MF Global: From vapor to vapid

February 1, 2012 12:05 PM

A day after a source close to the MF Global investigation told the  Wall Street Journal that client money may have vaporized, another unnamed source close to the investigation tells the New York Times that investigators know where the money went.

Actually the MF Global Inc. trustee’s report released earlier this month pinpointed where much of the money was stuck and the main question that needed to be asked is why is everyone still quoting the $1.2 billion figure when it simply doesn’t add up. I guess a simple math question is not as sexy as citing unnamed sources.


Perhaps the anomaly is a tale of two trustees’: one whose mission is to get customer money back, the other to preserve capital in the parent company so that creditors can claim it. So it would not be a wild stretch of the imagination to suspect that the insider suggesting fund’s vaporized came from the MF Global Holdings Ltd. side, suggesting the money is gone and the MF Global Inc. trustee can go home and customers should accept the 72¢ on the dollar they received — if they were not unfortunate enough to have money in accounts overseas or held precious metal certificates confiscated by the trustee—and go home. And that the source from the investigation saying they know where the money went is from the side looking for the money, with the goal—if not the will—to get it back. They are the ones who need to grow a backbone and go after the money at MF Global Holdings, MF Global UK and JP Morgan.

Legal entities aside, this was one company with one Chairman and CEO and the fact that it was split up for bankruptcy purposes the way it was seems a miscarriage of justice and done for no other purpose but to allow certain creditors to move in front of others. At least one court filing noted that there isn't much use in customer priority rules if it can be rendered moot by moving funds from one legal entity to another of the same organiztion.

The Sapere motion offered a simply solution. Basically it would treat MF Global et al as one entity and apply the Commodity Exchange Act bankruptcy priority to it. It is what should have happened from the beginning but unfortunately Judge Martin Glenn ruled against Sapere earlier today. However, he did acknowledge in ruling against broad discovery that it was unneccesary because "the Justice Department, FBI, CFTC, SEC, SIPA Trustee, and Chapter 11 Trustee are all actively investigating the collapse of MFGI and MFGH."

According to an FBI spokesman any FBI investigation is criminal, which raises the question, how does a government appointed trustee refuse to cooperate with a Federal criminal investigation? MF Global Holdings Trustee Louis Freeh (coincidently a former Director of the FBI) has withheld certain information requested by the CFTC in its investigation. We do not know if this same information was requested by the FBI but if it wasn't that raises another question. For the judge to suggest Freeh is investigating is a bit of a stretch. The trustee for MFGH is clearly working for the interests of the Chapter 11 creditors and against the interests of customers as he even attempted to prevent the third bulk distribtuion of funds from the MFGI estate. Since we know funds were moved illegally out of segregation, any information as to where those funds went should be made public so the process of clawing those funds back can begin. Any attempt to withhold information should be viewed as obstruction of justice.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.