Thursday, January 26, 2012

MF Global - CFTC Fake Non-Audit Audits

The CFTC is hopelessly incompetent.

On November 10, 2011, the CFTC issued an announcement that it was going to look at segregated funds at all commodity brokers (FCMs). It was widely reported that the CFTC was going to "audit" segregated funds, which sounds great, but that isn't exactly what the CFTC said.

Here's what they did say:
“Segregation of customer funds is at the core of customer protection in the commodity futures and options markets and must be maintained at all times,” said Commissioner Sommers. ... “we will do everything in our power to ensure public confidence in the markets by directing a review of clearing futures commission merchants (FCMs) to determine that segregated funds are being properly maintained in accordance with the CEA and Commission regulations.”

At first those sound like good words. "Everything in our power". Great. Unfortunately, they didn't do anything close to "everything in their power".

Most importantly, they did not do an audit. They did what they have already been doing. They did exactly what did not find the problems at MF Global.

They did not look at the actual accounts to see if the money is really there. They looked only at papers provided by the FCMs, and then concluded that numbers om the papers provided by the FCMs matched other numbers on the same papers. This will catch no one.

On January 25th, 2011, newspaper articles appeared with the conclusion. The CFTC reported that there were "no material breaches" at FCMs. This was reported widely, for example in the Wall Street Journal. Looking into the details, things are not what they seem.

The CFTC's press release of January 25th provides the details, and they are really scary stupid.

There are 120 FCMs registered with the CFTC.

First off, the CFTC did not review seg funds at all 120 of these guys. They only reviewed 14 of them. (ie less than 12% of the FCMs.) CFTC asked NFA and CME to review the other 106 FCMs.


Next, the review was not an audit. Says so right there in their press release:
" staff of the CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO), Chicago Mercantile Exchange (CME), and National Futures Association (NFA) did not conduct an audit.."

Well if none of these people conducted any audits of anything, what the heck did they do?

We don't know exactly what NFA and CME did, but CFTC DSIO tells us what they did: " DSIO staff obtained from each FCM a detailed listing of assets held in segregated and Part 30 secured accounts as reflected in the firm’s books and records. The listing of assets was compared to independent third-party source documents and reconciliations maintained at the FCM’s offices supporting the asset balances"

In other words, the FCM provided two pieces of paper, and the CFTC looked to see that the total at the bottom of one piece of paper matched the total at the bottom of the other piece of paper.

There are a couple of problems with this approach.

First, no criminal will ever fail such a review unless he is really stupid. The criminal will always provide two pieces of paper where the totals match. Madoff, for example, got this right every time, for more than 20 years.

Did any of these people read Markopolos' book? He explains this in great detail.

The folks at the CFTC didn't read Markopolos' book after the Madoff fiasco, and they didn't audit the FCMs seg funds after the MF Global fiasco! The CFTC is useless.

Second, FCMs are already required to provide daily totals of customer accounts and seg funds, so the great CFTC review actually just required the FCMs to provide a slightly larger piece of paper, with some numbers that total to the numbers the FCMs were already providing. The CFTC then looked at those totals, as they have been doing all along, and saw that they matched, as they have all along, just as they always matched at MF Global.

That's right, the CFTC did essentially nothing, and issued a press release about it. The press release says everything is fine.

I am reminded of the Jedi mind trick from Star Wars: "These are not the droids you're looking for. You can go about your business. Move along."

This insults our intelligence. How can we tolerate this?

The segregated funds at every FCM must be audited. The CFTC commissioners obviously don't see it that way. They think they can do business as usual, doing nothing, and play Jedi mind tricks on us, and keep their jobs.

I call for the resignation, in disgrace, of all present CFTC commissioners.

The Oversight and Investigations subcommittee of the Financial Services Committee of the House of Representatives is holding a hearing on Feb 2, 2012 titled “The Collapse of MF Global: Part 2”

The O&I subcommittee are the folks in congress who are supposed to oversee investigations such as the phoney baloney I've described above. Please contact these members of congress, and let them know you don't approve of what the CFTC is doing. Ask them to raise these issues with the CFTC commissioners at the upcoming hearing.

Please tell these members of congress that they should ask for the resignation in disgrace of all present CFTC commissioners.

Members of the O&I subcommittee...
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

Monday, January 23, 2012

MF Global - I've FOIA'd the CFTC

The Freedom of Information Act (FOIA) requires federal agencies to divulge internal documents under a wide range of circumstances. It is a great law.

