Is independent counsel the answer?

On Wednesday Rep. Michael Grimm (R-N.Y.) and several other Republican congressman as well as representatives of the Commodity Customers Coalition (CCC) gathered in Washington D.C. outside the Capital building to urge Attorney General Eric Holder to appoint an independent counsel to investigate MF Global.

The move appears to be borne of frustration with the slow pace of an investigation, now more than six months old, that doesn’t seem to be moving. It is also based on suspicion that the highly connected former MF Global Chairman and CEO Jon Corzine is being treated with kid gloves by his former Goldman Sachs colleague, Commodity Futures Trading Commission Chairman Gary Gensler and his former colleagues in the Senate. Gensler has in fact, recused himself of the investigation but only after participating in arguably the biggest decisions: allowing MF Global Inc. to be placed in a Securities Investor Protection Corporation (SIPC) controlled liquidation and failing to argue against its parent, MF Global Holdings Ltd. (MFGH), being able to file a chapter 11 reorganization while its subsidiary had a massive shortfall in customer segregated funds.

But the motives are really irrelevant. The whole MF Global debacle has a bad smell to it. The futures industry rules on customer segregation are clear and they were violated. These rules have kept customer funds safe through some of the most violent financial upheavals, like the Lehman Brothers bankruptcy in 2008 and the Refco bankruptcy in 2005, and are the lynchpin for futures customer protection. The failure to protect customer funds clearly falls on the parent MFGH and the fact that it has a separate bankruptcy process with a separate trustee, Louis Freeh, looking out for the interests of the creditors often at the expense of customers is a travesty.

“The CCC believes that the current investigation has stalled,” says co-founder John Roe. “The key witnesses we have spoken to have yet to even begin the proffer process by which an immunity deal could be reached.  We have a case with $1.6 billion in stolen customer property in which three government agencies are investigating, there's clear circumstantial evidence of fraud in the public domain and no one has been arrested months later.  We believe that an Independent Counsel would fast track not only the criminal investigation, but the fruition of the entire MF Global saga.”

The CFTC is ultimately responsible for administering its rules and it seemed to abandon its responsibilities in this case. It has the ability to work with other jurisdictions and other regulated entities like JP Morgan, who are reportedly holding onto to former MF Global customer assets.

Six months is too long a time for customers to wait to get their money, which they were promised was safely segregated by regulators and industry leaders.

The CCC was done a tremendous job in advocating on behalf of former MF Global customers but the fact that an ad hoc group of industry participants needed to take the lead in advocating on the behalf of customers in a highly regulated industry is a sign that someone is not doing their job.

The Justice Department has not as of yet responded to Grimm’s demand but this should at least light a fire under those who are supposed to be investigating this case.

About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, 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. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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