In late November, the MF Global collapse was a month old, farmers and ranchers had assets frozen in bankruptcy court and investigators had begun efforts to locate some $1.2 billion in “lost” customer funds at the firm.
At the time, Farm Press spoke with John Roe, principal at BTR Trading Group, about efforts by the newly-formed Commodity Customer Coalition to influence bankruptcy court proceedings and upcoming congressional hearings on behalf of MF Global customers.
On Tuesday morning (Dec. 20), following four congressional hearings and busy court sessions, Roe – the son of Tennessee Rep. Phil Roe -- revisited the swirl of MF Global happenings, where things currently stand in Congress and the courts, and speculated on the actions of the firm’s leadership. Among his comments:
On the MF Global bankruptcy proceedings…
The coalition’s “motion to prevent JP Morgan’s use of cash collateral was denied. But we were successful in inserting language into that motion that if any of that money is proven to be client funds, it’ll come straight back to the clients. So … we got what we wanted.
“That’s kind of what we’ve done in the court all along. Our motions have been either denied or not actually ordered but what we wanted has been inserted into the orders that have transpired.
“Right now, we have nothing pending before the court. However, we are in the process of drafting a few motions that will attempt to pierce the veil and go after the holding company. We’re still developing a legal theory on that because that’s the issue we see coming down the road.
“We want to get the remaining 28 percent” of funds still held back to clients. “Actually, it’s less than 28 percent because the trustee has about $1 billion that he hasn’t released yet. So, it’s more like the last 15 percent (of client funds).
“We’ll have to try and get ahead of” other claimants of the funds. “There won’t be enough money in the brokerage unit for that. We’ll have to go after any funds at the holding company level.
“Beyond the traceable funds, any money shifted there, we’ll have to work out a theory where we can actually pierce the veil and go after the assets of the holding company. We’ll be filing motions and pleadings going forward to try and do that.”
On JP Morgan’s role in the MF Global collapse and bankruptcy…
“We’re very suspicious of JP Morgan’s actions throughout this. It’s definitely a case of the fox in the henhouse.
“You have JP Morgan as the custodian of some client funds. You have JP Morgan as the chief creditor and head of the creditor’s committee. You have JP Morgan buying various units of MF Global up for sale. And you have JP Morgan potentially engaging in transactions where they’re buying actual trades off the book at MF Global during the liquidation at steep discounts for profit.
“If those aren’t a number of conflicts of interest, I don’t know what is…
“We’re very interested to know if the liquid-to-maturity trades were liquidated and purchased by anyone trading units of JP Morgan – or, perhaps, brokered by JP Morgan. If they were, at steep discounts and the trades are actually going to be profitable, then it’s a situation where we need to call those back to the broker for the benefit of the customer.
“Additionally, we’re looking at the conflicts of interest that abound between JP Morgan and the trustee. One of our members filed a motion that was granted to request more information on the trustee’s relationship with JP Morgan and the potential conflicts of interest that arise there.
“And we’re interested in potentially advising FCMs (Futures Commission Merchant) and others with business at JP Morgan,” to cease that business. “It’s very clear they’re massaging the bankruptcy process for their benefit. … We’re looking at ways to take the fight to them.”
What about the $200 million found a couple of weeks ago at a JP Morgan London branch?
“We understand the CFTC is tracing that. We don’t have any additional information at this time.
“We can speculate, though. I think what happened is the music stopped on Oct. 31,” when MF Global fell. “That money was transferred, perhaps, to that affiliate in London and the collateral was never sent back.
“We’re interested in seeing what the CFTC will do about that. To our mind, it’s a simple call-back. The money shouldn’t be (at the affiliate), so send it back.
“We’ll be filing a motion to get that back if that’s the case.”
What about the interaction between the coalition and JP Morgan? There was supposed to be a powwow…
“I haven’t communicated directly with (JP Morgan Chase head, Jamie) Dimon or anyone at JP Morgan. But I’d be flabbergasted if they want to pick a fight with MF Global customers, especially given all the conflicts of interest.
“I’d certainly want to keep the (customers) as close to being on their side as possible and show JP Morgan is interested in working with customers.
“We reached out to JP Morgan through a few channels and it’s our understanding they don’t want to meet with us. That doesn’t mean they want to pick a fight.
“If they do, it’ll probably be something that results in a negative publicity campaign. I don’t know why they’d want that. But if it comes down to them trying to prime customers, we’ll take the fight to them.”
On the coalition’s interactions with Congress…
“Congress has been very, very busy with the payroll tax, funding government, etc. It’s been difficult for (legislators) to give us time. But we’re working with them.
“A number of Chicago-area congressmen will be filing a letter to the CFTC (Commodity Futures Trading Commission) later this week. It will indicate they support our legal theory and actions.
“Additionally, we’re working with them to ask more relevant questions on the record from the House Financial Services Committee’s (Oversight and Investigations subcommittee). And we’re advising them going forward on potential solutions and how to get the culpable players brought to justice, if necessary.
“So, we’re continuing to work with Congress and have gotten support from both sides of the aisle. With one notable exception, no one has taken this to a partisan area. We think it is not a ‘left/right’ issue but a ‘right/wrong’ issue and Congress is approaching it as such.”
Lines of questioning that the committees didn’t pursue that they should have?
“I think the House Financial Services Committee got closer to the correct lines. They started to ask questions relating to fraud and (former MF Global head Jon) Corzine’s reasoning.