Many of us MF Global customers have been wondering about the strange decision made by the CFTC and SEC in the early morning hours of Oct 31, 2011 to liquidate MF Global Inc under the SIPA law, rather than the ordinary bankruptcy code. (CFTC calls it "SIPC-led", but this means in accordance with the SIPA law.) Many MF Global customers believe this was the moment we were "thrown under the bus".

There's been a lot of speculation. Recently several blogs have claimed that there were secret meetings, and undue influence from a certain large bank. Could be. I dunno.

I decided to simply ask the CFTC how this decision was made. In this case "ask" means to invoke FOIA. Lets see if this works.

If any of you would like to do something similar, feel free to copy & paste!


FOIA Compliance Office
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581

January 23, 2012

FOIA Compliance Officer:

Under the Freedom of Information Act, 5 USC Section 552, I am requesting information or records regarding the CFTC’s choice of a SIPC-led liquidation as the appropriate mechanism to liquidate MF Global.

Background: On October 31, 2011, CFTC issued a statement regarding MF Global (attached) which says:

“The SEC and CFTC have determined that a SIPC-led bankruptcy proceeding would be the safest and most prudent course of action to protect customer accounts and assets.”

The issue is quite simply: How was that determination made?

I request all correspondence, email, written memos, meeting minutes, conference call notes, conference call recordings, conference call transcripts, powerpoint, or other documents which influenced the determination quoted above, or document the process. The timeframe searched should be October 30 thru October 31, 2011. This search should include discussion of pros or cons of any liquidation approach, risks, staff recommendations, legal requirements, etc. SIPC (SIPA) vs 11 USC chapter 7, etc. The search should include contacts with the White House, SEC, and agents of MF Global or JP Morgan or any other entities.

I agree to pay any search, review, or copying fees that may be incurred in processing this request up to $350. I believe I am most likely in the “other requester” category.

If you have any questions, please email me at .


Xxxxxxx Xxxxxxx
xxxx xxxxxxxx xxx
Xxxxxxxx, XX xxxxx

Tuesday, January 10, 2012

MF Global - Everyone Has Opinions

Everyone has opinions. We have convictions.
Proclamations are common on Wall Street.
But they are meaningless if you don’t stand by your words.
– 2011 MF Global Print Advertisement


Tonite I was reading the initial complaint filed in the Klinker case. This is the class action suit filed Jan 9, 2012 against Jon Corzine, JP Morgan, and Pricewaterhouse Coopers on behalf of MF Global customers.

I wish Klinker et al well, but I do not recommend that you read this document. It is pretty boring. Typical of the initial complaint in such cases. Lawyers grab every supposition made by a newspaper, uttered by a congressman, etc, and roll 'em up in a long writeup, send it to a judge, and hope they can convince him to let them initiate discovery. Its an application for a fishing license. The parties then argue about the details of the fishing license for a couple of years. After that, things might get interesting.

To my great surprise, and to the lawyers' credit, they began the complaint with a sort of a joke. They put that MF Global quote at top center on the first page. I have never seen that in a legal document before. Thanks guys.

If you want to follow the Klinker case, the docket is available on Pacer. (you have to pay to look at the docket) It is Case 9:12-cv-00005-DWM in the US District Court in Montana.

Saturday, January 7, 2012

MF Global customers - Boycott JPMorgan!

MF Global customers: Please join me in a boycott of JP Morgan.

I'm going to explain what JP Morgan is doing to you, and why you should join the boycott. Then I'm going to tell you how to boycott JP Morgan. It's more difficult than you think.

JP Morgan is using particularly aggressive legal tactics against MF Global customers. Against you and me. JP Morgan is trying to take our money!

The MF Global bankruptcy is complex. I will try really hard to explain it in a simple way.

Lets begin with the corporate structure of MF Global. MFG is comprised of many different legal entities. In the US alone, there are 11 corporations inside MF Global. Several of these corporations are undergoing separate bankruptcy proceedings.

We're going to talk about only two of these corporations.

First, "MF Global Inc" (MFGI) is the corporation that contains the broker. Your account is held here. The "segregated funds" accounts that were supposed to contain your money are held here. MFGI is being liquidated by trustee James Giddens. This liquidation is being done under a law known as the Securities Investor Protection Act (SIPA).

Second, "MF Global Holdings Ltd" (MFGHL) is the parent corporation that traded on the NYSE. This is the entity where most of the assets were held, including giant investment portfolios. This is where all those Italian sovereign bonds were held. MFGHL is in a chapter 11 bankruptcy. The trustee is Louis Freeh, former director of the FBI.

