From the November 01, 2012 issue of Futures Magazine • Subscribe!

MF Global’s original sin

How did we get there? 

Then came the fateful error: The day after the bankruptcy declaration, Ziman walked into the U.S. Bankruptcy Court at One Bowling Green in New York. He had been up all night with the team of  interested parties and attorneys preparing for the hearing. The groundwork was in place, but there might be a problem. If the court determined the millions of dollars of missing customer funds in the brokerage unit indicated “fraud, dishonesty, incompetence, or gross mismanagement,” a Chapter 11 filing might not be approved. The judge might put the proceeding into a court-appointed trustee or outside examiner. Regulators would be brought back into the loop; remaining assets in Holdings might be frozen. The creditors would lose standing and Holdings would not be allowed to continue operations on its own. 

There was a lot to accomplish at this hearing, including an $8 million loan from JPMorgan for a superiority lien on the estate. But getting Holdings into Chapter 11 was paramount. If Judge Glenn were to ask Ziman about the shortfall, how could Ziman reply? The courtroom was packed and legal counsel from the SEC, CFTC and U.S. Trustee’s Office of the Department of Justice all were in attendance.

Then the question was asked by Judge Glenn about missing customer funds and Ziman answered, “All funds are accounted for, and I’m talking about the broker-dealer.” 

Yet everyone in the room, including counsel for regulators — ostensibly there to protect the public interest — knew there was a massive shortfall. MF Global General Counsel Laurie Ferber confirmed the prior evening to the CFTC and SEC that there was a “significant shortfall in its segregated funds account” at the brokerage unit. That fact had not changed. 

But the plan worked. The bankruptcy filing was accepted substantially as prepared. Ziman’s hesitant, rambling misstatment of the facts brought no objections from regulators. (The day before, the SEC and CFTC agreed the broker-dealer would be liquidated through SIPC because of its dual registration.) When Ziman refers to the broker-dealer in this testimony, he was referring to MF Global Inc., the FCM and broker-dealer, a single entity. This connection is critical and is the very reason CFTC Commissioner Jill Sommers testified to Congress that MF Global Inc. had to be put under SIPC protection. “They cannot be separated,” she stated. 

When contacted, Ziman had no comment on the hearing or MF Global. 

The original sins of the MF Global bankruptcy, with its programmed confusion, continue to work. Actions taken by attorneys for Holdings and U.S. regulators determined the outcome. 

When a Senate aide recently requested answers from the CFTC on the bankruptcy structure and its inaction to secure threatened customer property while on site in the days before the bankruptcy, he was brushed off with: “The funds that were taken out of segregation were mostly done so at the broker-dealer.”  

Today, executives that may in the future face criminal charges still are working for MF Global Holdings. This includes Henri Steenkamp, the CFO who continues to sign off on millions in legal bills submitted to the Holdings Trustee, despite the assertion by MF  Global Inc. Trustee James Giddens that there are valid claims of “breach of fiduciary duty and negligence against” him and other former MF Global executives. 

Elaine Knuth is managing principal of Davenport Advisors, LLC and author of “Trading Between the Lines: Pattern Recognition and Visualization of Markets” (Bloomberg Press and John Wiley & Sons, Inc. 2011).

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