MF Global Roundup: the [so-far] Great Escape of "Teflon Don" Corzine; Bankruptcy Shenanigans Exposed; the "F" Word Revisited

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Ahead of Tuesday's Senate Banking Committee hearing on MF Global, we present the April 20 installment of Capital Account with Lauren Lyster, featuring futures industry veteran guest, Mark Melin.  Ms. Lyster pulls no punches in the opener:


Has the case really gone cold? Or, are those who are in charge of the investigation, the "regulators" and the trustees, simply spraying teflon on every piece of sticky evidence that could lead to criminal prosecutions--and, ultimately--the recovery of stolen customer money?


We wish that MF Global were just a one-off affair--a bad apple, if you will.  Unfortunately, it seems more likely to us that this is another milestone in the history of what we see as criminality, which has swept through the financial services industry, like some sort of Medieval Black Plague--the Black Death for capital formation.  It seems the only time people are held accountable anymore, is when they commit crimes that affect the super-rich.


Bernie Madoff is a prime example...Madoff is securely behind bars, but Jon "Teflon Don" Corzine is busy ordering carmel-Frappuchinos at the local Starbucks as he goes to shop for office space in New York...bothered only by the low din of discontent emanating from the blogosphere (and shows like this, Capital Account).  What a nuiscance we must be to the new God-fellas of Wall Street...


Nuiscance, indeed, to which we hope we are part.  Below is the entire episode, in which Ms. Lyster and Mr. Melin cover the following salient points, all pointing to a criminal intent to commit fraud, as well as the role of regulators and investigators aiding and abetting the criminals:

  • Why was the MF Global back office cleared out with three top personnel allowed to leave, just as the firm was exeriencing its most serious liquidity (ahem solvency) crisis in its soon-to-be-terminated existence?
  • Why were C-level executives, far from being sequestered by investigators and being placed in an information silo, allowed to run the company for six weeks (prior to Mr. Freeh being installed as Trustee of the Holdings company)?
  • Why did Freeh wait until early March to have MF Global Holdings USA declare bankruptcy, the very entity that retained the few remaining executives and employees and may have been cash-rich? 
  • Why did Federal cops and investigators fail to so much as question Mr. Corzine nearly six months after the crime?
  • Why were large counterparties paid with wire transfers, when requests from lowly customers for wires were converted to checks (which ultimately bounced)? "Sloppy is when you don't do things consistently.  Sending all checks to customers and all wires to counterparties--that's consistent."  See here for details published by John Roe of the Commodity Customer Coalition.
  • Why were the final days characterized as so "chaotic" when a properly programmed iPhone or Android smart phone (sorry, RIMM) should have been able to handle what amounts to maybe a few dozen megabytes of transfer instructions?
  • Just what were the details surrounding the successful lobbying effort by top level MF Global execs that effectively postponed reforms on rules that would limit use of customer funds (coincidentally, or not perhaps, just ahead of a $325 million bond offering by MF Global)? [For more details, see our prior piece from this week, which includes exclusive CFTC emails on the issue.]

