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Is Jon Corzine “Too Big to Be Indicted”? Part VI

Posted by Larry Doyle on December 15, 2011 10:22 AM |

The ongoing saga to determine what may have happened at the critical points of demise within MF Global continues again today.

I once again encourage you to grab both a large popcorn and a barf bag while witnessing the House Financial Services Committee Hearing re: MF Global.

Will the committee members have the balls to drill down and address the critical questions as to who knew what and did what to violate the sanctity of segregated customer funds totaling a cool $1.2 billion at MF Global?

Will we be fed a line of questioning by committee members which fails to put Jon Corzine on the spot?

Might we witness a day not often seen in modern American history in which a once mighty financial and political titan is compelled to provide the truth? Will Jon Corzine be forced to confront the testimony provided earlier this week by Terrence Duffy, CEO of the CME.

Let’s help the committee members by providing a line of questioning which they should pursue if they have any sense of rectitude and dignity. To this end, I welcome referencing BankThink’s Francine McKenna’s fabulous commentary, Hard Questions Lawmakers Should Ask at MF Global Hearing.

McKenna provides questions which the best prosecutors in the country would appreciate. She also provides a frame of reference for her questioning which can only be defined as enlightening.

Let’s navigate as Mckenna writes:

So if I were one of the lawmakers on the House panel, I’d ask the following questions on Thursday:

To Corzine and Abelow:

Did you pledge customer assets to obtain a last-minute line of credit from a private investor intended to hold the firm over until a sale was completed over the weekend?

Were those customer assets liquidated when MF Global filed for bankruptcy on Oct. 31? If so, which firm or individual lent money to MF Global using customer assets as collateral?? Which custodian enabled this illegal transfer of assets? Who in MF Global arranged this financing with the intention of repaying the loan and replacing the assets when a sale of the firm was completed?

Such an arrangement is not beyond the imagination. MF Global could have gotten the idea from firms it has done business with.

In August of 2007, the SEC used an emergency temporary restraining order to stop Illinois-based managed futures advisor Sentinel Management Group from continuing to loot customer accounts after declaring bankruptcy. Sentinel claimed to have $1.2 billion in assets under management prior to filing for Chapter 11 protection. Sentinel defrauded its clients by improperly commingling, misappropriating and leveraging those clients’ securities without their knowledge, the SEC said.

Sentinel transferred at least $460 million in securities from client investment accounts to a “house” account, the agency said. Sentinel also used securities from client accounts as collateral to obtain a $321 million line of credit as well as additional leveraged financing.

MF Global was a customer of Sentinel. According to the most recent annual report, Sentinel’s bankruptcy trustee sued MF Global to claw back a late withdrawal from Sentinel.

The Sentinel trustee also sued Bank of New York for enabling the commingling of customer assets with firm assets. MF Global also has a relationship with Bank of New York.  Who authorized the movement of customer assets to a house account for this purpose?

Was the account inside or outside the U.S. The firm transferred UK customer assets to BNY in August. It did so after FINRA pushed MF Global to increase capital in its U.S. brokerage unit as a result of a $6.3 billion repo-to-maturity transaction backed by European sovereign debt. Taking the assets off MF Global’s U.S. brokerage firm books reduced regulatory capital requirements.

Did MF Global have sufficient internal controls over financial reporting given the breach of segregated funds that occurred subsequent to the Sarbanes-Oxley certifications signed for the fiscal year ended March 31 and the quarters ended June 30 and Sept. 30?

Were you and MF Global CFO Steenkamp being truthful with your auditor, PricewaterhouseCoopers, when you signed the Sarbanes-Oxley certifications and assured investors and regulators of the adequacy of internal controls over financial reporting?

To MF Global auditor PricewaterhouseCoopers:

Your firm certified that, “in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2011.” Why did PwC allow MF Global financial statements to be issued (and used to back MF Global’s August bond issue) with a clean audit opinion?

No deficiencies in internal control over financial reporting or in controls over segregated assets were noted even though, given the breach of customer segregated funds and the reports of accounting and systems disarray, there were obviously serious ones present.

Why didn’t PwC issue a “going concern” qualification to the March 31 annual financial statements?

Given everything that’s been going badly inside and outside of MF Global, it sure looks like PwC could have raised doubts about the brokerage’s ability to survive the next 12 months, which is the threshold for issuing a “qualified” accounting opinion.

MF Global had lost money since its IPO in 2007. Structural problems – a low interest rate environment and lower trading volumes – apparently could not be fixed or, at least, not fixed on a timely basis to restore profitability under the primary business model. Free cash flow was severely negative in 2009 and 2011. The firm had embarked on a highly risky proprietary trading strategy to quickly restore profitability that added significant market and concentration risk.

To the CFTC, SEC, and FINRA:

Why did the agencies allow Corzine to serve as CEO and Chairman of MF Global and simultaneously a partner at Flowers’ firm J.C. Flowers?

Corzine’s loyalty seems to have been biased, in my opinion, towards recouping Flowers’ investment rather than protecting shareholders.

Did PwC identify any material inadequacies in MF Global’s controls over safeguarding customer assets in any of the required reports submitted to your agencies under the Commodity Exchange Act? Did your agencies follow up on those reports?

MF Global recently settled five class actions brought on behalf of purchasers of MF Global stock between the 2007 IPO and Feb. 28, 2008 regarding alleged misrepresentations and omissions related to risk management and monitoring practices and procedures.

PwC must review the procedures for safeguarding customer and firm assets in accordance with the Commodity Exchange Act on an annual basis. The annual audit, completed most recently for the fiscal year ended March 31, must include a review of a firm’s practices and procedures for computing the amounts that, by law, have to be set aside in clients’ accounts each day. MF Global also had to send regulators an annual supplemental report from PwC. The report would describe any material inadequacies existing since the date of the previous audit and any corrective action taken or proposed.

To James Kobak, Chief Counsel to James Giddens, bankruptcy trustee for MF Global Inc.:

Can you and Giddens continue to serve as bankruptcy trustee and counsel in light of the significant conflicts your law firm, Hughes Hubbard & Reed, has from your work with JP Morgan and PwC?

PwC is MF Global’s auditor and a creditor of MF Global. The audit firm is the auditor of HHR, Giddens’ law firm, and it is a client of the law firm. PwC is also auditor of JPMorgan Chase, MF Global’s largest creditor. JPMorgan has also been a client of HHR. PwC in particular could have been tempted to use its significant knowledge of MF Global, its flaws and its sins, to help its viable clients, HHR and JP Morgan, rather than MF Global shareholders.

Can we quickly get Francine McKenna appointed to the House Financial Services Committee or, at the very least, on the committee staff? I have more confidence in her than any sitting committee member.

I ask now for the sixth time, “Is Jon Corzine Too Big to Be Indicted”? (I, II, III, IV, V)

What do you think?

Larry Doyle

Isn’t it time to  subscribe to all my work via e-mailRSS feed, on Twitter or FacebookDo your friends, family, and colleagues a favor and get them to do the same. Thanks!!

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.


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