There is a pattern.  Scratch just below the surface of who is who and we find the intricate network of power players and patterns of events circling the MF Global crimes.  I am not talking about Governor-Senator Jon Corzine, but Eric Holder, Edith O’Brien and Reid Weingarten.  Who is Reid Weingarten?  “Defense attorney Reid H. Weingarten is a Washington fixture,”  Brook Masters of  The Washington Post writes.

Weingarten, a long time close freind of Eric Holder is also Edith O’Brien’s  defense attorney.  O’Brien is apparently seeking immunity from Holder’s Department of Justice because she, and she alone, holds the threads in the investigation of the illegal use of customer funds at MF Global, Inc. and Holdings.  To date, after eight months, she has not received immunity.  (Yet notably the DOJ has already granted Barclay’s Bank immunity from prosecution for cooperating in its Libor-gate investigation.)

With time, evidence becomes stale to a prosecution.  The longer she is kept off any witness stand and the longer DOJ waits to uncover all evidence, the weaker discovery becomes.  Putrefying the evidence through delays and time decay is a tried and true practice.  So it is reasonable to ask if there even a desire by the DOJ to uncover all the facts of the plundering of over 1.6 billion of private funds and build a case of wrong doing?

O’Brien can blow open the investigation

It was Edith who clarified to CFO Christine Serwinski that a shortfall of over $1 billion (depending on how it is counted) resulted from messy and hastily carried out transactions in the days before the bankruptcy filing.  O’Brien made the transactions, she knew where the money came from and where it went.  Very early on, it was known that an-mail from O’Brien noted that one major transfer was done “Per JC’s [Jon Corzine's] direct instructions.”  Yet to date, we hear nothing from her, nor are there charges against her.

It was Edith O’Brien who was asked by MF Global general counsel, Laurie Ferber, to sign a letter to JP Morgan confirming that no customer funds were being sent to the bank.  Even under pressure of Executive staff, she refused to sign the overly-broad, bogus statement Ferber asked her to sign.  It is of note to remember that JP Morgan’s chief risk officer, Barry Zubrow personally called Jon Corzine asking him to verify that no funds transferred belonged to customers. Barry did not call Edith O’Brien.

Recall that under oath, Corzine pinned O’Brien by name as the one who provided assurances to him that all transfers were legal.

Eric Holder’s friendship with Edith’s attorney is very close, goes back years

When the DOJ is on your back, friendships and access goes a long way.

The personal and professional relationship between Holder and Weingarten go back decades:  As young attorneys, they worked together in the Public Integrity section of the DOJ in the late 1970’s.   There, as reported in Main Justice, they became “best friends.” In the 1980’s, Reid left the DOJ for the rich pastures of partnership with Steptoe & Johnson.

In 1997, Weingarten and Holder raised money together to launch a non profit foundation in the District of Columbia. Weingarten’s bio states that “He is the chairman and co-founder, along with US Attorney General Eric Holder, of a non-profit program, See Forever Foundation, which is designed to assist juvenile offenders in rehabilitation to prevent recidivism.”

As Weingarten was in the private sector, Holder remained with the DOJ only to come under investigation in 2001 for what was determined to be his inappropriate influence on the final approval to pardon fugitive, Marc Rich.  Here, it is agreed by many that Holder massively blundered when he overstepped White House legal counsel opposition and gave a DOJ seal of support for the pardon. This was said to have “significant impact” for the final green light on the Marc Rich pardon fiasco.

When Holder came under investigation for his heavy hand in the Rich’s pardon, Reid Weingarten was his personal and strong-armed defense attorney as reported by Eric Lichtblaue and David Johnson of the New York Times in 2008.

More recently, and shortly after Holder took over the reins of the Department of Justice, he hired Weingarten’s son, Ross Weingarten for a job with the DOJ as a press staffer.

When in trouble, hire a lawyer with friends in high places: Roman hires Reid with Eric

Fugitive Roman Polanski hired Reid Weingarten in 2009 to get the DOJ off his back in their efforts to extradite him back to the US. Reporting on this, Main Justice cites Weingarten as “a well-known criminal defense lawyer and close friend of Attorney General Eric Holder.”  Efforts to extradite Polanski to finally face charges of drugging and sodomizing a 13-year old, garnered lots of media attention.  But that case was quickly quashed for still-inexplicable reasons. But we do know this: the DOJ refused to release evidence to the Swiss authorities which would enable them, under Swiss law, to extradite Polanski to the US.   The question of possible help for Polanski from the DOJ is raised by by many including U.S.  Supreme Court-admitted attorney, James Hirsen in 2010.

Cases going cold among friends

In another twist on the pattern of investigations with the Holder/Weingarten connection: ironically, the DOJ attorney handling the Polanski case as represented by Weingarten  was none other than Mr. Nick Marsh.  Marsh had worked in the same Public Integrity Section as Holder and Weingarten, only to be moved out of it and into the DOJ Office of International Affairs, after he came under criminal contempt of court for handling of evidence in the failed Sen. Ted Stevens prosecution. (A foreshadowing of fast and furious leading to the Holder Contempt of Congress ruling?)

Edith Hires “Washington Fixture” Reid Weingarten

O’Brien’s attorney is perhaps THE top white collar defense lawyer in the country.  Not only has he defended some of the biggest names in white collar crime (Ebbers of World Com, Lay of Enron) and the high profile Hollywood Director above, last year he was also  retained by none other than Lloyd Blankfein, CEO of Goldman Sacs. His hourly rate?  Surely north of $1,000.