Was MF Global a parking lot for European sovereign debt?
On another note, Pam Martens, writing for has a fantastic exercise in out-of-the-box thinking, as well as her own round-up.  She begins:
Only on Wall Street can you bankrupt a company; misplace $1.6 billion of customers’ money; lose 75 percent of shareholders’ money in two weeks; speed dial a high priced criminal attorney and get a court to authorize the payment of your multi-million dollar legal tab from the failed company’s insurance policies; have regulators waive your requirements to take licensing exams required to work in the securities and commodities industry; have your Board of Directors waive your loyalty to the firm; run a bucket shop out of the UK; and still have the word “Honorable” affixed to your name in a Congressional investigations hearing.
One of the few to question the role of JC Flowers in the MF debacle, Martens continues:
But wearing the three incompatible hats was not the only fatal flaw in Corzine’s management model: he contractually did not owe his total loyalty to MF Global. The August 11, 2011 proxy issued to shareholders and filed with the SEC carried this caveat:
“During the term of Mr. Corzine’s employment agreement with the Company, Mr. Corzine will spend substantially all of his business time and attention on Company matters, except that he may serve as an operating partner of J.C. Flowers. Pursuant to his contract with J.C. Flowers, Mr. Corzine will not receive any salary from J.C. Flowers as long as he is serving as Chief Executive Officer of the Company, but he will have a financial interest as a limited partner in certain of J.C. Flowers’s investment management entities. Mr. Corzine’s employment agreement with the Company contains a provision regarding corporate opportunities. In general, this provision provides that, if Mr. Corzine acquires knowledge from J.C. Flowers (and not the Company) of a potential transaction or other business opportunity that may be a business opportunity for the Company he will have no duty to communicate or present such opportunity to the Company…” 
We would point out to MF Global customers pursuing redress against Mr. Corzine, individually, that it is not always the case that simply by disclosing something, one waives his or her responsibility under the rule of law for it.  
And, how the CATO institute founders, the Koch Brothers (see this EPJ exclusive), got out of Dodge early:
Compared to Corzine’s former employer, Goldman Sachs, MF Global was a flea on an elephant’s back.  It had experienced a string of quarterly losses since 2007, was predominantly a Futures Commission Merchant (FCM) holding retail and institutional commodity and futures trading accounts, and had 80 regulatory actions against it since 1997. It had a securities brokerage unit with 300 to 400 U.S. accounts according to the trustee. How big those accounts were is unknown.  If they were all institutional or hedge fund accounts, it could have been a sizeable operation.  One known account, which presciently moved out before the bankruptcy, belonged to the $100 billion private energy firm, Koch Industries, majority owned by Charles and David Koch, financial backers to numerous corporate front groups.
The other "JC"
More on the role of "the other JC," who, we note, was not only instrumental in securing Mr. Corzine's hire, but that of fellow ex-Goldmanite Laurie Ferber, who was MF Global's go-to reguatory fixer:
JC Flowers was the namesake of J. Christopher Flowers, a former colleague of Corzine’s at Goldman Sachs. Flowers had acquired a stake in MF Global to help shore it up in 2008 after a trader blew up $141 million of the firm’s money overnight in what the firm called an unauthorized trade. It was Flowers who invited Corzine to become CEO of MF Global.  Corzine left MF Global on November 4, four days after its bankruptcy filing, at the request of the Board.
Why Corzine, a man of great wealth and political stature, would join an obscure brokerage firm is a mystery worthy of pursuit by the FBI, which is investigating the missing customer funds according to Congressional sources. One avenue worthy of pursuit according to Wall Street veterans, is whether Jon Corzine turned MF Global into a giant parking lot for other Wall Street firms’ bad bets on sovereign debt. Fueling that speculation is the fact that JPMorgan, Citigroup and Bank of America were part of a syndicate of 22 banks that provided MF Global with an unsecured $1.2 billion revolving credit line that required no posting of collateral, despite the company’sstring of losses and weak credit rating.  The firm heavily tapped this line of credit in its last days.
And on the beleaguered trustee of the MF Global Holdings estate in Chapter 11 (who, incidentally is still under investigation by the Treasury department for allegedly accepting funds from a designated Iranian terrorist group):
The trustee of the Chapter 11 proceeding for the parent holding company is Louis J. Freeh, a former FBI director. On April 19, Freeh asked the court for an expedited hearing to grant him the ability to issue subpoenas to “the Debtors’ affiliates and subsidiaries, the Debtors’ former employees, current and former officers, directors and employees of the Debtors’ affiliates and subsidiaries, lenders, investors, creditors and counterparties to transactions with the Debtors…” 
The court is allowing Freeh’s own firm, Freeh Group International Solutions, to perform the accounting work. Four docket entries show that Freeh has asked for and received four extensions by the court to file a list of assets of the holding company.
We would add that Mr. Freeh and his firm(s) have exactly ZERO experience in bankruptcy prior to MF Global, and even Judge Glenn has expressed concern about the work he has been forced to outsource to a plethora of other law firms.
Revisiting the Trustee Conflicts
Then, there is the other trustee of the broker unit, Mr. James W. Giddens, who is statutorily designated under SIPA as the customers' advocate.  Ahead of the Senate hearings, we would like to remind that just over one year ago, the Office of Inspector General at the SEC released a scathing report of SIPC (the private corporation created by SIPA statutes), which is supposed to oversee failing securities broker dealers for the protection of customers and that now by-gone relic, "market integrity."
