Finding Transparency in the MF Global Fraud - Essay Example

MF Global and its parent holding company (MFGH) were forced by federal regulators to file for Chapter 11 bankruptcy protections on October 31, 2011 (Bunge 3). Within less than a week one of Wall Street’s pinnacle trading firms was reduced to a heap of broken promises and over one billion dollars in missing investor and client assets. After the MF Global bankruptcy was filed, investigators from the Securities and Exchange Commission discovered that a subsidiary of MF Global, MFGI, had improperly “booked” commodity trading transactions that exceeded the margin capability of MF Global to repay (Arends 14). The nature of this and how it was orchestrated and hidden by MFGI and MF Global executives are the focus of this paper.   MF Global was in the business of facilitating futures trading (USCHC on Financial Services 81). If a customer opened a position on a commodity, MF Global was required to post the margin required to hold that position on the contract exchange. For the most part, the amount of margin required was determined using a standardized algorithm called the Standard Portfolio Analysis of Risk (SPAN) (USCHC on Financial Services 102). Federal regulations require certain margin requirements; the basis of the margin protected both the customer and contract exchange if the value of the commodity shifted severely in market value (USCHC on Financial Services 103).   Beyond the MF Global Commodity operations, the firm through its subsidiaries ran a standard securities brokerage for its clients on Wall Street (Bunge 5). The two effective MF Global “storefronts” were by practice kept separate (Weidner 7). In reality, the undercurrents that ripped the foundation from under MF Global were caused by a loophole in accounting practices that allowed MF Global executives “to book” assets on both sides of the commodity and securities ledger (Orol 2). MF Global executives at some point in 2010 began co-mingling assets from the securities side into the commodity operation to cover massive short position losses on European bonds (Arends 9). The Chief Executive Officer at MF Global during the crisis was a former Governor and Senator from the state of New Jersey, John S. Corzine. John Corzine was first appointed as Chief Executive Officer (CEO) in 2010 by the MF Global Board of Directors (Bunge 9).    Corzine envisioned turning MF Global into a dominant Investment Bank on Wall Street and embarked on an ‘aggressive”(Weidner 2) and risky management plan (Sandler 2). Less than eighteen months later the contrived plans of Jon Corzine to alter and reshape the much-respected MF Global began to unravel. Through the SIPA process and the unwinding of MF Global commodity positions, it has been revealed that the shortfall in customer assets had two basic causes. MF Global uses a loophole in their “audited and regulated” (Orol 4). The accounting regimen had been depositing and moving customer-segregated funds and securities through MF Global general accounts that were operated by company commodity traders and executives. The funds which were being transferred between “off-shore and domestic banks in the United States” were in the process deposited through MF Global corporate accounts (Orol 3). Customer money was re-routed by MF Global to “artificially inflate the companies deposit reserves required to meet their commodity margin demands” (Orol 5). MF Global customers by a quirk in the accounting system were effectively “loaning” (Sandler 2) MF Global money to prop up John Corzine’s “bad bets” on European sovereign bonds (Orol 5).   In the figure of Jon Corzine, key aspects of the apparent immunity offered to Wall Street executives in financial cases come to a shocking and hideous head. As investors are left to sort out the ruin, their only current outlet is a class action lawsuit against the accounting firm charged with auditing MF Global and certain executives of MF Global. The suit, filed in Manhattan federal court, argues that Jon Corzine, as MF Global's former chief executive, and other officials at the firm breached their fiduciary duty to MF Global customers and violated the Commodity Exchange Act (Sandler 6). By seeking class-action status the plaintiffs are alleging that the auditing firm PricewaterhouseCoopers LLP failed to adequately audit MF Global's internal controls resulting in a negligent breach of Securities and Exchange Commission regulations (Sandler 6). As the criminal investigation was halted in August of 2012, without a single indictment or prosecution the reality of the incestuous ties between Wall Street and the very regulators that are empowered to police them reaches the apex of a one-billion-dollar question with no answers and no one responsible.  Read More