Revelations, such that they are, that high-level MF Global executives will likely not be prosecuted also fly in the face of recent Congressional testimony by MF Global Inc. Trustee James Giddens. He noted to Congress, “Management’s actions, along with the lack of sufficient monitoring and systems, resulted in customer property being used during the liquidity crisis to fund the extraordinary liquidity drains elsewhere in the business, including margin calls on European sovereign debt positions.”
Giddens went on to testify, “I have determined there may be valid claims against certain individuals and entities. I believe that there are [plausible] claims, including claims for breach of fiduciary duty and negligence, against former MF Global CEO Jon Corzine, former MF Global CFO Henri Steenkamp, and former MF Global Assistant Treasurer Edith O’Brien, among others.”
CFTC Commissioner Jill Sommers testified at that same hearing that “a shortfall if customer segregated funds could amount to a violation of the Commodity Exchange Act (CEA) and commission regulations including those that govern segregated funds, prevent theft of customer money, require our registrants to properly supervise accounts [and] prevent making false statements.” She added, “A willful violation of the CEA is a Federal crime so if there is evidence to indicate that, that would be something that a U.S. Attorney would be able to pursue.”
Sommers would not comment on the New York Times web story but says, “We have been working with [The Department of Justice] from the beginning. We continue to review information in the enforcement investigation and until we are finished reviewing every single piece of information, we will not conclude our investigation. We wouldn’t purposely drag it out.”
Schmeltz was particularly disturbed by the notion that a criminal indictment could be avoided by simply citing poor risk management because that is what Sarbanes-Oxley attempted to address.
“The reason you have porous risk management is because the CEO, the president, the COO don’t make it job one to manage customer money appropriately,” he says. “If you take the tone at the top that we will do whatever we have to to keep these trades alive because they are the way we keep our firm profitable for the future, that sanctions the fraud. That is turning a blind eye to the very risk management that should be in place to protect customers.”
Next page: Tone at the top