The voluntary return of $546 million in MF Global customer assets, the subject of hard fought 2 ½ year battle, was not motivated solely by the kindness of JP Morgan.  Rather, it could be considered fruit from a likely hard investigation now gearing up if not already under way.  This investigation, declared “dead” many times over in leaks to the press from official sources, has heated up, as first discussed here.

The return of illegally transferred MF Global customer assets was always a key bone of contention.  JP Morgan had summarily dismissed regulatory and public pressure to return customer assets, so the question is: why submit to authority now?

In 2012 the National Futures Association (NFA) went so far as to send the bank a public letter, which was generally brushed aside as were numerous verbal requests and mounting public pressure from groups such as the Commodity Customer Collation and its leaders James Koutoulas and John Roe.  This significant pressure was dismissed, yet an attempt by bankruptcy trustee James Giddens was successful.  The fact this occurred at this moment in time is not a coincidence.

Speculation is JP Morgan’s normally dismissive attitude towards government regulators might have changed in the face of what is expected to be a no holds bar CFTC / DoJ criminal investigation.  In other words, the specter of government actually asserting itself and allowing career investigators to do their jobs unimpeded is enough motivation for JP Morgan to return what are documented to be illegally transferred customer assets.

But perhaps more important to the future, a real investigation could also be motivation for JP Morgan to provide critical testimony regarding the criminal activity of MF Global executives, including that of Jon Corzine.

The need for deterrence that derives from a Jon Corzine conviction is more important because the future that matters most.  Since 2008, when financial crimes that damaged the US financial system were was documented not to be investigated by DoJ’s former assistant attorney general in charge of criminal investigations Lanny Breuer, Wall Street crime has imploded in its brazen disregard.  MF Global is one example, but the case of HSBC laundering money for terrorist organizations and drug cartels – after being warned on several occasions not to do so – is a sign of complete disrespect and a breakdown of law and order on Wall Street.   When the full story is known, Mr. Corzine’s disrespect for the US financial system and its cogs of justice will likely stand as the turning point in a long battle.

Is this real?  Is the investigation a serious point where the rule of law might actually apply to once exempt Wall Street players?  We don’t know for certain at this point, but one key tell is going to be the type of charges filed against MF Global executives.  If RICO charges are used, this will send the powerful message that a cop is in fact back on the beat.

Mark Melin is author of three books and taught a course on managed futures for Northwestern University’s Executive Education program.  To read more of his blog posts, click here (requires free registration).  Contents Copyright (C) 2013 Mark Melin.

How does one define a previously un-definable topic such as High Frequency Trading (HFT)?

Sources close to the Commodity Futures Trading Commission (CFTC) indicate new thinking may be underway regarding the topic of High Frequency Trading (HFT). Speculation is this thinking could look at the relative market impact HFT may have in a given market move as a legal definition. Such a definition could consider the relative impact of a particular HFT player as a percentage of a market damaging move and could be used for potential CFTC action on the issue. This new thinking could be outlined sometime in March, sources said.

Current US regulation regarding HFT is considered by some market participants to be behind the curve relative to the European Union. In the EU, for instance, algorithm type is used as an identifier to determine market participant behavior during crisis conditions.

“There is significant uneasiness on the speed in markets,” noted Vassilis Vergotis, Executive Vice President, Head of Eurex, Americas.

For the full article, visit the source web site (requires free registration): http://www.uncorrelatedinvestments.com/blog/?p=59

Mark H. Melin is author of several books, including High Performance Managed Futures and taught on the topic at Northwestern University’s Executive Education program

NEW YORK (Reuters)—U.S. financial regulators are pushing to turn hedge funds into informers on the white collar crime beat.

The Financial Crimes Enforcement Network (FinCEN) is working on a rule that would require U.S. hedge funds to file formal reports notifying U.S. authorities of any suspicious trading by employees or outside parties, the regulatory agency said.

The rule being crafted by FinCEN, part of the Treasury Department, would force the $2 trillion hedge fund industry to police itself in much the same way banks, brokerages and mutual funds are required to do by filing suspicious activity reports (SARs) with the unit.

Steve Hudak, a FinCEN spokesman, said a proposed rule for the hedge fund industry could be filed for public comment sometime in the first half of this year. But the rule, which would cover activities such as insider trading and money laundering, will force funds to spend more money on building out their compliance and legal departments.

Hedge fund lawyer Ron Geffner said he expects many in the industry will oppose the new rule as being both intrusive and costly.

“Anytime there’s any regulatory hook into a firm, it’s like a domino,” said Mr. Geffner, a partner at the law firm Sadis Goldberg in New York. “When taken together, all of the rules and regulations, both new and revised, serve to intimidate entrepreneurs.”

A spokesman for the largest hedge fund trade group, the Managed Funds Association, did not respond to a request for comment.

The measure also could heighten tensions in the hyper-aggressive hedge fund world as it could put firms and their employees in a position to snitch on their competitors.

FinCEN’s move is not entirely new. In 2003, the agency began looking at imposing a SARs requirement on hedge funds, but eventually withdrew a proposed rule in 2008 after deciding it was too hard to define a hedge fund and enforce the requirement. The agency now believes the new mandate in the Dodd-Frank financial reform law that requires U.S. hedge funds to register as investment advisers gives it the ability to require hedge funds file SARs.

James Freis, a former FinCEN director, said the new rule is long overdue and would require hedge funds to do more due diligence on their employees and customers. He said it also would require hedge funds to hire staff who are well-versed in anti-money laundering procedures, which is one of the main reasons banks are required to file SARs.

“Suspicious activity reporting would put an affirmative obligation upon investment advisers, including certain hedge funds, to notify the authorities of suspected illegal activity,” said Mr. Freis, now an attorney with the law firm Cleary Gottlieb in Washington.

Mr. Freis served as the director of FinCEN until September, when he was forced out over disagreements with Treasury officials over FinCEN’s priorities, according to a person familiar with the matter. During his tenure he was an advocate for a hedge fund reporting requirement.

The filing of SARs reports took on new urgency for the financial industry in the wake of the Sept. 11, 2001, attacks on New York and Washington as federal lawmakers moved to require banks to become more aggressive in tracking money flows by terror groups.

The SARs reporting requirement is one that banks and brokers do not take lightly.

Jay Hack, a partner at Gallet Dreyer & Berkey in New York, said many banks file a “defensive SAR” when they see something even remotely suspicious to keep the regulators satisfied.

In the brokerage world, the SARs requirement has provided securities regulators and federal prosecutors with leads about investment scams and insider trading rings, securities lawyers said.

From 2003 to 2011, securities firms filed more than 110,000 SARs, with most of those involving incidents of money laundering or unusually large transactions, according to FinCEN. Roughly, 3,500 of those SARs involved a suspected insider trading incident. Final numbers for 2012 are not yet available.