So how did a mid level Assistant Treasurer from a minor Brokerage come to one of the most expensive and politically connected white collar criminal attorneys in the country?  How can she pay the fees that will surely go into six figures if not more?  Who pointed O’Brien to Weingarten, or rather, Weingarten to O’Brien?

MF Global Employees and officers have coverage under the firm’s Professional Liability Insurance, which also covered employees of the brokerage unit. A review of the court filings show that Ms. O’Brien is named in six ongoing suits against the company, which appear to be covered by the insurance policies.

However, as of late last winter, coverage on ongoing legal counsel on DOJ actions are not revealed by the court documents.  But for now, let’s assume the millions in MF Global insurance policies will pay for all her massive legal fees.

How did she hook up with the most connected white collar crime attorney in the nation?  The Yellow Pages?  Her friends?  Of course not. We can be sure Edith does not travel in the same circles as Reid.  The hookup took place just as any between a high profile attorney and an unknown client:  An introduction from high places.  He was surely recommended to Edith by someone powerful in the ranks of MF Global. By whom?  At this point, we can only assume.  My guess is Laurie Ferber.  She was the MF Global general counsel and had ongoing working contact with Edith.  Edith may not have even known she was heading for possible criminal charges.  Ferber, of course, understood this.  And it would have been in her capacity to advise O’Brien of her need for very strong legal representation, and who she should hire concerning professional liability with MF Global. (Remember, it was Ferber who worked on the drafts of letters to JP Morgan concerning the legitimacy of the funds and requested that Edith sign the letter.)

Further, it is not unreasonable to surmise that Jon Corzine may have pointed Ferber to the Weingarten name for Edith.  A fix was clearly needed for all and Edith, as Corzine testified, had the keys. Both Corzine and Weingarten’s paths crossed in the political arenas. Weingarten is, like Corzine, a major Washington, D.C. insider.  They personally knew each other. And with Weingarten’s connections deep into the DOJ and the past magic he worked? He would be their man.

What is the game plan?

We wrote earlier that a fix for MF Global executives was worked by feigning chaos, confusion and convincing the world that “Edith did it!” (See The Big Fix was In)

But there is more to the fix, much more.

1. Senior MF Global executives possibly “helping” Edith O’Brien by setting her up with the top and most connected Washington. D.C. criminal attorney in the country.  An attorney who is personally and deeply connected with Eric Holder, Director of the Department of Justice.

The same attorney who represented Polanski, only to have the case somehow mysteriously fall apart after the DOJ suddenly refused to release information to the extraditing authorities.  (An example of what now appears to be the ongoing  DOJ modus operandi — one that also recently resulted in Holder’s recent contempt of Congress charges.)

2. Stall for time and do not offer immunity.

3. At the same time, do not press any charges against executives due to lack of evidence.  This way the case will surely “go cold.”  Then, prepare the public for this outcome as seen when early reports anonymously leaked to the New York Times from federal investigators on investigations going cold. Information from those on the “case who were not authorized to speak publicly about the investigation.”

4. And, because Reid Weingarten is also sort of working for Edith –  with MF Gloal insurance policies  paying for him — make sure that no charges are ever pressed against Edith.

Voilà!  It is fixed and the stalemate is in.  Everyone is safe. Investigative failure is assured, just as a series of earlier high profile investigations under the current DOJ have also failed — from the Ted Stevens prosecution to the Polanski extradition, to the ongoing gun running investigation. And now for MF Global.  It works every time!

And now we hope?

The FBI is a division of the Department of Justice. Louis Freeh is not only the former head of the FBI under the DOJ, but is the Trustee for MF Global. We can make our own conclusions about that apparent conflict of interest.

A few months ago over 64 members of Congress called for an independent investigation of MF Global due to increasing perceptions of a conflict of interests between Mr. Corzine and the Department of Justice.  And now the closer we look, the stronger the smell of conflicts and a pattern of heavy hands at the top.

We now can only hope that Congress finally moves to appoint an independent investigation of MF Global without motivations of petty partisan posturing, but of responsibilities of honest leadership for which they were elected.  We can only hope, it is eternal.

Nick Knight

July 7th, 2012

Listening to the hearings it is now clear:

It was the chaos, confusion, volume of trading, voice based transactions, fast computers, slow computers.  Then finally “someone pushing a button” that made MF Global take customer funds. And as Trustee Giddens, concluded to the Senate during the hearings it was not Senior level that “directly authorized a young vice president.”

As reported earlier, the fix was in. But listening to all the hearings, we hear not only Jon Corzine securing the fix for the defense, but Trustees repeating  the chaos meme almost verbatim.  And the most recent April Senate hearing might have also have sealed chaos and confusion defense line.

When Jon Corzine testified in December 2011:

I must make it clear that since my departure, I have not had access this year to many of the relevant documents which are essential to my being able to testify accurately about the chaotic days preceding the declaration of bankruptcy.

Why is there a shortfall the Chair of the Congressional hearing asks.

There were many transactions that occurred in those last chaotic days….it is clear that in the last hours, the last days, there were many many many many more transactions that typically occur. Ultimately there is somebody that hits a button….It is a complex process.

Yes, that was it: So much chaos and soooooo many transactions.  How many trades could MF Global have had on its own books? The technology of an iPhone can handle high speed algorithmic trading. So we learn not only about chaos, but another implausible excuse from Jon Corzine:   Hundreds or Thousands of trades must have been conducted over the telephone. This was a Primary Broker Dealer for the Federal Reserve for the US financial system?

The line is “We had not stayed up to date with technology,  we were voice brokering …there chaos of the last few hours and days.”  We hear this over and over in each of the hearings.  All are on script.

