Gary DeWaal and Associates LLC

On 27 June, 2013, the CFTC filed its long awaited complaint related to the October 2011 MF Global collapse, naming MF Global Inc., (the futures commission merchant holding customer accounts; "MFG"), its parent company, MF Global Holdings Ltd. ("Holdings"), John Corzine, CEO and Chairman of Holdings and CEO of MFG, and Edith O'Brien, Assistant Treasurer and who the CFTC alleged was also the "functional head" of MFG's Treasury Department during October 2011. Simultaneously MFG settled all charges against it by agreeing to pay all customers 100% of all funds owed; this settlement is subject to court approval.

In its complaint, the CFTC charged all four defendants with failing to segregate customer funds as required, and for misusing customer funds. Holdings and Mr Corzine were charged as controlling persons of MFG, while Ms. O'Brien was charged for aiding and abetting MFG's wrongful conduct. MFG was also charged with a reporting violation and for submitting false or misleading statements to the CFTC, while MFG and Mr. Corzine were also charged with failure to supervise.

Consistent with a prior report regarding the last months and days of MFG issued by the Trustee of Holdings during February 2012, the CFTC alleged that a mosaic of confusion permeated MFG particularly following a downgrade in its rating during its last week. In this environment, funds were transferred from accounts that were required to be segregated for the benefit of customers 24/7 when the respondents probably should have known, or should have questioned, whether such transfers were lawful. The CFTC also claimed that from January through May 2011, MFG invested customer funds in collateral that was not legally permissible at the time. After the Chicago Mercantile Exchange auditors discovered this during a May 2011 examination, MFG was required to unwind this investment.

MFG also agreed to imposition of a $100 Million fine that it will pay only after the Firm exhausts all funds paying customers and certain creditors. A large payment will be made to customers after receipt of a payment during September 2013 from a MFG UK affiliate currently in special administration in the UK.

In reflecting on this specific matter, as well the numerous reports and media articles regarding the MFG debacle, it is clear what the principle lesson is: when managers of registered financial services entities, even the most senior officers, receive information regarding potential problems within their organization involving material matters, it is not sufficient to simply accept a verbal or even written assurance that "no, things are ok," or even worse, a vague response. They are expected to do more to assure themselves that relevant laws or regulations are being followed, and certainly not create an atmosphere where breaches are encouraged or expected. In the words of David Meister, CFTC Director of Enforcement, in connection with the CFTC's enforcement action involving MFG:

"Turning a profit is not the only job of the person at the top of a CFTC-regulated firm. Particularly in times of crisis, the person in control, like the CEO here, must do what's necessary to prevent unlawful uses of customer money, so that customers' money is still there if and when the music stops."

Time will tell whether the CFTC possesses sufficient facts to prove its case in this matter. However, the broad message is clear. A manager within a registered financial services entity must appropriately pro-actively follow-up when he or she possesses information regarding a possible offense; the more material the subject of the offense, the deeper the manager has to inquire personally. Relying on subordinates to conduct ground work is ordinarily satisfactory -- but at least ensure yourself that their ground work was competent and their conclusions justified.

Don't just hear what you want to hear, or hear nothing at all!

For more information, see:
http://www.cftc.gov/PressRoom/PressReleases/pr6626-13
http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfmfglobalcomplaint062713.pdf
http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfmfglobalorder062713.pdf