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Prosecution, Regulation Needed for MF Global Customers

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Hedge funds fail. Banks make mistakes. But the collapse of MF Global last fall was extraordinary in that customer funds were compromised. And when investigations into those missing funds led to vague non-answers, bankrupt farmers, and an industry on the verge of ruin, the collapse truly became a spectacle.

Much has been made in the past few days about the lack of federal prosecution against MF Global executives, whether because of a lack of criminal activity or a lack of evidence. If the rumors are true, it's a significant blow to MF Global customers looking for vindication. Federal prosecution would have gone a long way in sending the message that banks and bankers can't be allowed to run amok.

The criminal inmates are running the Wall Street asylum.
James Koutoulas, head of the Commodity Customer Coalition, and the leading advocate for MF Global customers, doesn't pull punches. When it comes to MF Global leaders getting a pass on accountability, his frustrations lie with the Department of Justice. "They've essentially given everybody who committed fraud in 2008 a pass," Koutoulas says, "and it appears the DOJ doesn't have the will to prosecute this either."

His frustration is founded; despite the collapse of the economy, and the undeniably large role banks played in it, bank fraud prosecutions are at the lowest they've been in the past four administrations, less than half of what they were 20 years ago. That's even as federal prosecutions for other crimes have nearly doubled.

"If you look at how they've treated financial crimes over the last four years, it seems their philosophy is, if we don't have four years of wire taps on insider trading, then we're not going to bring a case," Koutoulas says. "Barring a deathbed confession or a suicide note, they're unwilling to prosecute."

It's not (just) about the money
Koutoulas says that currently, 80% of the missing funds have been distributed to clients with U.S.-designated accounts, and Koutoulas has negotiated claims sales in the distressed markets at levels above 97%. But the damage done by the collapse of MF Global was more than financial. Changed worldviews, a shaken faith in the financial industry, and an inability to conduct business as usual have led some customers to keep their money under their mattresses. For them, the only way to be made whole is for someone to accept responsibility.

Koutoulas will continue to apply pressure to the DOJ to bring federal charges against ex-MF Global CEO Jon Corzine and other MF Global executives. But should federal prosecution elude Corzine, Koutoulas will pursue him at the state level. "As a customer advocate, I'm not stopping," he says. "If the DOJ doesn't bring charges, I will go to states attorneys who told me in the past they had to lay off the case because DOJ had dibs on it."

When asked which states Koutoulas expects to find the most receptive, he replied, "I only need one. Corzine broke states laws. I don't care which jail he's in. I prefer general population, but I don't care whether it's federal or state. As long as it's not a white-collar Club Fed."

A long, slow road to regulation
To ensure customers are protected in the future, the industry is slowly responding to calls for more oversight. In testimony before the Senate Agriculture Committee on Aug. 1, Jill Sommers, senior commissioner of matters relating to MF Global for the Commodity Futures Trade Commission, said that the commission "had developed recommendations for enhancing [CFTC] and designated self-regulatory organization programs related to the protection of customer funds." These changes, according to Sommers' testimony, include changes to the governance of futures commission merchants.

The CFTC isn't the only body making changes in regulation and governance. The National Futures Association, working with CME Group (Nasdaq: CME  ) and other futures markets, approved new regulations for customer funds this week. Those changes include an automated system that will monitor customer funds for discrepancies and send daily reports outlining any issues. This system will apply to all futures brokerages. The proposed regulations require approval from the Commodities Futures Trading Commission. The NFA also proposed a rule, dubbed the "Corzine Rule," which would require futures executives to sign off on large withdrawals from customer accounts.

But the CFTC can't regulate traders who don't register, and since many of the senior MF Global executives weren't registered with commodities regulators, such changes wouldn't have applied to them. The one exception, of course, is Corzine himself, who was registered with regulators. That'll be handy, as he's mentioned starting a new hedge fund.

Neither the NFA nor the CFTC responded to my request for comment.

Affirmation through prosecution
As Koutoulas sees it, the only way to re-establish the industry is to prosecute those people who corrupt it. "I run a hedge fund and I do it honestly. It's important that people trust the financial system and don't have to worry that banks and brokers will take their money to cover their own risky bets. I want people who commit crimes to go to jail so that my customers are safe and confident investing with us. By the DOJ not doing their job, it makes my job a lot harder."

"(Corzine) put 2,800 people out of work," Koutoulas says. "A lot of those people are my friends. He stole from 38,000 customers who trusted him. He damaged the entire industry.

"And I'm not going to let him get away with it."

Molly McCluskey is co-author of The Astonishing Collapse of MF Global, which is available for the Kindle on Follow her on Twitter at @MollyEMcCluskey.  She doesn't own shares in any of the companies mentioned. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (7) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 23, 2012, at 1:04 PM, preyn wrote:

    why no mention of Corzines ties to the democratic party and as a major bundler for the current admin.

  • Report this Comment On August 23, 2012, at 1:09 PM, TMFDarwood11 wrote:

    Great article and thanks for "bird dogging" this.

    I agree, this needs to be properly prosecuted.

    After the "panic of 2008" and the issues that led up to it, I am more than chagrined that these systemic problems haven't been properly addressed, and the perpetrators brought to justice.

    I don't want to get political, but I also am more than disturbed that the current administration has not made this a priority.

    Because I don't want to get political, I won't go farther into that "rabbit hole." But I will say that it is my opinion that it is a role of government to protect the citizens from these types of excess and malfeasance.

    It is difficult to avoid the comparison of these protected individuals with the likes of Capone and other well shielded miscreants.

    I will write a letter to my Congressmen and the President that this needs to become a priority.

    I will also issue a letter to Mr.Koutoulas, encouraging him to "fight the good fight."

  • Report this Comment On August 23, 2012, at 1:54 PM, jlre2 wrote:

    Maybe John Ashcroft would come back and clean up this mess. I believe in the 4 years he served as AG his Crime group was able to get 1100 convictions, such Global Crossing, World com, Tyco, some of the worst of the worst.

    The problem he had Congress would not pass vacancies that existed on the federal judiciary system and many went free.

    This kind of turn your head it really does not exist, never worked with John Ashcroft. He served but 4 years our loss, Criminals gain. jlre2

  • Report this Comment On August 23, 2012, at 2:12 PM, TheRealRacc wrote:

    Not a political website.

  • Report this Comment On August 23, 2012, at 3:41 PM, hightimes1 wrote:

    Let's get a grip, here! The likelihood of a prosecution in this matter, should Romney be elected, is zero. And the likelihood of a prosecution, should Obama be re-elected, is even less. With Captain Corporation, we're actually talking negative numbers, here. Corzine and Obama are buds. Jamie Dimon and Obama are buds. Indeed, Obama is Wall Street's best friend, even if some on Wall Street are too damned stupid to realize it. Ms. McCluskey is right on the money with her article, but it ain't gonna happen with the Republicans or with the Dems.

  • Report this Comment On August 23, 2012, at 11:04 PM, XMFAlaska wrote:

    Folks, thanks for all your great comments. I'll echo the sentiment that this isn't a political site, or a political article.

    From the beginning of my MF Global coverage, my focus has always been on the customers who lost their livelihood, and how all of us, as banking customers and investors, have been/will be impacted. The lack of prosecution speaks to a much larger issue, one that has no easy answer, regardless of the outcome of the presidential election.

  • Report this Comment On August 26, 2012, at 5:37 PM, nickjob wrote:

    Eric Holder reminds me of the sheriff in the movie "Open Range".

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