Mr. Koback, representing Trustee Giddens contributes in December: And there was a tremendous volume of transactions in the last week or 10 days…it is very hard to sort through all of that, especially with electronic systems nowadays

He emphasizes the story line of a tremendous volume of transactions, but his version deviates and gets a little confused. It is because computers “nowadays” can transact so many trades that they lost track, but not a word about voice brokering and not recording transactions.  (Not recording a transaction is impossible because all transactions are recorded no matter how ordered.)

Chaos comes up yet again in the first hearings: So in those last days your word was Chaotic? Congress tries to confirm, repeating the language of Corzine.  Later answering another line of questioning from Congress Corzine repeats, Again the chaotic last days and hours, I think you have a different set of conditions. This is the basis of a defense:  because of the claimed chaos, it is different, out of the norm, out of his control. No one can help it.

Months later at the April 24th Senate hearing, Trustee Giddens continues with this scenario of loss of control, chaos and extreme trading. But this time he goes further than Jon Corzine who said someone pushed a button, but later implicated Edith O’Brien. As the Trustee, appointed under the authority of the SIPC (which is authorized by Congress), Giddens makes clear to the Senators that no one at the top could possibly be responsible; it is was an underling who did it, “a young vice president,” he says for the record.
“With so many volumes of transactions that we think is what accounts for the mistakes. ..Given the fact that so-called operational personnel could move funds, there were clearly mistakes being made. Most people don’t realize relatively low level operational people have the authority to transfer hundreds of millions of dollars……Seniors and higher ups do not directly authorize the young vice president to move money.”

Then with that, and without being asked a question, Trustee Freeh blurted the desperate slow computers defense.

“There was the inability of the IT and technology system just to keep pace with the trades and to even record them. In the last days there were many non-reported trades. The IT system and technology was not equipped for the frenetic pace of trading in the last several days. And the inability to control and track the trades and the accounts was a perfect storm.”

Senator Menendez, who has his seat as a Senator of New Jersey with the patronage of Jon Corzine concludes for all that it was simply a structural problem:
So you clearly had between poor capitalization, a liquidity crisis, highly leveraged and and inferior technology, a structural problem at MF Global.   Menendz states for the record.

“Where are you in your investigation?“  He then asks.

“Just beginning”, says Freeh.

“So you cannot identify the responsible parties?”

“I cannot do that fairly at this point.“  Freeh assures Senator Menendez of  New Jersey.
__________
May 18, 2012
Nicholas Knight

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.

THE COURT: With -

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

He Said, She Said: The CEO, Senator and Governor’s Word Over a Mid-level Operations Assistant.

You can watch it here.

Let’s highlight two important points  that came out of this lightning interview:  Questions on evidence of material documents withheld from the public, which we might hear more about in the next weeks and months. ( This was first reported by Bob English on the blog, Economic Policy Journal,  and expanded upon by Mark Melin of Opalesque here .) And that the SEC should send itself a “Wells letter.”

Santelli states in the interview that two Wells notices just went out to bond dealers.  A Wells notice is when the SEC informs an entity that is to be the subject of investigation. It is just a heads up there might be an investigation. These are generally sent when a firm did not make timely or complete material required public disclosures.

Santelli asks, “ I noticed this morning that the wells notices went out, and that’s because the SEC said they didn’t give enough information on some bond deals. My next question is if the SEC knew in August which many documents seem to show that the $6.3 billion position existed in MF, a primary dealer, no less! Why did the August issuance of $300 million in new paper from that company not disclose that? And why doesn’t the SEC send themselves to Wells notice?

Here Santelli is asking why absolutely material information was not disclosed in the offering, and at the same time alluding to the revelations published here on MFG Facts.com and Opalesque that SEC had this information in hand before the bond offering.  So if the SEC knew of the information and knew that it withheld in the offering disclosures, why didn’t MF Global receive a Wells noticed right after the offering?  Or as the SEC also withheld this information, why isn’t the SEC sending itself a Wells notice?

Chilton defers saying he cannot speak for the SEC but agrees that this must be investigated.  In the same breath, he then quickly and defensively brushes Santelli off, stating that this is not how investigations are done.  But Santelli asked about a Wells notice, not an investigation.

Chilton answered: Two things. first of all, and this little bit is going to sound like a bureaucrat. the sec is the sec. I’m not the Sec. I can’t speak to them. second, these are all issues that need to be looked into. I don’t disagree with you at all. But the way that these things are done, you have an investigation. You develop a case, and then you go forward as you see appropriate.

Why was this exchange important? For the first time we have a Commissioner of a Federal Regulatory Agency stated that because the SEC withheld material information from the public before a bond offering, it must be at least “looked at.”  (He does not go so far as to say investigated.)

Why is this important here?

1.)  Three short months after those bonds were cast into the market, they were worthless and investors lost everything.  If that information was out there, MF Global may not have been able to raise the money they did not deserve from public investors such as state run retirement funds and endowments.

2.) It is yet another demonstration of “regulator capture” where the regulated catch the regulators.

Nicholas Knight

15.Feb. 2012

This article on  Mary Fricker’s great blog is required reading by all who want to understand the meltdown of MF Global and what is tells us about our Financial and Regulatory system.

How? MF Global borrowed on the repurchase market, used that money to buy securities, and put up those securities as the collateral for the repo loans.

Where’s the danger in that? It’s in the collateral.

One reader makes a comment as to how it is that the bankruptcy code adopted for MF Global allowed funds and collateral, stolen from customer accounts to support the big trade, were then sequestered by a third party such as JP Morgan.

