Wednesday, November 16, 2011

More On Legal Stealing - The Infamous CFTC Rule 1.29

Obfuscate - transitive verb:  Darken, to make obscure;  Confuse;  intransitive verb:  to be evasive, unclear or confusing  (Merriam Webster)
Time to cut to the chase.  Let me just preface this with my belief that the missing $600 million from MF Global was money taken from segregated customer accounts and used by MF Global to satisfy a massive margin call issued by JP Morgan on MF Global proprietary accounts.  I say JPM ultimately has the funds in question because if you have been following all of the news from the beginning, including the initial proclamation that the missing funds were found in the basement of JP Morgan followed by the slightly delayed statement of denial by JPM, then it makes sense to me that the dotted lines ultimately connect that missing money to JPM.

If the court rules that JP Morgan's claims are superior to that of the customers, whose assets were supposed to be in a segregated account and arguably should be treated with a greater degree of superiority and protection than that of a general creditor, then the MF Global bankruptcy is indeed a case of legal stealing.

Everyone is discussing this nefarious CFTC rule 1.29 and pointing to it like it's the culprit.  In order to understand exactly what 1.29 is, it requires a review of the CFTC regulations with respect to "Safeguarding Customer Funds," which starts with rule 1.20 and includes the subsequent rules through 1.30, plus rule 1.32.  A definitive summary of these rules can be found HERE starting on page 8.  Reading and understanding this is crucial to understanding the degree to which MF Global acted illegally and fraudulently and to understanding why my view is that the segregated customer funds should be treated as "superior" to any and all other creditor claims by the bankruptcy court. 

The nefarious rule 1.29 simply says that any profits from customer funds which are hypothecated for purposes defined in 1.20-1.28 may be kept by the broker (FCM - Futures Commission Merchant aka commodities broker).  Whether or not you agree or disagree with this ruling, and I disagree with it, the rules outlined in 1.20-1.28 set forth very specific procedures which must be followed in order to keep customer funds not only definitively segregated but clearly defined in terms of amount and market value.  Here's some examples from the link:
- the books and records of an FCM shall at all times accurately reflect the FCM's interest in total assets on deposit in segregated accounts, which is the amount of funds in segregation in excess of the amount of funds required to be segregated (CFTC Regulation 1.23)
- each FCM that invests customer segregated assets must keep a record of such investments that shows certain information for each investment (CFTC Regulation 1.27)
- each FCM must prepare, as of the close of each business day, by noon the following business day, a record showing the total amount of customer assets required by the Act to be deposited in segregated accounts, the total amount of assets deposited in Section 4d(2) segregated accounts, and the amount of the FCM's residual interest in such segregated customer assets (excess funds in segregation) (CFTC Regulation 1.32)
As you can see, the procedure for segregating and accounting for this segregation is very well defined and explicit.  It's essentially the "mother's milk" of the securities industry.  Furthermore, pursuant to the following, at any given point in time firms like MF Global should know exactly how much each customer has in its segregated account, how much can be hypothecated or repo'd and how much is hypothecated or repo'd AND what the usage is of those hypothecated funds - these are all legally defined procedures which are computerized and backed-up on a separate server, typically:
Whenever an FCM knows or should have known that the total amount of its funds on deposit in segregated accounts on behalf of customers is less than the total amount of such funds required to be segregated on behalf of customers, CFTC Regulation 1.12(h) requires the FCM to report immediately such deficiency to the CFTC and to either NFA or the exchange having primary responsibility for compliance surveillance of the firm
In effect, these rules dictate that the customer funds should not be missing and that tracking down what happened to them should have been a few mouse-clicks away.  This is true regardless of whether or not 1.29 enables MF Global to accrue profits on the funds.  Moreover, the CFTC and CME, the exchange having primary responsibility for compliance surveillance, should have been on top of this.  I guess since Goldman Sachs people (Corzine and CFTC Chairman Gary Gensler, Corzine's buddy from Goldman) are used to throwing around and losing $10's of billions, they couldn't be bothered with mere pocket-change like $600 million.

The bottom line here is that ultimately the flow of funds should have been very easy to track.  And given that $600 was initially traced to JP Morgan, I believe that JP Morgan needs to be given the financial accounting equivalent of a proctology exam to convince me that they were not the beneficiaries of the $600 million missing from the customer accounts.  Finally, Corzine and every staff member responsible for oversight on this matter needs to be held accountable and punished accordingly.  There is a massive amount of fraud and theft going on here that is systematically being covered up and obsfuscated by the CME, the CFTC and JP Morgan.

The problem with this situation is that if it is not settled in a manner which creates a vast overhaul of the CFTC regulations and rules regarding the treatment of customer funds and if JP Morgan and other Wall Street creditors to the bankruptcy are treated with superiority with respect to the liquidation claims and distribution, what's to stop this method of legal stealing from being implemented on a widescale basis by every large securities broker who is about to go under anyway?  (Think:   Jeffries, Bank of America/Merrill, Morgan Stanley...)