Hopefully we haven't lost you yet. Two corporations: MFGI and MFGHL.

MFGI has 38,000 commodity account customers, and 400 securities customers who want their money back, including you and me. About $5.9 Billion of customer accounts to pay back, and MFGI is short about $1.2 Billion. That money has to come from somewhere.

MFGHL has a bunch assets and bunch of very large creditors (ie folks who lent MF Global money), who also want their money back. The biggest creditor by far is JP Morgan. MF Global owes JP Morgan about $1.2 Billion.

If common sense and the intent of law prevail, the MFGI trustee will be allowed to "reach into" MFGHL and grab some cash, so MFGI can pay back the customers. However, the creditors of MFGHL, especially JP Morgan, don't want that to happen.

Bankruptcy law contains very careful provisions that define the ranking of various creditors, in other words who gets paid first. For commodity customers, this is really simple. The bankruptcy code and the CFTC regulations say the customer's property is returned to the customer first, before anybody else gets paid.

I'll try to avoid digging into the legal details here. For those who want to read up, the magic is found in the bankruptcy code at 11USC766 and CFTC regulations at 17CFR190.08 . The CFTC wrote a good explanation of all this and filed it with the court. It is filed as docket #724 in the MFGI liquidation.

The guys who wrote these rules were very careful. They explicitly wrote that even if customer's property is stolen, it is still the customer's property, and must be returned before anybody else gets paid. So clear. ... What could possibly go wrong?

Here's what went wrong.

The fellows who wrote the laws didn't anticipate a modern complex corporate structure. It is the fact that MFGI and MFGHL are separate legal entities that causes all the trouble.

James Giddens, running the liquidation of MFGI, has a mission to repay customers first, before anyone else, but he does not have the power to "reach into" MFGHL, where the money is, to get cash to pay MFGI customers.

On the other side, Louis Freeh, running the liquidation of MFGHL has a mission to repay creditors of MFGHL (ie JP Morgan), and he doesn't want "his" money to go to pay MFGI customers.

The law is applied to each of these corporate entities one by one, rather than all together.

JP Morgan completely controls the MFGHL creditors committee, because JP Morgan is the largest MFGHL creditor by far. Lets look at some of the incredibly ugly things the creditor's committee has done. I'm going to explain just two of them.

On December 5 ,2011, the MFGHL creditors committee attempted to block the most recent return of MFGI customers' segregated funds on the grounds that those funds should perhaps be used to repay creditors (JP Morgan) instead of customers (you and me). This is outrageous, to put it mildly. The MFGHL creditors committee isn't even a party to the MFGI proceeding, nevertheless, they tried to insert themselves and throw their weight around. See MFGI liquidation docket item #604 for the details. Luckily, the judge didn't fall for it.

When that failed, on December 22, 2011, the committee argued to the court that certain CFTC regulations (17 CFR 190.08) should not be applied to the MFGI liquidation. This is horribly offensive, because this section of the CFTC regulations is where the priority of the customer (you and me) is clearly established. The committee was trying to get the judge to abandon the fundamental principle that protects the commodity customer. See MFGI liquidation docket item #778 for the details. This letter to the court from the MFGHL creditors committee contains substantial errors in its explanation of the law. The committee's lawyer (Martin Bienenstock of Dewey & LeBoeuf) surely knew this. It was a hail Mary pass. Luckily the CFTC responded immediately with a rebuttal, correcting the record. We can't expect JP Morgan, or their creditors committee, or Dewey & LeBoeuef to play fair.

I think we can expect every week or two another one of these outrageous attempts to disrupt the process by which you and I get our money back. They're trying to claw their way in any way they can.

We must not condone JP Morgan's anti-customer actions.

Now if the things that the MFGHL creditors' committee is doing weren't bad enough, the government appointed trustee Louis Freeh is also working against you.

The various regulators (CFTC et al) have repeatedly expressed the opinion that in order to puncture the legal wall between the MF Global subsidiaries, and thereby get our money back, they're going to have to prove criminal intent. I don't know whether that legal theory is right or wrong, but it shows you where CFTC's head's at. CFTC, FBI, SEC, are working to find criminal activity and prosecute it. Perhaps if they finds some, they'll puncture that wall, and we'll get our money back. Who would stand in their way? Louis Freeh.

Freeh is refusing to turn over documents to the CFTC's investigation, claiming attorney-client privilege. This is described in a recent Wall Street Journal article.

