New evidence surfaces in MF Global investigation

News
Mar 30, 2012

Even if the money is still missing, something might have been found in the MF Global scandal: a smoking gun.

Friday, March 23, a congressional memo was released in the MF Global probe. The memo cited an email sent Oct. 28, 2011, by then-MF Global Assistant Treasurer Edith O’Brian. The email’s language suggests then-MF Global CEO Jon Corzine not only knew about the use of customer funds to back the group’s risky trades, but instructed transfers be made.

A transfer of funds made just days before the company’s collapse was “per JC’s direct instructions,” said the email, “JC” referring to Jon Corzine.

In late October 2011, MF Global—then one of the biggest independent futures brokerages in the world— began a downward spiral. Risky bets on European debt bonds led to being downgraded by the major rating houses, and on Oct. 31, 2011, MF Global was forced to file bankruptcy. This downfall left customers, many of them ranchers and farmers, out roughly $4.3 billion.

MF Global had had a habit of using funds from customer accounts to back up trades and conduct its day-to-day business. The “borrowed” money never amounted to more than $50 million for any given account, and was paid back by the end of the day during business as usual.

The supposedly sacred and hands-off customer accounts had been touched, something Joe Nocera of the New York Times calls “the sin of sins” for a group like MF Global.

Though about 72 percent of the missing customers’ funds were recovered, an estimated $1.2 billion (some sources say as much as $1.6 billion) are still missing over four and a half months later.

Tyler Martinez, owner of Martinez Ranch Management and Real Estate of Red Bluff, CA, and past MF Global customer, commented on the ongoing issue.

“They’ve returned about 72 percent… Hopefully we’ll be made whole and those involved will be pursued.”

Martinez continued, saying he was hopeful that wronged MF Global customers would see the majority of their money some day. “I think it might be 5 percent going to the lawyers to get it back, but I’m hopeful we’ll get 95 percent of the money back.”

The congressional memo at the heart of the situation came from a House Financial Services subcommittee involved in the investigation.

The memo cites the email from O’Brian and many see this as evidence of Corzine’s awareness of the inappropriate use of customer money.

This draws into serious legal question Corzine’s earlier claims of ignorance of any wrongdoing.

Steven Goldberg, a spokesman for Corzine, however, said the instruction to transfer roughly $200 million was to correct existing overdrafts with J.P. Morgan and did not represent a command to misuse customer funds. Goldberg added that Corzine recalls receiving documentation that the source of those transferred funds were appropriate.

The House Financial Services subcommittee reported J.P. Morgan sought assurances of the appropriateness of the source of the transferred funds. These efforts reportedly came in the form of direct calls to Corzine and draft letters for his signature. Other emails recovered by the subcommittee sent between O’Brian, MF Global’s general counsel Laurie Ferber, and other lawyers on Oct. 29, 2011, suggest Corzine was reluctant to sign the letters.

If it is determined Corzine knew or had reason to know customer funds were being misused, his claims of ignorance would be perjury It has been pointed out by economic analysts that, regardless what other potential misdeeds Corzine and MF Global committed, he and his now-defunct company are in violation of the 2002 Sarbanes-Oxley Act.

Among other things, the Sarbanes-Oxley Act—largely a reaction to the scandals of Enron and other securities firms of the time—requires senior executives of public accounting firms to take individual responsibility for the accuracy and completeness of their company’s financial reports. Even if Corzine is being truthful in his statements of ignorance of MF Global’s illegal use of customer funds, he is still in violation of the Sarbanes- Oxley Act.

The new information the email represents is a massive boon in this investigation, which previously looked inconclusive. With the events ongoing, it is hard to determine where proceedings are in the investigation.

As of Thursday morning, March 29, no indictments had been made Martinez called it criminal that no criminal proceedings have been initiated.

“It’s frustrating that they can confiscate that much money from people and nothing is done.”

Investigators had earlier cited the “mountain of documentation” they had to wade through before criminal indictments could be made. It is unclear if any such actions will be taken now, but this new evidence gives investigators something more to go on.

A number of proposed fixes to the current situation have been suggested, along with guards against a similar event happening in the future. Among these are CME’s $100 million protection fund for farmers and ranchers, creating a rule against the so-called “Corzine defense,” and the IRS waiving fines for affected farmers and ranchers.

Immediately following the disaster, CME—primary regulator of MF Global—set up a $100 million fund to protect customers in the case of another brokerage collapse. The fund is intended to act as an immediate payout to ag customers should a group working under CME default in the future. Though the move was intended to reassure spooked futures customers, many called it window-dressing.

“They’ve done a lot since the fallout of all this,” said Troy Vetterkind of Vetterkind Cattle Brokerage, LLC in an earlier interview. “And the $100 million safety net is trying to restore confidence in the market, but it’s lost a lot of stability in this whole mess.”

Another suggested fix for the future includes neutralizing the media-named “Corzine Defense” of CEOs claiming ignorance over the goings on of their companies. The National Futures Association is contemplating a rule to require top executives of futures brokerages to take personal responsibility by signing off on transfers of customer funds and of money movement over a certain size.

Opponents of the suggestion claim it would put undue stress and responsibility on CEOs. Another complaint against the suggestion is that it is unnecessary in the face of the Sarbanes- Oxley Act, which has similar provisions.

Since the lateness of the MF Global bankruptcy affected this year’s tax season, the Internal Revenue Service (IRS) is offering some relief to affected ranchers and farmers. According to a March 23 IRS press release, anyone who did not receive their Form 1099 from MF Global in a timely manner can apply for late-filing penalties to be waived.

If you have been affected by MF Global’s bankruptcy and were unable to file your March 1 tax return in a timely manner due to issues getting your 1099s from the company, this penalties waiver may apply to you. For more information, visit the IRS website’s newsroom at www.irs.gov/newsroom/ or call 1-800/829-1040. — Kerry Halladay, WLJ Editor

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