Seizing was possible (albeit not legal) under amendments to the 2005 Bankruptcy Reform Act. “The special bankruptcy treatment given repos and derivatives means that repo lenders and parties to derivative contracts can keep the collateral if their trading partner becomes insolvent. This exempts them from the “automatic stay” rule in bankruptcy, which prohibits most creditors from trying to collect ahead of other.”

Most all customer funds have been identified.  Much appears to have been taken by the Holdings as collateral, which was then immediately seized by counter parties.

_________

Daniel Buckley | January 17, 2012 at 6:40 pm | Reply

The stated purpose of the hearing is to “to continue the investigation of the $1.2 billion in missing customer funds during the bankruptcy of MF Global.”  Looking at the lineup of witnesses many wonder how this panel might bring us any closer to discovery of the claimed 1.2 billion missing.  Questions are if these hearings are really to investigate the stealing of customer funds and facilitate recovery, or are instead a political show to call attention to, for example, the problems of the Dodd Frank Act.  Or to beat up on Rating Agencies that operate without any ultimate accountability?

We sincerely hope that the committee is prepared and dedicated enough to seek this opportunity for truth,  justice  and resolution and not for political posturing. The witness panel is as follows:

Panel I

• Mr. Michael Roseman, former Global Chief Risk Officer, MF Global Holdings Ltd.
• Mr. Michael Stockman, Global Chief Risk Officer, MF Global Holdings Ltd.

Panel II

• Mr. Craig Parmelee, Managing Director, Corporate and Government Ratings Division, Standard & Poor’s Rating Services
• Mr. Richard Cantor, Chief Credit Officer, Moody’s Investors Service
• Mr. James Gellert, President and Chief Executive Officer, Rapid Ratings International, Inc.

Mr Roseman was hired by MF Global in 2008 as Chief Risk Officer to identify risk and keep the company and it’s investors out of trouble.  Doing his job, he challenged the enormous leverage used behind Mr. Corzine’s sovereign debt trade.   A trade recognized very early to have the real potential to blow up the company.  He went so far as to make his case to the board in September 2010.  But then in January 2011, he was informed that he would be replaced by Michael Stockman who was more agreeable to Mr. Corzine. Stockman was at UBS for a number of years leading up to the near meltdown on the bank’s exposure to Credit Default Swaps — which lead the Swiss Government to bail out UBS to the tune of over $59 billion.  As an aside, Mr. Stockman also helped develop a course on “credit crisis analysis and risk management” for Dartmouth’s Tuck School of Business.

While it may be interesting to listen to testimony, we question if either of these two gentleman are in a position to tell us anything new at all about the handling of customer funds and the sudden – as the Wall Street Journal recklessly reports,  “vaporizing” or stealing of 1.2 billion  with “chaotic trading” in those last hours of MF Global, Inc’s, existence.  Roseman was long gone and Stockman worked far from a trading desk.

But perhaps the Committee is lining up the basis for related questioning and not conducting a political show.  We can only hope.

Why we do not have any clarity after so much time

From the very first day of the MF Global Bankruptcy MFG Facts questioned the structure.  Now others, who are perhaps even more informed on the US Bankruptcy code, go so far as to publicly characterize it as “criminal.”    Our regulators and courts applied a bankruptcy process (Chapter 11 and SIPA) to sequester private property into the MF Global estate.  An estate that is now expected to pay hundreds of millions in fees to attorneys and the bankruptcy industry.

Last week MFG Facts published an analysis and report on the still-opaque meeting where it was agreed by the SEC and CFTC that the MF Global bankruptcy proceedings would go under Chapter 11 and SIPA.  This report received much attention.  Since then the CFTC has made public statements addressing issues raised not only by MFG Facts but many others as well.

The CFTC tries to answer

Chairman Sommers’ January 27^th remarks to the National Association of Wheat Growers were informative and welcome, but did not offer explanation why the CFTC only now finds itself asserting that “commodity customers have an exclusive right to customer property. This includes, without limitation, segregated property, property that was illegally removed from segregation and is still within the debtor’s estate, and property that was illegally removed from segregation and is no longer within in the debtor’s estate, but is clawed-back into the debtor’s estate by the Trustee.”

Sommers continues that “When a BD is also a registered FCM, as MF Global was, there is one dually-registered entity and the entire entity gets placed into liquidation. Because there is one entity, it is not possible to initiate a SIPA liquidation of the BD, and a separate bankruptcy proceeding for the FCM.”

But her comments do not reveal that there is flexibility in the law, and therefore a possibility for a very different bankruptcy structure that would not have made customers creditors to the MF Global estate.  (We will soon see why if you stick with us.)   The structure applied was a choice.  The reasons behind this chosen path are not addressed.  The input and exact role of the CFTC into this choice, other than its agreement, has still not been revealed to the public. Commissioner Sommers’ full remarks can be found here.

Commissioner O’Malia also speaks out

This subject of the increasingly questionable, and now very messy, bankruptcy proceedings were also addressed by Commissioner O’Malia this week in a speech at NewYork Univesity.   In sum, he states, “All they [customer] can do is to meekly fill out the claims forms presented by the SIPC trustee, all of which are due today. This situation is intolerable and unacceptable.”  In spite of an overall very good speech, the CFTC again takes cover as helpless and hapless, rendering itself a now useless entity behind a SIPA proceeding:

O’Malia states, “Moreover, MF Global was dually registered with the Securities and Exchange Commission (the “SEC”) and the Commission. As a result, SIPC and its trustee have the primary responsibility for conducting the insolvency proceedings. The Commission has been relegated to a supporting role…”

And continues, “Of course, DSIO can only review the books and records that they can access. In the U.S. alone, the MF Global insolvency involves two regulators and two trustees. I want to call on all involved to make sure that the Commission has full access to relevant books and records and witnesses. Otherwise, recovery for MF Global customers may be delayed needlessly.”

