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Why SIPC? MF Global Customers Were Thrown Under the Bus on Day 1

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Guest Post by MFGFacts.com

Below is the text of the SIPC answer to Judge Glenn addressing the question as to how the Trustee was appointed.  Declaration here.

This declaration was in response to the court order last week for additional information to determine the Trustee’s disinterestedness.

Underlines are our own, and [italicized] text [contains] comments to the declaration.  SIPC’s declaration did not address how and why the Trustee was assigned.  In fact, it raises even more questions.

__________________________________

DECLARATION OF STEPHEN P. HARBECK IN SUPPORT OF MEMORANDUM OF THE SECURITIES INVESTOR PROTECTION CORPORATION IN RESPONSE TO THE COURT’S ORDER DIRECTING TRUSTEE TO FILE FURTHER DISCLOSURES REGARDING DISINTERESTEDNESS

Pursuant to 28 U.S.C. § 1746, I, Stephen P. Harbeck, declare as follows:

1. I am the President and Chief Executive Officer of the Securities Investor Protection Corporation (“SIPC”).

2. On Monday morning, October 31, 2011, at 5:20 a.m., I received a telephone call from a representative of the Securities and Exchange Commission’s (“SEC”) Division of Trading and Markets, who was then in New York. The purpose of the call was to inform SIPC that a liquidation proceeding under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa et seq. (“SIPA”), was necessary with respect to MF Global Inc. (“Debtor”). This call was the first notice to SIPC that such action was required to protect the Debtor’s investors. SIPC subsequently received a formal written notification from the SEC via an e-mail at 7:29 a.m. stating that the commencement of a liquidation proceeding with respect to the Debtor was appropriate under Section 78eee(a)(1) of SIPA, and setting forth the legal and factual basis for commencing the case.

We note there was no call to protect Debtor’s (MFGI) depositors.  In other words customers.  SIPC was notified to protect “investors.”  Assuming this language refers to the less than 400 securities accounts at MFGI, why would this turn into a SIPC liquidation when less than .010% were security accounts subject to SIPC protections and 99.99% of the client accounts were not covered under SIPC?  Role of the CFTC was to step in and protect MFGI customers/depositors.

3. While four members of SIPC’s staff flew to New York, other legal personnel drafted the documents necessary to initiate a SIPA liquidation with respect to the Debtor. SIPC personnel also made simultaneous inquiries to a number of professionals concerning whether those persons, and the law firms with which they are associated, were presently engaged in the Chapter 11 proceedings initiated with respect to the Debtor’s parent company, or were otherwise disqualified from serving as trustee or counsel under the disinterestedness definition in Section 78eee(b)(6) of SIPA.

This answer rings of the ongoing Jon Corzine testomony.  Lots of words, but no answers. If Mr. Harbecks’s answered the question his statement would tell us what “professionals” were contacted.  Professional what?  His staff in the early hours?   What number is how many exactly?  Names and positions of professionals are needed to evaluate the process.  What firms were considered?  As most all clients were commodity customers, were firms specializing in the commodity industry considered?

4. Approximately ten possible trustees and counsel having the requisite bankruptcy experience, skill, and resources were considered. A number of persons were not contacted because it was public knowledge that they or their firms were involved in the Chapter 11 proceedings involving the Debtor’s parent company. Approximately five persons were contacted, of whom only two were associated with firms eligible to serve.

Which approximately ten possible council were considered?  For those deemed not to be candidates, what was the known extent of their involvement with the Debtor’s parent company?

5. Of the two remaining law firms, one had never served previously as the trustee or counsel in a SIPA liquidation. Due to the fact that the Debtor operated both a substantial securities business and a multi-billion dollar commodities business, and that its liquidation therefore would be unprecedented and unique, SIPC determined that the Debtor’s liquidation would not be appropriate for a law firm with no prior experience in SIPA matters.

Fewer than 400 securities accounts is not “substantial” by any measure. The current Trustee has absolulte no experience in liquidation in the commodities industry.  Was a firm with experience in the commodities industry considered?

