MF Global Trustee Finds That Company "Did Not Always Record Cash Movements"

Tyler Durden's picture




 

The MF Global Trustee has just released their preliminary report on the progress in uncovering where the vaporized cash went. Bloomberg notes:

  • MF GLOBAL DIDN'T ALWAYS RECORD CASH MOVEMENTS, TRUSTEE SAYS
  • TRUSTEE SAYS MF HAD SHORTFALL IN COMMODITIES FUNDS START OCT 26
  • MF BROKERAGE TRUSTEE TRACED $105 BLN IN CASH MOVEMENT
  • MF COMPUTERS COULDN'T TRACK VOLUME IN FINAL DAYS, TRUSTEE SAYS

Of course, we know that MF Global is the only company to not follow Fiduciary Principles 101 (client cash commingling) but also Accounting 101 (T square, debits, credits, and all that boring and apparently irrelevant in a time of uber-kleptocracy, stuff) leaving us wondering just how much of that unrecorded cash may be found in unrecorded suitcases in unrecorded bank vaults.

 

Full report: Status Update from the Office of James W. Giddens, Trustee for the Liquidation of MF Global Inc., Concerning the Trustee’s Investigation

February 6, 2011 – New York, New York – James W. Giddens, the Trustee for the liquidation of MF Global Inc., today filed a preliminary report on the progress of his investigation into the failure of the broker-dealer with the United States Bankruptcy Court for the Southern District of New York, the Honorable Martin Glenn, presiding. The Trustee’s investigation has preliminarily determined that MF Global Inc. had a shortfall in commodities customer segregated funds beginning on Wednesday, October 26, 2011, and that the shortfall continued to grow in size until the bankruptcy filing on Monday, October 31, 2011.

 

The Trustee’s investigators have now traced a majority of the cash transactions, totaling more than $105 billion, made in and out of MF Global Inc. in the last week before bankruptcy and are completing the process of tracing the remaining transactions. MF Global also executed securities transactions totaling more than $100 billion during its final week of operations. These included liquidation of customer securities, proprietary positions and other items. The securities included complex instruments, such as off-balance sheet repurchase transactions involving sovereign debt securities and derivative structures.

 

“For three months our investigative team has worked to understand what happened during the final days of MF Global when cash and related securities movements were not always accurately and promptly recorded due to the chaotic situation and the complexity of the transactions,” Giddens said. “With these preliminary investigative conclusions in hand, we will analyze where the property wired out of bank accounts established to hold segregated and secured property ultimately ended up. We will then determine whether there is a sound and legal basis for recoveries against third parties that will help make customers whole. These will be very complex legal and factual determinations, which we will make consistent with our duty as the advocate for the former customers of MF Global Inc.”

 

The investigation to date has found that transactions regularly moved between accounts and that funds believed to be in excess of segregation requirements in the commodities segregated accounts were used to fund other daily activities of MF Global. In the past, such transfers were in amounts of less than $50 million, but as liquidity demands increased and could not be met from internal sources, much larger amounts were used, apparently with the assumption that funds would be restored by the end of the day. By Wednesday, October 26, as the result of increasing demands for funds or collateral throughout MF Global, funds did not return as anticipated. As these withdrawals occurred, a lack of intraday accounting visibility existed, caused in part by the volume of transactions being executed, and the 4(d) U.S. segregated commodity customer account appears to have reached a deficit condition on Wednesday, October 26 that continued through to MF Global’s bankruptcy.

 

The Trustee has identified most of the parties that were the immediate recipients of transfers from MF Global Inc. during the final days and weeks of operation. These transfers were largely effected through the clearing banks acting on behalf of MF Global Inc. The ultimate recipients of these transfers included banks, exchanges and clearing houses, MF Global Inc. affiliates, counterparties, and customers of the futures commission merchant and the broker-dealer.

 

The number of transactions executed by MF Global during the last week prior to the bankruptcy escalated to unprecedented volumes. The rush to meet funding needs for collateral, margin and customer liquidations led to billions of dollars in securities sales, draws on credit facilities, and a web of inter-company loans across affiliates, some foreign. The company’s computer systems and employees had difficulty keeping up with the unprecedented volume of transactions. A number of transactions were recorded erroneously or not at all. So called “fail” transactions – where either the buyer or seller fails to deliver the cash or the security, respectively – were five times the normal volume during the firm’s final week.

