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More Details on How MF Global Customers Got Thrown Under the Bus

EB's picture




 

Submitted by MFGFacts.com 

 

Last week we witnessed lawyers dueling in the bankruptcy court on the details of exactly what code of law supports customer priority in liquidation of the parts of MF Global Holdings,  and gosh!….is  the Holdings is even a broker?  Why are lawyers debating these questions at this late date?

 

First we’ll cover what started the fight and then move onto the genesis of why it has come to this so far into the proceedings.  Do stick with the story as it might sound like legal minutiae, but does have everything to do with recovery of customer funds.

 

It started with the Sapere Wealth Management, LLC assertions (among others) that the MF Global estate must be administered under 17 C.F.R paragraph 190.  Remember paragraph 190 as
you will hear more about this in the next weeks.  Applying this clause of the bankruptcy code to the liquidation of MF Global Holdings would assure customer priority in the liquidation of MFGH, which is also claimed to have taken customer assets out of
MFGI, the commodity brokerage unit of the Holdings company, MFGH — before and after the bankruptcy.

 

That all customer property as defined in paragraph 190 of the code, must be returned to commodity customers free and clear of other claims is also supported by others parties, including the CFTC.  The CFTC, however, also asserts that existing principles of law are available to ensure this, but first the court needs to make “antecedent determinations.”  In other words, the CFTC legal team is playing the adult and indicating that we already have the laws on the books to deal with this once the court figures out what laws it wants to use.

 

So why is the question if MFGH is even a broker so important?  Again, the key paragraph 190, which legally secures customer priority and distributions can only be applied to a brokerage  Chapter 7 bankruptcy, which is used for brokerage bankruptcies, but was not used for MFGH, which is the holding company of MFGI.  MFGH was filed as a Chapter 11 bankruptcy.  This Bankruptcy Code is used for non-broker entities, seeking re-organization.

 

Also, and to use the words of the Sapere plea to the court, “A decision by the court that 17 C.F.R §190 applied to MFGH’s estate can, among other things, obviate the need for titan law firms representing MFGH and MFGI, respectively, to engage in battles with one another funded by “other people’s money,” i.e., at substantial costs to the estates of MFGH and MFGI.

 

The ability to use many millions of customer funds locked in the estate to pay trustees and their “titan” law firms representing MFGH and MFGI  is possible because the bankruptcy was filed as a Chapter 11 for the Holdings and Chapter 11 SIPC filing for MFGI, the commodity brokerage, and not under Chapter 7 for both.

 

As regular readers know, from the start of this sorry saga, MFGFacts.com has focused on the questions around why a Chapter 11 SIPC bankruptcy with almost non-existent securities accounts when neither SIPC nor Chapter 11 address brokerage liquidations.  Additionally, Chapter 11 is the choice when a restructuring is planed, which is not so with MFGH.

 

A Breaking Investigative Report

 

Fortunately, these question are now receiving greater scrutiny in the industry press as we read in this investigation published last week by Mark Melin of Opalesque Futures Intelligence who contacted MFGFacts.com while conducting his investigation, Sold Out: How A Private Meeting Between Regulators Gave Away MF Global Investor Protections.  In short, as Melin reports, “Deciding upon a Securities industry SIPA liquidation process for an FCM over the Commodity Exchange Act (CEA) liquidation and section 7 of the US Bankruptcy Code was a legal maneuver with far reaching consequences for customers with segregated funds and property with custodial banks. The selected SIPA liquidation does not recognize fund segregation or futures industry account regulations. The process considerably favors creditors.”

 

In other words, when the SEC threw the liquidation process to SIPC under for a Chapter 11 securities liquidation, and with the CFTC’s immediate agreement (under the conflicted Chairman Gensler who had not yet to recuse himself  from MF Global issues), a framework of law was chosen where customers were — for the very first time ever — made creditors and their assets thrown into the entire MF Global estate.   Many say what!  And the industry is now asking how?

 

According to the report, the speculation is this: Robert Cook, SEC Director of Division and Trading and Markets is said to have been the lead regulator at the key meeting, the details of which are still not public. “Before joining the SEC, Mr. Cook was a partner at the powerful Washington D.C. law firm of Cleary Gottlieb Steen & Hamilton LLP, which represents JP Morgan, among other clients,”  Melin reported.  We all know that JP Morgan is the largest creditor to MF Global Holdings.  Readers may reach their own conclusions about that.  Yet, making the liquidation of MF Global Holdings and its parts a Chapter 11 and SIPC bankruptcy, set the stage for expensive dueling among lawyers over the fact if MF Global is even a broker or not. This also and — most importantly — tremendously enhanced the recovery position for non-customer creditors over all customers.