6. Instead, SIPC selected James W. Giddens as trustee and his law firm, Hughes Hubbard & Reed LLP (“HHR”), as his counsel. In SIPA matters, Mr. Giddens is the most experienced attorney currently practicing, and has served as the trustee or counsel in SIPA cases since the early 1970s. He is also serving as the trustee, with HHR as his counsel, in the liquidation under SIPA of Lehman Brothers, Inc., the largest and most complex SIPA liquidation in history. SIPC selected Mr. Giddens and HHR after discussions with Mr. Giddens to ensure that he and HHR were disinterested within the meaning of Section 78eee(b)(6) of SIPA.

In Mr. Giddens own words,”he has been involved with SIPC from the time of its creation in 1970….”  Over 40 years.   Further Mr. Giddens is on the SIPC Modernization Task Force.  A trusteeship is a highly desirable assignment and it was clearly assigned by SIPC to an insider.

7. Given the extreme fragility of the Debtor, and the risk to which any delay might have exposed its customers, all of the foregoing actions were, and had to be, taken within hours. Consistent with this urgency, Mr. Giddens and HHR were designated by SIPC pursuant to SIPA Section 78eee(b)(3), and were appointed by the United States District Court for the Southern District of New York, on October 31, 2011. As a result, they were able to take control of the Debtor’s premises in New York on the afternoon of the same day. I declare under penalty of perjury that the foregoing is true and correct.

The initial order (docket #1) was standard boilerplate for a SIPC liquidation of a securities dealer .  Remarkably, it had to be modified by hand (apparently after the filing) to remedy all deficiencies as it did not even address commodity regulation. The actions of the trustee shortly after assignment as Trustee introduced additional risk to all customers and markets.  This demonstrated an inappropriate, perhaps disastrous,  assignment to HHR.

Executed on

December 12, 2011.

/s/ Stephen P. Harbeck

STEPHEN P. HARBECK

* * *

The following is reposted from EconomicPolicyJournal.com

Why was MF Global put through a SIPA liquidation designed for securities brokers?

 

Answer: to protect the creditors.

Had MF Global been resolved under Subchapter IV of Chapter 7 of the Bankruptcy Code (appropriately entitled "Commodity Broker Liquidation"), customers would have been put first, against the interests of the large bank creditors of MF Global. From the unambiguous Historical and Revision Notes in the US Code (emphasis ours):

SENATE REPORT NO. 95-989

[Section 765] Subsection (a) of this section [enacted as section 766(h)] provides that with respect to liquidation of commodity brokers which are not clearing organizations, the trustee shall distribute [commodity] customer property to customers on the basis and to the extent of such customers' allowed net equity claims, and in priority to all other claims. This section grants customers' claims first priority in the distribution of the estate. Subsection (b) [enacted as section 766(i)] grants the same priority to member property and other customer property in the liquidation of a clearing organization. A fundamental purpose of these provisions is to ensure that the property entrusted by customers to their brokers will not be subject to the risks of the broker's business and will be available for disbursement to customers if the broker becomes bankrupt.

Some tough questions need to be asked to those who approved the last minute handing over of what was primarily a commodities broker into the hands of a trustee experienced only with securities brokers, and pursuant to SIPA legislation that does not afford protections first to the commodities customers. The entire model of customer protection under SIPA is that it establishes an insurance fund for securities customers. Because no such fund exists for commodities customers, they are put at an extreme disadvantage from the outset.

Who made the decision to throw MF Global into a SIPA liquidation? More to come...

 


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Sun, 12/18/2011 - 16:42 | Link to Comment jmcadg
jmcadg's picture

Has anyone explained how Soros (low life fuck monkey) was able to pick up the European bond trades at reduces prices AFTER MF Global went into bankruptcy. A reduction I believe that equates to something similar to the outstanding $1.2 billion?????

Also the wired transactions that were recalled BEFORE the bankruptcy that went back to JPM accounts and then ooops vanished?????

Why do I still feel slightly sorry for Corzine???? I know, I know, he's scum, but I have this overriding feeling that he was fucked in the ass by Dimon. 

I know this is somewhat stating the obvious, but for me Dimon is enemy No.1, with that weasel Blankfein just behind him.

Anyone with any sense will heed Ann Barnhardt's advice here.

http://www.youtube.com/watch?v=LPPxOP3na5o&feature=player_embedded

And if you add this:

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

and this:

http://www.youtube.com/watch?v=aC19fEqR5bA

That pretty much sums up this shitty mess and gives you a clear indication what to do.

Good luck all this week!

