I'm not a lawyer. I don't even play one on TV. As a result, one of the most difficult aspects of breaking down the MF Global (OTC: MFGLQ) case has been trying to understand how the legal system works in this kind of situation.
At this point, my nagging suspicion is that it simply doesn't work. Or at the very least, a quagmire of overlapping rules and regulations has created a labyrinth that not even some of the sharpest legal minds (or at least some of the most well-paid legal minds) seem to be able to navigate.
Not that the legal issues are the only maze that those working on MF Global have had to navigate.
This just in
In an update released Monday, James Giddens, the trustee for the MF Global brokerage subsidiary, said that at this point the small army that's been picking apart the broker's books has a decent picture of where money was moved in the final days of MF Global's solvency. In short, it's not a pretty picture.
The numbers that Giddens included in his press release back up his familiar refrain that tracking down the $1.2 billion of missing customer money would be difficult because of the frenetic final days at MF Global. Here are a few of the pertinent numbers from the release:
- Cash transactions at the broker totaled more than $105 billion in the final week.
- There was an additional $100 billion in securities transactions.
- In all of October 2011, the trustee examined 840 individual transactions that exceeded $10 million, for a total transaction value of $327 billion.
- The large cash transactions include 47 bank accounts across eight financial institutions.
- In the final five days of solvency, MF Global was hit with margin calls totaling $554 million.
To put the magnitude of these numbers in perspective, MF Global's -- the holding company -- final earnings release reported total assets of $41 billion as of Sept. 30, 2011. Shareholder equity at that date was put at $1.2 billion. That means that in the course of one week, the broker's cash transactions alone were a multiple of the company's total assets, while margin calls were nearly half of the company's total previously reported book value.
In other words, that was indeed an incredibly hectic week.
The same old story
Of course while the new numbers may be fascinating, they still leave the same nagging question: Will customers that had segregated accounts at MF Global be made whole?
The answer is still unclear, and if it is going to happen, the road to 100% appears to be a long one. While it certainly helps that the trustee now has a good idea of where all of MF Global's money went, reclaiming it is hardly an easy matter. Since these transactions involved MF Global sending money to parties that it rightfully owed money to, Giddens said he's forced to "investigate the complex factual and legal questions" that might allow him to pursue claims against some of the recipients.
But to the non-lawyer in me, this all seems hopelessly and needlessly convoluted. The bottom line is that if MF Global pulled money from customer accounts -- without replacing the funds with certain allowed assets -- to meet other obligations, then it did so illegally. In that case, the customers should be made whole from the general assets of the broker or even the holding company if necessary.
And it appears that the latter scenario is exactly what happened. Giddens wrote:
The investigation to date has found that transactions regularly moved between accounts and that funds believed to be in excess of segregation requirements were used to fund other daily activities of MF Global. In the past, such transfers were in amounts of less than $50 million, but as liquidity demands increased and could not be met from internal sources, much larger amounts were used. ... [T]he 4(d) U.S. segregated commodity customer account appears to have reached a deficit condition on Wednesday, October 26 that continued through to MF Global's bankruptcy.
Unfortunately for the customers that are still out roughly a third of their MF Global accounts, recovering the property pits them against some of the most powerful financial bodies in the world, including MF Global Holdings' two top creditors, JPMorgan Chase (NYS: JPM) and Deutsche Bank (NYS: DB) . And thus far, it seems that these "too big to fail" banks have a strong ally in Louis Freeh, the trustee for MF Global Holdings. The Commodity Futures Trading Commission has already blasted Freeh's views on handling the case, writing in January:
The brief of the Chapter 11 Trustee contains errors and misstatements of law that, if accepted, may inhibit commodity customers from recovering their property. ... If, contrary to the language of the statute, the Chapter 11 Trustee were correct, the senseless result would be to render inapplicable the key regulations of the Commodity Futures Trading Commission in the largest commodity broker bankruptcy in U.S. history, and to strip of a remedy all MFGI commodity customers who entrusted their property to MFGI in reliance on applicable segregation requirements, based solely on the happenstance that the commodity broker also operated a much smaller securities business ... that is not the law.
The chapters still to come
The MF Global debacle is far from over. If controls at the broker weren't enough to keep the company from raiding customer accounts in those final days, CEO Jon Corzine may be on the hook because of assurances he made under Sarbanes-Oxley provisions. While CME Group (NYS: CME) created a $100 million fund to protect farmers and ranchers in future cases like this, that exchange operator still remains under a cloud and realistically will probably have to do much more. The U.S. government and regulatory bodies have also been considering changes in how they handle this industry moving forward.
But most notable may be the showdown between the large, big-money interests such as JPMorgan and Deutsche which took legitimate risk in lending money to MF Global, and the diverse group of smaller customer interests that held the belief that their supposedly segregated accounts at MF Global were a risk-free proposition.
As I said at the beginning, I'm no lawyer, but in this case it doesn't take a legal degree to see what's right.
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