Nice call, but reality is, the SIPC trustee was given and now has the primary responsibility as O’Malia states.  Of course it will be delayed needlessly.  That is the structure the CFTC agreed to. And with that, a legal machine will be richly rewarded out of the estate which has commingled customer assets.

Trustee Freeh of the Holdings is not aiding the investigation of customer funds stolen out of MF Global.  His responsibility is to liquidate the Holdings and pay its creditors, not return stolen assets to customers of MFGI.  The bankruptcy framework adopted by the courts allow for such intransigence.  That was the agreed upon choice by Gensler’s CFTC along with the SEC.

And no, in spite of the picture painted by both CFCT Commissioners as a system beyond their control, this bankruptcy did not needed to turn into a feeding fest of the MF Global carcass and its former customers by a platoon of bankruptcy attorneys. (For more on Big Bankruptcy Billers lining up around MF Global, read here)  A strong case could have been made from the first moment to protect and prevent customers from “meekly fill[ing] out the claims forms presented by the SIPC trustee.”

36000+ customers thrown to the billing machine. Who cares what federal laws say?

Readers might ask how can MFG Facts and others counter statements made by CFTC  Commissioners and other authorities who have even testified in Congress that this had to be a Chapter 11 SIPA bankruptcy?  Is it only opinion?

We need only to read the Bankruptcy Basics published by the Federal Courts (pg 31)

“In addition, stock and commodity brokers are prohibited from filing under chapter 11 and are restricted to chapter 7. 11 U.S.C. § 109(d).”

But let’s go beyond the cursory basics and review Case Administration (Vol 2, Chapter 7,pages 56-60) published by the United States Trustee Office of the Department of Justice (underlines our own):

The United States Trustee should be aware that section 109(d) prohibits a stockbroker or a commodity broker from filing under chapter 11. See In re SSIW Corp., 7 B.R. 735 (Bankr. S.D.N.Y. 1980); In re CO Petro Marketing Group, Inc., 11 B.R. 546 (B.A.P. 9 Cir. 1981), rev’d in part, 680 F.2d 566 (9 Cir. 1982).

If a broker files a chapter 11 petition, a motion should be made by the United States Trustee to convert the case to chapter 7 or to dismiss it, with specific notice to the SEC and SIPC for the stockbroker and to the CFTC for the commodity broker.

But is MF Global Holdings a Broker?

The question of broker or not is the reason a massive legal machine is now fighting over definitions, as MFGFacts reported last week.

Yet we wonder how this can even be argued as MF Global Holdings presented itself to the public as a broker  as on it’s bankruptcy petition on October 31^st described itself as a great big broker!

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3. Brief description of MF Global’s business:

MF Global, a Delaware corporation, is one of the world’s leading brokers in markets for commodities and listed derivatives, providing access to more than 70 exchanges globally and is a leader by volume on many of the world’s largest derivative exchanges. The company is also an active broker-dealer in markets for commodities, fixed income securities, equities, and foreign exchange.

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Is the Trustee for the Holdings now claiming the filing was wrong?  Is the court expected to believe it?  Apparently so.

Let’s return to the DOJ Bankruptcy guidelines:

Because stockbroker and commodity broker cases are very rare and can present unusual issues, the United States Trustee should notify and consult with the Office of the General Counsel immediately upon the filing of such a case. (page 56)

The United States Trustee should, if possible, appoint a trustee with experience in commodity broker liquidation, and should encourage the trustee to retain counsel and other professionals with related experience.  (page 57)

Here we have it:  What does, indeed, increasingly appear to be a “fraudulent” application of bankruptcy structure to MF Global.

1.) A nontransparent decision making process that within a few short hours rushed MF Global into bankruptcy filing.

2.) A filing made with no reported and required notification and consultation with the Department of Justice US Trustee Office.

3.) No apparent input at all by CFTC Legal council.

4.) As court records show no effort to appoint a trustee with experience in commodity broker liquidation, but instead a SIPC insider who is also the trustee for Lehman Brothers but with no experience at all in the commodities industry

5.) And finally (for now) a trustee of the Holdings who has never worked as a trustee, but instead is well connected to Washington (former FBI Director) and a financial industry insider as a former board member of MBNC as we see here.

A series of Department of Justice guidelines under the US Bankruptcy Reform Act have been disregarded for the feeding fest.  Where is the DOJ?

Tomorrow’s hearing by the Congressional Financial Services Committee:

Against this background we have Congressional Hearing with the stated intent to investigate the claimed $1.2 billion in missing customer funds. We all know where the funds are and what likely happened.  But the reality is until the shield of a bankruptcy structure is pierced to enable a true investigation with intent to rapidly return stolen funds, the funds will never be returned.  The hearings will go on and we will hear about Dodd Frank and rating agency lack of information and many “I do not recalls’” while  the bankruptcy industry lavishly feeds itself from the estate filled with “stolen” customer assets.

