The congressional investigation of the MF Global collapse and subsequent bankruptcy — the eighth-largest in U.S. history — is expected to focus on less senior members of the brokerage’s back-room team.

There is rampant speculation that at least one witness, former MF Global assistant treasurer Edith O’Brien, will plead the fifth at a hearing of a House Financial Services Subcommittee. Despite her pleas to those who might grant it, O’Brien has been denied immunity for her testimony, which will be given under subpoena.

Meanwhile, Jon Corzine, disgraced former head of MF Global (and former New Jersey governor and senator), denied reports he ordered some $200 million worth of funds — possibly including farmer/rancher client money — be transferred to remedy an overdraft in a brokerage account with bank JP Morgan. The directive was supposedly given last Oct. 28, three days prior to the firm’s implosion, and outlined in an O’Brien e-mail that says the $200 million transfer followed Corzine’s “direct instructions.”

(For more, see: Stabenow says MF Global bonuses ‘outrageous’)

This claim flies in the face of Corzine’s testimony before House and Senate legislators last December. During several hearings, Corzine claimed he was unaware of the “misuse” of customer funds, a word he used repeatedly. “I didn’t authorize it, didn’t intend to have it happen,” he told the Senate Agriculture Committee.

Fallout from the loss of some $1.2 billion worth of customer funds due to MF Global actions is not limited to congressional inquiry. In bankruptcy proceedings, client and creditor trustees have butted heads as some 10 class-action court cases have taken shape.

On March 23, John Roe — principal at BTR Trading Group and co-founder of the Commodity Customer Coalition (CCC), which is working to ensure MF Global customers are made whole — spoke with Farm Press. Roe, son of Tennessee Rep. Phil Roe, explained what is happening in the bankruptcy, what ex-FBI head Louis Freeh is doing in the case, and what regulatory actions Congress should consider. Among his comments:

On MF Global customer advocates and bankruptcy proceedings...

“We have a lot of irons in the fire.

“We’ve been working hard with distressed debt trading companies to get a better bid for MF Global claimants — and we did. We aren’t recommending anyone take that since we think there will be higher recoveries. But this will allow people who need to access their collateral now an avenue to do so.

“We’re also trying to get some traction to convert support of involuntary conversion for the holding company from Chapter 11 to Chapter 7. Basically, that company won’t survive, it isn’t reorganizing. By going to Chapter 7 it will clear out a bunch of professionals who are billing $1,000 an hour to the bankrupt state of the holding company.

“It more than chaps me a little that the two largest banks in the United States — Bank of America and JP Morgan — are paying for their legal expenses related to this out of the creditors’ committee from the holding company.

“Customers like us don’t get anyone to pay for our legal expenses.

“So, beyond it being the right thing to do, (the move) will help preserve capital for us to get when we prove comingling (of MF Global client funds). And that is coming — the money is missing and was clearly comingled and sent everywhere. We think some of it is sitting at the holding company.

“We want to make sure that when that comes out in court and we go to the holding company, (those funds) haven’t been billed out to every accounting firm and legal group now up there hitting the holding company.

“So, we met with CFTC (Commodity Futures Trading Commission) commissioners O’Malia and Sommers to discuss it. We’ll work with them to see if they can file it. If they don’t have the standing or are unwilling to file, maybe they’ll support us through an amicus brief.

We have a couple of court dates coming. April 2 is the closest.”

Evidence

On a pending segregation protection…

“We still have our response brief out requesting segregation protection follow customer funds wherever they were sent. The judge is probably holding onto that waiting for the criminal investigation to continue. So, there hasn’t been a ruling yet — we’ll try to work with and advise the court on that.

“We’re also working with a few people to help get something moving regarding a criminal investigation. Our main challenge, once the trustee goes after the counterparties sitting with 4d funds, will be preventing them from hiding behind the 2005 amendment to the Bankruptcy Code for ‘safe harbor.’

Note: 4d segregated accounts are for customer funds used to trade futures and options. They are kept separate from the firm’s.

“That relates to settling security transactions and says ‘hey, unless there is actual fraud that clause isn’t intended to help the recipients of stolen property to keep it.’ That’s what they’ll try and say — ‘we’ve got safe harbor according to this provision.’

“However, if there is evidence of actual fraud they can’t invoke that. So, it’s very important there be a criminal element to this. And, very clearly, there is.”