“Corzine is saying ‘I’m cooperating and doing everything I can.’ Yet, the only thing he’s done to help investigators is his useless testimony before Congress. He quit (as MF Global head) on Nov. 3 or Nov. 4. Well, if you don’t have any culpability why quit? Why aren’t you down there with your sleeves rolled up helping to find this money?
“The hearings are structured in way that’s difficult” to dig into the facts. “It’s not like cross-examining witnesses in court where you have all the time you need. They have to move on, allow other committee members an opportunity to ask questions.
On the CFTC’s views about possibly “legitimate” MF Global actions…
“One of the questions that should’ve been asked (involves) the CFTC saying there can’t be a shortfall in customer funds. The second there’s a shortfall, the rules have been broken.
“Yet, in the press, we hear from the CFTC ‘Well, it looks like MF Global did, in fact, transfer the money. But those transfers may have been legitimate and therefore (customers) can’t get (those funds) back.’
“Well, I’d like to hear under what scenario you could have a legitimate transfer that results in a shortfall of customer funds. How would that not result in a call-back? That question needs to be asked.”
The CFTC should also be asked “why they haven’t moved or petitioned for Mr. Corzine and the rest of the (MF Global) board’s assets to be frozen? Why haven’t they asked them to surrender their passports?
“We have $1.2 billion in missing customer funds and no one has moved to do that? I’ve seen cases involving less than $1 million missing where that’s happened.
The CFTC needs to be asked “why it decided not to initiate an immediate call-back when there was an apparent shortfall? Why didn’t they petition the court to do that before going into a SIPA (Security Investors Protection Act) proceeding?”
On the hearing testimony by the CME Group’s Executive Chairman Terrence Duffy regarding Corzine’s knowledge of MF Global’s use of customer funds…
“I don’t know Mr. Duffy personally but I have friends who speak highly of him. I got the impression that he may have been muzzled by his attorney. That’s understandable because of the fear of liability for the CME.
“He had a written statement for the Senate (Agriculture Committee) and he inserted new language (while speaking). It’s possible he said ‘I’m going to go ahead and stand up customers.’ And he did and we strongly support him.”
“He very plainly said that he believes laws have been broken, that he was given information that Mr. Corzine knew about it. Of course, that makes sense. At least hundreds of millions of dollars were transferred out (of customer accounts) without” Corzine, MF Global Chief Operating Officer Bradley Abelow or Chief Financial Officer Henri Steenkamp “knowing about it? That would be crazy.
“One line of questioning that Congress began … is if what Duffy says is true, MF Global filed all segregation reports on Oct. 28 indicating they had $200 million in excess segregation. Then, they revised that when they went to bankruptcy saying ‘oh, that was a $200 million debit.’
“The fact is they sent out statements on Oct. 28 showing clients were in full segregation. If they knew that report was false, that’s 55,000 counts of mail fraud.”
Have you figured out why CFTC head Gary Gensler continues to push his ‘non participation’ as opposed to ‘recusal’ in his refusal to be involved in the MF Global investigation?
“We haven’t but it is very interesting. … I think, perhaps, because ‘recusal’ indicates there was some relationship” between himself and Corzine, his former boss at Goldman Sachs “that needs to be looked at. I think he just wants to indicate because of the appearance of impropriety he’s choosing not to participate…
“It’s interesting he’s choosing that language, I agree.”
What about the CFTC’s strengthening of Rule 1.25? I guess it puts tighter limits on how firms can use customer funds. But would it have made any difference in the MF Global actions if it had been passed earlier?
“One thing, obviously, is they wouldn’t have been able to use customer funds to back their repo-to-maturity trade. But that doesn’t mean they wouldn’t have engaged in them on a proprietary basis on the broker-dealer side.
“With customer funds being moved around as they are, you could have only ratcheted up so much trading by backing trades with customer funds. So, I’m not convinced (the strengthened rule) would have stopped the collapse of MF Global or stopped the shortfall of funds. It all depends on where that money ended up.
“As Congress pointed out, the CFTC knew there was a problem. Within a few weeks of MF Global going down, they closed that avenue of trading.
“However, it doesn’t really stop the problems with FCMs. In a zero interest rate environment they have to accept additional market risk to make any money.
“Getting customer funds out of repo-to-maturity transactions is a good thing. But if the direction the CFTC moves is towards closing down all the ways FCMs can invest customer funds, it will actually precipitate more bankruptcies. You’ll have customers unwilling to post additional collateral trade because they’re worried the FCM will lose it, steal it, whatever. So, there will be less customer funds to deal with more risk and they can’t make any money because interest rates are negative. It will be just a matter of time before some (other firm) blows up.”
“We’ve been able to get 72 percent (of customer funds) back. Our understanding from the trustee was that it wouldn’t be anywhere near that percentage until 2012.
“We’re happy we’ve been able to push the process this far but still have to close the 28 percent gap. We want to do that as quickly as possible.
“We need everyone in the industry – not just people who had money at MF Global but everyone who has a futures account and is at risk of this happening again – to contact their (legislators) and attorney general to get them involved and keep the pressure up.
“That will help make sure that MF Global customers get their money back. You can’t prevent a guy from robbing a bank. But you can put things in place to ensure the bank doesn’t close its doors and hold onto your money while they try to find out what’s missing.”