Sun, 12/18/2011 - 20:43 | Link to Comment tom a taxpayer
tom a taxpayer's picture

Thanks for the links. Ann Barnhardt is fantastic!

Sun, 12/18/2011 - 16:29 | Link to Comment ebworthen
ebworthen's picture

Message:  any money anywhere if not in PM's or cash in hand is at risk

Sun, 12/18/2011 - 15:57 | Link to Comment AndrewCostello
AndrewCostello's picture

MF Global was just a tool of fraud, used by JP Morgan to target investors who were trying to buy hard physical assets, instead of the fantasy crap of Wall Street.  This whole thing was one big set up from start to finish, and now all that Physical Silver has been transferred to JP Morgans accounts to cover their shorts.

This was BLATANT FRAUD.

 

Read this book, its really good and quite inspiring.

http://www.amazon.com/Simple-Wealth-Mr-Andrew-Costello/dp/1463523017/ref

Sun, 12/18/2011 - 16:16 | Link to Comment NuYawkFrankie
NuYawkFrankie's picture

Dopey Duffy was/is just the token Dumb Oirishman - fresh off the ol' Turnip Truck - whose only function was to take the fall when the real operators had disappeared with the goodies. And all the time this deluded sorry-ass thought he was a Big Swingin D!ck (ahhhemmmm,,..  'scuse the anatomical reference ladies - I've  just been informed that the smelling-salts will be arriving shortly)

What? He thought he got to be the head of the CME 'cause he was so smart, so connected, the top of the heap, the best & brightest? Yeah right - you just gotta look at the guy!  Gimmee a freekin break! LOL!

 

Sun, 12/18/2011 - 15:04 | Link to Comment Bagbalm
Bagbalm's picture

Nobody was hurt badly enough to walk up and put a bullet in the head of these thieves?

Sun, 12/18/2011 - 15:58 | Link to Comment AndrewCostello
AndrewCostello's picture

If they ever steal my money like that, they can kiss thier asses goodbye.

Sun, 12/18/2011 - 16:12 | Link to Comment NuYawkFrankie
NuYawkFrankie's picture

They already have stolen your money - along with everything else you thought you had, like a fewtcha... you just don't realise it yet. When you do, you'll be kissin your own ass goodbye - 'cause their asses will be looooo..ng gone. Enjoy the show ;)

Sun, 12/18/2011 - 15:58 | Link to Comment Divine Wind
Divine Wind's picture

I was thinking the same thing.

Madoff did it smart. When he realized the game was up, he confessed and went right into custody, making it a harder to reach him.

As long as Corzine and the MFG crew are NOT behind bars...

Sun, 12/18/2011 - 14:38 | Link to Comment Joebloinvestor
Joebloinvestor's picture

I want to see a cage fight with Gensler and Duffy.

I want Duffy to be handicapped with a sawed off baseball bat (not a full length one).

Gensler is a fucking piece of shit who should be fired and indicted.

Read the transcript, and one finds Gensler made one phone call on a "fishing expedition" to find out how far the auditors were, then got as far away from the shit as he could.

Gensler put the CME on the hook and Duffy ain't happy about it.

Sun, 12/18/2011 - 16:20 | Link to Comment NuYawkFrankie
NuYawkFrankie's picture

/

 

Sun, 12/18/2011 - 13:54 | Link to Comment ThisIsBob
ThisIsBob's picture

JPM grabbed the dough - probably legally - and blew them up, which was nervertheless an inevitability.

Either that or it was those Venezueland and Iranian hacker bastards.

Or maybe it was a Sri Lankan rouge trader.

Sun, 12/18/2011 - 14:11 | Link to Comment technovelist
technovelist's picture

Yes, that Sri Lankan rouge contract is a bitch to trade!

Sun, 12/18/2011 - 13:03 | Link to Comment cocoablini
cocoablini's picture

The SIPC is a self-regulated private insurance account. It's not the FDiC. The SIPC could never insure all the accounts and lost money by even MFGlobal alone- nevermind a bunch of brokerages. It's a total, levered joke run by the party boys of wall street.
Which is why no one should have any cash in a brokerage- the system will guarantee you get your stock back( maybe) but cash will be gone and the SIPC will be broke.
And if you have an options account, the brokerages can lend you shares out for shorts which means you may be in a line of 30 other people who thought they had the same shares.
Best course of action:
- move money and cash into FDIC banks which is gov insured.
- own long only stocks you want to hold during another crash and bank holiday
- stop investing in a 401k with severe time restrictions
- by assets like gold and silver and guns
-Pay off any debt. Don't go out on margin unless you understand you could lose 100%
- assume just because you are in the "right" doesn't mean you will get your money or stock returned.