But the agency reports that the number of SARs filed involving insider trading was up 34 percent in 2011 from 2010. The increase came at a time when U.S. authorities were engaging in a massive crackdown on insider trading in the hedge fund industry that has led to more than 70 convictions.

Many hedge funds maintain relatively small compliance and legal departments, often preferring to hire outside contractors to perform that work.

SAC Capital, the $14 billion hedge fund with 900 employees that has drawn scrutiny in the insider trading investigation, is rarity in that it has more than 30 people working on compliance matters. People familiar with SAC Capital, which declined to comment, said the firm’s compliance team is one of the largest in the hedge fund industry.

By Emily Flitter

Written by Bob English

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. Here is a link to 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:

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 Lois 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 criminal 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.]

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.

To view the full video interview with Lauren Lyster and Mark Melin click here.

Bob English is the author of this article, the opinions expressed are entirely his own. View his work at:

http://english.economicpolicyjournal.com/2012/04/mf-global-roundup-so-far-great-escape.html

When one considers the lack of investigatory zeal in the MF Global scandal, it might raise questions as to the need to make the investigation of MF Global’s top executives – which is occurring some six months after a potential crime was committed – eventually a matter of public record.

MF Global is a story that publicly debuted with a fraud allegation. This is when CMEGroup president Terry Duffy famously proclaimed in Congressional testimony that critical account segregation reports had been falsified by MF Global to regulators during their final week of operation. Further, Mr. Duffy clearly called into question the honesty of MF Global CEO Jon Corzine’s now famous testimony “I simply don’t know where the money went.”

With credible acquisitions of potential fraud highlighting a major pronouncement regarding the eighth largest bankruptcy in the US, one might assume that an investigation, or at least questioning, of MF Global’s top executives might take place. This is particularly the case as reports had surfaced in leading publications quoting those close to the investigation as saying “the case is cold” and “prosecution is unlikely.” With all this, one might assume questioning of the top executives had taken place.

That didn’t happen.

According to the New York Times, MF Global’s inner circle of executives, including CEO Jon Corzine, General Counsel Laurie Ferber, president Bradley Abelow, along with newly employed Henri Steenkamp, Chief Financial Officer, had not been initially questioned after the “loss” of $1.6 billion in customer segregated funds. In Congressional testimony on March 28, 2012 rumors that top MF Global executives had yet to be questioned were confirmed when both Ms. Ferber and Mr. Steenkamp testified they had not yet been directly questioned by investigators. However, in this same testimony it was confirmed that Chicago back office employee Christine Serwinski, chief financial officer for North America, had been questioned twice. Sources have indicated that back office employees have undergone extensive questioning while watching MF Global top executives float freely through the company with impunity. These same sources say that the back office employees who remained at MF Global were sequestered and not allowed to talk to one another about MF Global or its demise, while MF Global’s top executives operated the company that was plundered and had the ability to wire transfer money out of MF Global for up to six weeks after the firm declared bankruptcy.

When it comes to investigations, the type of questions and how they are asked can greatly impact the outcome. Given the fact that an investigation into the top officers might never have taken place without public pressure, and with such un-even investigation of the back office, is it not reasonable to ask that the now long overdue investigation into MF Global’s top executives be made transparent so it can be held to a higher standard?

Transparency need not be immediately made public. It can occur after a trial or when the “case is cold.” The point is known transparency into a situation can alter behavior and operate as a most cost effective regulator.

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To follow the MF Global case in real time, go to www.Twitter.com/MarkMelin or visit www.Go2ManagedFutures.com

All contents Copyright (C) 2012 Mark H. Melin.

In many ways, Wednesday’s House Financial Services subcommittee hearing on the eighth largest bankruptcy in US history was as much about what was not said than what was said.

Much attention was focused on MF Global assistant treasurer Edith O’Brien and her widely anticipated move of declining to answer questions during the hearing. Ms O’Brien has been at the center of questions surrounding her role in questionable money transfers of nearly $1 billion during the final days of MF Global’s existence. Speculation is Ms O’Brien received instructions from top officers at MF Global to transfer the money, a charge which has been denied by the executives, who generally claim either to not be aware of “where the money went” or claim they did not provide specific instructions to dip into customer segregated funds. A handful of money transfers were sent to the likes of JP Morgan and related MF Global overseas brokerage units in the final days of the firm’s existence. The staggering size of the money transfers makes it impossible for such transfers to have occurred without dipping into customer segregated funds, as the reported $1.6 billion “missing” from MF Global far exceeds the company’s net worth at the time.

While O’Brien was up-front about not answering questions, the remaining panelists might have just taken “the fifth” because their responses often didn’t answer questions.

In a contest for the most absurd answer of the hearing, MF Global chief financial officer Henri Steenkamp may be the winner. When asked about the historic money transfers in the final week of existence, Mr. Steenkamp claimed he was unaware of fund transfers due to his “global role” and he was engaged in “other serious matters” that apparently took his attention away from the draining of $1.6 billion in assets from the firm.

While the transfers were initially painted by quotes in news reports as due to “chaos” and implications were made that money vanished due to clerical errors, questions remain as to how $1.6 billion in cash – an amount in excess of MF Global’s total liquidation value at the time – could have escaped the notice of top executives. In fact, testimony highlighted how the bankruptcy trustee clearly identified October 26 as the date the segregated funds short fall was officially identified, while in testimony Mr. Steenkamp claimed learning of the transfers several days later.

“The height of absurdity is thinking that $1.6 billion simply vanished without the CFO’s knowledge,” noted Stanley Haar, who runs a managed futures hedge fund and has been a leader in bringing the MF Global issue to the attention of Congress.

When asked an obvious question regarding the role of creditor’s bankruptcy trustee Louis Freeh and his stated motivation to deliver assets to creditors as opposed to customers, Steenkamp answered with “I’m not an expert in bankruptcy.” Mr. Freeh is effectively Mr. Steenkamp’s employer and has authorized bonuses be paid to MF Global executives such as Steenkamp who have remained at the firm while it is being liquidated.

If Mr. Steenkamp was consistent in one area, it was avoidance of questions – and this drew the ire of Committee Chairman Randy Neugebauer, who flatly questioned Mr. Steenkamp’s honesty. At one point Congressmen queried Mr. Steenkamp regarding relatively arcane details of his college life, which he remembered. Then the Congressman proceeded in asking why the CFO of a financial firm couldn’t remember details regarding what were likely the most significant money transfers in MF Global’s 224 year history.

