Andrew Abraham

andy-0101 My name in Andrew Abraham. I have been investing in commodities and managed futures since 1994. I adhere to the philosophy of trend following. Trend following stresses a disciplined approach to commodity/ futures trading. Successful trend following and commodity futures investing requires patience, discipline and actively managing the risk. What sets me apart from other traders is that I am not only concerned about the return on investment but how much risk I will have to tolerate to achieve my goals.

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Questions on Conflicts Increase After Declaration of “Disinterestedness” of MF Global

This is a recent post from MF G Facts

Questions on Conflicts Increase After Declaration of “Disinterestedness”

Yesterday, (November 29th, 2011) the Trustee law firm, Hughes Higgens & Reed (HHR) submitted a carefully crafted statement to the court: A Declaration Regarding “Disinterestedness” of the Trustee and the firm as representative of the Trustee, James Giddens. In other words, to declare to the judge that HHR and the Trustee do not have a conflict of interests.
Examination shows JP Morgan is an important client, and PwC a very significant client since many years. And citing the recent settlement of 891 million with JP Morgan as Trustee for Lehman Brothers only works to additionally highlight perceived conflicts. We also discover a case where HHR has been representing MFGI from November 2008. While not large, it requires disclosure.
Let’s look at the declaration and what we do know.
The filing reads:
As a general practice firm of over 300 attorneys, the Firm represents many entities, including financial entities or investors, who may have been involved in the past with transactions in which MFGI, MFGI’s parent, or some MFGI affiliate was involved or may have been a counterparty. Some of these entities include parties-in-interest in this proceeding such as JPMorgan Chase Bank (“JPMC”) and PricewaterhouseCoopers LLP (“PwC USA”), which the Firm may from time to time represent on other unrelated matters. HHR has historically represented JPMC or affiliates or syndicates in which JPMC or an affiliate may be involved in certain corporate and other matters.
The paths of a large multinational law firm like HHR would be “linked-in” to firms such as JP Morgan and PwC. It’s unavoidable. We will never see billing records, but preliminary MFG Facts research shows that over the years the work and relationships for both JP Morgan and PwC and HHR are far beyond routine and minor. Numerous associates cite work for JP Morgan for example, “Represented JP Morgan Securities in connection with a $230 million offering of senior secured notes and subsequent $100 million add-on offering of senior secured notes by the Agua Caliente Band of Cahuilla Indians.”
HHR’s own promotional material proudly highlights work for JP Morgan and PwC as among the significant HHR clients. For example citation of recent work for Pwc “representation of PricewaterhouseCoopers in various corporate and litigation matters”
Just a short example from Why Hughes Hubbard & Reed?
Q. Who are some of the Firm’s clients?
A. Included among our clients are domestic and foreign corporations, financial institutions, investment banking firms, partnerships and individuals, and many clients in the public and non-profit sectors. Clients we have recently represented include: Viacom, BMI, Christie’s, PricewaterhouseCoopers…
Very recent litigation in New York on behalf of a unit of PwC is highlighted stating:
“Delivering a major victory for Hughes Hubbard from the bench, Justice Charles Ramos recently dismissed billion-dollar accounting malpractice claims against client PricewaterhouseCoopers hf. by the receivers of Iceland’s third-largest bank.”
If these clients contribute such a miniscule amount of work as cited in the declaration, why are both highlighted on so much of the firms self-promotion material?
Birth of PwC, and only two years billing revealed but without US revenues
HHR created all the 13 Billion worth (value of the merger) of paper creating PwC as Price Waterhouse and Coopers and Lybrand merged. This was a decade ago, but as any in the legal industry understands merger work secures a long and enduring relationship.
The declaration of Disinterestedness makes an argument based on global revenues for the firm: (underlines our own)
In 2009 and 2010, fees generated from such representations constituted less than one-tenth of one percent of total Firm revenue for each year. In 2011, any such syndicate or other representations are projected to generate revenue constituting less than one one-thousandth of one percent of total Firm revenue for the year.
Did not the Honorable Judge Glenn asked for a statement concerning HHR,USA? This declaration does not answer that question. Most importantly, a complete disclosure in a court of law requires much more time than just two years back. Revelations of billings as far back to at least 2007 must be declared. Anything less than five years is an immaterial time frame to establish “disinterest” in the slow moving legal industry. Nowhere does this declaration reveal the revenue percentage for HHR, USA which is of the court concern.
The declaration then defensively continues: (underlines our own)
The Trustee was not involved in any representation of JPMC during this time period. Instead, during this time, the Trustee, in his capacity as trustee for the SIPA liquidation of Lehman Brothers Inc. (“LBI”), with HHR serving as counsel, investigated and actively pursued claims against JPMC and certain affiliates, resulting in a settlement that returned over $860 million in customer property to the LBI estate.
The settlement with JP Morgan reached this spring is so thoroughly controversial, it’s surprising – even embarrassing – that HHR cites it to demonstrate disinterest. Those assets, were the easy portion to recover as they came from customer identified cash and securities simply held in Lehman accounts. Citing this as proof of no conflicts is dangerous territory. Examination of the settlement with JP Morgan indicates otherwise, and achieved only after “close cooperation with JP Morgan” as in the Trustee’s own words.
This “milestone” as the Trustee refers to the settlement, took more than two years to reach (A perfect example as to why a two-year billing records in the legal industry are absolutely meaningless.) The LBI bankruptcy proceedings continue now. Conservatively estimated, and to the benefit of the Trustee, this milestone settlement got back only .052% of the 17 billion in ongoing LBI claims against JP Morgan. Just over one half of one percent! For those inclined, more on the sordid controversy surrounding LBI Claims against JP Morgan and handling by the Trustee.
Let’s move onto the work with PwC, and related firms, which are surely significant clients.
In 2009 and 2010, fees generated from such representations constituted 3.08% and 1.89% percent, respectively, of the Firm’s revenue. In 2011, these representations are projected to generate fees constituting less than one-half of one percent of the Firm’s revenue.
The footnote to the above statement tells us two-thirds of the fees were generated by representation of foreign units of PwC, as if to render them insignificant. Again the Judge was asking about HHR, USA. What was the percentage billing to Pwc over at least the past five years for HHR, USA? And as for projected fees, that is an unknown and thus irrelevant.
The declaration goes onto to state that the Trustee’s work on the Lehman Brothers liquidation puts the firm in an adversarial role to PwC, UK. Again, that is irrelevant. Concerning the MFGI liquidation, PwC – USA was both the auditor for MFGI and ais major client of HHR.
As an aside, PwC is is also the but the in-house auditor for the HHR employee 401K. This may be considered a minor detail, but considered in context it reflects of the broad and long term relationship between the companies.
This conflict between HHR and JP Morgan, and most especially PwC is more glaring than that between Jon Corzine and Gary Gensler. Gensler no longer worked with Corzine, but had a relationship going back many years. That alone was enough to recluse himself from the MF Global case and to put him under fire by the Senate at this moment.
JP Morgan is an important client for HHR and much routine work is conducted on behalf of JP Morgan. PwC is a major client. Both PwC and HHR have a long history together. There are more indications of “interestedness” than “disinterestedness” between the two firms.
By accepting this declaration of Disinterestedness, is the court papering over the real indications of conflicts of interest?

Andrew Abraham
Abraham Investment management

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