serial number (SS #)

To create as much difficulty as possible to cause the greatest use of personnel and assets
so as to reduce their capacity to wage warfare elsewhere on us.

Fri, 11/11/2011 - 12:14 | 1869939 Mary Wilbur
Mary Wilbur's picture

The missing $600million went to money heaven

Fri, 11/11/2011 - 10:54 | 1869644 NEOSERF
NEOSERF's picture

Vigilante justice bitchez!

Fri, 11/11/2011 - 10:20 | 1869557 Todd Horlbeck
Fri, 11/11/2011 - 10:03 | 1869510 Downtoolong
Downtoolong's picture

Looks like it’s time to rekindle some of those old AIG advertising slogans, with appropriate contemporary revisions of course:

“We Know Money” becomes “We NO Money”

“It’s Your Money” becomes “Your Money Is Now Our Money Honey”.

Fri, 11/11/2011 - 11:01 | 1869666 Stuck on Zero
Stuck on Zero's picture

Wheeeeeeee  no money!

Fri, 11/11/2011 - 09:45 | 1869471 zilverreiger
zilverreiger's picture

What does this mean for a "normal" Interactive brokers margin account?

Fri, 11/11/2011 - 09:01 | 1869395 michigan independant
michigan independant's picture

cut em down

http://www.youtube.com/watch?v=IStlBOX9F4o&feature=related

there time will come. Move your assets

Fri, 11/11/2011 - 20:16 | 1871298 srelf
srelf's picture

Can I be on your (God's) side, please?

Fri, 11/11/2011 - 08:36 | 1869365 TruthHunter
TruthHunter's picture

So it appears that CFTC

now stands for Customer? Fuck The Customer

Fri, 11/11/2011 - 06:57 | 1869266 DollarDive
DollarDive's picture

Great Article - 

 

HEADS Rule.

Fri, 11/11/2011 - 06:22 | 1869257 tliberty
tliberty's picture

Good article. I'd like to point out that reform is not possible. Sure, the State can create new laws and such, but at the end of the day this power structure creates incentives for beasts such as Wall Street to emerge.It won't go anywhere as long as a the State exists.

I once had a friend say that Wall Street owned the State. I agreed, with the caveat that the State made Wall Street possible in the first place.

www.golddeputy.com

 

Fri, 11/11/2011 - 06:20 | 1869256 tliberty
tliberty's picture

Good article. I'd like to point out that reform is not possible. Sure, the State can create new laws and such, but at the end of the day this power structure creates incentives for beasts such as Wall Street to emerge.It won't go anywhere as long as a the State exists.

I once had a friend say that Wall Street owned the State. I agreed, with the caveat that the State made Wall Street possible in the first place.

www.golddeputy.com

 

Fri, 11/11/2011 - 05:21 | 1869238 Cult of Criminality
Cult of Criminality's picture

Glad it is now official they (criminal banking cartels) have been stealing since civilization started.Wall street just extends their reach.

Love the Talking heads. Might as well play Psycho Killer

Cheers

 

Fri, 11/11/2011 - 02:56 | 1869165 Paul Bogdanich
Paul Bogdanich's picture

Stealing without fear of retribution became the law of the land January 20th 2009.  The political cover man for the bank heist was elected President and his Uncle Tom attorney general will make absolutely sure that the statute of limitations on the crimes expires before there are any meaningfull prosecutions.  Unless of course you are not white or a member of a protected ethnic minority.  They cause huge problems because after them the only way to restore the law is to break it and that always ends badly for everyone.  Especially for them but for everyone.  I hate them.  Their inflexable obstinancy is deserving of punishment.

Fri, 11/11/2011 - 12:18 | 1869964 Mary Wilbur
Mary Wilbur's picture

@Paul Bogdananich  Eventually there will be a major income tax strike. That might get there attention.

 

Fri, 11/11/2011 - 03:37 | 1869190 TheMerryPrankster
TheMerryPrankster's picture

actually the previous regime looted the treasury on their way out the door, remember TARP? The Troubled Asset Repurchase Program, that never repurchased anything but just gave away literally trillions of dollars courtesy of the treasury and ex goldman ceo Hank Paulson. He worked for bush the guy that did 2 wars off the books so that all the debt accrued for 8 years off budget.

I'm no supporter of the current regime by any means, the skinny black guy doing the bad sammy Davis impersonation is a corporate whore of the 1st degree, but give blame where it is due, so far Bush is making Obama look like a piker, then again there wasn't that much left to steal when Obama took office, so he was starting with a handicap. i'm sure if the corporations see fit to give him 4 more years he will do his best to steal as much for them as Bush did.

Fri, 11/11/2011 - 01:44 | 1869083 jack stephan
jack stephan's picture

It's official: Hollywood Babylon

The word of the day for me is liquidate, I trust me........better to make fast nickles than slow dimes or an empty promise of those mysterious dimes.  The taxes will be higher later anyway.

Fri, 11/11/2011 - 01:09 | 1869034 the grateful un...
the grateful unemployed's picture

you all know how the rule of pooled assets works, since the change to end certification of stock transactions back in the 90's? why are you all surprised about this?

