Through information recently brought to light in Congressional hearings and documents provided to the Commodity Customer Coalition (“CCC”), we believe that sufficient evidence exists of intent to commit an actual fraud to support probable cause to arrest one or more employees of MF Global for several state and federal financial crimes. We are submitting this information, along with our theory of how intent is proven, to all investigative bodies who are conducting inquiries into the collapse of MF Global.
Our assertion that intent to commit an actual fraud occurred in the MF Global collapse centers on the combination of two different sets of transfers. Documents obtained by the CCC show that in the final week of October 2011, MF Global converted customer wire transfer requests to payments by check. At the same time, MF Global sent wire transfers to counterparties from that same customer segregated account to satisfy proprietary obligations. Specifically, we are referring to a wire transfer of $200 million dollars from MF Global’s customer segregated account to a proprietary MF Global account held by JPMorgan in the UK. This account in London was overdrawn by $175 million. At the same time MF Global was wiring this money to its creditors out of customer segregated funds, it was sending money by check to customers seeking withdrawal of their funds, despite the fact that customers asked for wire transfers and MF Global’s standard practice was to send customers their funds by wire.
These activities—paying creditors quickly while returning customer funds as slowly as possible—provide strong evidence that MF Global knew or should have known that it was sending customer funds (not excess segregated funds) to its creditors in its final days. Though MF Global maintained excess proprietary funds in the customer segregated account (as is common industry practice), they would not have made such a drastic change in standard business practices unless they knew that there could be issues their own transfers out of segregation. Moreover, we now know that a CME spot audit of MF Global revealed that the firm maintained only $117 million in excess segregation as of October 27th. It is highly unlikely that a firm under great liquidity stress would be able to increase the amount of capital contributed to its customer segregated account, especially within 24 hours. This knowledge, along with several ‘badges of fraud’ in MF Global’s actions, provides enough evidence of actual fraud that prosecutors ought to be bringing charges immediately.
Checks issued to customers from the customer segregated bank account could take a week or more to clear that bank account. By slowing customer redemptions from a wire transfer (which clears instantaneously) to a check sent via US mail, MF Global artificially reduced the amount of assets they were required to keep in segregation on paper, while not reducing the amount of assets in the customer segregated bank account. Checks that are issued to customers from their MF Global accounts are immediately debited in the customer’s account at MF Global through Sungard’s GMI software, MF Global’s derivatives accounting software. This would have given MF Global a lower number to report in their Friday segregation calculation, tabulated by netting customer debits, debts and liabilities against customer positions, cash, collateral and assets. Comparing this number against their balance from Harris bank, which would not have shown debits from checks which had not yet cleared, would have distorted the segregation report in MF Global’s favor. In other words, MF Global was engaged in a form of check-kiting in order to keep its business going while avoiding scrutiny from its regulators.
The CCC has acquired evidence from customers who had their wire transfer requests converted to checks in the days preceding MF Global’s bankruptcy. This evidence demonstrates that MF Global made a decision—in the C-suite or in the Treasury Operations Group—to convert wire requests for customers to checks. This decision, coupled with the wire transfer from MF Global to JP Morgan on Friday October 28, 2011 and the resulting benefits of that decision, provides substantial probative evidence of an intent to fraudulently misuse customer property in order to satisfy the obligations of the firm.