On new evidence regarding comingling of MF Global customer funds…

“Evidence is now floating around that people knew some things — prior to segregation and before they admitted to the CFTC they were under segregation. And if they knew (funds) were short and they were still sending money to counterparties, that’s general criminal intent.

“Of course, that doesn’t even touch on a scenario where you say ‘we’ll ignore all the missing money.’ If a CFO that is to be bankrupt in six days is telling ratings agencies the company has never been in a stronger financial position, you can’t tell me that isn’t securities fraud.

“There are all sorts of evidence of wrongdoing. We want to pressure some of the agencies involved in the investigations to make sure it is actually going on.

“We keep reading the anonymously sourced articles that appear from time to time — ‘there’s no criminal wrongdoing and (investigators) can’t really find anything.’ That sounds to me like someone is floating a story to see if there is any blowback.

“So, we’re making sure there is blowback.”

On briefing congressional staffers…

“I’m headed to Washington, D.C., on April 3 to sit on a panel for congressional staffers of the Senate Agriculture Committee. … That’s to just update them on what should be, in our opinion, the policy response to this.

“We’re working on a couple of proposals that are simple. We keep hearing from people who have a vested interest in nothing being done: ‘hey you can’t stop someone from robbing the bank.’ Of course, that’s true but when the bank folds it doesn’t keep everyone’s money for a year. There are ways to prevent that.

“One of the things we’ll propose is there be no BD/FCMs (broker-dealer /futures commission merchant) — you can’t have both securities and futures broker in the same entity, they must be in separate corporate structures. That way, when the securities side goes down, (the fallout) goes through SIPA (Securities Investor Protection Act); when the futures entity goes down, it goes to Chapter 7. That protects everyone’s customers.

“Or, if you have a BD/FCM you must hold the money in a SIPA account. That way, commodities customers do get SIPA protections.”

On streamlining the Bankruptcy Code…

“We’ll also recommend a provision, an amendment, in the Bankruptcy Code to amend safe harbor. That will keep it from applying in instances of actual fraud but in fraudulent conveyance or constructive trust. If something like this happens again the banks won’t be able to use safe harbor to keep stolen property.

“We’re also going to look at other amendments in the Bankruptcy Code that streamline the process. There ought to be orderly liquidation procedures.

“In terms of insurance, we’ve looked at all the proposals. Most are like SIPA — they’ll be expensive and raise the cost of doing business and not very effective.

“However, there can be a self-insurance mechanism that could work outside of Congress. We’ll tell Congress ‘look, if you take a group like the NFA (National Futures Association) and double the fee from 2 to 4 cents — and put that extra in a fund and let it grow — if (an MF Global situation) happens again the fund will offer liquidity for any shortfall. Then, it can be the entity that goes to bankruptcy and negotiates claims and the like.’

“So, you’d have a single entity that would be arguing on behalf of customers, representing customers’ interests, and actually going into bankruptcies and fighting on behalf of customers. They’d have the money to withstand the legal expenses of bankruptcies and use that reserve that would build up to plug shortfalls or facilitate loans to keep people trading.”

Witnesses

On Edith O’Brien and Wednesday’s hearing…

On March 28, “the Oversight and Investigation Subcommittee of the House Financial Services Committee will have an interesting panel to put questions to. (Among the) big hitters will be Edith O’Brien — the assistant treasurer, who Corzine dropped during congressional testimony back in December.”

Note: At that hearing, Iowa Sen. Charles Grassley was “baffled” by the inability of a panel of MF Global executives to answer basic questions about the firm’s demise. The trio’s “supposed lack of knowledge ... is alarming,” said Grassley. “I want answers and Iowa farmers want answers.”

Grassley then began a series of questions — asking for names of MF Global employees able to provide answers that the executives wouldn’t — that was picked up by other committee members. The reluctant executives provided only several names and eventually pointed to the firm’s treasury department, where O’Brien worked.

Kansas Sen. Pat Roberts loudly wondered how much testimony it would take “before we finally drill down and find someone’s name who knows what the heck is going on?” He suggested MF Global COO BradleyAbelow put together a chart of the firm’s hierarchy and employee names “and we’ll finally get down to the custodian.”

For more on the exchange, see here.

