MF Global debacle grows more outrageous

June 15, 2012 01:08 PM

We have pointed out on several occasions how the original sin in the MF Global debacle is how the firm was allowed to be split — the futures commission merchant/broker dealer (FCM/BD) MF Global Inc. (MFGI) into a SIPC liquidation and the parent MF Global Holdings Ltd. (MFGH) into a Chapter 11 proceeding — with a shortfall in customer segregated accounts.

It has been pointed out that this was aided by an attorney for MFGH telling a whopper to Bankruptcy Judge Martin Glenn at the initial hearing on Nov. 1.  Attorney Kenneth Ziman of Skadden Arps when asked about press reports of a shortfall told the judge, “I think, to the best knowledge of management, there are no shortfalls, Your Honor. All funds are accounted for, and I’m talking about the broker-dealer. That’s to the best knowledge. All funds can be accounted for.”

No one seemed to jump in to correct the record even though attorneys for the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) attended that hearing and Laurie Ferber, General Counsel for MF Global, acknowledged the day before that indeed there was a shortfall in customer funds.

The Judge asked about this specifically so there is a chance he may have acted differently if he was given an honest answer.

Several interested parties have stated that the appropriate action — one perhaps more likely to have occurred had the facts of the situation been clearly presented — was for a judge to place the entire entity in receivership. A receiver would have more power to pursue leads and claw back money and perhaps more importantly, a company that operated as one entity would not have been able to divorce itself from its responsibility of having to segregate customer funds and the priority of those customers’ property over general creditors would have been maintained. That is what happened in this case with MFGH and its main creditor JP Morgan attempted to jump in front of customers.

Why is this important now? Tyler Durden of connected some interesting dots in a blog post today titled: Four Bullet Points Explaining How JPMorgan Doubled Its Money from MF Global's Corpse in Seven Months.

In it he points out how JP Morgan purchased a stake in the London Metals Exchange (LME) from MF Global’s UK affiliate, on Nov. 23, several weeks after the parent filed Chapter 11. KPMG, the administrator for MF Global UK, executed the sale. This is the unit currently being sued by MFGI Trustee James Giddens for approximately $700 million in customer part 30.7 secured funds believed to be held in the UK.

Fast forward to today’s announcement that Hong Kong Exchanges & Clearing Ltd. has agreed to pay 1.39 billion pounds ($2.15 billion) for the LME, making JP Morgan’s interest  $103 million, roughly a 160% profit in seven months.

Meanwhile the trustee for MFGI is still negotiating with JP Morgan over possible customer money still stuck at JP Morgan. Commodity Customer Coalition (CCC) co-founder James Koutoulas indicated more than a week ago that sources within JP Morgan say as much as $600 million in former MF Global customer money is still stuck at JP Morgan.

JP Morgan Chairman and CEO Jamie Dimon was briefly questioned on MF Global during hearings of the Senate Banking committee earlier this week. Senator Jon Tester (D-Mont.) asked Dimon why it took seven months for JP Morgan to return $168 million in margin money to the MFGI estate. Dimon basically just said he was cooperating with authorities.

Unfortunately Tester did not ask about the $600 million in customer money many believe is still being held there.

Now we learn that JP Morgan may not only be hanging on to customer money but was allowed to buy assets from part of the firm, even though it had failed to protect customer money, and may soon turn a huge profit on it.

Meanwhile, customers have still not been made whole.



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.