 

The investigation has revealed that a confluence of factors contributed to the deterioration of MF Global’s liquidity position. The exposure to European sovereign debt, coupled with the announcement of disappointing quarterly results, triggered credit downgrades by Moody’s, Fitch and S&P. This escalation in credit risk mandated substantial margin calls and increased demands from counterparties and exchanges for collateral. As an example, the additional margin paid to support only the sovereign debt positions exceeded $200 million during the final week of operations. This was a significant drain on available cash and securities. The sovereign debt investments undertaken on a repo to maturity basis allowed some immediate gains to be booked, but these were purely paper profits generating negligible cash while the underlying transactions resulted in calls for substantial additional margin.

 

The heightened risk and apparent loss of confidence drove customers to close their accounts and withdraw funds, resulting in even greater demands on a relatively limited amount of available cash. The Trustee’s investigation has revealed that, while personnel may not have been immediately aware of it, MF Global Inc. experienced a shortfall in 4(d) customer funds beginning during the day on Wednesday, October 26. The MF Global parent company struggled to continue to operate and even to sell the business, but MF Global Inc. appears to have remained in a shortfall of commodity customer segregated funds virtually continuously until its parent filed for Chapter 11 protection on Monday, October 31 and the Securities Investor Protection Act (SIPA) proceeding was commenced against MF Global Inc. later that afternoon.

 

The Trustee’s investigators, including the legal and forensic accounting teams, have conducted over 50 witness interviews, preserved secure access to thousands of boxes of hard copy documents, imaged over 800 computer drives, and are maintaining over 100 terabytes of data.

 

To understand where the money went during October 2011, the analysis conducted by the Trustee’s professionals has included 840 cash transactions in excess of $10 million that total $327 billion, and an ongoing analysis of related securities transactions involving a value of over $100 billion. These large cash transactions alone span 47 bank accounts across eight financial institutions. An additional 20,000 cash transfers that total $9 billion involve transfers of less than $10 million.

 

The Trustee’s investigation is continuing to correlate cash transfers to relevant movements of securities used as collateral or loaned to counterparties. To that end, the Trustee is now working with various third parties to further define these securities transactions and obtain more complete information about the extent and basis for transfers to select parties. The Trustee continues to investigate the complex factual and legal questions to determine how best to pursue possible recoveries and the extent to which applicable law would support claims against particular recipients of funds, affiliates, and possibly to other parties, including employees of MF Global.

 

The Trustee’s investigation will continue, in coordination with the regulatory and law enforcement investigations that are being conducted by the Department of Justice, the CFTC, and the SEC on an ongoing basis. The Trustee will seek to release additional information related to his investigation in the future, but cannot prematurely release information that might compromise the integrity of those investigations or the Trustee’s own efforts to recover funds for customers and the estate.

 

CLAIMS PROCESS AND ACCOUNT TRANSFERS

 

The Trustee’s staff is continuing its analysis of customer claims after the claims filing period for commodities customers closed on January 31, 2012.

 

Once a claim is reviewed by the Trustee’s staff on as expedited a basis as possible, a determination letter will be issued to the claimant. These determination letters are being issued on a rolling basis. The determination letter will acknowledge the claim and provide a determination as to whether the claim has been allowed, denied, reclassified, or is subject to further reconciliation or information requests.

 

The Trustee is eager to make additional distributions to former MF Global Inc. customers as soon as possible. However, the Trustee is required by law to hold an appropriate reserve of funds until disputed claims are resolved either through negotiation or by the Court. At this time, the Trustee anticipates significant disputed claims against the MF Global Inc. estate by MF Global Holdings Ltd., MF Global UK Limited, and other entities. The Trustee will move to attempt to resolve these claims as quickly as possible, but it is uncertain how long resolution will take. Therefore, it is not known at this time when the Trustee will be legally able to make additional distributions.

