MF Global Mystery: The Beginning of the End or the End of The Beginning?

Yesterday I wrote a long and detailed column for Forbes about the conscious dodging by regulators and the trustees in the MF Global case.

Bob English, an independent trader and contributing editor to the blog, Economic Policy Journal, wrote earlier Monday about some filings funny business over at the SEC.

On January 3, 2012, a copy of the missing audit reappeared under a different index number (the original, as of the time of writing, remains here). While it seems the replacement simply corrects what is an obviously wrong stamped receipt date on the face page of the original, there are a few curious annotations that we will explore. More importantly, after researching the SEC’s public database for scanned paper filings, which includes private offering Form D’s, exchange filings, firm advertising literature, and other filing types (including broker dealer audits themselves), we are left with more questions than answers.

It seems that sloppy scanning and filing standards combined with preferential treatment for certain large brokers has substantially reduced the value of this part of the SEC’s public filing system…a look into all of 2011’s scanned paper filings reveals that only 45% of the sequentially indexed PDF files that were scanned from hard copies by the SEC remain public (7,949 out of 17,718). [The SEC has kindly left the source code to its PDF scrubbing program here, also archived here on Scribd.]
There’s more, but you have to read Bob’s post to get the full flavor. He’s even taken before and after screenshots.
What I was most interested in were the filings of MF Global auditor PwC, including the specific reports the auditor is required to file that might describe any weaknesses or discrepancies in internal controls over customer segregated assets.

On November 4, 2011, days after the bankruptcy filing, I described in an American Banker column the information the regulators and investigators should be looking for:

Since MF Global is a broker-dealer and a Futures Commission Merchant, PwC’s job went well beyond a standard audit. The auditor for a firm like this must annually review the procedures for safeguarding customer and firm assets in accordance with the Commodity Exchange Act. The annual audit must include a review of a firm’s practices and procedures for computing the amounts that, by law, have to be set aside in clients’ accounts each day. MF Global also had to send regulators an annual supplemental report from PwC. This report would describe any material inadequacies existing since the date of the previous audit and any corrective action taken or proposed.

I’m sure the CFTC wants to know if PwC ever documented any material inadequacies in MF Global’s controls over safeguarding customer assets. But wouldn’t they already know that? Regulators like the CME Group, the CFTC, the SEC, and FINRA received audited financial information annually, unaudited information semiannually and monthly reports that provided a capsule view of MF Global’s financial position. MF Global is required to perform calculations daily (by the CFTC) and weekly (by the SEC) to ensure that the proper amount of customer funds is set aside in the separate accounts.

PwC’s report to the SEC of internal control discrepancies for 2010 – and there is one according to the filing index – is private. None of the auditor’s reports specific to the broker/dealer and FCM are available to the public on Edgar for 2011.

Is this just sloppy scanning? It’s no coincidence to me that auditor PricewaterhouseCoopers may also be playing a role in keeping uncomfortable or incriminating information from the public about its audit clients. PwC audits MF Global as well as Bank of America, Goldman Sachs, JP Morgan, andBarclays. (See latest record fine against PwC for looking the other way at customer funds commingling at JP Morgan. PwC is also under investigation for similar sins at Barclays.) The largest audit firms routinely request confidential treatment of their reports and contract details such as engagement partners, whether as a vendor to the government or as a defendant in a contentious lawsuit.

There were some items I did not focus on at Forbes that Bob did focus on. And there have been some developments in the case after press time and this morning that I wanted to document here for you.

Bob mentions the curious case of Louis Freeh, the newly appointed Trustee for the MF Global Holding Company bankruptcy:

Louis Freeh, the former FBI Director cum MF Global Holdings trustee, is running cover for MF’s largest creditors, not the least of which is JP Morgan Chase, it is all the more critical that the integrity of the SEC’s public filing system be scrutinized. [Update: according to Mr. Freeh’s Statement of Disinterestedness filed with the bankruptcy Court here, MF Global Inc.’s auditor, PricewaterhouseCoopers, provides accounting services to him and his firm.]

