On June 29, 2009, high-profile Wall Street broker Bernie Madoff was sentenced to 150 years in prison for illegal use of customer funds. This year, the financial implosion of once-mighty MF Global (MFG) managed by another high-profile Wall Street broker, Jon Corzine, has revealed that over $600,000,000 in “good faith” customer deposits from his MFG brokerage firm are missing and were presumably used to purchase risky, junk-rated national debt from some of the European Union’s so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain).
“Section 4d(2)3 of the Commodity Exchange Act ("Act") provides among other things that: (1) customers' funds shall not be commingled with the funds of the FCM; (2) an individual customer's funds may, for convenience, be commingled with the funds of other customers for deposit with a bank, trust company, or clearinghouse; (3) customers' funds may be invested in obligations of the United States, in general obligations of any State or any political subdivision thereof, and in obligations fully guaranteed as to principal and interest by the United States; and (4) the Commission may prescribe by rule, regulation, or order the terms and conditions under which these things may be done.” This quote from the Commodity Exchange Act specifically forbids two major criminal actions taken by Corzine’s MFG: customer funds were co-mingled with MFG’s capital and then invested in obligations that were not guaranteed by the United States.
Corzine's action, undetected by numerous responsible regulatory authorities from the CME Group to the Futures Industry Association (FIA) to the federal government’s Commodity Futures Trading Commission (CFTC), was clearly illegal. Even after the CME, whose stock fell sharply after the MFG bankruptcy filing and is trading near its 52 week low, provided an infusion of $300 million, MFG customers have still not recovered their funds. Is this condition systemic? Is customer money safe in any commodity futures brokerage account? The government and the exchanges are still trying to find the customer money that was stolen from the previously considered sacrosanct “segergated funds” accounts. Only that will restore confidence in the futures industry.
Sunday, November 20, 2011
Wednesday, November 09, 2011
MF Global can't find $633 million of customer funds
Is it possible that over six hundred thirty-three million dollars of customer money is nowhere to be found? MF Global accountant résumés are easy to find on Linked in, though. MFG's auditor, an independent accounting firm hired to sign-off on the accuracy of the books as a protection for stock holders, is PricewaterhouseCoopers LLP. How did they miss $600 million? Was anyone doing their job there?
It's also an embarrassment for the CME, the world's largest futures exchange, who has the responsibility to audit customer funds at its member firms. After it's rebirth as a publicly traded "for profit" corporation in 2002, the CME became more interested in customer deposits to cover margin requirements rather than in total customer deposits. In fact, when over 50,000 MF Global customer accounts were transferred on Monday to other clearing firms (primarily R.J. O'brien and Rosenthal Collins Group), the positions were transferred but only the funds required for margining the positions were transferred from MF Global customer funds. In other words, traders who were under-margined were more likely to get all their money whereas traders with extra funds in their account received only that portion of their money that was required to margin the transferred positions.
The Chief Financial Officer at MF Global is 34 year old Henri Steenkamp who spent his previous eight years as an employee of MFG's "what-$600-million?" auditor, PricewaterhouseCoopers. But there are plenty of others with oversight that dropped the ball on behalf of customers, too. There's the Securities and Exchange Commission (SEC) who, along with the FBI, is "investigating" things at MF Global. Then there's the Commodity Futures Trading Commission (CFTC). And what about the Futures Industry Association (FIA) that gets a piece out of every customer trade that takes place. Is there anyone looking out for the customer now? According to the 1970 Securities Investor Protection Act, brokerage customers are to be at the front of the bankruptcy payback line. The current thinking is that some of the customer segregated funds are just "gone" and customers of MF Global will not get all their money back. Sounds like a potentially big payday for lawyers coming up, though.
It's also an embarrassment for the CME, the world's largest futures exchange, who has the responsibility to audit customer funds at its member firms. After it's rebirth as a publicly traded "for profit" corporation in 2002, the CME became more interested in customer deposits to cover margin requirements rather than in total customer deposits. In fact, when over 50,000 MF Global customer accounts were transferred on Monday to other clearing firms (primarily R.J. O'brien and Rosenthal Collins Group), the positions were transferred but only the funds required for margining the positions were transferred from MF Global customer funds. In other words, traders who were under-margined were more likely to get all their money whereas traders with extra funds in their account received only that portion of their money that was required to margin the transferred positions.
The Chief Financial Officer at MF Global is 34 year old Henri Steenkamp who spent his previous eight years as an employee of MFG's "what-$600-million?" auditor, PricewaterhouseCoopers. But there are plenty of others with oversight that dropped the ball on behalf of customers, too. There's the Securities and Exchange Commission (SEC) who, along with the FBI, is "investigating" things at MF Global. Then there's the Commodity Futures Trading Commission (CFTC). And what about the Futures Industry Association (FIA) that gets a piece out of every customer trade that takes place. Is there anyone looking out for the customer now? According to the 1970 Securities Investor Protection Act, brokerage customers are to be at the front of the bankruptcy payback line. The current thinking is that some of the customer segregated funds are just "gone" and customers of MF Global will not get all their money back. Sounds like a potentially big payday for lawyers coming up, though.
Thursday, November 03, 2011
Too Big to Work: MF Global and Bankruptcy
The modern business world of IPOs and M&A has produced mega-entities in the fields of banking, insurance, communications, health care and other critical industries. Too often, drastic and expensive action has been required to save the public from the consequences of poor – and, in some cases, criminal – management of organizational monstrosities that are said to be “too big to fail.” The 2009 government bailout of AIG, GM, Chase and other major American firms is the latest and most dramatic example of this dangerous concept. Perhaps the real problem is that these companies are “too big to work” – too big to be managed.
On Halloween, the markets were spooked when MF Global, the country’s largest commodity broker, filed its bankruptcy papers. There were frantic, last minute, middle-of-the-night attempts to find buyers and even to find customer money! How could this happen? What went wrong? The most efficiently run organizations have always been those run by individual entrepreneurs. These are the people that know their business intimately. They know their product; they know their employees; they know their cash flow. In many cases, they have to reconcile their operations to the market on a daily basis. Obviously, there are certain advantages in economies of scale when related businesses merge. But, when a corporation gobbles up competing firms and becomes an economic blob with armies of employees that require a multi-tiered management structure because it extends itself into diversified global markets, it becomes too big to work and bad things start to happen. Costs go up, quality goes down and competition is crushed. Instead of being bailed out, these giants should be broken up before their cancerous growth destroys our economic body.
MF Global and Jon Corzine represented the worst of all possible combinations: an organization that became too big to manage being managed by a man who was too small for the job. We can only hope that we are not similarly at risk on a national scale with our federal government.
On Halloween, the markets were spooked when MF Global, the country’s largest commodity broker, filed its bankruptcy papers. There were frantic, last minute, middle-of-the-night attempts to find buyers and even to find customer money! How could this happen? What went wrong? The most efficiently run organizations have always been those run by individual entrepreneurs. These are the people that know their business intimately. They know their product; they know their employees; they know their cash flow. In many cases, they have to reconcile their operations to the market on a daily basis. Obviously, there are certain advantages in economies of scale when related businesses merge. But, when a corporation gobbles up competing firms and becomes an economic blob with armies of employees that require a multi-tiered management structure because it extends itself into diversified global markets, it becomes too big to work and bad things start to happen. Costs go up, quality goes down and competition is crushed. Instead of being bailed out, these giants should be broken up before their cancerous growth destroys our economic body.
MF Global and Jon Corzine represented the worst of all possible combinations: an organization that became too big to manage being managed by a man who was too small for the job. We can only hope that we are not similarly at risk on a national scale with our federal government.
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