 

The Trustee has already distributed nearly $4 billion to former MF Global Inc. retail commodities customers with US futures positions via three bulk transfers:

  • Within days of the bankruptcy, the Trustee received court approval for the transfer of 10,000 commodities customer accounts with three million open positions, along with approximately $1.5 billion in collateral associated with those positions at the time of the bankruptcy. These open positions had a notional value of $100 billion. It is estimated that 40% of all commodity futures exchange activity in United States markets came from MF Global Inc. trades and a serious disruption in markets was avoided by the transfer.
  • A transfer of 60% of the cash attributable to approximately 15,000 customer commodity accounts with cash only in the accounts, totaling approximately $500 million, was completed in November.
  • And in December and January a third transfer occurred that moved approximately $2 billion to restore 72% of US segregated customer property to all former MF Global Inc. retail commodities customers with US futures positions.

 

In addition, the Trustee has received Court approval to sell and transfer approximately 318 active retail securities accounts, which is substantially all of the securities accounts at MF Global Inc. Nearly all securities customers have received 60% or more of their account value and already 194 of former MF Global Inc. securities customers have received the entirety of their account balances because of a Securities Investor Protection Corporation guarantee.

 

The information in this statement does not apply to any other MF Global entity, including separate insolvency proceedings involving the parent company, MF Global Holdings Ltd.

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Mon, 02/06/2012 - 15:15 | 2131352 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Cash, vaporized!

Mon, 02/06/2012 - 15:19 | 2131374 Manthong
Manthong's picture

Just like the government.

Mon, 02/06/2012 - 15:23 | 2131399 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Hopefully

Mon, 02/06/2012 - 15:30 | 2131421 Colombian Gringo
Colombian Gringo's picture

Your wish is already realized. The Fed's  also vaporize cash  when it is convenient.

9/10/2001: Rumsfeld says $2.3 TRILLION Missing from Pentagon

  http://www.youtube.com/watch?v=xU4GdHLUHwU

 

 

Mon, 02/06/2012 - 15:35 | 2131446 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Zero Hedge is listed as the third best Financial blog by cnbc.com:

http://www.cnbc.com/id/46163886/?slide=4

Mon, 02/06/2012 - 15:44 | 2131486 Stax Edwards
Mon, 02/06/2012 - 16:33 | 2131676 Saro
Saro's picture

He says the fed has tripled the monetary base but he doesn't see any indication of inflation. Someone should ask him what he thinks the word "inflation" means.

Mon, 02/06/2012 - 17:08 | 2131846 Smiddywesson
Smiddywesson's picture

Wow, what a putz.  He wrote:

"Guess what caused the arrest? Could the unprecedented Fed interventions have something to do with that. After all, that was the main differentiator this time around. Yes, it was terribly unjust, yes it bailed out people who caused all the trouble. Yes it reinforces moral hazard. But there was simply no alternative."

So I quoted the above and left him a little response:

One of the many flaws in your argument is that you assume the crisis of 2008 is over and was solved. It wasn't and it isn't. Rather than have our big banks melt down and become nationalized, Uncle Sam pulled out his credit card and gambled the nation that we could spend our way out of this. Now we are utterly screwed and there is simply no way out of this.

If the level of arrogance and lack of self reflection in the Austrians takes your breath away, look in the mirror. It's not just those who you consider beneath you that hold this opinion, a lot of the academic community disagrees with you too. People like Reinhardt and Rogoff, Harvard University professors who studied 800 years of financial history in the book This Time is Different. How about the Chief IMF Economist Oliver Blanchard? He has repeatedly warned that as debt piles up, the rates a nation has to give come periliously close to the rates that will bankrupt them. At that point, a nation is in a Catch 22 situation, and any fiscal austerity you engage in destroys your growth and thereby scares away your bond purchasers. Blanchard's speeches carefully reassure everyone that if we have political harmony and perfect execution and follow through, we can slowly grow our way out of this is 20 years. LOL, good luck. While you are at it, read the last chapeter of When Money Dies. Once you hit the political tipping point, you are lucky to get ANY political cooperation at all because it isn't in anyone's self interest to do so.

That's the bind your Keynesian theories have put all the nations of the West in, so take a bow for bailing out the banks in 2008, and just ignore the trillions of dollars that will never, ever, be paid back. Maybe all the savers who were ripped off by people like you will be impressed with your intellect.

Mon, 02/06/2012 - 17:40 | 2131969 Revert_Back_to_...
Revert_Back_to_1792_Act's picture

They knew a hell of a lot more about liberty and economy in the 1800's.