Ferber Confirms Investigators Finally Questioning Top Executives

While MF Global chief legal officer Laurie Ferber was generally evasive, one interesting piece of information to emerge is that investigators are beginning to question the firm’s top executives. Unlike MF Global’s back office, which had been questioned by executives early in the process, Ms. Ferber acknowledged that she will be questioned for the first time in April – close to six months after the fact. Mr. Steenkamp confirmed that he has not spoken to investigators, although his lawyers have answered questions. MF Global’s chief financial officer for North America, Christine Serwinski, who worked in the Chicago back office, confirmed in testimony she had been previously questioned twice by investigators. “I’m shocked,” said Congressman William Posey, speaking of the fact investigators have not interviewed MF Global’s top executives until long after the potential crime had occurred.

Ferber also made statements confirming that Mr. Corzine was involved in MF Global’s questionable money transfers to JP Morgan and she acknowledged she was responsible for compliance and disclosure to regulators. One issue in the MF Global case is that proper disclosure of segregated account balances was not made to regulators during the final week of the firm’s life.

Finger Pointing to Steenkamp, Serwinski, O’Brien

During a rare moment of candor, at one point Mr Steenkamp was asked who would have authority over money transfers and he apparently pointed a finger at Ms Serwinski, who proceeded to point the finger at an absent Ms. O’Brien. When Ms Serwinski was asked if she would have approved the wire transfer in question had she been in the office, she said she would not have approved the transfer.

Committee Treats JP Morgan to Soft Questions

Among other panelists was JP Morgan, which played a number of reported conflicting roles as MF Global’s primary lender, provided clearing services and was custodian of certain MF Global customer funds. Questions that might point more specifically to JP Morgan’s intimate knowledge that such money transfers took place from customer funds were left alone in the testimony.

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Mark Melin is author of three books, including HIgh Performance Managed Futures. He taught managed futures at Northwestern University in Chicago and has consulted for a variety of futures exchanges, hedge funds and professional traders. He can be reached at: markhmelin(at)yahoo.com

Contents Copyright (C) 2012 Mark H. Melin all rights reserved.

(What follows is the authors individual speculation.  Written by Mark Melin with Bob English.  To download a PDF version of this article, visit  http://www.go2managedfutures.com/Vaporized.pdf)

Sometimes you wonder if we’re living in an alternate universe.

Recent news reports that cite un-named sources and indicate the MF Global criminal case has “gone cold” are curious.  In fact, these news reports are even more bizarre than previous reports claiming MF Global client funds have simply “vaporized.”  A pattern of behavior and reporting appears to be emerging that supports one overall goal: push the MF Global story under the radar, avoiding serious investigation and keep the inner workings and questionable circumstances surrounding a historic event out of public view and understanding. This, in turn, paves the way for MF Global creditors to legally swoop in on what rightfully belongs to the customers.

The “vaporized” and “case gone cold” news reports all convey a common underlying message: no one is responsible for what is now estimated as the loss of $1.6 billion taken from customer segregated accounts.  There was no criminal activity.  The message seems to instruct people to “mind their own business, keep quiet and just ignore what is the 8^th largest bankruptcy in US history, a scandal tainted with fraud allegations that involves a man who is arguably the most politically connected Wall Street insider to ever walk among the backroom corridors of Washington DC.”  Yet, by not officially using the “f” word (fraud), regulators, trustees, prosecutors and the rest of the panoply of public “protectors” make it more likely that the recipients, such as JP Morgan, of hundreds of millions in transfers of customer money in MF Global’s final days will simply get to keep it.  The core integrity of the commodity markets has been destroyed and an “industry of investor protections” with an exemplary regulatory record for protecting customer funds, now demands a rewrite.

This is the story we are supposed not to discuss? Is it really too complicated for mere mortals to understand?

Explaining a Complex Story with a Simple Analogy

One critical goal among those on the side of JP Morgan and other creditors is that they are attempting to confuse the issue, so it helps to start with a simple analogy of what occurred.

Imagine for a moment that MF Global was your bank. One day you woke up and discovered that the account holding your college savings was gone. Poof! The money in your retirement accounts and related checking accounts had just been “vaporized.” You go to ask the bank where you money is and you are locked out of the bank while strangers who are not depositors are allowed to enter and take assets from the bank, including the contents of the “safe” deposit boxes. You finally hear from the bank and the authorities, who essentially say that while they can see all the transactions of the bank over the last month, for some reason, there is just no longer any trace of the money, and no explanation of what happened. The funds just “vaporized.”  And after a few weeks of minimal information dribbles, you hear the search has gone cold.  You are told the money disappeared in a chaotic tsunami of transactions and there is no evidence of any criminal actions.  But, if money happens to get found, you might get some of it.  Oh, and the contents of your safe deposit box are going to be auctioned off, with only a portion of the funds returned to you (this was the fate of the unlucky souls who held gold and silver bars on deposit in their own name with MF Global).  That’s all…talk to you later. Good bye and good luck.

How would you react? Would the notion that your money “vaporized” elicit outrage?

Welcome to the MF Global case, one that is currently being swept into the tangle of questionable bankruptcy litigation and under the media rug.

In Criminal Investigations, Shouldn’t The Witnesses to a Crime And Suspects Be Interviewed Before a Case “Goes Cold”

In the case of MF Global, claims of customer “seg funds” being “vaporized” and the “case going cold” are made without investigators interrogating the primary suspect and individual in charge, former MF Global and Goldman Sachs President, New Jersey Senator & Governor, Jon Corzine.   As the New York Times reported last week, “…authorities have yet to interview key witnesses — including a person who is believed to have transferred client funds in the firm’s final days.”  Yet around the same time, Reuters reports:  “Criminal Probe Trial going cold at MF Global.”

One would, of course, think a “case gone cold” proclamation is made only after investigators have finished examining all evidence, and only after questioning the primary suspect and all witnesses.  That’s not the case – investigators claim they haven’t finished reviewing documents, but they are pretty sure the “case is cold.” Further, and as an aside, Mr. Freeh, trustee for MF Global Holdings has agreed to release documents from October 17^th going forward, but nothing from before that date.  Why would a US Trustee, under the authority of the Department of Justice, withhold anything needed for the investigation? (Many questions regarding Mr. Freeh’s appointment as trustee, and who recommended that appointment, are not being addressed in this document.)

Is this the information the financial services industry is asked to accept and then “vaporize” from its collective mind?

The “vaporized propaganda campaign” is a well-coordinated effort intended to confuse, divert and distract from the truth surrounding the crime of taking over a billion of customer funds.  That’s the goal. In fact, it’s impressive how “Mr. Vaporized” has managed to keep this case out of the news so well.

