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.

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