Pile that on top of the conflicts acknowledged by the parties but now blessed by Judge Martin Glenn between the Trustee under the SIPA liquidation, James Giddens, and his firm Hughes Hubbard:

So much, also, for an investigation by the broker/dealer bankruptcy Trustee Giddens of what happened at MF Global. Giddens’ firm, Hughes Hubbard, is both customer and vendor to MF Global’s auditors, PwC, and vendor to JP Morgan, MF Globals banker and biggest creditor.  And so much for an investigation by the broker/dealer Trustee who has chosen to use Ernst & Young as its forensic accountants. Ernst & Young is the same firm, according to sources, that designed and implemented MF Global’s internal controls in time for their first Sarbanes-Oxley review and the firm that Randy McDonald, the MF Global CFO prior to current CFO and PwC alumni Henri Steenkamp, came from.

Reuters reported that the Judge said, “No biggie…”

Trustee James Giddens and his law firm, Hughes Hubbard & Reed, are sufficiently “disinterested,” Judge Martin Glenn said in a ruling in U.S. Bankruptcy Court in Manhattan.

The ruling came in response to accusations from some customers that past work done by the firm for JPMorgan Chase & Co (JPM.N), one of MF Global’s main lenders, constituted a conflict of interest…

Giddens acknowledged that it is not clear whether PricewaterhouseCoopers, a client and auditor of Hughes Hubbard, is a creditor of MF Global’s brokerage.

In Tuesday’s order, Glenn said that if future conflicts arise on particular issues, another trustee or lawyer may have to be appointed to handle those matters.

Unfortunately for those who will be looking for third-parties like the auditor PwC and the banker JP Morgan to make up the difference in the missing funds, these disclosed conflicts set up an easy out for the Trustees to decline to investigate claims against the parties they have a deep and fruitful business relationship with.  It happened before in a case that is too close of anyone involved here to claim ignorance of:  Refco.

How did PwC avoid getting the finger pointed at them by Mr. Hochberg of McKenna Long?

Well, it wasn’t for lack of trying to join the party that was Refco in its prime. It was well reported that PwC was instrumental in helping Refco to address these financial reporting and accounting deficiencies. They needed significant help in getting ready to meet public company financial reporting requirements at the time of their IPO. PwC spent more than a year with Refco and must have given them some advice on how to do what was required. PwC was also auditor of Refco Public Commodity Pool, LP until September 15, 2006 when they resigned.

So shouldn’t PwC also have to answer for their involvement with [Refco]?

Per Mr. Hochberg’s report, PwC’s potential culpability could not be pursued by his investigation because of a conflict.McKenna Long and Aldridge, Mr. Hochberg’s firm, has PwC as a client in a case regarding a government contract. They disclosed this conflict to the judge and then Mr. Hochberg unilaterally decided not to continue investigating his own client, PwC. The judge “did not direct the Examiner to continue his investigation.”

Also yesterday, the first MF Global lawsuit that includes auditor PwC was filed. The Billings, Montana Gazette reports:

Montana farmers trapped in the $41 billion collapse of brokerage giant MF Global are suing its officers and its business partners for trade violations.

The lawsuit filed Monday in U.S. District Court in Missoula targets not only MF Global CEO Jon Corzine, a former Democratic governor and U.S. senator, but also auditor Pricewaterhouse-Coopers and banker J.P. Morgan for enabling MF trading practices that last October led the nation’s eighth largest bankruptcy…

Klinker and other plaintiffs contend that auditor PricewaterhouseCoopers kept giving MF Global clean bills of financial health, even as customer accounts were raided. Had the auditor reported the activity, regulators for the Chicago Mercantile Exchange and the U.S. Commodities Futures Trade Commission might have been alerted.

A spokeswoman for PricewaterhouseCoopers said Monday that the company doesn’t comment on litigation.

In another new development, The New York TImes DealBook reports that MF Global Treasure Edith O’Brien, one of the employees that Jon Corzine pointed the finger at to satisfy the Congressional inquisitors, won’t talk to investigators without immunity.

While prosecutors and regulators have jointly conducted dozens of depositions with former and current employees, a senior official in the Chicago office of MF Global recently declined to meet with the federal authorities, people briefed on the investigation said.