 

The CFTC Warned in the 1980s of Potential for Abuse and Problems when Bankruptcy Codes Conflict with a Duel Registered Entity

 

As Melin shares, that the CFTC – to the agency’s great credit — recognized and dealt with this problem:  Citing the exemplary record in the futures industry in the event of bankruptcies, former CFTC Director of the CFTC Division of Trading, Andrea Corcoran writes in a January 1993 issue of  Futures International Law Letter  “As early as 1980, however, concerns were expressed about the ability to retain this record in the event of the bankruptcy of a dually-licensed firm – that is, a firm registered as both a futures commission merchant (FCM) and a securities broker-dealer.”

 

To rectify this, the CFTC then drafted rules we find under then now famous Part 190 where Corcoran writes,  “In the final rules, the Commission noted that Section 7(b) of SIPA (read Securities Investors Protection Act) …proved that a trustee in a SIPA liquidation shall be subject to the same duties as a trustee in a commodity broker bankruptcy under Subchapter IV of Chapter 7 of the Code.”

 

The CFTC was well prepared for a MF Global-like event. Against this background, and as Melin also reports, the choice of a Chapter 11 SIPC bankruptcy code for the liquidation of a futures broker, makes Chairman’s Genslers “give away” even more baffling.  We’d call it a throw away and ask if Chairman Gensler invited a single CFTC attorney into that early hour meeting before agreeing to file MFGI under MFGH as a Chapter 11 SIPC bankruptcy?  Regardless, with that decision the fate was sealed.  And not only were customers and the industry severely damaged, but there was a complete disregard of the decades of work, preparation and public service by the many professionals in the CFTC to which Chairman Gensler was entrusted.

 

And now we have the spectacle of “titanic” lawyers in one of the largest bankruptcies ever arguing if an entity is a broker or not.

*  *  *

 

See also:

Stanley Haar makes the case on Fox news on Vimeo.

 

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Thu, 01/26/2012 - 16:14 | 2098586 JeffB
JeffB's picture

Duplicate. Sorry. Please delete.

Wed, 01/25/2012 - 22:47 | 2098585 JeffB
JeffB's picture

I used to belong to an organization called HALT (originally named "Help Abolish Legal Tyranny") which had some horrific stories. They referred some lady to me for some reason, and she had another one... a lawyer as underhanded and crooked as they come was harrassing her mercilessly. A broker had churned her account and when she called the Bar Association for a referral his was the only name they gave her.

He talked her into signing on with him on a Friday evening & she called him Monday morning to ask out of it as she had just gone through a divorce and didn't want to go through a lawsuit. She just wanted to accept the money the brokerage had offered her. The lawyer went ballistic & was calling her at all hours of the night, calling and harrasing her at work, where he even showed up and was screaming at her boss that she was a crook etc.

He sued her for some massive amount of money and she thought he was crazy & started looking for info on him. This was in the days before the internet, but she found a couple of newspaper articles where he had been arrested for felonies. It turns out that he had turned in his license to practice law a few years prior so they would drop the cases against him.

But he was still practicing law using the licenses of new lawyers just out of law school. But his name was on the door, and the one listed in the phone book. And the Bar Association was still referring people to him.

We went to the courthouse and found numerous cases filed against him and although we couldn't wade through all of them some of them were quite absurd. I can't believe someone never shot the guy. In one of the cases the judge excoriated him for using whiteout to change dates on one of the documents he filed as evidence and then photocopying it to hide the foregery. But they did nothing to him for it.

She had a lot of trouble getting any lawyer to sue him to stop the harrassment and when she finally found one this lawyer started the same harrassing techniques on her new lawyer. He quit & said he couldn't handle it. By then the lawyer sued her for a ridiculous sum even though he had done no work for her.

She took it to arbitration which was organized by the Bar Association. She said he started yelling at her when she was giving her side of the story, jumped up and grabbed her documents from her hands and none of the arbitrators seemed to care that he refused to give them back to her.

They gave him 100% of the judgment he had sued her for.

You can't trust the Bar Association to protect the citizens.

As an interesting side note, he is the lawyer who had sued for the right to advertise. Prior to that the Bar Association had apparently had an agreement that lawyers couldn't advertise as it was too unseemly. He took the case all the way to the Supreme Court and won. Now we're also inundated with all of these ambulance chaser ads.