How  “Vaporized” and “Mr. Vaporized” Entered the Picture

On January 24, 2012 a jarring news leak, first reported by Wall Street Journal reporters Scott Patterson and Aaron Lucchetti, was said to come from sources close to judicial proceedings.  The report made the now famous claim that MF Global customer funds had simply “vaporized.” After months of rapt attention to the question of “where’s the money,” those in the media still paying attention were now told the money just simply disappeared without a trace! Poof!

After initial, and inaccurate speculation, a potential source for the leak emerged and was summarily dubbed “Mr. Vaporized.” It is the author’s speculation that “Mr. Vaporized” is none other than Kent Jarrell, the third party media management consultant hired by customer trustee James Giddens.  When reached for comment Mr. Jarrell responded “I have no idea where that word ‘vaporized’ originated from and I don’t know what you are talking about.”

Mr. Jarrell is a highly connected Washington DC media operative, who works for APCO Worldwide, a marketing, brand management and public relations firm with significant experience in “community relations” and strategic media planning.  Mr. Jarrell is director of APCO’s Washington, D.C.-based litigation communication practice.  The firm’s web site states “He advises CEOs, general counsels and boards of directors on preparation for unfolding material events.”  And that, “He currently …advises the trustee in the liquidation of Lehman Brothers Inc.” Attorney James Giddens is also the Lehman Brothers Liquidation Trustee, a case in which $160 million was said to have been billed by trustees in legal fees.

Mr. Jarrell’s role in MF Global has been limited to communications regarding the liquidation and bankruptcy, as well as controlling the message and public expectations. Early in the process, Mr. Jarrell relayed a message through the media to MF Global clients that they should be prepared to “share” the MF Global proceeds with creditors such as JP Morgan.  The message further stated that customers would only receive on a pro rata basis what is “identified by the trustee as available for distribution.”  Further, that “The trustee then would be unlikely to find much value within the estate to pay back commodities customers, unless he can locate the missing cash,” noted a Reuters article.

In previous cases where futures brokers failed, the customer accounts were either transferred to another broker prior to a bankruptcy filing or the customers were afforded priority protection above all other claims in the bankruptcy process, in accordance with the Commodity Exchange Act.   (That customers are not first is only so because of the curious way in which the bankruptcy and liquidation were structured by the regulators and MF Global execs in the first place.   The parent holdings company filed under Chapter 11, generally used for reorganizations—not liquidations—and the broker unit was forced into a SIPA liquidation by the Securities and Exchange Commission.  This decision has been a highly debated topic, as the 99% of accounts that were futures customers were afforded no insurance under SIPA and no protections from bankruptcy that fall under the Commodity Exchange Act.  All in all, another MF Global mystery.)

On October 31, 2011, the day of the filings (or, perhaps even before), MF Global and its regulators may have planned such a structure to put customers on the same footing as creditors.   Whatever went on in those closed door meetings, these reports of a new set of rules came as yet another shock to futures industry participants.

How Stupid Do They Think We Are?

Rules of propaganda teach us that if you repeat something long enough, no matter how absurd, it will eventually be believed.  Multiple sources and narratives have parroted the thematic evolution: there was an unknown amount of missing money, which became money that had somehow disappeared, and finally an investigation gone cold, setting the stage for customers to expect less than 100% of their money back.

In an article dated January 30, 2012, The Wall Street Journal reported “a ‘significant amount’ of the money could have ‘vaporized’ as a result of chaotic trading at MF Global during the week before the company’s Oct. 31 bankruptcy filing, said a person close to the investigation.” It is interesting to note the phrase “a person close to the investigation” might indicate someone associated with court proceedings or grand jury proceedings.

Is anyone so stupid to believe that customer funds held in a segregated account could simply “vaporize?”  Yet sources quoted in the Wall Street Journal seem to believe that could be possible. The assertion was widely questioned by those with knowledge of the situation, including CFTC commissioner Bart Chilton and US Congressman Bill Posey.

Judging by reactions of expert industry participants on Twitter, the medium de jour for exchange among professionals in the futures industry, the outrageous stunt of the “vaporized” claim was met with shock and disbelief.  Knowledgeable industry participants understand there are special documentation requirements for 4-D and 30.7 customer funds and strict regulations that must be followed to move funds in such accounts.  Further, the brokers are subject to daily reporting requirements which, combined with the traditionally sacrosanct nature of segregated account protections, relentlessly drilled into industry participants, makes “mistakes” in this realm highly unlikely.

These claims of back office “mistakes” stand beside a less reported note. In sworn Congressional testimony CMEGroup Chairman Terry Duffy was clear.  Just before the bankruptcy, critical documents given to regulators by MF Global had been falsified.   Mr. Corzine’s sworn testimony had been called into question by an MF Global employee – an employee now potentially being prevented from talking, a story that needs to be told to prosecutors.  Not only has potential fraud been publically disclosed, but a web of fraud may lie underneath the 8^th largest bankruptcy in US history.  But, as the propaganda campaign goes: Ignore MF Global.  No fraud investigation required here.

With informed participants now detecting that an obvious agenda was in play by the media sources close to the bankruptcy, the question becomes: why the focus on back office “mistakes” rather than investigate fraud?

Why Avoiding a Fraud Investigation Is So Critical: The Safe Harbor

If fraud is investigated in a bankruptcy it is much easier for illicit money transfers to be “clawed back” in Court through preference actions by the trustee.  Thus, in the case of MF Global, if $1.2 billion was wired out of MF Global to JPMorgan the week before the bankruptcy, this money could be safely returned to client segregated accounts.  If fraud is not investigated, if illicit money transfers will be allowed to move out of MF Global into JP Morgan, then JP Morgan keeps the money.

Speaking on Bloomberg Law, a web-based video program, editor at large Bill Rochelle was clear: “Here is (why fraud) is an important point in the bankruptcy process,” Rochelle continued.  “Congress passed what is known as a ‘safe harbor.’   What it says is the in a bankruptcy if money was paid in a stock transaction or if it was paid as margin, (MF Global account holders) can’t get it back.  The only way you can get money back in a case like that if (the money) disappeared as a result of actual fraud.  This report that the trustee was filing to me doesn’t sound like he (the trustee) is making a case for actual fraud, but rather (they are making a case for classical incompetence – and that may not be enough to get the money back,” which is a key point.  Legal sources independent of Mr. Rochelle say if fraud is involved in a bankruptcy case, MF Global customer rights could be enhanced.

Trustee Giddens Softens Up MF Global Customers to Take it on the Chin

On February 6, 2012, James W. Giddens, the MF Global broker unit Liquidation Trustee, who is statutorily tasked with obtaining as much recovery as possible for customers, released a preliminary status report.  In it, he sets the tone for ensuing media stories, toeing the “chaos and confusion” theme.    

