On MF Global Anniversary Something Still Missing

15 january 2013

Something is still missing today, the one year anniversary of the bankruptcy of MF Global.

Of course, we’re not yet being told who has $1.6 billion of customer funds still unaccounted for. If the SIPA Trustee James Giddens tells you he may be able to make customers almost whole, it’s from other funds recovered via negotiations from other sources. Not one organization has been sued, nothing has been clawed back, no one has been held formally responsible.

But I’m talking about something more than money. What’s still missing from this sordid affair is an accounting of the whereabouts of the financial auditor, PricewaterhouseCoopers. The global audit firm would rather come off as stupid than complicit in the actions of whomever broke the law and stole MF Global customer funds. PwC prefers you believe they were “duped” and given false or no information when executives took on inordinate risk with little or no oversight, and took advantage of lax or relaxed internal controls to double down with other people’s money in the noble hope they could “save the company” for investors including Corzine’s true boss, Chris Flowers.

Rest assured, “We were duped” will be the auditor’s defense when, and if, they are ever called to answer questions from the SEC, PCAOB, or a Senate/Congressional investigative committee. More likely the audit firm has been working behind the scenes to “help” regulators and the trustees makes sense of the transactions they were supposed to have been questioning while the firm was still viable. Most likely, in exchange for the promise of no prosecution, the firm has agreed to tell them where the bodies – the $1.6 billion –  is buried and point fingers at executives that lied to them or witheld information so the case against management will be stronger.

That’s how it works.

Whether civil, criminal, or private litigation, the auditors who are supposed to be standing up for shareholders and, in this case, customers who have a big stake in MF Global’s viability, are instead most worried about their own liability. And the lawyers play along. That’s how it was done at AIG and Huron, more PwC audit clients.

In the case of AIG, PwC partners agreed to testify against their client in exchange for a smaller settlement. In the case of Huron, private litigation against the firm was dropped in exchange for making the embarrassing admission the client lied to them repeatedly. In both cases, PwC is still the auditor, collecting its fees.

There’s plenty of evidence of what PwC, the auditor, saw at MF Global. The relationship was a long one. PwC is also auditor for Man Financial Group, the firm that bought a brokerage business from the fraud- ridden, failed firm called Refco in 2005, beefed it up and rebranded it, then spun it out as an IPO called MF Global in 2007. (PwC was also responsible for setting up internal controls for Refco, but escaped liability for that on a technicality. The Trustee suddenly found a conflict of interest and couldn’t do the suing himself. It wasn’t viewed as worthwhile to appoint someone else to pursue PwC.)

Conflicts abound now, too.

Giddens is using Ernst & Young as his forensic investigation firm. In addition to all the other conflicts Giddens – and Freeh – have with JP Morgan and MF Global auditor PwC, the use of Ernst & Young in this context should not have been allowed.  Ernst & Young is the same firm, according to sources, that designed and implemented MF Global’s internal controls in time for its first Sarbanes-Oxley review and same firm that Randy McDonald, the MF Global CFO prior to current CFO and PwC alumni Henri Steenkamp.

Unfortunately we can’t see what PwC ,the MF Global auditor, saw. It’s been given confidential treatment at PwC’s request.  Only the SEC knows.

What I was most interested in were the filings of MF Global auditor PwC, including the specific reports the auditor is required to file that might describe any weaknesses or discrepancies in internal controls over customer segregated assets.

MF Global  – and PFGBest – were futures commission merchants, or FCMs, with broker-dealer subsidiaries. The ten futures commission merchants, or FCMs, with the most customer segregated assets under their control, almost $117 billion, as of June 30, 2012 according to reports filed with the CFTC, are audited in four cases by PwC. The rest are audited by one of the other Big Four audit firms. (A Big Four auditor obviously didn’t help safeguard customer funds any better at MF Global where the auditor is also PwC.)

• Goldman Sachs (PwC)
• JP Morgan (PwC)
• Newedge (EY)
• Deutsche (KPMG)
• UBS (EY)
• Citigroup (KPMG)
• Merrill Lynch (PwC)
• Morgan Stanley (Deloitte)
• Barclays (PwC)
• CSFB (KPMG)

Large banks have been sanctioned recently for commingling their broker-dealer customers’ funds with their own. JP Morgan, and its auditor PwC, and Barclays were fined in the UK for not safeguarding the funds of brokerage customers.

JP Morgan was MF Global’s primary banker.

PwC has been complicit in customer account segregation failures as well as complacent about numerous other control failures and illegal acts at JP Morgan and Barclays.

PwC also audits JP Morgan and Barclays.

From a column at American Banker earlier this year.

But JPM had an extensive relationship with Jon Corzine’s brokerage, giving the megabank a bird’s-eye view of the firm’s finances before and after it failed.

As such, JPM must have at least a clue about the other $1.4 billion of MF Global customer funds that have gone missing.

As MF Global’s largest unsecured creditor, for example, JPM was first to the courthouse to protect its rights after the Oct. 31 bankruptcy filing. And as Genova told the House Financial Services Oversight and Investigations Committee on March 28, MF Global maintained a large number of cash demand deposit accounts at JPM. Four of these accounts in the U.S. were designated as customer segregated accounts.

MF Global also cleared agency securities through JPM, Genova said. The brokerage had two revolving credit facilities in which JPM was the administrative agent for a syndicate of other banks. And MF Global had securities lending and repurchase arrangements with JPM, the largest of which involved MF Global borrowing U.S. Treasuries from JPM’s securities lending clients and posting agency securities as collateral.

JPMorgan even considered acquiring MF Global. But before anyone else outside of MF Global knew that there was a $1.6 billion hole in customer segregated funds, JPM passed on a deal.

So, let me ask you this. As a customer, should you do business with a broker-dealer or FCM that’s chosen PwC to protect your money?

I wouldn’t.