[Vision2020] Corrupt Governor Becomes Corrupt CEO

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

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June 8, 2012
Trustee Sees Customers Trampled at MF Global By JAMES B.
STEWART<http://topics.nytimes.com/top/reference/timestopics/people/s/james_b_stewart/index.html>

If the collapse of the commodities brokerage firm MF
Global<http://topics.nytimes.com/top/news/business/companies/mf-global-ltd/index.html?inline=nyt-org>were
a murder mystery, the revelation that $1.6 billion of customer money
had disappeared would be the equivalent of finding the corpse.

Who did it? And given that customer assets, by law, must be segregated from
a firm’s assets and operations, how could it have happened?

This week, MF Global’s liquidation trustee, James W. Giddens, went a long
way toward solving the mystery in a 181-page account of MF Global’s decline
and fall.

Contrary to vague and self-serving assertions that MF Global’s affairs in
its last week were so chaotic that no one really knew what was happening,
some people at the firm obviously knew only too well, and took desperate
measures that ignored clients’ interests. In doing so, they violated the
most basic obligation of any brokerage firm, which is to protect customers’
assets.

More broadly, the report makes clear that the notion that customer assets
are safely segregated, at least at commodities brokers, is an illusion
thanks to a lax calculation of customer assets allowed by the Commodity
Futures Trading Commission, which regulates commodities brokers.

Mr. Giddens cautioned that his report was by no means complete, and that he
wasn’t in a position to draw conclusions about potential civil and criminal
liability. But it seems clear that serious violations of law were
committed, and the report will surely add to pressure on the Securities and
Exchange Commission, the commodities commission and the Justice Department
— the agencies investigating MF Global for potential enforcement and
criminal proceedings.

That MF Global was an accident waiting to happen under the leadership of
Jon Corzine, a former Goldman Sachs chief executive, United States senator
and New Jersey governor, is evident from the structure of the firm. Merely
describing lines of authority requires a chart that resembles a convoluted
family tree.

Responsibility for accessing funds in segregated customer accounts and
transferring them elsewhere rested with one employee, Edith O’Brien, an
assistant treasurer in Chicago who reported to the firm’s treasurer in New
York, who in turn reported to the chief financial officer, Henri Steenkamp.
The treasury division’s main responsibility was meeting Mr. Corzine’s
increasingly frantic demands for liquidity to support his high-risk and
ultimately disastrous bet on the debt of shaky European nations.

Regulatory compliance — making sure that customer funds were safe — was the
responsibility of the financial regulatory group, which reported to
Christine Serwinski, the North American chief financial officer, who also
reported to Mr. Steenkamp as well as an executive based in London. Ms.
Serwinski was responsible for daily reports on segregated customer funds to
the commodities commission and weekly reports to the S.E.C. Mr. Steenkamp,
in turn, reported to Mr. Corzine.

It’s apparent from Mr. Giddens’s report that as MF Global’s financial woes
deepened last summer and fall, protecting customer assets was among the
least of Mr. Corzine’s priorities. Mr. Corzine testified to Congress that
he never knowingly asked anyone to break the law, and nothing in the report
explicitly contradicts that. At the same time, he made demands for cash
that appear to have left employees no alternative but to divert customer
assets.

None of this would have been possible if regulators actually required firms
like MF Global to keep customer funds safe. Instead, the commodities
commission allows firms to use an alternative method for calculating
customer funds in foreign accounts that vastly understates what belongs to
customers. Cash, for example, doesn’t count. The difference between what MF
Global actually owed its customers and what it needed to segregate under
the alternative method was calculated at the firm on a daily basis and
often exceeded $1 billion. Although MF Global reported only the alternative
calculation to regulators, it prepared its own segregation report every day
that showed the true extent of its liabilities.

MF Global, like most brokerage firms, also kept a surplus in the segregated
funds to make sure that it never ran short. This was available to the firm
for other purposes, although in practice it was rarely used. But as
the European
debt crisis<http://topics.nytimes.com/top/reference/timestopics/subjects/e/european_sovereign_debt_crisis/index.html?inline=nyt-classifier>escalated
last summer and demands for greater liquidity intensified, the
firm proposed to tap the surplus and borrow funds overnight from segregated
customer accounts, which prompted a worried response from Ms. Serwinski,
according to the report.

“Client assets may be put at risk even if for overnight,” she warned, and
then asked whether, in the event of “financial crisis,” there was any
guarantee that the firm would be able to repay its customers.