In various places, the report implies a degree of certainty about the flow of funds in MF Global’s final days, such as, “The Trustee’s investigators have now traced a majority of the cash transactions, totaling more than $105 billion, made in and out of MFGI in the last week before bankruptcy and are completing the process of tracing the remaining transactions.”  And, “The Trustee has identified most of the parties that were the immediate recipients of transfers from MFGI during the final days and weeks of operation.”

Interspersed with these glimmers of hope, though, are statements about the reign of chaos, such as, “For three months the Trustee’s investigative team has worked to understand what happened during the final days of MF Global when cash and related securities movements were not always accurately and promptly recorded due to the chaotic situation and the complexity of the transactions.”  And, “The company’s computer systems and employees had difficulty keeping up with the unprecedented volume of transactions [in the final week]. A number of transactions were recorded erroneously or not at all.”

But, where subject and medium converge is in Trustee Giddens’ confusing representation of cash movements at the broker unit during the month of October, 2011:

Mainstream Media Starts to Find the Scent

It seemed that certain mainstream and alternative business journalists had begun to take an interest in the unusual circumstances of the case.  But the pattern of deception over truth would eventually persist, apparently taking a cue from Trustee Giddens’ early report about the back office.  Bloomberg’s Bill Rochelle noted the trustee’s report characterized MF Global management as simply having “lost control of the backroom.  The left hand didn’t know what the right hand was doing.  They were not recording transactions.  They (MF Global back office) ordinarily sometimes took out customer money but replaced it by the end of the day, but as the company was collapsing they weren’t able to.”

This characterization of MF Global back office behavior is noteworthy and requires critical examination.  Would back office testimony contradict these statements?  In fact, one familiar with MF Global operations and futures industry auditing procedures might express surprise at what was characterized as routine violations in back office behavior.  We may never know, because investigators have determined the case “is cold” before any investigation into what industry professionals consider highly unusual behavior for any firm regardless of the level of “chaos.”

On February 9, Reuters reporters Nick Brown and Grant McCool reported that an investigation of some sort was taking place, but again downplayed the possibility  for any serious charges due to “plenty of ‘chaos’ at MF Global in its waning days, but ‘no evidence of fraud,’” the article noted, quoting sources close to the investigation.

Unfortunately for MF Global customers, sweeping changes in the Federal Bankruptcy Code enacted in 2005 grant special super-priority status to derivatives in bankruptcy (including loans structured as repos) and prevent last minute margin transfers from being clawed back, except in the case of fraud (which everyone in charge refuses to discuss).  The excuse, or in legalese, “safe harbor”, was again roundly questioned by many leading industry professionals, including R. Christopher Whalen, when he appeared on CNBC with Rick Santelli and in an article he penned at Zero Hedge titled “MF Global: Where’s the Cash — Part II.”

The February 9 Reuters article went on to note “and keeping with the message pattern identified, people familiar with the situation said some executives and employees who, in the normal course of an investigation would have been interviewed by authorities at this stage, have not been asked to provide their version of events.” The February 10 report was similar in context and tone, noting an investigation was ongoing but that investigation was stalling.  This is a pattern that had developed, as increasingly pessimistic news concerning the potential for discovering the perpetrators was also accompanied by a dash of hope to add seasoning to the bad taste the investigation was leaving in people’s mouth.

Jubilation Over Justice Is Quickly Dampened

Fast forward to February 28, 2012. This is when solid news reports of a Chicago federal grand jury investigation surfaced in the CMEGroup annual report, which noted the exchange had received a subpoena.   This news was cheered by many industry participants, as the potential for justice finally appeared to arrive.  Just as quickly as the ray of hope of grand jury news reports were made public, another leak to the press emerged to dampen expectations that an investigation might yield results, again highlighting how the “case had gone cold.”

In an article titled “Doubtful Signs of a Criminal Case Against MF Global” on February 28, New York Times reporters Azam Ahmed and Ben Protess noted “Federal authorities are struggling to find evidence to support a criminal case stemming from the collapse of MF Global.”

Frustration Boils Over, Limited Options For Industry Participants

By now, growing discontentment from select industry participants with the investigation could be characterized as hostile.  Questions were being logically asked as to how it can be that a investigation was growing “cold” without interrogation of the primary suspect or interviewing potential witnesses to the crime.  Attempting to get their message heard with limited options, visible outrage occurred on Twitter, and a small group of industry participants, speaking behind the scenes, considered the motivation behind the press leaks.  A strategy appears to have emerged, with the goal to dampen expectations for any serious criminal charges and keep confidential key documents and testimony regarding what transpired before and after the historic bankruptcy.  Such suspicions grew with the next set of press leaks. Leaks apparently designed to discredit the more vulnerable.

Back Office Workers Defamed, Unable to Defend Themselves

From the moment CMEGroup Chairman Duffy released the bombshell that a senior MF Global employee had implicated Mr. Corzine, claiming falsification of documents and challenging the MF Global CEO’s sworn Congressional testimony, focus has been on those likely most knowledgeable of the situation: the back office employees.

Back office employees are typically trained to follow specific processes for managing customer capital, processes which are confirmed and audited on a regular basis by the broker’s regulator.  These processes are stressed tested, as the threat of real life chaos is considered a constant in the lives of many back office employees, particularly one as experienced and highly respected as Edith O’Brien, an MF Global treasurer.   It was these back office employees who likely executed what became, knowingly or not, the raid on customer segregated funds that may hold the key to understanding what really occurred.  If these individuals on the front lines were to provide testimony and documentation, it could unlock the key to understanding what transpired and potentially allow justice to prevail.

Unfortunately, the first news to emerge regarding back office employees didn’t focus on their cooperation with the court.  Instead, leaked reports focused on information possibly designed to defame the employees and paint a picture of lax back office behavior, which in turn supports the “vaporized” themes.  These leaks were also reported to come from those close to the court room proceedings and criminal investigation. Based on the documentation type, speculation favors that the documents were leaked by someone close to the liquidation trustee (Giddens) or bankruptcy trustee (Freeh), with a more distant possibility being law enforcement investigators.

How does the defamation of employees critical to the flow of funds work?

In an article published in both the Wall Street Journal and on the Fins Finance web site titled “Building Chaos at MF Global,” among the first reports to emerge regarding the MF Global back office focused on key employees and called them out by name.  The article noted that these two key employees were away at a ball room dancing competition in Las Vegas–a situation that might be laughable were it not so serious.  But this is yet only another distraction from the core issues.

The fact that two key employees, one, the MF Global North American finance chief, the second, the head of margins, would be away “ballroom dancing” when the company was under historic stress raises questions.  This curiosity is compounded when one considers that many at MF Global and inside the futures industry understood the firm may have been spiraling into bankruptcy during that very time.  In fact, senior management had prepared a “break the glass” document weeks before in early October that specifically identified a scenario under which the segregated customer funds account might go in the red.  Given this obvious crisis situation, of which senior management appeared acutely aware, why would management allow two key employees in finance and margins, potential customer safeguards, to be away at a time when they were known to be needed most?  It just does not add up.

