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CFTC and MF Global Holdings

In reference to a CFTC enforcement action against MF Global Holdings (MFGH or Holdings) and the CFTC press release on Christmas Eve of 2014 – http://www.cftc.gov/PressRoom/PressReleases/pr7095-14 – MFGH as principal admitted to the commission of specific acts creating a previously unrecognized (and unmeasured) liability, loss, and expense arising from claims asserted by the CFTC in its regulatory capacity. Generally, in analyzing claims, the fraud examiner | financial forensics practitioner should observe the following structure:

  1. Commission | omission – what specifically was done or not done to demonstrate the breach of duty / obligation creating the legal basis for the claim? For example, in the case at hand agents of the principal misused customers’ funds in support of the agents’ proprietary operations.
  2. Concealment – what specifically was done or not done before and after the commission | omission to cover up the breach of duty / obligation? For example, in the case at hand agents of the principal filed false reports to the regulator RE: the accounting for and financial reporting of the misused customers’ funds.
  3. Conversion – what specifically occurred to the proceeds resulting from the impermissible commission | omission? For example, in the case at hand agents of the principal wrongfully (re)invested the customers’ funds in illiquid (i.e., not marketable) securities.

In brief, “as Holdings’ Treasurer told Holdings’ CFO at that time, in one of many recorded phone calls obtained by the CFTC, the firm was “skating on the edge,” without “much ice left.” Whether the general public and specific customers of the MFGH enterprise were timely apprised of the impending drowning beforehand may be the subject of research. Questions about the external auditor were raised.

There are numerous poignant takeaways from the MFGH collapse, including denying to third parties the use of the Consent Order’s MFGH admissions, but the commonality of this case with innumerable other cases of its kind characterized by allegations of violation of law and regulation and breach of contract and duty is the failure to manage effectively (i.e., with the counterparty / customers’ interests in fair balance with the primary parties’ interests) conflicts of interest. Where a significant asymmetry of information exists between and among the parties, the selection of policies and actions adverse to and exploitative of the party with inferior bargaining position and inadequate information will occur and recur. It is important for stakeholders, especially investors and customers, to conceive of their financial relationship with the immediate contracting party (e.g., MFGH’s registered futures commission merchant and subsidiary MF Global Inc.) as only one material element | node in the network of affiliates, related parties, and other principals and agents, including the possibility of undisclosed principals and agents; this aggregate – the real economic enterprise – offers both opportunity for shared profitability and opportunity for selective exploitation.

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