Thu, 01/26/2012 - 13:25 | 2100021 MachoMan
MachoMan's picture

Yes.  I will say unequivocally that attorneys (that are worth a shit) will not step across the bar and sue a bar member, similar to the "blue shield" of police officers.  There is no express rule, but there is absolutely an unspoken agreement amongst all the medium tier and up attorneys in a particular locale to not sue another member of the bar.  It would absolutely be considered "bad taste." 

This applies to essentially all actions against an attorney for malpractice or other functions associated with his or her law license.  Now, collection actions against an attorney are a little more of a gray area (especially when you represent a big bank and they pay you enough to break through the bar so to speak).  In other words, it's not a purely black and white issue... 

At any rate, about the only time you see these types of actions is when there is a nub attorney that didn't get the memo or basically someone who is too old to give a fuck (won't burst through to "success").  For all of these things, outside attorneys have to be brought in...  I'd say there is probably a ~60 mile radius or so where people practicing in that sphere will not be touched...  (for people seeking an attorney to sue another attorney, they often get frustrated and quit because they don't being their search outside of the locale).

Judges, as people who used to practice in the area and know all the names, likewise have HUGE hesitancy to issue sanctions or even brow beat attorneys...  one of my favorite local judges has no problems taking a shit on frivolous cases...  at least we know where he stands.

But, as lawyers will be lawyers, you probably won't have a hard time finding someone outside the locale to come in and sue a fellow lawyer...  it will just cost you more with the travel time.

PS, we certainly have plenty of malpractice in our area...  but we're simply too small for the types of things you're describing to happen...  if something that outrageous happened, the guy would get black listed and the book thrown at him...  there are certainly boundaries to the professional courtesy of not going for another bar member's throat (it could be you who fucks up next time).

I can also say, without a doubt, that the story of the poster above you happens all day, every day.  Lawyers are, at least in part, political animals.  Having an incriminating document like that is something that gets tucked away and the next time that lawyer gets in trouble and the same lawyer is on the other side, it's, hey, do you remember that time when I saved your ass?  guess what?  Time to repay the favor.  This is something that I often do not have a problem with (because it's something that is probably not particularly material to the disposition of the case), but on something that would essentially win the case, it's gloves off.  There is no excuse for putting the "professional courtesy" above your client's interests.  Again, there are reasonable boundaries to these things.

Thu, 01/26/2012 - 16:15 | 2100697 JeffB
JeffB's picture

Thanks for the reply MachoMan.

"Having an incriminating document like that is something that gets tucked away and the next time that lawyer gets in trouble and the same lawyer is on the other side, it's, hey, do you remember that time when I saved your ass?  guess what?  Time to repay the favor.  This is something that I often do not have a problem with (because it's something that is probably not particularly material to the disposition of the case), but on something that would essentially win the case, it's gloves off.  There is no excuse for putting the "professional courtesy" above your client's interests.  Again, there are reasonable boundaries to these things."

I could be mistaken, but am suspicious that there are instances where those types of incriminating documents are used as blackmail where clients' interests are compromised. I've seen & heard of a number of situations where it seemed like it was an "easy as falling off a log" case only to have the attorney completely screw it up, or seem to act irrationally in not brining up critical issues, or just suddenly do an about face and recommend settling for something that would have been considered ridiculous when they took the case. I've heard any number of people think their lawyers must have been paid off or blackmailed or something, because they're behavior seems inexplicable otherwise.

I say that fully realizing there are times when additional info comes to light, or the situation changes or original appearances weren't accurate, but those situations should be able to be explained to the clients by the attorney. I'm not talking about those types of instances.

 

Wed, 01/25/2012 - 12:17 | 2096401 RichardENixon
RichardENixon's picture

I am shocked to hear this. Shocked. Round up the usual suspects.

Wed, 01/25/2012 - 14:07 | 2096822 Jonas Parker
Jonas Parker's picture

Yup! It's Bush's fault (again)!

Wed, 01/25/2012 - 19:31 | 2098115 Sunshine n Lollipops
Sunshine n Lollipops's picture

That piece of shit is as much to blame as anyone.

Wed, 01/25/2012 - 12:14 | 2096387 Bansters-in-my-...
Bansters-in-my- feces's picture

Can't resist.....

FUCK YOU's CFTC and the SEC.

I know you's read ZerOHedge

Wed, 01/25/2012 - 11:56 | 2096324 LawsofPhysics
LawsofPhysics's picture

Bring on the mother of all moral hazards and eventually make those customers whole again with devalued fiat.  Same as it ever was.

