Evidence of fraud at MF Global | Futures Magazine

    This article originally appeared in the April 2, 2012 edition of Futures Magazine.


    The Commodity Customer Coalitiondelivered a memo to U.S. Attorney General Eric Holder as well as U.S. attorneys from New York and Chicago and members of Congress stating that there is clear evidence of an intent to commit fraud by MF Global in its closing days.

    In the early days of the MF Global bankruptcy one of the red flags that something was incredibly wrong at the firm were reports from multiple customers that MF Global had stopped transferring funds to customer through wire transfers and instead began to cut them checks.

    This was disturbing to customers used to moving money by wire at a moment’s notice. Worse yet is that many of these checks—perhaps thanks to the delay—ended up bouncing. After last week’s hearing when it became clear that money was transferred out of customer segregated accounts the fact that MF Global purposely slowed down payment to customers is evidence of intent to commit fraud according to the CCC memo. “When you have abrupt changes in standard business practices that is a “badge of fraud,”” says CCC co-founder John Roe.

    The CCC’s claims of intent to commit fraud centers around two sets of transfers:  “MF Global converted customer wire transfer requests to payments by check. At the same time, MF Global sent wire transfers to counterparties from that same customer segregated account to satisfy proprietary obligations,” the memo notes. It concludes, “These activities—paying creditors quickly while returning customer funds as slowly as possible—provide strong evidence that MF Global knew or should have known that it was sending customer funds (not excess segregated funds) to its creditors in its final days.”

    The memo includes account statements from Steven N. Kaplan a client of Roe’s firm BTR Trading. Kaplan had requested a wire transfer of customer funds but instead received a check, which was co-signed by Edith O’Brien and Christy Vavra, that later bounced.

    The memo states, “The decision to stop sending wires to customers from the segregated accounts demonstrates that MF Global was concerned with preserving liquidity. This may have been done to bolster the prospects of selling the firm to Interactive Brokers or because they were concerned that the draining of this account would reveal that customer funds had already been commingled to stave off MF Global’ s bankruptcy.”

    The CCC is concerned press reports citing unnamed sources claiming that no actual crimes have been committed in the MF Global bankruptcy would hurt customers’ chances of being made whole. The memo states, “we believe that sufficient evidence exists of intent to commit an actual fraud to support probable cause to arrest one or more employees of MF Global for several state and federal financial crimes.”

    Roe points out that in addition to the converting wire transfers to checks, the fact that Jon Corzine himself directed a transfer to JP Morgan is an abrupt change in standard practices.