evidence of intent to commit an actual fraud mf global

8/2/2019 Evidence of Intent to Commit an Actual Fraud MF Global

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M E M O R A N D U M:

Evidence of Intent to Commit an Actual Fraud in the Collapse of MF Global

Date: April 2, 2012

TO:

The Honorable Eric Holder

Attorney General of the United States

Offices of the United States Attorney

General

950 Pennsylvania Avenue, NW

Washington, D.C. 20530

The Honorable Debbie Stabenow

Chairwoman

United States Senate

Committee on Agriculture, Nutrition &

Forestry

133 Hart Senate Office Building


The Honorable Pat Roberts

Ranking Member

United States Senate

Committee on Agriculture, Nutrition &

Forestry

109 Hart Senate Office Building


The Honorable Patrick J. Fitzgerald

US Attorney, Northern District of

Illinois

United States Attorneys Office

Northern District of Illinois, Eastern

Division

219 South Dearborn Street, 5th FloorChicago, IL 60604

The Honorable Randy Neugebauer

Chairman

United States House of

Representatives

Subcommittee on Oversight and

Investigations

Committee on Financial Services1424 Longworth HOB


The Honorable Michael E. Capuano

Ranking Member


Representatives

Subcommittee on Oversight and

Investigations

Committee on Financial Services1414 Longworth HOB


The Honorable Preet Bharara

US Attorney, Southern District of New

York

United States Attorneys Office

Southern District of New York

One St. Andres Plaza

New York, NY 10007

The Honorable Frank Lucas

Chairman


Representatives

Committee on Agriculture

2311 Rayburn HOB


The Honorable Colin Peterson

Ranking Member


Representatives

Committee on Agriculture

2211 Rayburn HOB


Introduction

Through information recently brought to light in Congressional hearings and documents provided to the Commodity

Customer Coalition (CCC), we believe that sufficient evidence exists of intent to commit an actual fraud to support

probable cause to arrest one or more employees of MF Global for several state and Federal financial crimes. We are

submitting this information, along with our theory of how intent is proven, to all investigative bodies who are

conducting inquiries into the collapse of MF Global.


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Our assertion that intent to commit an actual fraud occurred in the MF Global collapse centers on the combination of

two different sets of transfers. Documents obtained by the CCC show that in the final week of October 2011, MF Globa

converted customer wire transfer requests to payments by check. At the same time, MF Global sent wire transfers to

counterparties from that same customer segregated account to satisfy proprietary obligations. Specifically, we are

referring to a wire transfer of $200 million from MF Globals customer segregated account to a proprietary MF Globa

account held by JPMorgan in the UK. This account in London was overdrawn by $175 million. At the same time MF

Global was wiring this money to its creditors out of customer segregated funds, it was sending money by check to

customers seeking withdrawal of their funds, despite the fact that customers asked for wire transfers and MF Globals

standard practice was to send customers their funds by wire.

These activitiespaying creditors quickly while returning customer funds as slowly as possibleprovide strong evidence

that MF Global knew or should have known that it was sending customer funds (not excess segregated funds) to its

creditors in its final days. Though MF Global maintained excess proprietary funds in the customer segregated account

(as is common industry practice), they would not have made such a drastic change in standard business practices unless

they knew that there could be issues with their own transfers out of segregation. Moreover, we now know that a CME

spot audit of MF Global revealed that the firm maintained only $117 million in excess segregation as of October 27 th. It

is highly unlikely that a firm under great liquidity stress would be able to increase the amount of capital contributed to

its customer segregated account, especially within 24 hours. This knowledge, along with several badges of fraud in MF

Globals actions, provides enough evidence of actual fraud that prosecutors ought to be bringing charges immediately.

