Someone asked a pointed question this weekend:
âDoes the futures industry hate Jon Corzine?â
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.Â Many, including myself, donât 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.Â 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 didnât get it.Â Here is a man that is said to have engineered the toppling of a CFTC regulator in 1998 over the issue of transparency.Â This lack of transparency and disregard for regulators are career trait many practitioners in the futures and options industry couldnât get away with.Â 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, itâs 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 âIBâ stands for âIntroducing Broker,â not âInvestment Banker.â)
Here are key points that have emerged since his compelling testimony:
As Futures Magazineâs Dan Collins aptly noted in an article after Corzineâs initial testimony, the most significant information to come out of the testimony didnât come from the âlawyered upâ Corzine statements, but rather from the Chicago Mercantile Exchange (CME).Â The CME essentially established what had previously been undisclosed by Mr. Corzine:Â Funds were improperly transferred at 2:00 AM Monday morning.
The question is: who is responsible for that transfer?Â 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 âpushing the buttonâ not be aware they were violating CFTC fund segregation rules? Â 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.Â 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.Â 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.Â 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.Â MF Global was not a âbasicâ FCM and had a more detailed process in place, leading to a question:Â 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 âaccount records were a mess.â Â Really?Â Is this disorganization consistent or did it occur only after the transfer of capital out of segregated funds? Â Â Based on subjective observations, those close to the industry might find such disorganization inconsistent.Â 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. Corzineâs own statements.
âIn testimony on Capitol Hill on Thursday, Mr. Corzine only added to the mystery. He said that transferring customer funds was âa complex processâ and, asked who could execute such a transfer, said âI wouldnât know probably who that person is.ââ
In this testimony Corzine is making two potentially inaccurate statements.
First, he claims the process is âcomplex.âÂ Ok, taking this at face value âcomplexâ likely implies a number of people associated with such a transfer and a process that would also trigger alarm bells.Â 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?Â 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.Â 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 doesnât know the people or the process?Â 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.Â Most certainly at that point if Mr. Corzine were un-involved he would have investigated the people and the process.Â 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 doesnât know the people or process involved in transferring $1.2 billion out of segregated funds seems entirely inconsistent. Â But then the only real consistency in this story might be the specialÂ treatmentÂ 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. Â 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. Â 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.