The fastest growing segment of the financial services industry was the one hardest hit by MF Global’s suspicious demise and overt fraud at Peregrine Financial Group (PFG).
The managed futures industry, which had grown from $14 billion under management in 1991 to over $329 billion to end 2012, was a shining star of the new economy. Offering the unique ability to zig when other investments zagged, the lack of correlation and performance during crisis were key points of attraction. This attraction came to a screeching halt with the MF Global and PFG criminal incidents. Not only were investors getting acquainted with the asset class shocked to learn their accounts were looted of assets, but more troubling criminal behavior appeared the cause - casting a shadow over all participants.
“There is a severe loss of trust, a loss of confidence. There is incredible anger and frustration. Things need to change,” said Diane Mix Birnberg, president of Horizon Cash Management. Her firm just released a study, The Aftermath of MF Global and Peregrine Financial Group Meltdowns: A Crisis of Trust, showing that a whopping 91% of respondents believed there was a breakdown in audit procedures.
The study themes that emerged included:
The laws and rules that govern the industry need to have ‘teeth’ – and those involved in fraud and theft need to be punished.
Customer segregated funds must either be kept completely out of the FCM and/or be verified in real-time by regulators.
A strong and rare female voice inside a Type A male dominated industry, Ms Birnberg’s firm, Horizon Cash Management, has become the top cash management firm for participants in the managed futures industry. Starting in the 1970s as a secretary in a stock brokerage firm in Atlanta, where “women generally didn’t think about career aspirations,” she later joined Lehman Brothers in the bond business. After moving to New York City to work on Wall Street, she was recruited in 1980 by investors to operate a cash management firm in the futures industry and in 1991 founded Horizon Cash Management, which currently has $2 billion under management.
In MF Global “there was very little institutional leadership (from exchanges, regulators and major firms),” she said. “This resulted in rumor, innuendo and ultimately a lack of trust. The void in leadership is terrifying.”
Looking back on the MF Global and PFG disasters, Ms. Birnberg has the experience of witnessing 10 FCM implosions. “In every FCM implosion it has negatively touched the CTA / CPO segment of the industry.”
“Think about a plane crash,” she said. “When it happens? Key issues and facts are addressed by the airline, the FAA and even the US president. Information is available regarding what happened, why it happened and steps being taken to address the problem.”
With MF Global a plane crashed and there was silence.
This is the first part of a two part article.
Mark Melin is author of three books and taught a managed futures course for Northwestern University’s Executive Education program. To read additional blog posts visit www.UncorrelatedInvestments.com (requires free registration).
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. Â To read more of his blog posts, click here (requires free registration). Â Contents Copyright (C) 2013 Mark Melin.
Richard Beales and Breakingviews columnists Antony Currie and Agnes Crane discuss criticism of Jon Corzine’s legacy after the collapse of MF Global and the likelihood that two overlapping U.S. regulators will ever merge.
Our weekly newsletter is out, and now that it’s been a year after MF Global declared bankruptcy and left the futures industry in a state of disarray, where are we? Do we really understand what transpired? Have we made the reforms necessary to prevent it from happening again? Here, we take a look at how the story played out, the reforms we’ve instituted to date, and the steps we need to take moving forward, both as an industry and as individual investors, to avoid a campy sequel.
This time of year, our homes and streets are swathed with cotton cobwebs, goblins and ghouls as we indulge in the chills and thrills of the latest horror movies and ghost stories of the year. The monsters beneath our bed come to life in polyester costumes and garish face paint, and macabre goes mainstream. It’s a time where, instead of running from our fears, we embrace them – if only momentarily – for a rush of adrenaline and a few good laughs.
Except, last Halloween, the worst fears of the futures industry played out in agonizing slow motion without the superficial sheen of the holiday season. Amidst the candy corn and taffy apples came a sharp blow to investor confidence. The demon plaguing our central cast of characters did not don a cape nor boast a set of horns; he wore a suit and scraggly beard. Victims did not lose their lives, but some lost their livelihoods.
It has been a year since MF Global began a maddening descent into bankruptcy and scandal, but for many of us, it feels as though it was just yesterday. The story has, by and large, faded from the headlines, but the lessons of the past remain poignant today, and there is still much work to be done. We take a moment here to look back over the past year at what happened, how things have changed since, and what challenges await us on the horizon.
Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.
The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.
Managed Futures Disclaimer:
Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.
The Senate Agriculture Committee gets an update from regulators on two probes under way into scandals at futures trading firms MF Global and Peregrine Financial Group. (more…)
We’ve finished sorting out the newest information on the MF Global case, and there’s a lot worth knowing. While we were busy writing our newsletter Monday and keeping tabs on whether the markets would keep May’s performance going, the Trustee for the MF Global case released his 275 page “Investigation Report.”
In our opinion, this report is pretty damning- almost breathtakingly so. From Corzine to O’Brien to JP Morgan to under mentioned actors like BNY Mellon, this catastrophe was not a whirlwind crisis that caught everyone off guard. Those in the know saw it coming for miles, but absolutely no one did anything to stop it.
The story that has emerged is long and twisted, but as additional information becomes available, we’re starting to see exactly what unfolded at MF Global, and it isn’t pretty. The Trustee’s report goes even further, letting us begin putting names  to the question of “Who knew what, and when?” What can we take away from the new evidence this document presents? Everything you need to know is right here, in Attain Capital’s analysis of the report.
Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.
The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.
Managed Futures Disclaimer:
Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.
Commodity Customer Coalition co-founder and Typhon Capital CEO James Koutoulas talks with Capital Account’s Lauren Lyster about Rep. Michael Grimm’s campaign to get the Justice Department to appoint an independent counsel to investigate criminal wrongdoing surrounding the collapse of MF Global.
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…
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?
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.
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.
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.
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