Checks issued to customers from the customer segregated bank account could take a week or more to clear that bank

account. By slowing customer redemptions from a wire transfer (which clears instantaneously) to a check sent via US

mail, MF Global artificially reduced the amount of assets they were required to keep in segregation on paper, while not

reducing the amount of assets in the customer segregated bank account. Checks that are issued to customers from thei

MF Global accounts are immediately debited in the customers account at MF Global through Sungards GMI software,

MF Globals derivatives accounting software. This would have given MF Global a lower number to report in their Friday

segregation calculation, tabulated by netting customer debits, debts and liabilities against customer positions, cash,collateral and assets. Comparing this number against their balance from Harris bank, which would not have shown

debits from checks which had not yet cleared, would have distorted the segregation report in MF Globals favor. In

other words, MF Global was engaged in a form of check-kiting in order to keep its business going while avoiding scrutiny

from its regulators.

The CCC has acquired evidence from customers who had their wire transfer requests converted to checks in the days

preceding MF Globals bankruptcy. This evidence demonstrates that MF Global made a decisionin the C-suite or in the

Treasury Operations Groupto convert wire requests for customers to checks. This decision, coupled with the wire

transfer from MF Global to JP Morgan on Friday, October 28, 2011, and the resulting benefits of that decision, provides

substantial probative evidence of an intent to fraudulently misuse customer property in order to satisfy the obligationsof the firm.

Proving Fraud: Oblique Intent and Badges of Fraud

As the MF Global bankruptcy has demonstrated, proving intent to commit fraud is a daunting task. The Corzine

defense of a lack of intent surrounding transfers from the customer segregated account, relying on ignorance or

incompetence, is an effective strategy. This defense has been echoed by every member of the C-suite who has given


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testimony before Congress. No doubt, a smoking gun of an MF Global executive commanding the misuse of custome

funds may never be found.

However, such overt evidence is not necessary. Edith OBriens now-famous e-mail, combined with evidence that MF

Global made a conscious decision to alter its standard practice and to disregard customers requests, constitute

sufficient badges of fraud to help prosecutors demonstrate that MF Global knowingly, intentionally, and fraudulently

used customer funds in order to pay its proprietary obligations.

Courts have developed several badges of fraud as tests for circumstantial evidence of fraud in transactions. One

example, found in section 4(b) of the Uniform Fraudulent Transfer Act includes 11 common badges of fraud. All or parts

of this Act have been adopted by most US jurisdictions1. Enough badges of fraud can be compelling proof of an actua

fraud.2 Based on the circumstantial evidence presented by these badges of fraud, a court may make a finding of actua

intent.3 That evidence which proves such intent gives rise to several civil and criminal causes of action in various

jurisdictions. MF Globals actions surrounding transfers out of its customer segregated account clearly display the

following badges of fraud.

BADGE OF FRAUD: Deviations from the Normal Course of Business

The first badge of fraud displayed by MF Global is a deviation from usual methods or the normal course of business. In

the days leading up to the MFG bankruptcy, requests for wire transfers from customers were converted to checks and

sent by US mail. No notice was given to the customer. Checks also experienced significant delay in reaching thei

owners. Of course, virtually all of these checks bounced. In my experience, both as a former employee and guaranteed

introducing broker of MF Global, a conversion of a valid wire transfer request to a check never happened. We believe

that the decision to change this standard business practice would have to come from the C-Suite. The outgoing checks

were signed by Ms. Christy Vavra and Ms. Edith OBrien (see exhibit D for the check obtained by the CCC), the two most

senior members of the Treasury Operations Group of MF Global, Inc.

As a result of testimony before the Oversight and Investigations Subcommittee of the House of RepresentativesCommittee on Financial Services (House O&I Subcommittee) last week, we now know that Jon Corzine instructed Ms

OBrien to transfer $200 million from the customer segregated account to an MF Global account at JPMorgan in London.

Therefore, at a minimum, Ms. OBrien would have been aware that customer requests for wires were being converted

to checks and large transfers were leaving the segregated account for MF Globals benefit. Therefore, at least Ms

OBrien knew or should have known that customer funds were likely being used by the firm. Furthermore, Ms. OBrien

knew or should have known that the CME spot auditcompleted only the day prior to Mr. Corzine tendering this

transfer requestindicated that MF Global had $117 million in excess segregation.