I have found some school books from that era, a third grade reader has what would be today's college level matierial in it.

http://www.archive.org/details/coinsfinancialsc00harvrich

I cannot imagine how cool the world would be if this system was still in place...even just partially in place. You can thank the guy that wrote the book above that the money stayed in the peoples hands for as long as it did.  That is where it was safest and that is where the money power should rest.

mort-gage = dead-pledge.

mort-main = dead hand.

They had these old common laws in place for a reason.

http://www.lexrex.com/enlightened/writings/bank/jefferson.htm

See all those dead assets around the US major cities, ghost malls, old steel mills, closed mines, old factories, people not working, etc. 

What might revive them is sitting in a vault somewhere. 

Put it back in the peoples hands as coin with intrinsic value and restore prosperity. Think about money that people really want (gold, silver, nickel, copper) VS coal mine script money. 

What is that old song about owing your soul to the company store?  They seem to be building a lot of company stores here lately.

Prosperity will continue to shrink with paper money and usury.  You cannot create or destroy matter.  You can however lock it up in a vault somewhere where people cannot use it for it's intended purpose. Discern the truth. Return to just weights and measures.

 

Mon, 02/06/2012 - 21:47 | 2132595 GetZeeGold
GetZeeGold's picture

 

....Did Not Always Record Cash Movements 

 

GAAP is for pussies.

 

 

 

Mon, 02/06/2012 - 17:37 | 2131958 Smiddywesson
Smiddywesson's picture

Both articles were pretty weak.  This guy is a lightweight.

Wow, let's hear that again!

"Now, for the sake of it, let's begin by simply assume they're right and take that statement that 25% of world economic output would disappear if not for the intervention of central banks. The choice then becomes a simple, but rather stark one: What would you rather have, ballooning central bank balances, or 25% of the world economy 'disappearing?' We think that simply asking the question should already be enough in answering it. If we would let 25% of world economic output disappear, that would wreak havoc on millions of lives and throw the whole world economy into a deep downward spiraling depression. So my first thought was something like 'thank you, central banks!'

I think the people of the world who DON'T live in an ivory tower would have preferred to see the bank shareholders lose everything, the bank officials fired, and the banks nationalized then to see their country utterly bankrupt and their savings destroyed. The banks are in no better a financial state today than they were back in 2008, in fact global derivatives are absolutely exploding at a 30% year over year increase. That's $707 trillion in derivatives in a world with @$65 trillion in GDP. Try to run a fire hose through your johnson, something's bound to give here.

Yes, I think the taxpayers would have preferred a 25% shrinkage in the economy to losing their pensions, their homes, their jobs, their savings, and their country. That would have thrown everybody into a deep downward spiraling depression? I'm sorry, did I miss something? I thought, after tens of trillions of looted taxpayer dollars that was exactly what we got, right? Or is this the point where you parrot back those great job numbers from the ministry of truth? If you think the people who are paying for this rape would applaud the banks, you probably think everything is just hunky dory.

Mon, 02/06/2012 - 19:26 | 2132290 Tyranny is Love
Tyranny is Love's picture

Third!

Are you sure the people at CNBC can read?

Fri, 02/17/2012 - 02:42 | 2131460 iDealMeat
iDealMeat's picture

Obama / in-action Jackson will never investigate that..  Nor would Romney / ? ..  In fact, that secret pinky shake is how one becomes POTUS.

Mon, 02/06/2012 - 15:43 | 2131478 DaveyJones
DaveyJones's picture

cash movements are like bowel movements. regularity and careful tracking or things will start to stink.

Mon, 02/06/2012 - 15:45 | 2131492 Buckaroo Banzai
Buckaroo Banzai's picture

I always admired Rumseld's timing on that announcement. It's almost like he knew exactly what was going to happen the next day, to wipe that announcement out of the headlines.

Mon, 02/06/2012 - 15:47 | 2131500 DaveyJones
DaveyJones's picture

If you make steel support columns vaporize, a trillion is "loose change."  

Mon, 02/06/2012 - 16:22 | 2131637 a growing concern
a growing concern's picture

Nano thermate, bitchez!