Sun, 12/18/2011 - 13:53 | Link to Comment Waterfallsparkles
Waterfallsparkles's picture

And what makes you think that the FDIC has enough money to pay people back if a big Bank went belly up?  Banks are just a dangerous these days.

For me the safest place to put your Money is in Rental Real Estate and you still can get a decent return on your Money in Rents.

Sun, 12/18/2011 - 12:59 | Link to Comment PulauHantu29
PulauHantu29's picture

Fleckenstein lost quite a bit on MF Global I read.

Sun, 12/18/2011 - 12:49 | Link to Comment tom a taxpayer
tom a taxpayer's picture

Incredible! Outrageous! This scheme to screw customers needs to be front page news on every TV, newspaper, investment newsletter, and investment homepage. Congress needs to haul these regulators (SEC) and industry front groups (SIPC) before Congressional investigating committee immediately. State and Federal prosecutors need to open investigations immediately. The passports of these filthy criminals need to be lifted immediately. 

This is the result of unchecked rampant Wall Street criminal activity and of not prosecuting the TBTF and their criminal aider and abettors in federal regulatory agencies and Congress. Where the hell are the prosecutors.

Sun, 12/18/2011 - 15:05 | Link to Comment WTFx10
WTFx10's picture

"Congress needs to haul these regulators" Yes, get all the bank employees involved congress has done so much for we the people. No matter what we want they do exactly the opposite.

Sun, 12/18/2011 - 12:53 | Link to Comment sun tzu
sun tzu's picture

The lame stream media will never educate the masses. They will continue to feed us Kardashian and Jersey Shore tripe while hiding the crimes of the elites in NY and DC. Remember this when the time comes

Sun, 12/18/2011 - 12:38 | Link to Comment stant
stant's picture

ann barnhardt said take you ball and go home. and they are

Sun, 12/18/2011 - 12:40 | Link to Comment JuicedGamma
JuicedGamma's picture

I keep hoping that maybe this all a mistake and that Corzine, Gensler et al are just completely incompetent and thus are guilty of culpable negligence and of being over their heads (the Peter principal at work).  

The more that comes out the more this looks like a huge scheme to defraud customers of MFG, plus I still believe Corzine is an incompetent pompous ass.

Whatever happened to the security industries adage that customer is always first, not at the pig trough apparently.

Sun, 12/18/2011 - 12:51 | Link to Comment sun tzu
sun tzu's picture

Corzine is a former Goldman Sachs CEO. Do you think incompetent people make it to the top of GS? He is a master criminal and professional liar

Sun, 12/18/2011 - 12:54 | Link to Comment JuicedGamma
JuicedGamma's picture

Let's define competent by example.

 

Blankfien, CEO of Goldman when their reputation has been torn to shreds.  Employees have been instructed not to mention their employer in public, I guess because people may take affront.

Hank Paulson, Treasury Secretary during TARP, etc.

Corzine, 'nough said.

 

Depends on your definition.

 

Sun, 12/18/2011 - 15:01 | Link to Comment disabledvet
disabledvet's picture

Gitmo. "with the Jefferson Bible" as reading material.

Sun, 12/18/2011 - 14:59 | Link to Comment rufusbird
rufusbird's picture

Kind of ironic that the higher the officers of banking or financial institution officers are in rank, the weaker their memory seems to be. Funny thing that...

Sun, 12/18/2011 - 12:24 | Link to Comment surfersd
surfersd's picture

Hey I got another 14% back Friday from the trustee. My offer stills stands they can keep the other 27% if the make Corzine do a perp walk.

Why hasn't the question been asked, "Mr Corzine why did you resign the day after bankruptcy was announced instead of helping to navigate the company through an orderly wind down?" Answer " Because now I couldn't sit here and say I have not been able to review any records" 

Heard story that the outside PR person in charge of the MF Global was concerned about the connotations of the name. Corzine's response he wanted to be known as Mother Fu#king Global!! Please put him a sell with Bubba.