Additionally, the CFO of MF Global Inc. (Ms. Christine Serwinski) testified on March 28, 2012 that the fact that the

instruction to move funds to JPMorgan came from Mr. Corzine was extraordinarily unusualanother example ofdeviation from the normal course of business.

143 States and the District of Columbia, http://uniformlaws.org/LegislativeFactSheet.aspx?title=Fraudulent%20Transfer%20Act

2See Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254-55 (1

stCir. 1991).

3See Robertson v. Dennis (In re Dennis), 330 F.3d 696 (5

thCir. 2003).


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BADGE OF FRAUD: An Attempt to Keep the Transfer Secret4

As a result of testimony before both the House O&I Subcommittee and the Senate Committee on Agriculture, Nutrition

and Forestry, we know that CME Group sent a notice to MF Globals Finance and Treasury Operations Groups in Chicago

on October 27, 2011 stating that any transfer would need to be approved by CME Group. No evidence exists of which

we are aware that anyone at MF GIobal requested approval from CME Group for the $200 million transfer to JPMorgan.

This demonstrates MF Global intentionally concealed this transfer from regulators as long as they could.

BADGE OF FRAUD: Existence of a Special Relationship Between Debtor and Transferee

JPMorgan was MF Globals largest creditor. They were also a custodian of some of MF Globals segregated funds

JPMorgan provided MF Global with billions of dollars in revolving lines of credit, as well as numerous bank accounts in

several countries. Reports in the media, which have been confirmed by a spokesperson from JP Morgan

(http://www.reuters.com/article/2012/01/04/us-mfglobal-goldman-idUSTRE80301V20120104), indicate that MF Globa

sold hundreds of millions of dollars in securities to Goldman Sachs that were cleared through JPMorgan on October 27

2011. JPMorgan did not immediately tender the proceeds of this transaction to MF Global. Additionally, MF Global had

a $175 million overdraft in an account held by JPMorgan in the UK.

A memo from the House O&I Subcommittee staff on their most recent hearing references an email from MF Globa

Holdings, Inc. Treasurer, Vinay Mahajan, stated that JPMorgan was holding up vital business operations in the US. He

went on to add that the overdrawn account in the UK must be fully funded ASAP. As MF Global was deeply indebted

to JPMorgan, waiting on hundreds of millions of their own assets to clear JPMorgan and JPMorgan was holding up vita

business operations of MF Global, a clear special relationship between the debtor (MF Global) and the transferee

(JPMorgan) exists.

BADGE OF FRAUD: The Debtor Was Insolvent or Became Insolvent Shortly After the Transfer

Since JPMorgan was holding up asset transfers over and above the overdrawn account in London, as well as theexistence of a deficit in customer segregated assets, MF Global Inc. was insolvent on Friday October 28, 2011. The firms

parent company filed for Chapter 11 protection on Monday, October 31, 2011. MF Global, Inc. entered into a SIPA

Liquidation Proceeding as well on October 31st and revealed a shortfall in customer funds estimated at $1.6 billion. The

debtor was insolvent before, during and after both the issuance of Mr. Kaplans check and the transfer of funds to cover

the overdraft in their London JP Morgan account.

BADGE OF FRAUD: The Cumulative Effect of a Series of Transactions After the Onset of Debtors Financial Difficulties

MF Global stood to benefit tremendously from slowing customer redemptions. It bolstered the price which they could

command from a buyer of their futures business. In the hours immediately preceding their Chapter 11 filing, MF Globa

was very close to a deal to sell their FCM accounts to Interactive Brokers. Slowing redemptions through checks not onlywould raise the sale price, it would hide the hole in segregated accounts, which ultimately killed the deal. By issuing

checks, it effectively allowed MF Global to take a short term loan from customer property to maintain firm liquidity.