Mon, 02/06/2012 - 19:31 | 2132299 Tyranny is Love
Tyranny is Love's picture

Nobody, not even the penta0n forgets what the spent $2.3 TRILLION on. not wanting to admit what it was spent on is another matter.

 

What does an underground facility below an airport cost to build with cost plus contracts?

Mon, 02/06/2012 - 19:56 | 2132374 Miss Expectations
Miss Expectations's picture

Is it bigger than Manhattan?

Mon, 02/06/2012 - 15:22 | 2131392 Comay Mierda
Comay Mierda's picture

nothing to worry about, i'm sure all the other fine financial institutions have better controls in place to prevent vaporization of cash & rehypothecation of your assets to infinite.  im sure this time there is just only one cockroach.

i couldnt even type that with a straight face

Mon, 02/06/2012 - 15:28 | 2131416 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

What the hell are the brokers doing while they are in the office if they aren't managing margin accounts T - Square?

Mon, 02/06/2012 - 15:41 | 2131465 dizzyfingers
dizzyfingers's picture

Cash business... one for you, ten for me!

Mon, 02/06/2012 - 15:16 | 2131357 EINSILVERGUY
EINSILVERGUY's picture

As we say in Texas

"Get a Rope"

Mon, 02/06/2012 - 15:16 | 2131363 non_anon
non_anon's picture

and Corzine still walks

Mon, 02/06/2012 - 15:29 | 2131419 Things that go bump
Things that go bump's picture

I'm sure he paid good money for his protection.

Mon, 02/06/2012 - 15:30 | 2131424 kaiserhoff
kaiserhoff's picture

Where are the indictments?

Younger readers may not know that Nixon was not impeached for a "third rate burglary."  It was the cover-up.

Mon, 02/06/2012 - 15:38 | 2131457 Gully Foyle
Gully Foyle's picture

kaiserhoff

Dude closer to ABSACM

https://en.wikipedia.org/wiki/Abscam

The FBI set up "Abdul Enterprises, Ltd." in 1978. FBI employees posed as Kraim Abdul Rahman,[1] a fictional Middle Eastern sheikh, in videotaped talks with government officials, where they offered money in return for political favors to a non-existent sheikh. A house (4407 W St. NW, Washington, D.C.), along with a yacht in Florida and hotel rooms in Pennsylvania and New Jersey, were used to set up meetings between various public officials and a mysterious Arab sheikh named "Kambir Abdul Rahman" who wanted:

  • To purchase asylum in the U.S.
  • To involve them in an investment scheme
  • To get help in getting his money out of his country

Much of the operation was directed by Melvin Weinberg, a convicted con artist, who was hired by the FBI for that purpose. It was the first major operation by the FBI to trap corrupt public officials; until 1970 only ten members of Congress had ever been convicted of accepting bribes.

On February 2, 1980, NBC Nightly News became the first media outlet to break the story that FBI personnel were targeting members of Congress in a sting operation. The FBI had codenamed the operation "Abscam", a contraction of "Abdul scam", after the name of the company.

Of the thirty-one targeted officials, one senator, Harrison A. Williams (D-NJ), and five members of the House of Representatives John Jenrette (D-SC), Richard Kelly (R-FL), Raymond Lederer (D-PA), Michael "Ozzie" Myers (D-PA), and Frank Thompson (D-NJ), were convicted of bribery and conspiracy in separate trials in 1981. While most of the politicians resigned, Myers had to be expelled and Williams did not resign until the vote on his expulsion was almost due. Five other government officials were convicted, including New Jersey State Senator Angelo Errichetti; members of the Philadelphia City Council, including Louis C. Johanson; and an inspector for the Immigration and Naturalization Service.

 

Mon, 02/06/2012 - 17:59 | 2132051 4horse
4horse's picture

perhaps echoing too much of a mob hit, or even vietnam hangover, Wackenhut had a name change  .  .  .

http://www.globalresearch.ca/index.php?context=viewArticle&code=BOW20120206&articleId=29109

.  .  .  geo-synchronized with the times, its new navigation does seem to find more and more travellers safely arriving, at GEO

Mon, 02/06/2012 - 16:43 | 2131715 dickizinya
dickizinya's picture

I give $5k to my kid and the government gets three pieces of paper.  MF moves billions and doesn't keep track?  Who goes to jail?

