March 12, 2012

                       Is MF Global Getting a Free Pass?

        By JOE NOCERA

   It's sure starting to look as if Jon Corzine is going to get away with
   it.

   By  now,  it  has been well established that Corzine's former firm, MF
   Global,  committed  the  sin  of  sins  for  a  broker-dealer. In late
   October,  during  the  final,  desperate  days  before  it  entered
   bankruptcy  proceedings,  its  executives  took  money from segregated
   customer  accounts  -- money that belonged not to MF Global but to the
   farmers  and  commodities traders that were its clients -- and used it
   to  prop  up its rapidly collapsing business. Nor was this petty cash:
   of the $6.9 billion in customer assets that MF Global held, a stunning
   $1.6  billion  is  missing. There is virtually no chance that the full
   amount will ever be recovered.

   Let's  not  mince  words  here.  These  executives  committed a crime.
   Virtually every knowing violation of the Commodities Exchange Act is a
   crime,  but  taking  money from segregated customer accounts is at the
   top of the list. And for good reason. Customer money is supposed to be
   sacrosanct.  If a broker-dealer goes bankrupt, the segregated accounts
   are  supposed  to  remain  safe,  a  little like the way bank deposits
   remain  protected  if  a bank goes under. Indeed, customers need to be
   able to trust the fact that their money is segregated and protected at
   all times. Otherwise, the markets can't function.

   Yet,  a  few  weeks  ago,  Azam Ahmed and Ben Protess, who have done a
   remarkable  job covering the MF Global bankruptcy for The Times, wrote
   an  article  suggesting  that  prosecutors were having trouble putting
   together a criminal case against anyone at MF Global. So far, wrote
   Ahmed  and  Protess,  they'd  been  "unable to find a smoking gun." In
   fact,  they continued, "a number of federal prosecutors have expressed
   doubts"   that  MF  Global  "intentionally  misused  customer  money."
   Apparently, the current theory is that it was all just a big accident,
   the  chaos  of  those  final days causing the firm's executives to tap
   into customer funds without realizing it.

   Excuse  me  while I roll my eyes. Of course there isn't a smoking gun.
   As  a  general rule, financial professionals tend not to write e-mails
   that  say,  "Hey,  we're  desperate.  Let's  break  into  the customer
   accounts!"  And,  of  course,  they  are  always  going  to say it was
   unintentional.  They  are  saying  it  already, starting with Corzine,
   who  told  Congress  last  year  that  "there  was no intention to
   violate segregation rules."

   As  for the chaos, you bet it was chaotic at the end. How could it not
   have  been?  Last  month, James W. Giddens, the bankruptcy trustee for
   the  broker-dealer  arm of MF Global, issued a report that vividly
   described  the  scene:  "The  rush  to  meet  funding needs ... led to
   billions  of  dollars  in securities sales, draws on credit facilities
   and  a  web  of intercompany loans. ... The company's computer systems
   and  employees  had  trouble  keeping up. ... A number of transactions
   were recorded erroneously or not at all. ..." And so on.

   Well,  fine. But is it really plausible that you can take $1.6 billion
   --  nearly  25  percent of the customer assets under management -- and
   not  know  you've used customer money? It is not. One theory, which is
   implicitly  suggested  in the trustee's report, is that the executives
   "borrowed"  the money thinking they would be able to replace the funds
   quickly,  which they then couldn't because the counterparties wouldn't
   give back the collateral. That's still a crime.

   I  understand that bringing complex financial cases in front of a jury
   is not easy. But what prosecutors don't seem to understand is that the
   country  needs  them  to  bring  these cases. When they took a pass on
   Angelo   Mozilo,  the  former  chairman  and  chief  executive  of
   Countrywide,  and  Richard Fuld, who was chief executive of Lehman
   Brothers  when  it  went  bankrupt, they sent a signal that the highly
   paid  executives who gave us the financial crisis would not be held to
   account.

   A failure to prosecute anyone at MF Global would be, if anything, even
   worse.  It  would  mean  that executives at a broker-dealer can indeed
   steal  customer  money  and  get  away  with  it  -- so long as it was
   "unintentional."  And it would only deepen the cynicism so many people
   feel about government. I've heard it suggested, for instance, that the
   Justice  Department  won't  prosecute  Corzine  because  it would hurt
   President Obama. (Corzine, the former governor of New Jersey, had been
   a  big  fund-raiser for the president.) I don't happen to subscribe to
   that theory, but I certainly understand why others might.

   To  be  sure, it is early yet. Federal investigators are still digging
   into the facts surrounding MF Global's failure, no doubt searching for
   that  elusive  smoking gun. But if, in the end, they decide they can't
   make  a case, I hope they understand what they are telling the rest of
   us.  Giving  the big guys a pass isn't good for the financial markets.
   And it isn't good for democracy either.