  1. I steal, you steal, we all make a deal...or this is how the rich stay rich!

    I voted for Obama and all I got from the experience is dry heaves!

    President John F. Kennedy’s nephew, Robert Kennedy, Jr., netted a $1.4 billion bailout for his company, BrightSource, through a loan guarantee issued by a former employee-turned Department of Energy official.

  2. Thanks for the analysis.

    "There is a massive amount of fraud and theft going on here that is systematically being covered up and obsfuscated"

    Where are the police? I want to see handcuffs, all gains clawed back, and decades of prison tmie.

    "if it is not settled in a manner which creates a vast overhaul of the CFTC regulations and rules"

    Keeping money in the markets to receive a monthly statement is a confidence game. When the confidence is lost by those with a 401k, there may be mass selling of paper assets.

  3. "Don't fire until you see the whites of their eyes"

  4. Cramer said Margin Stanly is hedged. Nothing to see here.

  5. "what's to stop this method of legal stealing from being implemented on widescale basis by every large securities broker who is about to go under anyway"

    In other words, what's to stop plan B?

    Why, nothing ... if all goes well. Retail, a.k.a. dumb money, will be reamed and stepped on, but that's what Retail is for. Duh.

    And now, we return to Bubblevision Circus. Here's your host, Jiiiiiiiiiim Cramer!

  6. When TSHTF in 2-3 years, CME won't pay off on any of their contracts. Anyone holding futures over the next 3 years deserves to be ruined, and they will be.

    China will publicly tell the US to eat shit as they abandon the USD. That will be the catalyst, and holders of USD will flock to whatever the new world reserve currency is----probably something backed at least in part by gold.

    Hyperinflation will commence in the US as soon as China walks. It will take the US MANY decades to recover from that.

  7. Dave,

    Thank you for highlighting the word of the day (obfuscate).

    Knowing the true meaning of a word is a lost art these days.

  8. Gerald Celente's Gold Account Was Emptied By MF Global

    World Gold Demand Up 6% In 3rd Quarter Marketwatch

  9. Interesting...

    MF Europe Chief Antonio Borges Quits One Year Into Job Amid Debt Crisis

    Powerful Department

    “He’s a heavyweight,” said Edwin M. Truman, a former U.S.
    assistant Treasury secretary who’s now a senior fellow with the
    Peterson Institute. The strategy department “on policy matters
    is the most powerful department.”

    Borges strayed from the IMF line when he told reporters in
    Brussels on Oct. 5 that it was “hypothetically possible” for
    the fund to intervene in bond markets to restore confidence in
    Spain and Italy. He retreated from those comments later that

    “Let me be clear about some earlier comments I made,” he
    said. The IMF “can only lend its resources to countries, and
    cannot use these resources to intervene in bond markets

    Borges joined the fund in November 2010 after overseeing a
    group in Europe that set standards for the hedge fund industry,
    the London-based Hedge Fund Standards Board.

    He was with Goldman Sachs 2000 to 2008 and a professor of
    economics and dean of INSEAD Business School in Fontainebleau,
    France, from 1993 to 2000 and a deputy governor of the Banco de
    Portugal from 1990 to 1993.

  10. Money has been stolen from segregated accounts and this is the best that the CTFC can come up with “The lost money is sort of like a lost child,” said Bart Chilton, a Democratic member of the Commodity Futures Trading Commission. “Every day that passes is more and more concerning, and there’s less and less hope.”

    No wonder people all over the world are pulling their money out of New York and Reuters is saying that a run on the US is on.

    How do people stll support people like Butler surely even the most stupid must really Chilton's a scammer. Corzine is walking around and Chilton is acting like they can't identify the perps.

    As authorities comb through some 38,000 customer accounts, they are growing more suspicious about what went wrong at MF Global, the commodities powerhouse once run by Jon S. Corzine, the former Democratic governor of New Jersey.

    “The lost money is sort of like a lost child,” said Bart Chilton, a Democratic member of the Commodity Futures Trading Commission. “Every day that passes is more and more concerning, and there’s less and less hope.”

  11. Great commentary. But just getting past the rules my thought is there really is not a time that the clients became creditors with their unencumbered cash. It is more like theft. In a simple way if you own a Dodge and it is stolen and the thief captured, are you a creditor in line with other victims for return of the vehicle? Of course not. Any judge with half a brain or police authority would return the car without fuss. This fraud does not make the clients creditors. And the recipients of the cash i.e. JPM ae not innocents if they knew or were in a position to know the circumstances around the added capital. They are the possessors of stolen property. Their position seems more like conspirators to conceal a crime.