Testimony before the Senate Committee on Agriculture, Nutrition and Forestry revealed that the Board of Directors of

MF Global Holdings, Inc. commissioned a study on liquidity stresses that would be applied to the firm as the market

4Groman v. Watman (In re Watman), 301 F.3d 3 (1

stCir. 2002).


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reacted to its second quarter earnings. This plan has become known as the break-the-glass plan (review the plan

http://goo.gl/w47sa). It was composed by the members of Finance, Treasury and Risk Operations Groups from MF

Global, Inc., including their CFO Henry Steenkamp.

Commissioned in August 2011 and completed in mid-October 2011, the plan detailed several scenarios in which

business would be affected by revelations in their second quarter earnings (slide 2). In only one of those scenariosthe

highly improbable event that investors, ratings agencies and lenders had no response to their miserable earnings report

and over-leveraged exposure to the European sovereign debt crisiswould business as usual be possible. In each o

the other scenarios, some type of contingency plan would be required to prevent the insolvency of the business.

MF Global believed that it had sufficient liquidity to manage through one month under a severe stress event (slide 3)

Of course, they did not even last one week. The plan indicates that they were very concerned about client redemptions

and had contingency plans to mitigate them. One of those was to communicate to key clients about safety of thei

excess and margin balances (slide 10).

Also on slide 10, it is clear that MF Global was not concerned with mid market and retail client redemptions (like Mr.

Kaplans account) until after the first week. The slide notes that these redemptions would be orderly in the T8+T30date range, which we assume means after the first week and through the first month of the crisis. It follows from these

facts that MF Global did not anticipate the amount of redemptions they received from all customers. Clearly, they

needed a way to slow the drain on segregated funds and the wire to check conversion was the means to do that.

In his testimony before the House O&I Subcommittee, Mr. Steenkamp indicated that the final days were not unlike a

run on the bank. We have repeatedly heard this metaphor to describe the environment in which MF Global found

itself in the final week of October. This analogy is inadequate, as customer money at an FCM should be in the

segregated account at all times, as CFTC Chairman Gensler testified before the Senate Banking Committee. There is

nothing the firm should have to do to make these assets available for transfer or payment to their owners. If the

segregated customer account is whole and truly segregated, there is no reason to slow a run on this account from

customers. All of the assets should have been there. Segregated accounts at FCMs arent exactly analogous to bank

accounts, where a run on the bank can exceed reserve requirements that the bank must hold to satisfy customer

withdrawals.

Evidence of Conversion from Wire Transfers to Checks

Please note: redacted copies of this evidence are attached to this memorandum for public use. Original copies will be

made available only to law enforcement agencies.

One customer who requested a wire transfer and received a check was Steven Kaplan. Mr. Kaplan was a customer of my

firm, BTR Trading Group, which at the time was a guaranteed introducing broker of MF Global. Normally, Mr. Kaplan

would have requested a redemption from his account through the offices of BTR Trading Group. Given the severity o

the news on MF Global, Mr. Kaplan requested the closure of his account and the wire transfer of his funds directly from

MF Global.

On October 27, 2011 at 11:35 AM Eastern Standard Time, Mr. Kaplans request was transmitted via fax to MF Globals

Chicago office and copied via US mail to its New York offices. Please see the request as faxed in Exhibit A in the

appendix to this Memorandum. Mr. Kaplans request for a wire transfer was valid. It contained both the routing and

account number of a checking account in his name. It was transmitted to MF Global almost 90 minutes prior to the daily


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cutoff for same day wire transfer requests. MF Global had accepted wire transfers from Mr. Kaplans bank account in

the past, including the initial funding of this account (please see Mr. Kaplans original wire to fund his account in Exhibit

B).

