This article originally appeared in Futures Magazine.
The MF Global bankruptcy not only gave a black eye to the futures industry, it shattered the claim that futures customers have never lost money due to the failure of a broker — a claim that withstood the Lehman Brothers failure — which distinguished it in American financial circles.
That claim came crashing down. For some customers and industry participants, there was only one thing that would satisfy them, even beyond getting their money back: seeing former MF Global Chairman and CEO Jon Corzine behind bars. (A perusal of MF Global blogs and forums quickly confirms this sentiment.) Corzine placed the sovereign debt trades that put the firm in trouble and as head of the firm was responsible for it following rules on segregation.
But the case was different from the beginning. Regulators responsible for ensuring brokers followed the rules appeared to be caught off guard and lacked a sense of urgency. So when another story came out today — citing unnamed sources — claiming that “people involved in the case” say Federal prosecutors do not expect to file criminal charges against the former New Jersey governor, MF Global victims were angry but not surprised.
“After following all the details in this case since day one, I am no longer surprised or shocked by the failure of regulators and the [Department of Justice] to hold anyone accountable for the multiple criminal acts that occurred at MF Global,” says Stanley Haar, a former MF Global customer. “It should be clear to any objective observer, of whatever political persuasion, that this case is all about cronyism and political corruption, not justice. If customer segregated custodial accounts can be looted with impunity, how can anyone have faith in the safety of our financial system?”
Trace Schmeltz, partner with Barnes & Thornburg, who is also representing the Commodity Customer Coalition (CCC), adds: “In a firm like MF Global where story after story suggests that there was not a proper tone at the top, that Corzine shouted down compliance and risk management officers, had people replaced because they didn’t share his view of proper risk management, to suggest that a failure of risk management absolves a CEO and other top executives of responsibility is irresponsible.”
The MF Global debacle from the start has been one where the victims have had to stand up and demand action because they didn’t believe there was anyone looking out for their interests. An ad-hoc coalition of former customers — the CCC — was created to hold the bankruptcy trustees and regulators’ feet to the fire. It is clear that without the CCC, the initial distribution of customer funds would have been much slower.
Revelations, such that they are, that high-level MF Global executives will likely not be prosecuted also fly in the face of recent Congressional testimony by MF Global Inc. Trustee James Giddens. He noted to Congress, “Management’s actions, along with the lack of sufficient monitoring and systems, resulted in customer property being used during the liquidity crisis to fund the extraordinary liquidity drains elsewhere in the business, including margin calls on European sovereign debt positions.”
Giddens went on to testify, “I have determined there may be valid claims against certain individuals and entities. I believe that there are [plausible] claims, including claims for breach of fiduciary duty and negligence, against former MF Global CEO Jon Corzine, former MF Global CFO Henri Steenkamp, and former MF Global Assistant Treasurer Edith O’Brien, among others.”
CFTC Commissioner Jill Sommers testified at that same hearing that “a shortfall if customer segregated funds could amount to a violation of the Commodity Exchange Act (CEA) and commission regulations including those that govern segregated funds, prevent theft of customer money, require our registrants to properly supervise accounts [and] prevent making false statements.” She added, “A willful violation of the CEA is a Federal crime so if there is evidence to indicate that, that would be something that a U.S. Attorney would be able to pursue.”
Sommers would not comment on the New York Times web story but says, “We have been working with [The Department of Justice] from the beginning. We continue to review information in the enforcement investigation and until we are finished reviewing every single piece of information, we will not conclude our investigation. We wouldn’t purposely drag it out.”
Schmeltz was particularly disturbed by the notion that a criminal indictment could be avoided by simply citing poor risk management because that is what Sarbanes-Oxley attempted to address.
“The reason you have porous risk management is because the CEO, the president, the COO don’t make it job one to manage customer money appropriately,” he says. “If you take the tone at the top that we will do whatever we have to to keep these trades alive because they are the way we keep our firm profitable for the future, that sanctions the fraud. That is turning a blind eye to the very risk management that should be in place to protect customers.”
Schmeltz adds that “in cases where there is financial fraud or impropriety, almost always it is because there was not a proper tone at the top: of doing things by the book, of proper risk management techniques, of complying with rules and regulations and that is where you have problems. By all accounts Jon Corzine did not set a proper tone at the top at MF Global.”
CCC co-founder John Roe says the New York Times story calls for an investigation into potential leaks and reiterated his call for an independent counsel.
“The DOJ should be very careful not to release any information on its investigations, so as not to prejudice pending cases,” Roe says. “When anonymously sourced articles like this appear virtually clearing Corzine, it demonstrates the need for an independent counsel to get this away from the DOJ.”
He adds, “The SIPA Trustee told the Senate that there was enough evidence to pursue a case for fraud against Corzine. The CFTC has repeatedly told Congress that violations of the Commodity Exchange Act constitute felonies. Does the Department of Justice expect the public to believe that it’s not against the law to violate the Commodity Exchange Act?”
Throughout the long slog that has been the MF Global investigation, various stories, citing unnamed sources, have appeared in the press that seem to discourage the pursuit of making customers whole and criminal prosecutions. At one point the Wall Street Journal reported that MF Global customer funds may have “vaporized.”
Schmeltz says stories indicating there may be no criminal prosecution of top MF Global officials may be “trial balloons” use to gauge how big the public outrage would be.
He adds, “It is imperative that the message be sent to corporate executives, particularly executives in the futures industry who manage customer money that risk management is job number one. Not the profitability of your firm, not your shareholders return. If you want us to trade in a market, to put our money in your hands, risk management of our cash has got to be job one.”