There hasn’t been a lot of coverage of this week’s House Agriculture Subcommittee on General Farm Commodities and Risk Management preliminary hearings to reauthorize the Commodity Futures Trading Commission (CFTC), which is too bad because it was pretty explosive.
The primary purpose of the hearings was to explore ways to improve customer protections but the panelists participating used it to hammer away at the CFTC’s residual interest rule proposal.
Rarely do you hear a regulator criticize a fellow regulator but the National Futures Association President and CEO Dan Roth was sharp in his criticism of the CFTC on this matter. He pointed out that the rule—which isn’t really a new rule but a new interpretation of an existing rule—would not have prevented either the MF Global debacle or the Peregrine Financial Group fraud, in fact one of the panelists pointed out how it could have doubled the losses of customers of MF Global.
In the end Roth stated simply, “It is a bad rule.”
Subcommittee Chairman Rep. K. Michael Conaway (R-Tex) may have set the stage in his opening remarks by stating, “When crimes occur it is essential that our justice system acts diligently and decisively.”
The topic of criminal prosecution came out at several points in the hearings. Roth pointed out while a lot can be accomplished with civil penalties, “The strongest deterrent [to acts of fraud] is criminal prosecution.”
CME Group Executive Chairman Terry Duffy said criminal prosecution was in order in the MF Global case.
Perhaps most bold was James Koutoulas co-founder of the Commodity Customer Coalition who noted that the Department of Justice did not seem to pursue criminal prosecution despite “a mountain of evidence” and should look into whether MF Global executives perjured themselves in previous testimony before this committee.
Koutoulas pointed out that the leadership at MF Global was allowed to continue to run the company after the MF Global Inc. unit was split off into a SIPC bankruptcy despite nearly $1 billion missing in customer funds.
Unfortunately, none of the committee members asked the panelists more specific follow-up questions on what criminal prosecution should have occurred. I know of at least one panelist that would have been happy to add some meat to that bone.
They seemed content to talk about criminal prosecutions generally but did not seem appropriately curious about specific crimes that occurred in the MF Global situation and why a more vigorous prosecution did not take place.