Round Two Hearings Start, But Feasting on MF Global Continues


A second round of Hearings on the MF Global failure are scheduled by the Congressional Financial Services Committee on Thursday, February 2nd.  This Committee has the judicial power to call anyone into the hearings.

The stated purpose of the hearing is to “to continue the investigation of the $1.2 billion in missing customer funds during the bankruptcy of MF Global.”  Looking at the lineup of witnesses many wonder how this panel might bring us any closer to discovery of the claimed 1.2 billion missing.  Questions are if these hearings are really to investigate the stealing of customer funds and facilitate recovery, or are instead a political show to call attention to, for example, the problems of the Dodd Frank Act.  Or to beat up on Rating Agencies that operate without any ultimate accountability?

We sincerely hope that the committee is prepared and dedicated enough to seek this opportunity for truth,  justice  and resolution and not for political posturing. The witness panel is as follows:

Panel I

Mr. Michael Roseman, former Global Chief Risk Officer, MF Global Holdings Ltd.

Mr. Michael Stockman, Global Chief Risk Officer, MF Global Holdings Ltd.

Panel II

Mr. Craig Parmelee, Managing Director, Corporate and Government Ratings Division, Standard & Poor’s Rating Services

Mr. Richard Cantor, Chief Credit Officer, Moody’s Investors Service

Mr. James Gellert, President and Chief Executive Officer, Rapid Ratings International, Inc.

Mr Roseman was hired by MF Global in 2008 as Chief Risk Officer to identify risk and keep the company and it’s investors out of trouble.  Doing his job, he challenged the enormous leverage used behind Mr. Corzine’s sovereign debt trade.   A trade recognized very early to have the real potential to blow up the company.  He went so far as to make his case to the board in September 2010.  But then in January 2011, he was informed that he would be replaced by Michael Stockman who was more agreeable to Mr. Corzine. Stockman was at UBS for a number of years leading up to the near meltdown on the bank’s exposure to Credit Default Swaps — which lead the Swiss Government to bail out UBS to the tune of over $59 billion.  As an aside, Mr. Stockman also helped develop a course on “credit crisis analysis and risk management” for Dartmouth’s Tuck School of Business.

While it may be interesting to listen to testimony, we question if either of these two gentleman are in a position to tell us anything new at all about the handling of customer funds and the sudden – as the Wall Street Journal recklessly reports,  “vaporizing” or stealing of 1.2 billion  with “chaotic trading” in those last hours of MF Global, Inc’s, existence.  Roseman was long gone and Stockman worked far from a trading desk.

But perhaps the Committee is lining up the basis for related questioning and not conducting a political show.  We can only hope.

Why we do not have any clarity after so much time

From the very first day of the MF Global Bankruptcy MFG Facts questioned the structure.  Now others, who are perhaps even more informed on the US Bankruptcy code, go so far as to publicly characterize it as “criminal.”    Our regulators and courts applied a bankruptcy process (Chapter 11 and SIPA) to sequester private property into the MF Global estate.  An estate that is now expected to pay hundreds of millions in fees to attorneys and the bankruptcy industry.

Last week MFG Facts published an analysis and report on the still-opaque meeting where it was agreed the SEC and CFTC that the MF Global bankruptcy proceedings would go under Chapter 11 and SIPA.  This report received much attention.  Since then the CFTC has made public statements addressing issues raised not only by MFG Facts but many others as well.

The CFTC tries to answer

Chairman Sommers’ January 27th remarks to the National Association of Wheat Growers were informative and welcome, but did not offer explanation why the CFTC only now finds itself asserting that “commodity customers have an exclusive right to customer property. This includes, without limitation, segregated property, property that was illegally removed from segregation and is still within the debtor’s estate, and property that was illegally removed from segregation and is no longer within in the debtor’s estate, but is clawed-back into the debtor’s estate by the Trustee.”

Sommers continues that “When a BD is also a registered FCM, as MF Global was, there is one dually-registered entity and the entire entity gets placed into liquidation. Because there is one entity, it is not possible to initiate a SIPA liquidation of the BD, and a separate bankruptcy proceeding for the FCM.”

But her comments do not reveal that there is flexibility in the law, and therefore a possibility for a very different bankruptcy structure that would not have made customers creditors to the MF Global estate.  (We will soon see why if you stick with us.)   The structure applied was a choice.  The reasons behind this chosen path are not addressed.  The input and exact role of the CFTC into this choice, other than its agreement, has still not been revealed to the public. Commissioner Sommers full remarks can be found here.

Commissioner O’Malia also speaks out

This subject of the increasingly questionable, and now very messy, bankruptcy proceedings were also addressed by Commissioner O’Malia this week in a speech at NewYork Univesity.   In sum, he states, “All they [customer] can do is to meekly fill out the claims forms presented by the SIPC trustee, all of which are due today. This situation is intolerable and unacceptable.”  In spite of an overall very good speech, the CFTC again takes cover as helpless and hapless, rendering itself a now useless entity behind a SIPA proceeding:

O’Malia states, “Moreover, MF Global was dually registered with the Securities and Exchange Commission (the “SEC”) and the Commission. As a result, SIPC and its trustee have the primary responsibility for conducting the insolvency proceedings. The Commission has been relegated to a supporting role…

And continues, “Of course, DSIO can only review the books and records that they can access. In the U.S. alone, the MF Global insolvency involves two regulators and two trustees. I want to call on all involved to make sure that the Commission has full access to relevant books and records and witnesses. Otherwise, recovery for MF Global customers may be delayed needlessly.”

