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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Regulators Block The Truth regarding MF Global

The same regulators who are suppose to protect clients are blocking the truth regarding MF Global as per the below Forbes article

Instead of looking out for MF Global investors – and customers who are still waiting for their money – it looks like regulators and the bankruptcy trustees are busy suppressing information. Instead of full transparency, regulators and the trustees are holding onto crucial details that might tell us all who was asleep at the wheel when the broker/dealer and futures commission merchant (FCM) headed over the cliff.

Bob English, an independent trader and contributing editor to the blog, Economic Policy Journal, published a post this morning that raises serious questions about the Securities and Exchange Commission’s program of regulation for broker/dealers and, in particular, the agency’s role in keeping the truth from the public about what went wrong at MF Global. We’re also being kept from the truth about other broker/dealers who may be putting risky trades on their books or whose controls over segregation of customer assets may be weak or non-existent.

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. Since this is often the sole repository for disclosures about private companies, including broker dealers that do not have public holding companies, investors are being deprived of timely and critical information.

Even for those broker dealers that do have public holding companies, such as MF Global Inc., the financial notes of the broker audits disclose different, and oftentimes, more substantial information. Since it is now apparent that 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.

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, and Barclays. (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’s also a very strong interest on all sides of the MF Global mess in not leading anyone to third-parties such as bankers like JP Morgan, lawyers, and PwC, the auditors, too soon. Is there something in PwC’s secret audit reports and internal controls discrepancy reports for the broker/dealer for 2010 and perhaps 2011, that someone, anyone should have paid attention to earlier?

Here we are, more than two months after the forced liquidation of the MF Global broker dealer – it’s important to note this was no voluntary bankruptcy filing but a liquidation forced on MF Global by the Securities Investor Protection Corp – and the missing $1.2 billion of customer funds has not yet shown up.

The customer assets are gone, but no one in the officialdom – the two bankruptcy trustees, the CFTC, the SEC, or the Department of Justice – wants to admit just yet that the bankruptcy estate and, therefore, the customers will come up short.

No one but the CME Group will say that out loud. The CME Group timeline of events, updated most recently as sworn testimony by Terry Duffy to Congress, is the only reliable timeline out there.

Shortly after the filing on October 31st, all parties, including MF Global’s General Counsel Laurie Ferber, admitted that customer funds were short, not just misplaced. We’ve seen no new “on the record” facts from investigators, trustees, or regulators to refute these dramatic admissions.

CFTC in bankruptcy filing October 31 according to The Financial Times: The CFTC, in a court filing, revealed MF Global’s general counsel Laurie Ferber emailed the regulator at 7.18pm Monday – hours after the bankruptcy filing – to say that it had “discovered a significant shortfall in its segregated funds account”.

Joint statement of CFTC and SEC on November 1: “Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm.”

When the trustees, the regulators, and the FBI finally stop looking under sofa cushions for the missing customer funds, they’ll have to start preparing lawsuits against third-parties. These potential “deep-pockets” include directors, JP Morgan, Jeffries, who underwrote the bond issue in August, and auditor PwC.

The Department of Justice will be forced to file criminal charges against someone.

What evidence will they base these lawsuits and criminal complaints on? Typically, a bankruptcy trustee hires a bankruptcy examiner to develop the theories and uncover the evidence used to hold executives, directors, bankers, underwriters, auditors and attorneys responsible for the failure of the firm and any fraud.

That hasn’t happened here. Why not?

Just look at the Refco bankruptcy, infamous predecessor firm of MF Global that also went down in flames from fraud and declared bankruptcy. Bankruptcy examiner Joshua Hochberg produced a bang-up report that pointed to several parties where recovery was possible. The trustee is still litigating on behalf of the estate, although it has not been easy. Criminal conduct was suspected from the start in the Refco case, too. Executives went to jail. That did not impede either making customers whole right away or going after third parties to make up the difference immediately.

Instead for MF Global we have a holding company Trustee more intent on protecting MF Global executives and a broker/dealer Trustee who’s had to be pushed kicking and screaming to respond to customers.

So much, also, for an investigation by the broker/dealer bankruptcy Trustee Giddens of what happened at MF Global by his law firm. Giddens’ firm 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 that uses Ernst & Young as forensic accountants, 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.

If it was only the SEC abetting the obfuscation of helpful information, I’d maybe accept an excuse that the volume of filings from broker dealers precludes the detailed review of the content or SEC action on any information, such as discrepancies in controls over segregated assets noted by an auditor, until it’s too late.

But the CFTC, who seems to be using leaks to the press to deflect attention from its own role and responsibility for keeping an eye on customers’ money, is doing it, too. There is no data regarding status of segregated customer assets for MF Global on the monthly required regulatory report for FCMs posted by the CFTC for September, 2011.

I asked the CFTC:

“Did MF Global submit their data as an FCM for September on time within your required timeframe? If the CFTC received the data on time, why did the CFTC decide not to publish MF Global’s numbers as of September 30th? The full report was posted to the website on November 10, after the October 31 bankruptcy, but the data is “as of” September 30 when the firm was still in business.”

The CFTC spokesperson would not go on record with his response. Based on our conversation and the policies published on the CFTC ebsite of handling this report, I’ve determined that the September 30, 2011 financial statement filings for all FCMs, FCM/BDs, and RFEDs were originally due October 26th. The CFTC gives itself 12 business days after the due date to publish. It appears that organizations were given additional time due to the Veteran’s Day holiday. The Commission sates that it “generally” publishes data for active FCMs only. MF Global Inc. declared bankruptcy October 31, 2011. At the time the September data were posted, MF Global Inc. was no longer an active FCM and therefore the firm and its data was deleted for the report.

Was there something about what MF Global reported for September regarding its required customer segregated funds position that in retrospect, post liquidation and holding company bankruptcy filing, would be embarrassing to the CFTC? DidMF Global report at all and on time? Did the CFTC have a head start on the MF Global situation that they did not act on?

We will never know since so much information that’s supposed to be public, transparent, and informative is being held back from the public, from investors, and from the MF Global customers still waiting to get their money.

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