The members of the sub committees holding this are:

Randy Neugebauer, TX, Chairman

Michael G. Fitzpatrick, PA, Vice Chairman

Peter T. King, NY

Michele Bachmann, MN

Stevan Pearce, NM

Bill Posey, FL

Nan A. S. Hayworth, NY

James B. Renacci, OH

Francisco “Quico” Canseco, TX
Stephen Lee Fincher, TN

Michael E. Capuano, MA, Ranking Member

Stephen F. Lynch, MA

Maxine Waters, CA

Joe Baca, CA

Brad Miller, NC

Keith Ellison, MN

James A. Himes, CT

John C. Carney, Jr., DE

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Nicholas Knight

February 1, 2012

Much has been said about the ridiculous Vaporizing report.  Apologies, but we cannot stay out of the fray.  This is not just about silly and sloppy reporting.  And keep in mind this is not the first weird fear-mongering story around the MF Global bankruptcy.  Nor is this the first disinformation released by the media.  It now fits a pattern and the investment and futures industry has picked up on it.  Dan Collins at Futures Magazine writes here, “… the further we get away from the bankruptcy event, the less clear things become. Some are now suggesting that this could be on purpose.  It is hard to argue with that.”  Collins continues, “It seems odd that the Wall Street Journal would protect a source that provides an answer appropriate to a five-year-old with his hand caught in the cookie jar…”

Mark Melin of  Opalesque and industry observer writes here:  “While the article did a reasonably good job of setting expectations that the money has been lost, critical questions still need to be asked. The article notes segregated funds could have vaporized as a result of chaotic trading at MF Global… The chief question not being asked is: Why was someone authorized to trade segregated funds?”

Word on the street is that anonymous claims of vaporization (not stealing, mind you) was planted in the Wall Street Journal by interests around the bankruptcy litigation. Melin goes on to indicate that his sources point to efforts associated with the ongoing legal process.

This fits a pattern of propaganda. No sources are cited for the claims of  vaporized 1.2 billion customer funds.   And the only un-named sources are those close to the bankruptcy administration who also happen to be the sources explaining to the reporters what trustee Giddens is “looking into…”  The logical conclusion is that this and similar reports are an attempt to prepare the public with the notion that their funds can, indeed,  simply disappear into air as a result of “chaotic trading.”   That explains it!  Boy, we shudda’ known that from the start.

Chaotic trading does not vaporize funds.  But it can result in transfer of your funds to others on losing or poorly managed trades.   We know MF Global Inc. was used by the Holdings to finance an enormously leveraged bet.  We know funds were transferred from the Inc. into the Holdings.  There is always a trail, even when trading becomes “chaotic.”

Right now trustees and creditors are and will be paid from the estates of MG Global Inc. and MF Global Holdings.  The estate under control by the trustee of the MFGI includes primarily only customer funds.  The Holdings most likely (and logically) also has customer fund.  Trustee Freeh refuses to share information, exerting his right to client-attorney confidentiality.  This is a major hindrance to the investigation.  (We reported the details on this earlier here.) The bankruptcy court has not compelled this information or even an accounting from the Holdings.  And as the NY Times reports today, “A significant impediment has been clashes among the parties trying to resolve the MF Global mess: three federal agencies and two bankruptcy trustees.”

Unfortunately, and fitting the rules of propaganda, that same article and without sources writes, While authorities have traced hundreds of millions of dollars to banks, MF Global’s trading partners and even the firm’s securities customers, investigators remain uncertain about whether they can retrieve the money.

Stolen goods, including money can be moved around.  We live in the modern world where funds can be traced and recovered.  Money has been stolen from depositors out of the US financial system.  If there is uncertainty to recovery, we are looking at a Ponzi operation.   Otherwise federal regulators, including court appointed trustees must rapidly return the stolen funds.  We ask can it be there is no will to recover customer funds?

Meanwhile as this dually administered bankruptcy descends into deeper chaos and confusion we also wonder where is the DOJ United States Trustee Office? It is charged with oversight into Federal Bankruptcies. Where is the oversight over the eight largest bankruptcy?  Especially one that had descended into judicial confusion and headed by one trustee with no experience as a trustee, and another with absolutely no experience in the industry (Futures and Commodities) he is charged with taking control over?

Back to Money Vaporizers:  Payments to the bankruptcy process will amount to hundreds of millions.  Is bankruptcy administration and Federal Trustee actions  — such those by Louis Freeh, trustee of the Holdings, working for the largest creditors of MF Global Holdings —  a new euphemism for Vaporizing money?

For a more thorough commentary on this travesty of media reporting and manipulation of the bankruptcy courts read here.

And for how one writer takes the Wall Street Journal Vaporized front page story to the matt

Nicholas Knight

February 1st, 2012

First we’ll cover what started the fight and then move onto the genesis of why it has come to this so far into the proceedings.  Do stick with the story as it might sound like legal minutiae, but does have everything to do with recovery of customer funds.

It started with the Sapere Wealth Management, LLC assertions (among others) that the MF Global estate must be administered under 17 C.F.R paragraph 190.  Remember paragraph 190 as you will hear more about this in the next weeks.  Applying this clause of the bankruptcy code to the liquidation of MF Global Holdings would assure customer priority in the liquidation of MFGH, which is also claimed to have taken customer assets out of MFGI, the commodity brokerage unit of the Holdings company, MFGH — before and after the bankruptcy.

That all customer property as defined in paragraph 190 of the code, must be returned to commodity customers free and clear of other claims is also supported by others parties, including the CFTC.  The CFTC, however, also asserts that existing principles of law are available to ensure this, but first the court needs to make “antecedent determinations.”  In other words, the CFTC legal team is playing the adult and indicating that we already have the laws on the books to deal with this once the court figures out what laws it wants to use.

So why is the question if MFGH is even a broker so important?  Again, the key paragraph 190, which legally secures customer priority and distributions can only be applied to a brokerage  Chapter 7 bankruptcy, which is used for brokerage bankruptcies, but was not used for MFGH, which is the holding company of MFGI.  MFGH was filed as a Chapter 11 bankruptcy.  This Bankruptcy Code is used for non-broker entities, seeking re-organization.