Wed, 01/25/2012 - 11:54 | 2096317 OutLookingIn
OutLookingIn's picture

These lawyers (bottom feeding parasites) are now selling freezers to Eskimos!

The simple fact is - theft is theft. As Jesse Livermore famously said "whoever takes what isn't hissin, goes to prison." Except, back in his time there were alot fewer bottom feeding parasites, that come up with 'cute' little words like "rehypothecation," A rose by any other name - is still a rose!

All this 'legal beagle wrangling' is nothing more than smoke and mirrors in an attempt to confuse. Nothing more than outright stealing what "isn't hissin!" Exactly the same as sticking a short barrelled 'Saturday night special' in the victims ribs and demanding his wallet.

Don't be fooled.  

Wed, 01/25/2012 - 11:58 | 2096297 Widowmaker
Widowmaker's picture

Who the fuck cares about the law?

Nobody, that's who. 

The attorneys are getting paid rediculious amounts of money to squabble about whos horse is prettier at the glue factory.

The venue is Kangaroo Kourt Inc. where the only losers are US taxpayers not in the 15% fraud racket..

Wed, 01/25/2012 - 14:47 | 2096999 falun bong
falun bong's picture

Follow the money. Lehman bankruptcy lawyer fees are about to top $2 billion.

With a B.

Wed, 01/25/2012 - 12:24 | 2096425 NotApplicable
NotApplicable's picture

As always, the words of Prodigy are apropos.

Fuck 'em, and their law.

Wed, 01/25/2012 - 11:44 | 2096283 Dingleberry
Dingleberry's picture

SO what's new? Criminal activity continues unabated and of course, unpunished. Corzine is so untouchable that I doubt he even pays in a civil trial, let alone criminal trial where he belongs.  And the US public is about send Newt and/or Mitt up for election. I wonder what this election's theme will be...."hope and change" didn't exactly pan out. 

Wed, 01/25/2012 - 12:30 | 2096460 krispkritter
krispkritter's picture

Rope and Chains...question is, for us or them? I'd wager it's us.

Wed, 01/25/2012 - 11:28 | 2096238 El Gordo
El Gordo's picture

It really does not matter much since laws are for little people anyway.  Customers beware - if you don't have it in your personal possession where you can reach it with your grubby paws any time you want to, then you don't actually own it.

Wed, 01/25/2012 - 17:23 | 2097694 Doña K
Doña K's picture

Starve the beast. Without our participation, this corrupt system can not exist. I stil don't get it that people still invest in promisory paper without collateral and the law against them. 

Get physical guys! By all the meanings of the word. (with your PM's, your wives, girfriends and your adversaries.) Overturn the table of the money changers. (Matthew 21.12)

Wed, 01/25/2012 - 11:09 | 2096193 spankthebernank
spankthebernank's picture

Sooooo..... Corzine is just going to walk?

 

Par for the course.

Wed, 01/25/2012 - 19:21 | 2098092 philipat
philipat's picture

 If "O" gets re-elected, Corzine can expect a senior posoition in the new admin to reward him for taking care of TPTB and the Corporatocracy. Timmy's job will be available? Imagine how much fun Corzine could have in the Treasury.

Wed, 01/25/2012 - 12:15 | 2096392 CH1
CH1's picture

Of course he walks.

"Rule of law" is a sick joke.

Wed, 01/25/2012 - 16:20 | 2097441 lincolnsteffens
lincolnsteffens's picture

I predict if Corzine walks he may not walk very far before someone seeks their own justice on him.

 

Wed, 01/25/2012 - 20:34 | 2098267 Tompooz
Tompooz's picture

He'll go to LVS's Adelson for advice.

Adelson, (the biggest contributor to Palestinians-dont-exist-Gingrich), spends 2.5 million of company cash on private "security". 

See recent Forbes article.

Wed, 01/25/2012 - 17:13 | 2097653 Oracle of Kypseli
Oracle of Kypseli's picture

I heard that and they speak foreign languages. Haraso!

Wed, 01/25/2012 - 11:51 | 2096309 Widowmaker
Widowmaker's picture

Naw, that walking abortion of the common good gets a promotion and record bonus.  THAT is par for the course.

Wed, 01/25/2012 - 12:28 | 2096450 NotApplicable
NotApplicable's picture

Deifying the biggest villain is an excellent method of protecting the hundreds of lower level criminals who made it all possible. The alternative?

RICO, bitchez! (and we know that ain't coming)

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