 

Sun, 12/18/2011 - 15:04 | Link to Comment disabledvet
disabledvet's picture

"because I'm guilty and I needed to lawyer up first." sound about right?

Sun, 12/18/2011 - 13:01 | Link to Comment El Oregonian
El Oregonian's picture

"Please put him a sell with Bubba."

 How about sell him to Bubba? For let's say... a pack of smokes?

Sun, 12/18/2011 - 12:38 | Link to Comment Seasmoke
Seasmoke's picture

well that scumbag Abelow was still at MF and he said less than Corzine

Sun, 12/18/2011 - 12:14 | Link to Comment Georgesblog
Georgesblog's picture

It should be safe to say that we will see legislation and revision of regulations to protect investor assets. The public is of a mind to throw Congress under the bus. 

http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/

Sun, 12/18/2011 - 16:29 | Link to Comment Teamtc321
Teamtc321's picture

George, imo the banker lobbist would have a rule written into buried legislation within hour's to circumvent protecting inverstor assets.   

Sun, 12/18/2011 - 10:23 | Link to Comment max2205
max2205's picture

The effect on PD of margin accounts closing is like a need for 1500% reverse cash need to settle back their balance sheets. If they follow rules at all

Sun, 12/18/2011 - 10:21 | Link to Comment max2205
max2205's picture

Margin accounts closing like snow flakes across the world

Sun, 12/18/2011 - 13:41 | Link to Comment realitybiter
realitybiter's picture

I was reading that there was no longer enough liquidity in the markets to support both the bond market and the stock market.  Hence, bonds go up, stocks go down.  This explains the disconnect.

As prudent, intelligent investors decide, "holy crap, nothing is safe (due to lack of legal justice and enforcement of property rights), I better close my margin account and convert it to cash", I have to imagine that this liquidity situation will only worsen.  This is classic deflationary effect of debt contraction.

 

Much of this would be contained if  TPTB actually did their job rather than waste their time running guns into Mexico in a circuitous attempt of "gotcha" against the constitution, while determined to give amnesty bankers....no banker left behind....

 These guys are drunk on their arrogant political agenda.  Sober, rational reason need not apply.

They could raise the capital gains tax to 50% and it would not have any affect as there will be only gains on those that went short, but no one will go short because they will have already closed their margin account and there will be no stock to short.  Fear not.  The naked short sellers will creatively counterfeit new stock.......Deflationary hell.

BWTFDIK?  I didn't go to Harvard.  I'm sure the smarty pants that are calling the shots have it all figured out.  Larry Summers is obviously a very successful man(sarc).  Ditto for Rubin, Greenspan, Honk, Timmay, and now, BSB.  The scorecard for all is a long line of dramatically reduced stock price of any company they touched, yet somehow their personal fortune went through the roof.  Kleptocracy, anyone?  Simple, brainiac embezzlers.  

This is not the America that the employees of their Father's fought for in WW2.  

 

If you aren't pissed off you are an idiot or very uninformed.

I am with the poster above regarding keeping the rest of stolen funds in MFG.  PMITA prison for Corzine!  MF-er....

Thu, 12/22/2011 - 19:51 | Link to Comment Franktastic
Franktastic's picture

http://www.youtube.com/watch?feature=player_embedded&v=18A698QQex0#!

 

Peter Schiff interviews Ann Barnhardt Dec 21, 2011
Sun, 12/18/2011 - 10:14 | Link to Comment bank guy in Brussels
bank guy in Brussels's picture

It is shocking for Americans to finally realise they live in what has become a totally corrupt nightmare kleptocracy, and not the 'great country' described in the propaganda they have heard all their lives ...

And what is yet to come is the realisation that, short of some great revolution, that kleptocracy likely cannot be fixed or changed via 'normal' means.

In January of 2011, there was a commentator on ZeroHedge with the username 'Fat Ass', who posted this:

« The USA had 40 years of stability and power. In the future it will be a shithole. So what? Just another new-world shithole. Life goes on. »

Sun, 12/18/2011 - 19:52 | Link to Comment philipat
philipat's picture

The "light" touch of JPM?

Follow the metal??

Sun, 12/18/2011 - 15:10 | Link to Comment disabledvet
disabledvet's picture

So I never liked brussel sprouts...but I had a tuff mum and "learned to like them."

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