Submitted by EconomicPolicyJournal.com
It's been another action packed week on the MF Global scene. As we wrote yesterday, CFTC Chairman Gensler will go hat in hand to Congress today to beg for a budget increase. This, despite the fact that two of his own commissioners issued a scathing dissent to his fiscal year 2011 annual performance report. Commissioners Sommers and O'Malia revealed, among other things, that three major exchanges were not reviewed in fiscal year 2011: ICE, CBT and CME, the latter of which was of course MF Global's regulator.
They go on to write what is the closest we will probably ever get to an admission that the CFTC was asleep at the wheel as MF burned (emphasis ours):
We do not want to diminish the hard work of the Commission and the staff, to meet or exceed the Commission’s goals in many other areas. However, the Commission cannot afford to ignore mission-critical responsibilities either. The Commission originally voted to establish these goals and to make every effort to achieve them. Therefore, the Commission must use this report to review its shortcomings and make adjustments to both its budget and surveillance priorities to ensure that critical futures market oversight is not neglected. Failure to make these adjustments expose futures markets to both systemic and operational risk and could cost customers hundreds of millions of dollars. MF Global provides a startling wake up call for the Commission to review its existing rules and regulations for flaws and to ensure that the Commission’s current obsession with the Dodd-Frank rules do not compromise its existing mission.
We hope the Ag Subcommittee will not give up the chance to ask some tough questions of Gensler today. A few suggestions may be found here.
Moving along, it's been a rough couple of weeks for MF Global Trustee Louis Freeh. We learned the former FBI director is being investigated by the Treasury Department for allegedly taking tens of thousands of dollars in speaking fees from a designated Iranian terrorist group.
Freeh was also pounded last Friday by the Senate Agricultural Committee, which sent him a letter signed by every single member of the committee, itself a rare event. They wrote:
We are deeply troubled by media reports that you are considering seeking permission of the court to pay enormous bonuses to top executives of the now-bankrupt MF Global Holdings. It is difficult to understand why you would even consider paying anyone a bonus while nearly $1.6 billion in customer money is still missing. And it is absolutely outrageous to propose paying bonuses to the very people who were responsible for the firm’s operational, legal, and financial management at the time customer money disappeared.
These "very people" would be MF's top executives (sans Corzine) and lower level employees that were retained under the MF Global Holdings USA unit, which curiously filed for Chapter 11 protection only as recently as March 2, 2012. Four of these employees will testify next Wednesday, March 28, 2012, including General Counsel Laurie Ferber, known for being able to pull regulatory strings, and Christine Serwinski, who signed off on the MF Global Inc. broker unit annual audit that the SEC first withheld from the public, then changed the file stamp date. Mr. Henri Steenkamp, the PricewaterhouseCoopers-trained CFO, will testify again, as will the treasury back office worker, Edith O'Brien, for the first time.
It wasn't over for Mr. Freeh, however, as Sapere Wealth Management LLC called him out on a scandal that might be even more outrageous than bonus-gate. It turns out that there is a collection of insurance policies totaling $120 million underwritten by an MF affiliate, MFG Assurance Company Limited. Despite the sworn statement by one of the insurer's directors, John Oliver Heyliger, that these are not D&O policies, Mr. Freeh has sought to divert the payout from the broker customers that have yet to be made whole, to the MF directors and executives, including Jon Corzine, for legal defense fees. Blasts Sapere:
3. MFGI’s commodities customers seek in other courts to recover the full balance of the damages to which the law entitles them (i.e., out-of-pocket loss plus other tort damages) from non-debtor persons whose acts and omissions caused MFGI’s breach of its duty to maintain fund segregation. The non-debtors whom the MFGI commodities customers sued consist of former directors and officers and others (Jon Corzine, et al.). If the Chapter 11 Trustee and MFGA were to have their way, these liability policies’ proceeds would not be used to pay down a portion of MFGI’s existing liability to its commodities customers for their out-of-pocket loss. Instead, the policies’ proceeds would be diverted from the injured persons whose claims the policies cover and who have vested rights to the proceeds protected by N.Y. Ins. Law § 3420(a)(1), and instead used by Corzine, et al. to defend against actions by MFGI’s commodities customers. Because defense costs erode the policies’ limits, this would also waste MFGI’s estate property and would unlawfully subordinate the rights of MFGI’s commodities customers in order to favor Corzine, et al. The Chapter 11 Trustee’s and MFGA’s positions are outrageous, unjust, inequitable, legally untenable and absurd.
Sapere's attorneys also called out the broker unit's SIPA Trustee, James W. Giddens, for again not living up to his statutory duty to protect customer interests (just who does he work for, anyway?):
The Trustee is a fiduciary and has the duty to do this as promptly as possible. For unfathomable reasons, the Trustee has not collected the policy proceeds. Instead, the Trustee is passively acquiescing in efforts being made to devest MFGI’s commodities customers of the policies’ proceeds and to divert them to pay Corzine, et al.’s defense costs in actions brought against them in other courts by MFGI’s commodities customers trying to recover the entire loss to which tort law entitles them.
[Update: see Daniel Collins' article in FuturesMag, which expands on Giddens' mischieviousness.]
Finally, Dr. William K. Black took time to talk to Lauren Lyster at Capital Account yesterday about the MF Global cover-up. When the man who smoked out the Keating Five talks fraud, we listen.