Ms. O’Brien, who had to approve such transfers, was also worried about the
firm’s growing liquidity needs and where the cash would come from. “Why is
it I need to spend hours every day shuffling cash and loans from entity to
entity?” she wrote in an e-mail in August, describing the process as a
“shell game.”

Mr. Steenkamp, the chief financial officer, assured Ms. Serwinski that he
had “walked” Mr. Corzine through the regulatory requirements. Still, he
stressed that Mr. Corzine wanted the firm to make use of any surplus in the
segregated accounts and “maximize” it through “liquidity management.”
Despite mounting concerns by top officials, loans from segregated funds to
the firm became routine, and some weren’t repaid.

On Oct. 26, 2011, Ms. O’Brien approved transfers totaling $615 million from
segregated customer trust accounts at JPMorgan Chase, supposedly for an
intraday loan. The funds weren’t returned by the end of the day, which
caused “panic” in Ms. O’Brien’s operation, according to the report. Ms.
O’Brien demanded, in an e-mail, to know when the funds would be returned,
adding in capital letters: “I need to know now.” But the money wasn’t
returned, and Ms. O’Brien continued to approve such “loans” in the ensuing
days.

On the morning of Oct. 28, two officials in the financial regulatory group
who were preparing the daily segregation report for the commodities
commission noted a deficit in segregated customer accounts of about $300
million. Reporting that would have immediately set off alarms at
regulators. But according to Mr. Giddens’s report, two members of Ms.
O’Brien’s staff determined that a $540 million wire transfer into the
segregated accounts the previous day had somehow gone unrecorded. They
simply added $540 million to the segregated funds — in effect,
double-counting the transfer. That resulted in a surplus of more than $200
million, and the firm reported this number to the commodities commission.

The trustee’s report described witness accounts of these events as
“confusing and contradictory,” noting that the firm’s records accurately
reflected the $540 million transfer and that the segregation report was
revised to show a surplus without any backup documentation. Whatever the
reason, the result was that MF Global filed a false segregation report with
regulators.

That same day, the 28th, Mr. Corzine ordered Ms. O’Brien to transfer $175
million to JPMorgan to cover a firm overdraft. With no other source for the
cash, Ms. O’Brien approved a transfer of $200 million from a customer trust
account at JPMorgan. When she spoke to a JPMorgan banker about the
transfer, she said she knew the bank had “issues” with that, according to
the report, presumably because the trust account held segregated funds.
After consulting with their lawyers, JPMorgan officials had a series of
phone conversations with Mr. Corzine in which they demanded assurances that
the transfer was lawful.

Given that this transfer occurred the same day that the firm’s regulatory
group reported the $300 million deficit in segregated accounts, it’s hard
to know how withdrawing another $200 million could have met regulatory
requirements to safeguard customer assets. Ms. Serwinski was on vacation at
the time, but she testified to Congress that she would not have approved
such a transfer.

Mr. Corzine testified that Ms. O’Brien “explicitly confirmed” that “the
funds were properly transferred.”

But when asked on Oct. 29 for such an assurance in a letter demanded by
JPMorgan, she balked, even after the letter was revised to limit its scope
to just the $200 million and $175 million transfers. Ms. O’Brien “was
subjected to extreme pressure to sign the letter,” the report states, “but
steadfastly refused to sign it.”

Ms. O’Brien hasn’t given her side of this pivotal story. She invoked the
Fifth Amendment when asked to testify to Congress. A lawyer for Ms. O’Brien
declined to comment.

The trustee’s report concludes there was a substantial “shortfall” in
customer segregated funds every day from Oct. 26, when $615 million in
loans from customer accounts were not repaid, until MF Global filed for
bankruptcy on Oct. 31. Given the cavalier disregard of customer interests
and the huge transfers from customer assets that week, the only surprise to
Mr. Corzine and others at the firm should have been that customer losses
weren’t even greater than $1.6 billion.

Mr. Giddens’s report points out the need for some simple regulatory
reforms. The alternative method for calculating customer assets is a
glaring loophole that needs to be closed and should never have existed to
begin with. Any surplus in customer accounts contributed by a firm should
be maintained in a separate account that the firm can draw upon. Otherwise,
segregated funds should be just that — segregated. A comparatively
low-level employee like Ms. O’Brien should never have sole authority to tap
segregated customer accounts. A spokesman for the commodities commission
declined to comment on my proposals.

Those responsible for the MF Global debacle should be held accountable to
the full extent permitted by law. And the customer losses and resulting
hardships that happened at MF Global should never happen again.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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