Liquidations are similar to ordinary bankruptcy cases, it does not provide any limit on the amount of trustee fees in SIPA liquidations, unlike bankruptcy cases. Second, under SIPA, where payments are made out of the SIPC fund, courts have no discretion whatsoever to limit fees that SIPC has recommended for trustees or their counsel. Thus, even if a court finds the amount of fees awarded to the trustee to be excessive, it is required to approve such excessive fees if SIPC determines that the fees are reasonable. We found that in one case, a Southern District of New York bankruptcy judge deemed fees to be awarded to the trustee in a liquidation to be excessive, but found that he had no choice but to approve the fees.
According to the latest published report, the fees paid to the trustee and his counsels processing the Lehman claims for the period from September 2008 to September 2010 (24 months) totaled approximately $108 million. According to the fourth interim fee application, as of September 30, 2010, the entire administrative fees, including fees for accountants, consultants, etc., totaled approximately $420 million. comments, "We hadn’t see anything yet.  October 24th Bloomberg reported that LBH had spent “642 million on its liquidation, with most of the money going for professional and consulting fees. Trustee James Giddens and his law firm, Hughes Hubbard & Reed LLP, have earned about $169 million.”
Not to fear, there has been commissioned a SIPC Modernization Taks Force to implement reforms, on which no lesser than MF Global Trustee (and former price-gouging Lehman Trustee), James W. Giddens is a member.
Speaking of Mr. Giddens' firm, Hughes Hubbard & Reed, Ms. Martens also had something to say about them in her aforementioned MF Global article:
Hughes Hubbard and Reed is the same law firm handling the bankruptcy of Lehman Brothers.  After more than three years, customers have yet to be made whole. There are over 7600 law firms in New York City according to the legal web site,  Why SIPC has selected the same firm for two of the largest Wall Street collapses in history is noteworthy.
Hughes Hubbard and Reed hired the same public relations firm to handle both the Lehman and MF Global matters, APCO Worldwide.  APCO was originally formed as a subsidiary of Arnold & Porter, the law firm aligned with spin for Big Tobacco in the 90s. [EB: Arnold & Porter was also heavily involved in lobbying the CFTC with respect to DF implementation, including CFTC Rule 1.25, investment of customer funds.]
According to Wendell Potter, an insurance company public relations insider and whistleblower, writing in his book  Deadly Spin, "One of the deceptive practices of which APCO has a long history is setting up and running front groups for its clients. In 1993, Philip Morris hired APCO to organize a front group called the Advancement of Sound Science Coalition in response to the U.S. Environmental Protection Agency's ruling that secondhand tobacco smoke was a carcinogen. Philip Morris also hired APCO to manage what it called a 'massive national effort aimed at altering the American judicial system to be more hostile toward product liability suits' and to build a coalition to advocate for tort reform. According to the Center for Media and Democracy, the tobacco industry paid APCO almost a million dollars in 1995 to implement behind-the-scenes tort reform efforts and specifically to create chapters of 'grassroots' citizens' groups called Citizens Against Lawsuit Abuse."
In the same month that Corzine was hired by MF Global, March 2010, there were confirmed news reports that APCO Worldwide had been hired by the Financial Services Roundtable, a Wall Street trade group, to promote the image of Wall Street as trustworthy.  An APCO spokeswoman says they no longer represent the account.
Lets not forget that, according to the New York Post, MF Global was also paying Bill Clinton and Tony Blair's consulting firm, Teneo Holdings, betwen $50,000 and $125,000 per month for "public relations and investment advice."  
The arcane bankruptcy structure
Coming full circle, we will finally get back to the arcane bankruptcy structure of the MF Global entities that ought to be questioned in detail at Tuesday's Senate hearings.  In particular, the SEC Director of Trading and Markets, Robert Cook, should be held accountable for what was ultimately his decision (though with no protest by the toothless CFTC) to subject 38,000 futures customers to a SIPA liquidation, which offers no insurance protection and that places futures customer claims to MF Global estate assets in legal limbo.  For, as we have pointed out previously, it was his predecessor, at the then-styled position of Director of Market Regulation, who exercised authority to put Lehman in a SIPA liquidation (at least Lehman was primarily a securities firm, not a futures firm).
Stanley Haar discusses this, and other issues, here:
Even Chuck Grassley, the sponsor of the now-widely criticized 2005 bankruptcy reform act, has stated, "The bankruptcy laws are written to ensure that company executives who were involved in the demise of a company because of fraud or mismanagement shouldn't be eligible for bonuses," Mr. Grassley said.
More broadly, MF Global customers have an absolute right to clawback of questionable margin payments and asset transfers from the broker unit that occurred in the weeks leading up to the firm's demise because there was a clear pattern of intent to deceive investors and customers alike--from manipulating regulators and the regulatory process to changing business practices in the final wee--all of which ensured that customers would be last in line for the remaining morsels of the MF Global carcass. (And, as we have pointed out since early November, 2011, the very nature of the Corzine Trade from Day One was such that all the risk was put in the customer brokerage house, while profits were diverted to an offshore business unit).
"Fraud" is the operative word here.  There is no dispute that the Commodity Exchange Act (sic, the law) has been broken, but until fraud is investigated, customers are at the mercy of a very fuzzy and opaque legal process.

It's time for Congress to put pressure on those in charge of this investigation and oversight to break their own glass of silence and dare them to utter the magic "F" word.