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At The Court of Kanagroos

At The Court of Kanagroos

The moment access to markets and accounts were frozen on October 31st,  observers knew this “stinks like a dead fish sitting on the table,” as Congressman Michael Capuano (D-MA) exclaimed when asking about the ongoing around MF Global in the December Congressional hearings.

This was not the first bankruptcy of a futures broker, but suddenly the rules had changed.  And the umpires of the game were going along with it.

Cuapano’s spot-on dead fish theatrics were about what was going on inside MF Global. But the odor spread from the halls of MF Global and into the court room when MF Global Holdings filed for bankruptcy protection under Chapter 11.  MF Global legal council represented to Judge Glenn that there were no customer assets missing from MF Global, Inc.  “Misrepresentation” is a polite, maybe a diplomatic word.  Readers can use what language they choose to characterize the above statement.

On page 22 and 23 of the transcript (docket 396),  on that fateful day we read:

THE COURT: All right. Before you do that, Mr. Ziman,

19 in light of certainly all of the press accounts, some of which

20 quote press releases, this does — is relevant, in my view, to

21 the cash collateral motion. I’ve read a number of stories that

22 deal with alleged shortfalls in customer property. Is that

23 only in the registered broker-dealer?

24 MR. ZIMAN: Well, I guess I should take a step back.

25 I think, to the best knowledge of management, there are no shortfalls, Your Honor. All funds are accounted for, and I’m

2 talking about the broker-dealer. That’s to the best knowledge.

3 All funds can be accounted for. What we understand is that

4 some of those funds are slow to clear; they’re being held up by

5 clearing counterparties, clearing banks, exchanges,

6 clearinghouses. But to the best knowledge of management, there

7 is no shortfall.


9 MR. ZIMAN: But I’ll answer your question, Your Honor,

10 is that that all relates to the broker-dealer. None of those

11 accounts are in either the debtors before Your Honor here.

12 THE COURT: Okay.

The Broker Dealer (BD) is MF Global, Inc. (MFGI) which belonged to MF Global Holdings, the parent company seeking Chapter 11. MFGI had dual registration as a Broker Dealer and FCM. Judge Glenn asked about funds in MFGI.

The BD and FCM cannot be separated from each other — it is the same entity, MFGI.  In fact, this is the very reason the CFTC stated it was required to place MFGI into a SIPA proceeding – because of the shortfall of funds in the commodity accounts were that of the dually registered firm and that it is “not possible to separate.”  MFGI simply could not be considered and treated in a separate manner by regulators.  Yet here in the court, an abstract and false separation is created to establish how the proceedings should move forward.

Legal counsel for MF Global repeated four times that there was no shortfall.  (Talk about overstating.) Mr. Ziman explains the rumors of a shortfall away as nothing more than  trades that needed to clear, and with qualifiers such as “to the best of my knowledge, and to the best knowledge of management.”

Regulators were present when this went down.  The MF Global COO, Abelow, was in the room.  All were fully aware that on the eve of the bankruptcy filing, MF Global’s General Counsel, Laurie Ferber unequivocally informed regulators in writing the night before:  “This is to inform you that MF Global Inc. has discovered a significant shortfall in its segregated funds account. The company is continuing to review the circumstances of the shortfall. “

If that were not the case the sale to Interactive Brokers would have gone through, and they would not be standing there after pulling an all-nighter preparing the bankruptcy with JP Morgan and regulators to plead the court for Bankruptcy protection!

Why does this matter?  All the  professionals and responsible regulators knew there was a shortfall in customer assets.  (From both security and commodity accounts has we have since learned.) And with this truth, the court would have been compelled to immediately assign a receiver, or at least a court appointed trustee.  In the face of missing funds and possible fraud, the firm surely would not have been allowed to operate without immediate and court appointed control.  In other words, they would not be allowed to continue another day without adult supervision.

Additionally, the approval that day of inter-company “cash management” also would likely not have been possible at that time.  (See MFGfacts coverage of this and its significance published last year in Looting can continue!)

Further, the cash collateral motion (line 21) referred to is the 8 million collateral availability JP Morgan negotiated with MF Global the evening before the filing.  In return for that JP Morgan secured a priority lien on MF Global’s existing assets, as it was the largest creditor.  (Looks like JP Morgan is going to need it  with their own massive reported losses announced tonight.) So on that day, Judge Glenn very reluctantly approved this lien, saying it was highly unusual and he had never agreed to something like that before.  Bets are that he would never have approved it had Mr. Ziman or any regulatory authority in the room come forth on the missing customer funds.

Instead of explaining the shortfall away with “funds are slow to clear,” and with the truth (or if Judge Glenn questioned more closely to get to the truth) the bankruptcy would not have proceeded as approved by the court.  Apparently, this development has not been questioned by any investigator, let alone regulator.

It could have been any tiny Kangaroo Court rushing through the proceedings to create the conditions needed to get the fix in for MF Global and it’s most senior creditor, JP Morgan. Silent witnesses to this travesty in the court room were legal council from the CFTC, the SEC and the US Department of Justice.  Bob English cuts to the chase on this with simply  “And No One Stood Up” on this in his blog, on the Economic Policy Journal.

The media went along with the goings on in the court, not with silence, but incendiary headlines to propagate the “misrepresentation” with a flurry of false reports such as Bloomberg’s  “All MF Global Funds Are Accounted For, Held by Brokerage”

At the time when MFGfacts wrote to editor of the Bloomberg on this obviously misleading and false headline, the response was:  yes, Ziman’s declaration to the judge “is meaningless, but it is what he said.” So that was enough to write the headline, no matter the reality.  It was a taste of journalistic highlights to come, such as later reports of money “vaporizing” and trails “gone cold.”

Yesterday in Washington, D.C. freshman Congressional Representative Michael Grimm (R-NY) called for an independent investigation into the failure of MF Global and the bankruptcy.  On the surface this looks to have political motivations, reducing itself to nothing more than theater. But too much around MF Global does, indeed, have the smell of something very terrible. There is hope that legislators will open their eyes, hold their nose and remove the lid to take an honest look.


Nicholas Knight

May 10th, 2012