Fri, 11/11/2011 - 00:55 | 1869005 stainlesssteelrat
stainlesssteelrat's picture

And Nero fiddled as Rome burned...

Replace Nero with any number of persons and here we are...

Very much enjoyed the Talking Heads, lots of truth in that reference.

“Things fall apart, it's scientific.” 
David Byrne

Fri, 11/11/2011 - 11:05 | 1869031 TruthInSunshine
TruthInSunshine's picture

The first major event giving Wall Street firms the ability to steal from their clients was the use of arbitration and forced mediation clauses, in the classic adhesion contract sense, which took away any right to a jury trial in a civil court, no matter how aggrieved or abused a client may have been.

To add insult to injury, the arbitration and mediation panels, established intra-industry, were and are heavily stacked with pro-Wall Street scumbags who actually are current or ex-employees of finance.

Be careful when making deals with the devil.

Of course, had it not been for such arbitration and binding mediation clauses, supplanting the right to a civil jury trial for tort and economic damages, many of the worst, habitual offenders on Wall Street would have been broken up long ago, as jury after jury (rightfully) heaped financial punishment on them in massive doses, in order to compensate genuine victims of their genuine criminality.

Attorneys, with all their baggage and warts, are still necessary, and jury trials even more so, because of precisely these types of situations.

Fri, 11/11/2011 - 00:24 | 1868939 Jim in MN
Jim in MN's picture

It means that customers are bearing hidden counterparty risks on assets to which they thought they had a clear title, such as Treasuries, and foreign currencies, and warehouse receipts for precious metals.  

Read this, then re-read it and then read it a few more times.

Get anything you might want to keep the hell away from NY and DC!!!

Fri, 11/11/2011 - 09:18 | 1869433 Cheyenne
Cheyenne's picture

The bold/ital part is true. As a lawyer, I've seen first-hand clients (not mine) go to their law firms with warehouse receipts for silver with MF Global, which in turn takes the position that the silver is unsegregated and part of the general assets of MFG.

Three guesses as to who's on the creditor committee. Hint: COMEX added this firm to its (short) list of silver warehouses in record time earlier this year.

Thu, 11/10/2011 - 23:59 | 1868876 GMadScientist
GMadScientist's picture

I blame that turtle-lookin' motherfucker, Phil Gramm and Bubba Clinton.

 

Thu, 11/10/2011 - 23:33 | 1868807 Shizzmoney
Shizzmoney's picture

Reminds me of Jim Calhoun was asked by a reporter at a news conference (about his program getting suspended for recruiting violations) about his high salary ($12mil) when CT was on verge of being broke and making cuts.

Before the reporter could even ask the question we know he wanted to ask, Jim fired on the offensive:

"Naut a dime back."

http://www.youtube.com/watch?v=xokthY5zuPU

Thu, 11/10/2011 - 22:39 | 1868623 ??
??'s picture

Meanwhile happy days are here again according to this piece of work from Bloomberg (starts about 10 seconds into the vid) - vomit pail not included

http://www.bloomberg.com/video/79943344/

Thu, 11/10/2011 - 22:37 | 1868618 PulauHantu29
PulauHantu29's picture

"Why Steal less, when you can Steal more."

 

The Wall Street Credo

 

Fri, 11/11/2011 - 03:43 | 1869193 TheMerryPrankster
TheMerryPrankster's picture

StealMore, I think that was the original name for the Maidenlane pool of mortgage backed securities that were so stinky the Fed bought them and buried them next to Jimmy Hoffa.

Thu, 11/10/2011 - 22:36 | 1868617 mendigo
mendigo's picture

Somehow the money will be recovered because if those losses remain TPTB will be forced to make inconvenient changes. who would leave their money with those dirtbags now that their nature has been revealed.

Thu, 11/10/2011 - 22:31 | 1868607 jimmyjames
jimmyjames's picture

Did MF do anything different with clients funds than what all the TBTF banks are doing with taxpayers bailout money?

Speculating in the Commodity markets and driving prices higher-leveraging prices against the taxpayers with their own tax dollars and when they win-taxpayers get none-but if they lose (which the will eventually) taxpayers will bail them out again-

Thu, 11/10/2011 - 22:15 | 1868589 fizz
fizz's picture

Everybody better watch out for Penson to go next.

Fri, 11/11/2011 - 15:07 | 1870588 Cthonic
Cthonic's picture

Thanks for the heads up.  At the rate I'm closing brokerage accounts, I'll need to find a new day job soon.

http://www.securitiestechnologymonitor.com/news/penson-faces-flurry-laws...

Fri, 11/11/2011 - 01:06 | 1869028 The Fonz...befo...
The Fonz...before shark jump's picture

Penson is scum....

Thu, 11/10/2011 - 22:13 | 1868583 blunderdog
blunderdog's picture

Well one thing I've known for years: if you're smoking crack with some guys, and you give them some money to go somewhere and buy more crack, there's always a chance you won't get back either.

Fri, 11/11/2011 - 11:27 | 1869765 RichardENixon
RichardENixon's picture

I have found that the same holds true for Mad Dog fortified wine.