Nice call, but reality is, the SIPC trustee was given and now has the primary responsibility as the O’Malia states.  Of course it will be delayed needlessly.  That is the structure the CFTC agreed to. And with that, a legal machine will be richly rewarded out of the estate which has commingled customer assets. Trustee Freeh of the Holdings is not aiding the investigation of customer funds stolen out of MF Global.  His responsibility is to liquidate the Holdings and pay its creditors, not return stolen assets to customers of MFGI.  The bankruptcy is framework adopted by the courts allow for such intransigence.  That was the agreed upon choice by Gensler’s CFTC along with the SEC.

And no, in spite of the picture painted by both CFCT Commissioners as a system beyond their control, this bankruptcy did not needed to turn into a feeding fest of the MF Global carcass and its former customers by a platoon of bankruptcy attorneys. (For more on Big Bankruptcy Billers lining up around MF Global, read here)  A strong case could have been made from the first moment to protect and prevent customers from “meekly fill[ing] out the claims forms presented by the SIPC trustee.”

36000+ customers thrown to the billing machine. Who cares what federal laws say?

Readers might ask how can MFG Facts and others counter statements made by CFTC  Commissioners and other authorities who have even testified in Congress that this had to be a Chapter 11 SIPA bankruptcy?  Is it only opinion?

We need only to read the Bankruptcy Basics published by the Federal Courts (pg 31)

In addition, stock and commodity brokers are prohibited from filing under chapter 11 and are restricted to chapter 7. 11 U.S.C. § 109(d).”

But let’s go beyond the cursory basics and review Case Administration (Vol 2, Chapter 7,pages 56-60) published by the United States Trustee Office of the Department of Justice (underlines our own):

The United States Trustee should be aware that section 109(d) prohibits a stockbroker or a commodity broker from filing under chapter 11. See In re SSIW Corp., 7 B.R. 735 (Bankr. S.D.N.Y. 1980); In re CO Petro Marketing Group, Inc., 11 B.R. 546 (B.A.P. 9 Cir. 1981), rev’d in part, 680 F.2d 566 (9 Cir. 1982).

If a broker files a chapter 11 petition, a motion should be made by the United States Trustee to convert the case to chapter 7 or to dismiss it, with specific notice to the SEC and SIPC for the stockbroker and to the CFTC for the commodity broker.

But is MF Global Holdings a Broker?

The question of broker or not is the reason a massive legal machine is now fighting over definitions, as MFGFacts reported last week.

Yet we wonder how this can even be argued as MF Global Holdings presented itself to the public as a broker, has a primary dealer status with the Federal Reserve Bank and on it’s very own bankruptcy petition on October 31st described itself as a great big broker!


3. Brief description of MF Global’s business:

MF Global, a Delaware corporation, is one of the world’s leading brokers in markets for commodities and listed derivatives, providing access to more than 70 exchanges globally and is a leader by volume on many of the world’s largest derivative exchanges. The company is also an active broker-dealer in markets for commodities, fixed income securities, equities, and foreign exchange.


Is the Trustee for the Holdings now claiming the filing was wrong?  Is the court expected to believe it?  Apparently so.

Let’s return to the DOJ Bankruptcy guidelines:


Because stockbroker and commodity broker cases are very rare and can present unusual issues, the United States Trustee should notify and consult with the Office of the General Counsel immediately upon the filing of such a case. (page 56) 


The United States Trustee should, if possible, appoint a trustee with experience in commodity broker liquidation, and should encourage the trustee to retain counsel and other professionals with related experience.  (page 57)

Here we have it:  What does, indeed, increasingly appear to be a “fraudulent” application of bankruptcy structure to MF Global.

1.) A nontransparent decision making process that within a few short hours rushed MF Global into bankruptcy filing.

2.) A filing made with no reported and required notification and consultation with the Department of Justice US Trustee Office.

3.) No apparent input at all by CFTC Legal council.

4.) As court records show no effort to appoint a trustee with experience in commodity broker liquidation, but instead a SIPC insider who is also the trustee for Lehman Brothers but with no experience at all in the commodities industry

5.) And finally (for now) a trustee of the Holdings who has never worked as a trustee, but instead is well connected to Washington (former FBI Director) and a financial industry insider as a former board member of MBNC as we see here.

A series of Department of Justice guidelines under the US Bankruptcy Reform Act have been disregarded for the feeding fest.  Where is the DOJ?

[Today's] hearing by the Congressional Financial Services Committee:

Against this background we have Congressional Hearing with the stated intent to investigate the claimed $1.2 billion in missing customer funds. We all know where the funds are and what likely happened.  But the reality is until the shield of a bankruptcy structure is pierced to enable a true investigation with intent to rapidly return stolen funds, the funds will never be returned.  The hearings will go on and we will hear about Dodd Frank and rating agency lack of information and many “I do not recalls’” while  the bankruptcy industry lavishly feeds itself from the estate filled with “stolen” customer assets.

The members of the sub committees holding this are:

Randy Neugebauer, TX, Chairman

Michael G. Fitzpatrick, PA, Vice Chairman

Peter T. King, NY

Michele Bachmann, MN

Stevan Pearce, NM

Bill Posey, FL

Nan A. S. Hayworth, NY

James B. Renacci, OH

Francisco “Quico” Canseco, TX

Stephen Lee Fincher, TN

Michael E. Capuano, MA, Ranking Member

Stephen F. Lynch, MA

Maxine Waters, CA

Joe Baca, CA

Brad Miller, NC

Keith Ellison, MN

James A. Himes, CT

John C. Carney, Jr., DE