On October 28, 2011, Mr. Kaplan received his daily statement from MF Global. This statement indicated that check

number 388057 was issued from his account (please see Exhibit C). This check debited $25,853.46 from his MF Globa

account, leaving $0.00 in his US segregated 1.25 balance. As a result, when MF Global ran its segregation requirement

for October 28, 2011, they would have been required to keep $25,853.46 less in segregation.

On November 4, 2011, Mr. Kaplan received a check for the balance of his MF Global account (Exhibit D, Mr. Kaplans

check from MF Global and deposit slip). The check was issued on Friday, October 28, 2011, and was signed by Ms

Christy Vavra and Ms. Edith OBrien of the Treasury Operations Group in Chicago. Mr. Kaplan deposited the check and i

was returned with insufficient funds on November 9, 2011, as the SIPA Trustee had already frozen MF Globals bank

accounts (see Exhibit E).

The CCC is in the process of compiling additional evidence from customers like Mr. Kaplan who had wire transfers

converted to checks. We have heard reports that customers submitted wires before the noon Central Standard Timewire cutoff only to have them delayed beyond the wire deadline. In those cases, MF Global employees recommended

issuing checks and sending them via overnight delivery in place of wiring funds on Monday, October 31, 2011. We have

also spoken with introducing brokers of MF Global who may have evidence of millions of dollars of requests for wires

that were converted to checks. We will forward this evidence as soon as we are able to obtain it.

Conclusion

The decision to stop sending wires to customers from the segregated accounts demonstrates that MF Global was

concerned with preserving liquidity. This may have been done to bolster the prospects of selling the firm to Interactive

Brokers or because they were concerned that the draining of this account would reveal that customer funds had already

been commingled to stave off MF Globals bankruptcy. Regardless, this deviationwhich allowed MF Global to use

customer funds during a short window of time while representing lower customer segregated fund requirements to its

regulatorsdemonstrates in no uncertain terms that MF Global employees knew or should have known that they were

using customer funds as part of the October 28th payment to JPMorgan. Further, as a result of the CME spot audit o

October 27th, many MF Global executives knew or should have known that they did not have enough capital in excess

segregation to make their October 28th transfer to JPMorgan. Anyone who knew that wires were being converted to

checks or who was aware of the CME spot audit knew that customer funds were at risk. Ms. OBrien and Ms. Vavra

clearly knew this, as they were involved in the conversion of Mr. Kaplans transfer, the October 28th payment to

JPMorgan and should have been aware of the results of the CME spot audit.

Particular attention should be paid to MF Globals segregation calculation and the reconciliation of its segregation

reports. This will demonstrate if they utilized the delay in checks being cashed by customers to artificially reduce its

segregation requirement. In testimony before the House O&I Subcommittee, MF Global, Inc. CFO Ms. Christine

Serwinski referred to reconciliation issues with respect to the segregation reports being compiled by the Treasury

Operations Group in Chicago. If these reconciliation problems were because employees were noticing that checks were

not being accounted for properly in the segregation report, it would confirm that someone tried to use the check float

(i.e., an intentional check kiting scheme) to support MF Globals business operations during late October 2011.


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We hope that this aids in the ongoing inves

sources close to the investigation are not c

facts, we believe many crimes were commi

ranchers and small investors are made who

Regards,

John L. RoeCommodity Customer Coalition125 South Wacker Drive, STE 300Chicago, IL [email protected]

tigation. Various anonymously sourced news items

nfident that a crime was committed by MF Global.

ted and must be immediately investigated so that

le from this unprecedented theft of customer segr

have indicated that

In light of the above

housands of farmers,

gated funds.


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ExhibitACopyofMr.Kaplan'sWireTransferRequest


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ExhibitBCopyofMr.Kaplan'sAccountFundingWire

TransferRequest


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ExhibitCCopyofMr.Kaplan'sDailyAccountStatementforhisMFGlobalAccountforOctober28,2011


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ExhibitDCopyoftheCheckfortheProceedsofMr.

Kaplan'sMFGlobalAccount&HisDepositSlip


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ExhibitECopyoftheReturnedCheck


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