Thu, 11/10/2011 - 21:45 | 1868519 MrBinkeyWhat
MrBinkeyWhat's picture

Hey WB7, who claims art is not dangerous? "We got no Disco."

Thu, 11/10/2011 - 21:48 | 1868527 Freddie
Freddie's picture

Hope & Change.  Corzine is Obama's boy.

Thu, 11/10/2011 - 21:38 | 1868507 Oswald Spengler
Oswald Spengler's picture

Tungsten bitchez!

Thu, 11/10/2011 - 21:28 | 1868485 I_Am_
I_Am_'s picture

Hey! If you are a laundryman and have a future delivery date for that tuxedo then who will catch you if you rent it out to others in the meanwhile.......... and if it does get damaged, there is always a limiting clause....... simple eh!

Thu, 11/10/2011 - 21:25 | 1868477 business as stusual
business as stusual's picture

"An interesting game, the only way to win, is not to play"

W.O.P.R.

Fri, 11/11/2011 - 09:50 | 1869474 dwdollar
dwdollar's picture

I'll say it again... I don't understand how anyone can have faith in the system at this point. When you're dealing with criminals and their Ponzi games you're going to get burnt sooner or later. It's not a matter of IF, but WHEN.

Fri, 11/11/2011 - 00:49 | 1868993 OldTrooper
OldTrooper's picture

No shit!  That's why I can hold, shoot or grow beans on my investments.

Thu, 11/10/2011 - 21:22 | 1868470 DeadFred
DeadFred's picture

How is this any different from SOP?

Thu, 11/10/2011 - 21:22 | 1868469 JohnG
JohnG's picture

 

 

http://seekingalpha.com/article/306068-cme-is-legally-liable-for-mf-glob...

 

"Clearing members must calculate segregation and secured requirements and ensure compliance with capital requirements on a daily basis.

CME Clearing monitors intra-day price movements and trading activity throughout the trading session. To assess the impact of these price changes on clearing members, intra-day mark-to market calculations are performed on clearing member positions and reviewed by CME Clearing throughout the day and overnight. Additionally, CME Clearing monitors its clearing member firms’ settlement variation and performance bond activities at non–CME cleared exchanges and clearing organizations daily. The risk management team may contact the exchanges or clearing organizations to follow up on this activity."

 

Thu, 11/10/2011 - 21:59 | 1868554 max2205
max2205's picture

I am pretty sure that futures houses will only be playing with their own money because i sure as hell wouldnt use them. Duh!

Thu, 11/10/2011 - 23:05 | 1868712 JohnG
JohnG's picture

 

 

While I do like just buying metal and storing it, and I advocate this, there is no way to avoid a clearing broker if one chooses to venture into futures.  Not possible.

I manage money.  Customers wish to lever up.  Can't do it any other way.

I advise against it....customer is always right (even if they are wrong.)

It's just business, I guess.

 

I am currently burned quite bad (very) fom the MF mess.  It doesn't look like I'll get more than 75% of my (or my clients more importantly) collateral, IF ANY, returned.  Positions were tranfererred seamlessly.  No problem more than a few phone calls.  I did have to post collateral on those positions.  That hurt.  Bad.

Collateral loss will put me out of business.  After that, I'm done.  Rug pulled out.  Hammer, meet head.  Stinks, that's for sure.  I suppose that's the way it is.  It's up the the lawyers at this point.

We'll see what shakes out over the next few months, but I do not expect a good outcome.

Either way, I am out of this.  Call it tuition, whatever....  I'll be winding down and just get out.  Plenty of kids out ther looking for punishment.  Too tired of navigating the mess.  Ready for a rocking chair. I'm a tough old bastard, and used to stress.  It's the nature of the "game."  Even my favorite dog is feeling it (through me of course), and that is a sign.

It's time, and I've had enough.  Put me out to "pasture" as it were.

Good luck to you and yours.  And just buy the metal, please.  You'll be much happier.

 

Fri, 11/11/2011 - 08:53 | 1869392 weinerdog43
weinerdog43's picture

Sorry John G.  This sort of crap drives out the honest players. 

On Jesse's blog, he mentioned that he used to be a trader as well, but gave up when he saw the corruption.  I'd sure like to keep my 401k and pension someday, but I'm afraid the crooks have stolen it all.  Except for all the money I've put aside that I can put my hands on right this minute, is probably gone.  I just can't bring myself to cash out of the 401k. 

Fri, 11/11/2011 - 10:21 | 1869562 Axenolith
Axenolith's picture

Borrow 50% (usually the max allowable) of it out and put it in something secure.  The interest is paid to your acct, is around 3.5-4.5% and you have 50% that can't be accessed by the evil doers...

Thu, 11/10/2011 - 21:27 | 1868479 JohnG
JohnG's picture

There is much behind this.  The "rule" can be construed variously, yet in general it is an ambiguos tort.  Contract written "unclearly" are generally decided against the writer of said contract.

Yeah...lot's of ingeneral there.

This is the basis for which CMEG will be sued under.  It's up to the courts to decide.

This will certainly be a very long, expensive process.

 

 

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