All futures brokers are required to design and enforce internal controls and procedures that will protect customer funds under all circumstances.  These internal controls must be attested to by the firm’s senior officers and must be audited at least annually (in the case of MF Global, this was done by PricewaterhouseCoopers).  Who authorized these key employees to take time off in those critical days? What would be the motivation for top management to allow key back office personal to take off when, as Mr. Corzine even testified to Congress, they knew capital had to be rapidly raised and massive financial gaps had to be filled?     Were the firm’s internal controls and procedures followed?  Either way, the media ought to be questioning those who were responsible for designing and implementing those procedures, not putting out red herring stories that conjure images of a National Lampoon movie.

The source of these leaks ridiculing the two financial officers came from “internal emails, documents and people familiar with the matter.”  Who could this source be?  Simple knowledge of the case reminds us that the two trustees and FBI investigators had access to the documents in question.

More Strange Leaks, Wall Street Journal Headline: “Fast and Furious at MF Global”

The Wall Street Journal headline of March 1, 2012 may be appropriately titled, as it refers to another scandal at the Federal Bureau of Investigation, this one involving gun running to a Mexican drug cartel and a potential cover-up.

The article noted that “At 4:53 p.m. five days before MF Global Holdings Ltd. collapsed, an employee in its Chicago office asked a co-worker to move $165 million from one of the securities firm’s bank accounts to another.”  The approval was reportedly granted by email a mere minute later, and funds were transferred to an MF Global account at JP Morgan.  This raises a sea of questions:

First, the issue for customer segregated funds would have emanated from a transfer of funds from the futures brokerage unit into the securities brokerage unit.  The fact that it would be a securities to securities account transaction would fall under a different regulatory structure and likely not involve the theft of MF Global segregated funds.  MF Global had a paltry 318 securities accounts compared with over 38,000 active futures accounts.  Having said that, let’s assume the transfer was from a CFTC regulated futures account to an SEC regulated securities account.

That an end of day money transfer of $165 million out of a segregated account in the futures brokerage unit into the securities unit, approved in mere seconds, is almost surreal.  It could be speculated the speed at which this approval came might have indicated advance knowledge of the issue.  Conversely, if approvals of this magnitude are routinely granted this quickly, the issue of proper design and implementation of internal controls and procedures is brought into play.

To understand the significance of the approval, legal conditions are required between the bank depository and the FCM identifying the special segregated account status.  Further, what are known as 4-D and 30.7 account titles clearly identify the special nature of the customer segregated account.  Regulations that govern these special accounts cannot be violated–not on an end of day basis or even intraday, according to sworn Congressional testimony by CFTC General Counsel Dan Merkovitz. Did the transfer paperwork specify the 4-D or 30.7 account title?  With these rigid requirements, speculation among industry participants is that the move to transfer money out of a customer segregated account would not happen by “accident” in a moment of “chaos.”

According to the aforementioned February 6 status report filed in Court by Trustee Giddens, MF Global had a bad habit of dipping into customer funds during the day only to reconcile by the close of business.  Mr. Giddens states (emphasis ours):

The investigation to date has found that transactions regularly moved between accounts and that funds believed to be in excess of segregation requirements in the commodities segregated accounts were used to fund other daily activities of MF Global. In the past, such transfers were in amounts of less than $50 million, but as liquidity demands increased and could not be met from internal sources, much larger amounts were used, apparently with the assumption that funds would be restored by the end of the day. By Wednesday, October 26th, as the result of increasing demands for funds or collateral throughout MF Global, funds did not return as anticipated.

Recognize that some may interpret this statement as an admission that fraud regularly occurred at MF Global.  The unambiguous statement by the customer’s trustee clearly states that the provisions of the Commodity Exchange Act (CEA) designed to protect customer funds were likely routinely violated, and knowingly so .  Yet, neither he nor anyone else in the know can so much as hint at fraud?

In the report, Mr. Giddens falls back on the chaos angle, stating, “As these withdrawals occurred, a lack of intraday accounting visibility existed, caused in part by the volume of transactions being executed…”  One has to read between the lines here, because based on Giddens’ prior disclosures, the primary cause of the lack of accounting visibility was the habitual violation of CEA regulations, but this is not mentioned–only the sheer “volume of transactions.”

One of Several Smoking Guns Being Ignored?

Back to the WSJ article, in what might be construed by some as covering tracks, it then quotes the back office staff as saying they noticed a mistake and then tried to reverse it.  If this were a crime, the mastermind might be saying right now, here’s what you tell them: “Oops, we just transferred $165 million from customer segregated funds to JP Morgan.  I hate it when that happens.  And because this case is a SIPA/Chapter 11 bankruptcy, we can engineer the process so that fraud is not investigated from the start and MF Global customers have no claw back rights.  The money stays at JP Morgan.”  And, as was reported in the press early in the bankruptcy, customers will have to be happy with sharing whatever might be recovered from the estate.

“Midlevel finance officials usually couldn’t move such funds without direction from more senior officials,” the article continues.  This is the essential point.  It is the author’s speculation that at some point there was likely an order from one of the big three in MF Global – Mr. Corzine, COO Bradley Abelow and/or CFO Henri Steenkamp.  Given the $6.3 billion trade in risky sovereign debt was known as the “Corzine trade,” the risk allocation of the trade that put the customer broker unit on the hook for all losses could be characterized as “his brainchild.”  Further, in all likelihood it was Mr. Corzine who had key trade management relationships with JP Morgan, and it might be assumed he had awareness of $165 million being sent to the firm.  Any mid level investigator might rightfully conclude that Mr. Corzine’s knowledge of the money transfer was highly likely, if not based on his actual instruction.

At the very least, MF Global’s internal controls were sorely lacking in design and implementation, and anyone who signed off on them, including Mr. Corzine and PricewaterhouseCoopers, may eventually have to answer for these alleged transgressions.

The article further revealed interesting developments at J.P. Morgan:

“JP Morgan also has been questioned about the $165 million transfer, according to a person familiar with the matter. Four days before MF Global filed for bankruptcy protection, the company’s brokerage unit borrowed the same amount using a secured credit facility led by J.P. Morgan. The loan was paid back the next day, this person said. It couldn’t be determined if the loan and transfer were related.”

These types of relationships and apparent cozy transfer of money between two entities highly related to the process warrant clear explanation before calling the case cold.  However, such explanation might be rather difficult given the fact that neither MF Global senior management nor key people in the back office have been questioned by investigators.

But that is only if fraud is investigated.  Remember, in the MF Global case there is not even the apparent suspicion of fraud.  No reason for any serious investigation into this story.