Who could possibly benefit from Freeh's actions to protect the already defunct MFGHL from regulators? Why of course that would be the creditors of MFGHL, in other words JP Morgan.

This is other-worldly. Would you have expected a government-appointed trustee to be working against the 38,000 customers of MF Global? I would never have expected our government to work this way. The government's primary role in regulation of the financial industry is to protect the customer. Somewhere along the way this became confused.

Louis Freeh and Jamie Dimon make a hell of a team!

We need a fundamental change of attitude at JP Morgan. Their aggressive anti-customer actions will destroy the financial industry. If the big banks & brokers are going to turn customers into victims this way, there can be no trust. Without trust, there is no financial industry. Once other industry players begin to realize this, they will pressure JP Morgan to back off.

Here's what you can do:
  • Close any accounts you have with JP Morgan. This includes depository accounts at Chase banks and any Chase credit cards, JPM mutual funds, and so forth. Let them know why you are closing the accounts.
  • Ask your brokers whether they have a banking relationship with JP Morgan (most do! RJ O'Brien does.), and ask them to join the boycott. Tell them you don't want your money to support JP Morgan. Tell them why. Point out that JP Morgan's actions work to destroy the confidence in US markets on which your broker's business depends. JP Morgan is working to destroy your broker's business. These institutional relationships are most of JPM's business, so if we want our efforts to be felt, we must get institutional clients (brokers, hedge funds, mutual funds, other banks) to begin a dialog with JPM about boycott pressures they feel.
  • As you close your accounts, tweet about it. Use the hashtags #boycottJPM and #CCC

Finally, I urge you to join the Commodity Customer Coalition. This is the only group fighting for MF Global customers. CCC's lawyers are operating only on donations. CCC now represents more than 8,000 MF Global customers.

A recent Forbes article discusses CCC and the Boycott JPM movement.

A few useful links: - The official web site of the MF Global Inc trustee, James Giddens. This site contains the entire MFGI court docket. This web site is a little quirky. Sometimes it says you have expired, and you just have to try again. In some browsers you can't just refresh. You have to click a link or type again. The links to docket items I've provided above are links into this web site, so they may suffer from the same idiosyncrasies. - join the "MF Global Bankruptcy" group.

Friday, January 6, 2012

MF Global - CFTC Knows Where The Money Is

CFTC commissioner Jill Sommers has said publicly that she knows where MF Global customers' money has gone. ...but she won't tell us. The CFTC has been a disappointment.

I sent Commissioner Sommers the following letter today...

Commissioner Jill Sommers
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581

January 6, 2012

Reuters 12/14/2011:

“We certainly don’t want to lead anyone to believe we don’t know what happened. We do know, and we see where all the transactions went,” said Sommers, a Republican commissioner, in an interview on Wednesday.

Commissioner Sommers;

I’m an MF Global customer. Like thousands of others, I hope to get my money back.

You have admitted that you know where the money went.

I ask you to publicly disclose this important information immediately.

Secrecy now can serve no good purpose.

Secrecy does harm thousands of MF Global customers, like me, who are struggling to get our money back. With this knowledge in hand, we could make the correct arguments, to the correct courts, to preserve our money, and return it to us. If we are denied this information by you, it seems quite likely that the one of the several bankruptcy proceedings now underway may distribute our money to creditors, such as JP Morgan. The Louis Freeh and Jamie Dimon team appear to be working very hard to make this happen.

I imagine that you justify your secrecy with the excuse of an “ongoing investigation”, however that is a poor argument in the present situation. MF Global has been shut down, and all the records of every imaginable kind have been sequestered by regulators and law enforcement. Sequestered records will not change upon your disclosure.

There is no harm in disclosure. There is harm in secrecy.

The public good demands disclosure.

History may know you as a leader of the CFTC that destroyed faith in US markets by failing in its regulatory duty and allowing MF Global to steal from thousands of customers, or perhaps history will know you as the commissioner who broke the veil of secrecy and told thousands of US citizens where their money was .

Which would you prefer?

Thank you,

Xxxxxxxx Xxxxxxx

Let the folks at CFTC know what you think. Write or send them a fax. They need to hear from lots of MF Global customers.

CFTC fax numbers:
Commissioner Sommers 202-418-5067
Commissioner Chilton 202-418-5620
Commissioner O'Malia 202-418-5550
Commissioner Wetgen 202-418-5072
Chairman Gensler 202-418-5533
Inspector General Lavik 202-418-5522
General Counsel Berkovitz 202-418-5524
Director of Enforcement Meister 202-418-5523

You can also tweet @CFTC