That official, Edith O’Brien, a treasurer at MF Global, is considered a “person of interest” in the investigation, the people said. Federal authorities suspect that she transferred about $200 million to JPMorgan Chase in London on the eve of the bankruptcy of MF Global, money that turned out to be customer cash.Authorities had expected to interview Ms. O’Brien last month. She instead balked at meeting voluntarily, asking first to strike a deal with criminal authorities that would excuse her from prosecution, the people said. The criminal investigation is led by the Federal Bureau of Investigation and federal prosecutors in Chicago and Manhattan.

You go, girl!  Let me know when you’re ready to give that tool the equivalent of a Chicago baseball bat to the knees.

Jamie Dimon was on CNBC yesterday talking to Maria Bartiromo.

Dimon dodged questions about MF Global. When asked about JP Morgan’s assertions of priority over customers, Dimon perpetuated the hoax of the missing customer funds “being found” and responded:

“…JP Morgan did a lot of work with them. I hope though funds are still found. JP Mmorgan is just another creditor. So that situation I thought will sort itself out. I think they’re referring to one overdraft. Prepaid a couple days before the bankruptcy. It was prepaid in ordinary course of business.”

Jamie, I guess you did not read my column over at American Banker.

Jamie Dimon will have the misfortune, I believe, of catching a significant amount of fallout from the MF Global mess. As MF Global’s primary banker, JPMorgan Chase has been consistently accused in the media and by the attorney representing a customer coalition of taking advantage of the firm’s vulnerable financial state. Bloomberg News reported that the MF Global trustee said “certain” actions of JP Morgan Chase “are likely to be the subject of investigation.”

What JP Morgan Chase may have allowed – the use of customer funds to meet MF Global’s corporate obligations – is something JP Morgan was recently severely sanctioned for in the U.K. The bank’s London unit was fined a record 33.3 million pounds by the FSA, Britain’s financial regulator, for commingling client funds in its futures operation.

Dimon’s got a lot on his plate and it’s steaming. Not in the good way. And he admitted yesterday that he’s no longer a friend of the Obama administration.

“Bartiromo: Are you going to support Obama?

Dimon: I don’t publicly support any candidates. I’m still barely a Democrat. But i’ll see when the time comes. And i won’t tell you.”

Dimon’s administration mole, Bill Daley, is back home in Chicago.  It’s the beginning of the end, I believe for JP Morgan and Jamie Dimon.

6 replies
  1. Carl Olson
    Carl Olson says:

    Dear Francine:

    The Fannie Mae and Freddie Mac execs should be criminally prosecuted.
    The current SEC action is only a civil procedure.

    Sarbanes-Oxley promised big fines and jail time for executives who signed false
    financial statements.

    But so far there have been no prosecutions.

    How about Fannie Mae, Freddie Mae, AIG, Lehman Brothers, Bear Stearns,
    Countrywide, Merrill Lynch, etc.? Add Corzine and MF Global.

    Attorney General Holder needs to start prosecuting ASAP.

    Best regards,

    Carl Olson
    P.O. Box 6102
    Woodland Hills, CA 91365

  2. David
    David says:

    It’s absurd that JP Morgan would be given priority over the account holders. How does JP Morgan get to keep funds that were illegally transferred to it?

  3. Francine
    Francine says:


    It’s not over until it’s over. The problem was that until James Koutoulas and the Commodity Customer Coalition got organized and started pressing, JP Morgan was rolling all over the process with their lawyers. Justice is what you pay for it.

    I’m optimistic that the pressure and logic that the Commodity Customer Coalition and now others have brought to the table will prevail in the end.

Trackbacks & Pingbacks

  1. […] trustees, Louis Freeh and James Giddens, know who the partner from PwC is.  However, since both trustees and their law firms have conflicts of interest with PwC, a “conflicts” counsel was established to handle all issues related to the auditors. One […]

  2. […] is using Ernst Young as his forensic investigation firm. In addition to all the other conflicts Giddens – and Freeh – have with JP Morgan and MF Global auditor PwC, the use of Ernst Young in this context should not have […]

  3. […] is using Ernst & Young as his forensic investigation firm. In addition to all the other conflicts Giddens – and Freeh – have with JP Morgan and MF Global auditor PwC, the use of Ernst & Young in this context should […]

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