Also, and to use the words of the Sapere plea to the court, “A decision by the court that 17 C.F.R §190 applied to MFGH’s estate can, among other things, obviate the need for titan law firms representing MFGH and MFGI, respectively, to engage in battles with one another funded by “other people’s money,” i.e., at substantial costs to the estates of MFGH and MFGI.”

The ability to use many millions of customer funds locked in the estate to pay trustees and their “titan” law firms representing MFGH and MFGI  is possible because the bankruptcy was filed as a Chapter 11 for the Holdings and Chapter 11 SIPC filing for MFGI, the commodity brokerage, and not under Chapter 7 for both.

As regular readers know, from the start of this sorry saga, MFGFacts.com has focused on the questions around why a Chapter 11 SIPC bankruptcy with almost non-existent securities accounts when neither SIPC nor Chapter 11 address brokerage liquidations.  Additionally, Chapter 11 is the choice when a restructuring is planed, which is not so with MFGH.

A Breaking Investigative Report

Fortunately, these question are now receiving greater scrutiny in the industry press as we read in this investigation published last week by Mark Melin of Opalesque Futures Intelligence who contacted MFGFacts.com while conducting his investigation, Sold Out: How A Private Meeting Between Regulators Gave Away MF Global Investor Protections.  In short, as Melin reports, “Deciding upon a Securities industry SIPA liquidation process for an FCM over the Commodity Exchange Act (CEA) liquidation and section 7 of the US Bankruptcy Code was a legal maneuver with far reaching consequences for customers with segregated funds and property with custodial banks. The selected SIPA liquidation does not recognize fund segregation or futures industry account regulations. The process considerably favors creditors.”

In other words, when the SEC threw the liquidation process to SIPC for a Chapter 11 securities liquidation, and with the CFTC’s immediate agreement (under the conflicted Chairman Gensler who had not yet to recuse himself  from MF Global issues), a framework of law was chosen where customers were — for the very first time ever — made creditors and their assets thrown into the entire MF Global estate.   Many say what!  And the industry is now asking how?

According to the report, the speculation is this: Robert Cook, SEC Director of Division and Trading and Markets is said to have been the lead regulator at the key meeting, the details of which are still not public. “Before joining the SEC, Mr. Cook was a partner at the powerful Washington D.C. law firm of Cleary Gottlieb Steen & Hamilton LLP, which represents JP Morgan, among other clients,”  Melin reported.  We all know that JP Morgan is the largest creditor to MF Global Holdings.  Readers may reach their own conclusions about that.  Yet, making the liquidation of MF Global Holdings and its parts a Chapter 11 and SIPC bankruptcy, set the stage for expensive dueling among lawyers over the question if MF Global is even a broker or not. This also and — most importantly — tremendously enhanced the recovery position for non-customer creditors over all customers.

The CFTC Warned in the 1980s of Potential for Abuse and Problems when Bankruptcy Codes Conflict with a Duel Registered Entity

As Melin shares, that the CFTC – to the agency’s great credit — recognized and dealt with this problem:  Citing the exemplary record in the futures industry in the event of bankruptcies, former CFTC Director of the CFTC Division of Trading, Andrea Corcoran writes in a January 1993 issue of  Futures International Law Letter  “As early as 1980, however, concerns were expressed about the ability to retain this record in the event of the bankruptcy of a dually-licensed firm – that is, a firm registered as both a futures commission merchant (FCM) and a securities broker-dealer.”

To rectify this, the CFTC then drafted rules we find under then now famous Part 190 where Corcoran writes,  “In the final rules, the Commission noted that Section 7(b) of SIPA (read Securities Investors Protection Act) …proved that a trustee in a SIPA liquidation shall be subject to the same duties as a trustee in a commodity broker bankruptcy under Subchapter IV of Chapter 7 of the Code.”

The CFTC was well prepared for a MF Global-like event. Against this background, and as Melin also reports, the choice of a Chapter 11 SIPC bankruptcy code for the liquidation of a futures broker, makes Chairman’s Genslers “give away” even more baffling.  We’d call it a throw away and ask if Chairman Gensler invited a single CFTC attorney into that early hour meeting before agreeing to file MFGI under MFGH as a Chapter 11 SIPC bankruptcy?  Regardless, with that decision the fate was sealed.  And not only were customers and the industry severely damaged, but there was a complete disregard of the decades of work, preparation and public service by the many professionals in the CFTC to which Chairman Gensler was entrusted.

And now we have the spectacle of “titanic” lawyers in one of the largest bankruptcies ever arguing if an entity is a broker or not.

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Nicholas Knight

January 23rd, 2012

Why does lack of experience matter?

Aside from the obvious reasons, we have to remember this:  The SIPC made an aggressive defense of their questionable appointment of James Giddens and his firm Hughes Hubbard & Reed  as Trustee to MFGI. SIPC was compelled by the court to defend this appointment.  In this filing, SIPC explains that the qualifying reason for the assignment to Giddens was his vast experience in Bankruptcies and availability.

In this filing the Chairman of SIPC declared the overwhelming reason to disqualify others who were available as Trustee was their lack of experience:

“ Of the two remaining law firms, one had never served previously as the trustee or counsel in a SIPA liquidation. Due to the fact that the Debtor operated both a substantial securities business and a multi-billion dollar commodities business, and that its liquidation therefore would be unprecedented and unique, SIPC determined that the Debtor’s liquidation would not be appropriate for a law firm with no prior experience in SIPA matters.”