Mon, 02/06/2012 - 15:26 | 2131364 AC_Doctor
AC_Doctor's picture

A brokerage of sick bastards and overseen by even sicker bastards it seems...

Mon, 02/06/2012 - 15:52 | 2131514 hedgeless_horseman
hedgeless_horseman's picture

 

 

...but at least they weren't doing double entry.

Mon, 02/06/2012 - 17:11 | 2131849 TheFourthStooge-ing
TheFourthStooge-ing's picture

hedgeless_horseman observed:

...but at least they weren't doing double entry.

Unfortunately, they were doing DVDA.

 

Mon, 02/06/2012 - 15:18 | 2131369 Theta_Burn
Theta_Burn's picture

Still no felonious activity detected???

Mon, 02/06/2012 - 15:19 | 2131376 dwdollar
dwdollar's picture

Three months and they've gotten this far? Wow... glad to see they are on the ball.

Mon, 02/06/2012 - 15:20 | 2131380 williambanzai7
williambanzai7's picture

Just another good reason to throw the invisible book at Assange.

Mon, 02/06/2012 - 15:20 | 2131382 PaperBear
PaperBear's picture

I can barely believe what I am reading but then I snap out of it.

Mon, 02/06/2012 - 15:20 | 2131383 zilverreiger
zilverreiger's picture

we'll soon find out what his obama and biden connections are worth, maybe he has some shit on them

Mon, 02/06/2012 - 17:02 | 2131818 Whiner
Whiner's picture

Chapter 11 Trustee, SEC etc., investigation continuing until after election and out of public mind. Corzine will admit no wrongdoing but agree to behave and keep his license. Will pay &1M SEC fine and be back in the biz stronger than ever. Hush now, all is well. SuperBowl was great; American Idol still going strong, even Clint Eastwood sees a new dawning. It's all good- fornawhilenInwas a little worried. Kramer and Bartilaromo will tell us when to worry.

Mon, 02/06/2012 - 18:46 | 2132189 4horse
4horse's picture

the arc of governance fixes clerks under bankers

obama/biden are well downslope, where it's said to roll . . .

 

corzine, evidently, is neither below nor ever to be bowled over

of a higher calling, he answers only above- pols' paygrade -unto that mountaintop from which godswerk flows

Mon, 02/06/2012 - 15:21 | 2131384 GeneMarchbanks
GeneMarchbanks's picture

'At this time, the Trustee anticipates significant disputed claims against the MF Global Inc. estate by MF Global Holdings Ltd., MF Global UK Limited, and other entities.'

FSA... complicit

SEC... complicit

London + NY baby!

Mon, 02/06/2012 - 15:21 | 2131387 tony bonn
tony bonn's picture

fiduciary and accounting resonsibility is only for the little people - after they have eaten their cake....

Mon, 02/06/2012 - 15:21 | 2131388 distopiandreamboy
distopiandreamboy's picture

What a SHOCKING disregard for regulations!

/sarc off

Mon, 02/06/2012 - 15:22 | 2131396 urbanelf
urbanelf's picture

Verdict for the defendant!

Mon, 02/06/2012 - 15:23 | 2131398 carbonmutant
carbonmutant's picture

Well it solves the paper shredding problem...lol

Mon, 02/06/2012 - 15:27 | 2131412 HD
HD's picture

Actually you make very valid point.

Mon, 02/06/2012 - 15:23 | 2131400 narnia
narnia's picture

if corzine, the cfo & the board of directors were held without bail until proper accounting of fund transfers was presented, the court would have a proper accounting of all fund transfers by now.

Mon, 02/06/2012 - 15:26 | 2131406 HD
HD's picture

So, how do any of us know our brokers are safe?

Mon, 02/06/2012 - 15:32 | 2131432 hedgeless_horseman
hedgeless_horseman's picture

 

 

The condom will occasionally come off in your ass and you will find it in the toilet.  That's how you know.

Mon, 02/06/2012 - 15:50 | 2131513 HD
HD's picture

That was disgusting. And hilarious.

Mon, 02/06/2012 - 17:11 | 2131851 Nobody For President
Nobody For President's picture

i wondered where that came from...

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