To quote the classic movie Wizard of Oz: “Ignore the man behind the Curtin.”  Ignore MF Global everyone.  There isn’t a story here…

####

Article written by Mark Melin http://www.Twitter.com/markmelin with Bob English www.economicpolicyjournal.com with thanks to others who contributed.

(Note: This is the first of three articles that details questionable, behind the scenes meetings and special treatment that negatively impacted investor protections.  This first article details a critical meeting where core investor protections were jeopardized.  The second article details tampering of critical MF Global documents at the SEC.  The third article provides names, dates and topics of critical meetings that took place between government regulators and Mr. Corzine that likely influenced the outcome of regulatory action.)

In Closed Door Meeting Preceding Bankruptcy Filing, JP Morgan and Goldman Sachs Granted Superiority over MF Global Segregated Accounts

Move Jeopardized Integrity of Futures Markets while Top CFTC Officials Acted As Idle Bystander

(Chicago) It seems ironic that after all is said and done, it was a hasty conference call between government regulators on October 31, 2011 that sealed the fate of MF Global segregated account protections – and plaaced in jeopardy the integrity of the futures markets.

A key legal protection providing security to the account segregation process appears to have been given away in a closed door meeting between the Commodity Futures Exchange Commission (CFTC) and Securities and Exchange Commission (SEC).  Early in the MF Global bankruptcy process, before even the first court filing, decisions were made that resulted in weakening the core integrity of the futures markets at its most fundamental level.

It was here a little discussed legal technicality usurped the common bankruptcy code, which has very specific language in it protecting MF Global segregated account holders.  The common bankruptcy code has the iron clad protections for segregated accounts built in. It is upon this very foundation that the integrity of the futures markets and its “segregated account comes before all else” claim rests.

This core protection was given away in a closed door meeting between the SEC and CFTC. This article provides details of the closed door meeting, including meeting participants and the profound impact the meeting has on the very integrity of the futures markets.

In this meeting, which is said to have taken place via conference call early on the morning of October 31, an SEC official made the discretionary decision to engage in what is known as a SIPA liquidation process written for the securities industry.  While it may seem absurd, this liquidation process wasn’t designed or written for a futures brokerage, which has very unique needs in a liquidation.  But here is where the technical detail becomes the devil:

In a SIPA liquidation creditors are afforded legal superiority over segregated accounts.

To read the full article click here.

Mark H. Melin is currently writing his fourth book on uncorrelated investing.  He is previous author / editor of three books, including High Performance Managed Futures (Wiley, 2010) and an adjunct instructor in managed futures at Northwestern University.  He can be reached at markhmelin (at) gmail.com

Risk Disclosure: Managed futures can be a volatile investment and is not appropriate for all investors.  Past performance is not indicative of future results.

The opinions expressed in this article are those of the author, may not have considered all risk factors and may not be appropriate for all investors.

Commodity Customer Coalition founder James Koutoulas is requesting that MF Global bankruptcy Judge Martin Glenn investigate three potential legal issues that are said to have occurred in transferring of MF Global assets.  The key issues include the fact that JP Morgan was able to purchase MF Global bonds at a discount without any open bidding process and the assets were apparently sold without disclosure to or approval from the U.S. bankruptcy court or trustees.  The third issue centers on JP Morgan seeking special favors from the Federal Reserve to receive priority treatment over investor segregated fund accounts.

The first such non-transparent movement of assets occurred when JP Morgan is said to have purchased MF Global’s Sovereign Debt at a significant discount without an open bidding process, paying $0.89 and later selling that debt to investor George Soros for $0.95.  No one is going to complain about JP Morgan generating profit.  However, purchasing assets of a bankrupt firm without an open bidding process or disclosure to the bankruptcy court and trustees is where JP Morgan may be in trouble, according to Mr. Koutoulas.  This sale could be subject to clawback provisions, legal experts speculate.  (On December 9, 2011 The Wall Street Journal reported the fact that bonds were moved to KPMG London office, which was the bankruptcy administrator, but at the time the article did not discuss sale details or approval through the bankruptcy process.  See “Corzine’s Loss May Be Soros’s Gain” by Gregory Zuckerman and Dana Cimilluca.)

The key issue is that such transfers is the bonds were purchased at a discount without open bidding and the process was not disclosed to or authorized by the U.S. Bankruptcy Court, according to Mr. Koutoulas.  “Who gave JP Morgan permission to purchase those bonds at a discount without open bidding?”

The second questionable movement of assets is said to have occurred when JP Morgan purchased MF Global’s stake in the London Metals Exchange (LME) without proper disclosure.  The event was widely reported at a basic level on November 28, 2011.  The larger issue, however, appears to center on the fact that such a transaction was not approved by the U.S. bankruptcy court and trustee.

“Was this disclosed in court?” Mr. Koutoulas rhetorically asked.  “No.  Was their trustee approval?  No.”

The third issue occurred in congressional testimony Thursday, December 15, 2011 where it was discovered JP Morgan asked the Federal Reserve to write a letter claiming that the segregated funds should not be categorized as client money.

“How many letters like this have they asked for in the past?  I want all the statistics regarding the number and content of letters,” Koutoulas questioned.  “JP Morgan wanted a ‘get out of jail free card’ from the Fed.  Guess what?  That doesn’t fly with me.”

“Their hubris is so severe.  They think we don’t know the industry, like we are Occupy Wall Street radicals or something and don’t have a clue or message,” Mr. Koutoulas said, noting that the CCC is comprised of experienced industry participants who understand the financial services industry from the inside.

Mr. Koutoulas seeks to solve the problem with JP Morgan without dragging the issue through court.  In speaking to JP Morgan, Mr. Koutoulas said “Listen, you are buying vulture MF Global claims at $0.86 ½ on the dollar.   Why don’t you pay a fair price of $0.97 ½ take the customers out of the bankruptcy and we will indemnify you from any class actions resulting from this.”  A vulture claim occurs when an MF Global claimant such as a farmer or small business person is in desperate need of cash and sells their claim to someone such as JP Morgan, who purchases the claim at a lower rate than the value at maturity.  In this example if JP Morgan purchased the claim at $0.87 and all clients were eventually “made good” JP Morgan would receive the par value of $1.00.  With the MF Global bankruptcy proceedings apparently moving along much quicker than expected, JP Morgan stands to potentially make a quick 13% return on such vulture claims.

Mr. Koutoulas reports that JP Morgan would not even discuss the issues.  “I can see that you disagree with me,” said Mr. Koutoulas, whose organization represents over 7,000 MF Global clients, mostly professional investors.  “They won’t even meet with me and talk with me.”