Laurie Ferber, (MF Global) general counsel — currently employed by Freeh — is also expected to testify before the subcommittee.

O’Brien is the one expected to plead the fifth?

“She’s definitely going to. She’s indicated to everyone but Santa Claus that she wants immunity. They’ve all said no and I don’t know why. She hasn’t been questioned by anyone yet.

“The only reason you’d want immunity is if something you did could get you in trouble.

“Congress wouldn’t give her immunity because they don’t want to complicate a criminal investigation. … But if she takes the fifth, it bolsters our case that a crime was committed. Why take the fifth otherwise?

“She’s retained a good defense attorney. … And if she’s done something wrong there’s every reason in the world to.

“Laurie Ferber is in a different situation. She can’t necessarily take the fifth on some things because she’s been working with the trustee office. She could invoke attorney/client privilege, though, so it’ll be an interesting hearing.”

How is (CFTC head Gary) Gensler sitting at the CFTC? Still entrenched?

I think he’s fairly entrenched.

“Down the road, I don’t know if there will be a sacrificial lamb. If so, I’m unsure if it’ll be Gensler. I don’t think you’ll see any regulator’s head roll.

“At the end of the day, this is one of those things where so many will shake their heads and say (the MF Global collapse is due to) ‘a failure of imagination. No one imagined it could be possible.’ That’s a weak excuse but I don’t know that Gensler could have prevented or mitigated it.

“By recusing himself (from the investigation), he’s given himself quite a bit of an out.

“To be honest, from the customer’s perspective, we’re not all that interested in (regulators being called on the carpet). We’re interested in criminal prosecutions of those who may have committed crimes.”

Freeh

What about (former FBI head and current MF Global creditor trustee) Louis Freeh and the bonus imbroglio (for more, see here)?Also, isn’t Freeh working with Penn State on the Sandusky scandal?

“That’s right, he is.

“As for the bonuses, all that goes away if you’re in Chapter 7. You don’t pay retention bonuses to people who aren’t going to be working for a firm that won’t exist.

“To say we have to pay a six-figure retention bonus to Abelow — who has made over $7 million from MF Global — is the kind of thing that people see and say ‘all our institutions are corrupt.’ The judiciary will say it’s fine that someone involved in a firm that was perfectly viable a year ago and then exploded and stole people’s money is paid a ludicrous bonus?

“I can’t believe you’d put that out there.

“Again, if this was in Chapter 7 where it should be, this wouldn’t even be a concern.

“Freeh has a job to do. But his incentives are to marshal assets for the creditors of that corporation. That runs counter to our incentives, to our trustee’s incentives. (The MF Global client trustee, James Giddens) is looking at this as an advocate for customers.

“The customer trustee and Freeh will bump heads because Freeh is an advocate for the creditors, including the two largest banks in the country. As he continues to shill for them there will be a lot of outrageous things coming down the pike. Will people stand up and make enough noise saying ‘hey, we see this. We know it’s going on and it must stop.’”

What about the class-action cases being prepped? Specifically the one the CCC is involved with?

“We’ve known the class-actions would move in. … They’ll all be consolidated, we think, into one big class-action. It will take on the insurance, the firm and everything else.

“I’ve been very critical of class-action lawsuits because, more times than not, they’re a mechanism only for lawyers to make money. Claimants get nothing — or coupons….

“We’ll work and fight to ensure that doesn’t happen here. If there is recovery here, lawyers should get their piece because they have expenses. I understand all that. But let’s make sure that the people actually missing money see some money.”

On Roe’s recent MF Global presentation (see here) to the Grain & Feed Association of Illinois…

“I was talking to a group of people all impacted by the MF Global collapse. They were farmers, grain elevators, co-ops, people who provided services to them.

“They had a bunch of great, pointed questions. I just wanted to bring them up to speed on what happened at MF Global, why it happened, what we think the policy response should be and how long it will take to get recoveries back. Also, what strategies can be employed to stretch out operational risk a bit to make sure if something like (MF Global) happens again that all their eggs aren’t in one basket.”

Anything else?

“If you’re someone who has been impacted by this, do what you can to keep it in the press. When this starts to die down, nothing good will happen for clients and they’ll get checks in eight years.

“If we keep pushing both trustees, pushing the judge, pushing Congress, pushing the regulators, they’ll want to finish this up. They’ve got other things to work on.”