(As an aside we note the disingenuous characterization of MFGI’s 318 securities accounts as “substantial,” and the existence of these few accounts to force a SIPC liquidation with all its consequences is another mysterious action by our regulators.)

We therefore ask why the courts appointed someone with absolutely no experience with bankruptcy liquidations to the eighth largest bankruptcy in US history?  What was the logic behind this recommendation by the committee and resulting court appointment?

The Debtors Committee requested the emergency appointment of Freeh a month after the bankruptcy. Prior to this, representative council for the Holdings secured un-hindered authority from Judge Glenn to transfer funds from MFGI (where a reported 1.2bn is missing) to the Holdings. See report here.

Mr. Freeh is now working for the interests of this committee to recover as many assets as possible to pay back debtors of the Holdings. He does not have the role to  investigate the recovery of stolen client assets from MFGI that were likely were sent to the Holdings before, and very possibly after, the bankruptcy.  We learned last week that he has little intention of cooperation with the MFGI Trustee, Giddens, who is charged with investigative powers.

Why was his appointment approved by the courts? With no bankruptcy experience, the Debtors Committee cited Freeh’s credibility to deal with all the simultaneous investigations. His “creds” were enough.

As we read in New York Times, Deal Book, Peter J. Henning, professor at Wayne State University Law School writes:

In petitioning the bankruptcy court for the appointment of Mr. Freeh, the lawyers for the firm and its creditors asked for a trustee with the credibility to deal with the different investigations into MF Global’s operations being pursued by the F.B.I., the Commodity Futures Trading Commission and the Securities and Exchange Commission. Satisfying their demands for information will make it easier to liquidate the firm and return money to investors and creditors.

Expected cooperation with investigation into stolen client funds

Hennings continues, “With the power to waive the attorney-client privilege, Mr. Freeh can make life for the investigators much easier by agreeing to disclose privileged communications to help sort out what management was told. It would also allow for Congress to question Mr. Corzine about any legal advice he received as MF Global struggled to stay afloat. While Mr. Freeh is not obligated to waive the privilege, he may be willing to do so if it will speed a resolution of the investigations.”

The legal community and more hopeful observers expected Freeh would surely waive attorney-client privilege to aid the investigation.  After all, he was a former FBI Director. His appointment would assure the public of an efficient and cooperative investigation of the stolen private property, that all investigators claim not to know where it could possibly be found. If anyone could do it, it would be a former FBI Director.

Cooperation in an investigation did not happen. The first thing Freeh did was to assert attorney client privilege and then claim absolute ignorance to the consequence of withholding evidence, as we reported last week.

Freeh did not waive attorney-client privilege, has yet to do that, nor has there been a plea to the court by Trustee Giddens compelling a waiver of attorney-client privilege to seek the needed information. The cynical answer as to why, is that there is no motivation for any extremely highly paid bankruptcy industry to do anything at all that would speed up an investigation to return stolen client funds.

Past Controversies and FBI Investigative Bungling and Cover-ups

We learn that Freeh has a troubled history as Director of the FBI, having been accused by peers, and others within the Beltway, of withholding and bungling information which resulted in multiple failed investigations. In fact, his directorship became such an embarrassment and unbearable, there were public calls for his resignation from serious corners after discovery of pattern of buried and lost documents and misleading information as reported here in 2000 in Business Week.

In the end, Freeh finally resigned before his term was up and shortly before 9/11. He left the FBI a discredited agency with a trail of failed investigations and  public embarrassments: The arrest and distracting investigation of Richard Jewell, who had nothing to do with the Centennial Park bombing in Atlanta. The bungled
Oklahoma Bombing investigation, the aftermath of the Waco, TX investigation, the tragic and misleading investigations and arrest of Dr. Lee — who was finally set free with the ruling Federal judge writing in his decision, the investigation “did not embarrass me alone, but…the entire nation.”

Demands for a Chop Shop

As early as 1997,the New York Times highlights  that Freeh’s FBI morphed into a skilled cover up shop, or automobile chop shop —  to the point of punishing FBI employees who pointed out investigation problems.  According to the report above, Freeh put more resources put into cleaning up bungled investigations and covering up than active and honest enforcement or investigation.  That was the FBI under Louis Freeh.

Fast forward and we see apparent demand for a master at orchestrating bungling within federal agencies to create cover and confusion.  A need to protect within the system.  And to be able to sell these skills and experience with the credibility as a “Former Director of the FBI” explains to some why he was appointed by Penn State to investigate the University handling of the abuse scandal — in  other words to protect that institution facing years of possible litigation.  This report out of Pennsylvania describes the motivation and need to appoint an investigator with connections, credibility and paint-over skills to protect the future of the enormously valuable Penn State Football program.

And so may be the motivations of the Creditor and Debtors Committee of MF GLobal Holdings. Protection is needed.  On the same day Louis Freeh was hired by Penn State University, he and his law firm Freeh Sporkin & Sullivan, LLP, was appointed as Trustee of MF Global Holdings (MFGH).

A few weeks after his appointment as trustee for MFGH, Louis Freeh declined to turn over documents to investigators trying to determine what happened to a reported  $1.2 billion missing customer funds as reported by the Wall Street Journal and commented upon by MFG Facts.  His excuse was obfuscated with the claim that he did not understand it would be necessary to aid the investigation.

The impossibility of a honest and efficient investigation to secure the return of stolen funds out of MFGI may have been assured with the Debtors and Creditors request and successful appointment of Louis Freeh as Trustee to MF Global Holdings.

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Nicholas Knight

January 15th, 2012

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Illustration credit: bankruptcymisconduct.com