Mr. Koutoulas is currently working Pro Bono and many of the lawyers are working at a highly discounted rates and requested that industry participants donate to help .  “I need professional litigators and bankruptcy attorneys backing me up,” said Northwestern Law School grad Koutoulas who also operates Typhon Capital Management, which is an NFA-registered Commodity Trading Advisor and Commodity Pool Operator.  ”We’ve had an outpouring of lawyers who want to help,” Mr. Koutoulas said, sitting with a young Yale Law School grad as we spoke.

In calling on MF Global presiding bankruptcy Judge Glenn to investigate these issues, Mr. Koutoulas is rallying the futures industry to boycott use of JP Morgan.  “Call your FCM and if they are using JP Morgan say ‘We won’t do business with you if you work with JP Morgan,’” he said, requesting that industry participants get on Twitter and follow the #BoycottJPM hash tag.

For additional information on the Commodity Customer Coalition visit www.CommodityCustomerCoalition.org and on Twitter use hash tag #boycottJPM

For a related radio interview: http://bit.ly/vGsnh2

Mark H. Melin is author / editor of three books, including High Performance Managed Futures (Wiley, 2010) [http://amzn.to/vyonBA] and was an adjunct instructor in managed futures at Northwestern University.  Follow him on Twitter @MarkMelin or visit www.Go2ManagedFutures.com for additional information.

Risk Disclosure: Managed futures can be a volatile investment and is not appropriate for all investors.  Past performance is not indicative of future results.

The opinions expressed in this article are those of the author, may not have considered all risk factors and may not be appropriate for all investors.

Opinion:

Someone asked a pointed question this weekend:

“Does the futures industry hate Jon Corzine?”

While no one person can speak for a diverse industry, it might not be true to generalize the futures and options industry hates Jon Corzine.  Many, including myself, don’t personally know the man.

What is known is that an industry has been brought to the brink and a serious test of its backbone is underway.  Many of our business associates and friends have been dramatically impacted by actions from someone known as an arrogant individual used to getting his way most of the time, a man who demonstrated a complete disregard for MF Global and the industry in which it operated.

Not only did Mr. Corzine expect special treatment, he was surprised when he didn’t get it.  Here is a man that is said to have engineered the toppling of a CFTC regulator in 1998 over the issue of transparency.  This lack of transparency and disregard for regulators are career trait many practitioners in the futures and options industry couldn’t get away with.  Why should a man who brought an industry to its brink and had a history of complete disregard for regulators and transparency be given special treatment?

As such, it’s time for the tough questions to be asked because we are getting close to the point where if this were regulators would descend on a mid-sized FCM or IB with the force of a predator drone attacking a domestic terrorist. (Mr. Corzine, to clarify in the previous sentence “IB” stands for “Introducing Broker,” not “Investment Banker.”)

Here are key points that have emerged since his compelling testimony:

As Futures Magazine’s Dan Collins aptly noted in an article after Corzine’s initial testimony, the most significant information to come out of the testimony didn’t come from the “lawyered up” Corzine statements, but rather from the Chicago Mercantile Exchange (CME).  The CME essentially established what had previously been undisclosed by Mr. Corzine:  Funds were improperly transferred at 2:00 AM Monday morning.

The question is: who is responsible for that transfer?  To think that Mr. Corzine or the top two or three officials at the top of MF Global were not aware of the transfer of $1.2 billion out of customer segregated funds might be similar to belief in the tooth fairy.

When the transfer occurred, how could it be that those “pushing the button” not be aware they were violating CFTC fund segregation rules?  Or perhaps with a history of ignoring regulation, those “pushing the button” might have assumed they would be accorded special treatment.

Are regulators expected to prevent such an action, or is their role simply to recognize how the regulation works and then enforce strict rules?

These questions should be answered in the context of a larger picture being painted.  Here is what likely happened, pointing to the questions to which Mr. Corzine should be responsible to answer.

(Note: what follows is highly speculative and opinionated)

In the chaos of the early-morning realization liquidity was gone, a decision was made to move segregated funds.  In almost any imaginable case inside an FCM, the only ones with access and authority to move such a large amount of capital at 2 AM was a high level official.  At minimum, such activity would likely have been reported to top officials at MF Global early Monday morning as mid-level and high-level officials would have been alerted to the transfer through even the most basic FCM security process.  MF Global was not a “basic” FCM and had a more detailed process in place, leading to a question:  Why did it take so long for this activity to get reported?

And here is where another inconsistency appears:

Upon entering the brokerage, it was said the “account records were a mess.”  Really?  Is this disorganization consistent or did it occur only after the transfer of capital out of segregated funds?   Based on subjective observations, those close to the industry might find such disorganization inconsistent.  Does the disorganization of critical account documents point to attempts to hide the paper trail that was clearly present at MF Global before funds were missing?

But perhaps most inconsistent are Mr. Corzine’s own statements.

In a New York Times article started to uncover the critical points:

“In testimony on Capitol Hill on Thursday, Mr. Corzine only added to the mystery. He said that transferring customer funds was ‘a complex process’ and, asked who could execute such a transfer, said ‘I wouldn’t know probably who that person is.’”

In this testimony Corzine is making two potentially inaccurate statements.

First, he claims the process is “complex.”  Ok, taking this at face value “complex” likely implies a number of people associated with such a transfer and a process that would also trigger alarm bells.  When were the alarms reported to regulators?

But more to the point, is the process really that complex for Mr. Corzine or his top deputies?  In all likelihood there were potentially a handful of those within the FCM that had the ability to authorize a large capital transfer out of segregated funds, including Mr. Corzine.  In many cases moving such capital out of segregated funds cannot be authorized by one individual, but might require a counter-signature.
Is Mr. Corzine seriously claiming that he doesn’t know the people or the process?  One can only imagine the day after the transfer of segregated funds was discovered, Mr. Corzine and top brokerage firm executives were notified of the transfer by the internal fraud alarm system.  Most certainly at that point if Mr. Corzine were un-involved he would have investigated the people and the process.  Remember, this is an individual who the New York Times noted in an article had a keen insight for remembering names.

Mr. Corzine expecting Congress and regulators to believe he doesn’t know the people or process involved in transferring $1.2 billion out of segregated funds seems entirely inconsistent.  But then the only real consistency in this story might be the special treatment Mr. Corzine typically received.

Mark H. Melin is author / editor of three books, including High Performance Managed Futures (Wiley, 2010) and was an adjunct instructor in managed futures at Northwestern University.  Follow him on Twitter @MarkMelin or visit www.Go2ManagedFutures.com for additional information.

Risk Disclosure: Managed futures can be a volatile investment and is not appropriate for all investors.  Past performance is not indicative of future results.

The opinions expressed in this article are those of the author, may not have considered all risk factors and may not be appropriate for all investors.