Jon Corzine made his third trip to Capitol Hill on December 15, 2011 to testify before the House Oversight and Investigations Subcommittee as the investigation of MF Global Holdings Ltd.’s collapse intensified.¹ As Corzine testifies, an important inquiry is going on behind the scenes: Trying to find the missing customer funds.
Congressman Michael Grimm, a subcommittee member (R-New York), said “this type of investigation is probably 80 percentforensic accounting. They will literally break down these segregated accounts.”
Grimm says he would look at the secured debtors because when they heard MF global was in trouble they took their collateral. The Congressman said he would also look for abberations in MF tickets made any un-hedged positions that cost investors money because they could not trade out of it.rimm was an FBI Special Agent and member of the Financial Fraud Squad. He went undercover as a hedge fund manager during “Operation Wooden Nickel,” which is considered one of the most successful White Collar undercover investigations in FBI History. From stock manipulation, currency scams, to money laundering, Grimm has tracked down evidence against more than 50 individuals committing such fraud.¹
The FBI might bring in a forensic accounting team for the investigation and the US attorney’s office would work closely with them. The group of them will be doing the tedious task of back tracking every single trade. MF was heavily involved in sovereign European debt and we also know when the collateral was being downgraded they were getting margin calls. Every wire transfer will be looked into.
Rep. Grimm said, “They will come close to finding every penny…” “…The bonds have some value. A receiver will have to come in and make those types of decisions.” In the end, the assets will be liquidated and the victims will get a percentage.
It will take investigators months to track down this money. There could be thousands of trades and transfers. If those involved tried to cover their tracks so as not to use segregated funds, the FBI will have to get a handle on the accounting and find where the money was taken and where it is now.
Congressman Grimm says, “In a case like Jon Corzine, I would say I don’t think he went into this with intent to defraud or damage his customers.” However, he was not performing like a traditional CEO. He was pushing a specific strategy on traders and looking to utilize his relationships to get some inside information to make a big bet on what would happen in Europe. The information gathered would be used by Corzine in his hedging position that Europe would not default. He probably went into panic mode when told MF Global had margin calls. To cover it they used customer funds.
In the end, however, that was Corzine’s decision and that’s why the FBI is so important to this investigation. Rep. Grimm said, “Finding the money will be a traditional forensic investigation- but what the real role and expertise for the FBI will be the interviewing of the employees. Separating them and (using interrogation) techniques to find out who was calling the shots, who knew what and who participated in the transfers.”
Should Dodd-Frank be changed?
The road to —- is paved with good intentions and many believe that is the case with Dodd-Frank. The scope is so board and all-encompassing that it works against itself. Too many cooks in the kitchen leads to a lack of accountability. Dodd-Frank attempts to eliminate systemic risk. However, a lot of the smaller banks who are trying to keep up with the regulations will go under and the big banks will buy them up making these big banks even bigger. This will create the systemic risk Congress was trying to avoid. Many in Congress believe it will have a large amount of unintended consequences.
Finally, the matter of MF Global is not a failure of regulation because if Corzine did in fact decide to break the law and co-mingle funds and use those funds to cover a position he should not have taken, there already are many rules and regulations against that.
If someone wants to break the rules they will. More regulation is not the answer, said Congressman Grimm. “Smart, concise rules and enforcement of those rules is what’s needed. A perfect example of this was Bernie Madoff. It was an outright fraud. It’s a question of proper enforcement and if the agencies have what they need to enforce (the rules).”
Regulation is a backdoor approach. The real loser in this is the US banking industry, not the customers the law is meant to protect. As a result of over-regulation, the consumers will have less access to products and pay more. This puts us at a competitive disadvantage.
¹from an article by Lori Ann LaRocco, CNBC.com