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Prosecutors Can’t Find Crimes at MF Global

No one will be prosecuted at MG Global for stealing from customer accounts, because there is no smoking gun. $1.2 billion disappears, but that isn’t a smoking gun. What’s the matter with these people?

The problem, according to Dealbook, is finding someone who intentionally took customer money. See, if it was Just One of those Things, then it wasn’t a crime. If you accidentally dip into my bank account and use it to pay your debts, why that just isn’t a crime. Circumstantial evidence isn’t enough to prove a crime any more. You have to have an e-mail from someone saying: “I’m going to use customer funds to pay counterparties of MF Global.”

Investigators are closing in on the money. Within a week of bankruptcy, MF Global sent $165 million to an account at JPMorgan from an account that held segregated customer funds. Someone at MF Global instructed the back office to do it, and someone authorized the transaction. But we can’t expect a US Attorney, say Preet Bharara in New York, or Pat Fitzgerald in Chicago, to go to a Grand Jury and say something like this.

The payment was authorized by these defendants. Those defendants knew how much cash MF Global had, and they did nothing to stop the first defendants from paying more than that to counterparties. Here are the records.

Is there anyone who wouldn’t indict all of them with this circumstantial evidence? Let’s let a jury of their peers decide. The lawyer for the defendants is free to argue it was negligence, an accident. The jury will want to know exactly what that accident was. The defendants meant to use a different account? Then the problem would easily have been solved by transferring money from the right account to the customer funds account. That didn’t happen.

Or maybe the accident was I didn’t know that was customer money. So the defense is “I forgot”, and “excuuuuse me”. I forgot that account held customer money. I forgot that I wasn’t supposed to steal customer money.

The real defense is that these are white collar criminals. They weren’t smoking pot or shoplifting. These people have million dollar mortgages and $32,000 private grade school tuitions to pay. They deserve respect from prosecutors. And don’t forget the terrible stress of their duties. They’ve been punished enough. It’s time to look forward. Ignore those innocent customers in the corner.

Anyway, Bharara is too busy with his pointless crusade of meaningless insider trading cases. Now he’s diverting FBI agents away from real work to that stupidity.

And, for a bit of wonkiness, here’s why the money isn’t coming back to the customers. When the back office people at MF Global figured out the problem, a matter of a few minutes, they tried to reverse it, but under the Uniform Commercial Code, wired funds are good funds, and the transfer is generally irrevocable.

Suppose you steal one of my checks and uses it to pay your creditor. There would be a forged signature on the check, and my bank would be on the hook for paying on a forged endorsement. I would not suffer a loss if I acted quickly.

That isn’t the way electronic fund transfers work. If the payment is sent using the correct security procedures, the recipient gets the money even if the transfer was not authorized by the sender. If the sender fails to guard the secret security procedure, the loss falls on the sender.

Now suppose that the recipient is the same bank that the customer used to initiate the transfer. For example, suppose MF Global instructed JPMorgan to send a wire from an MF Global Segregated Customer Account to an account at JPMorgan in the name of a subsidiary, say JPM Commodities Broker of London. Even if the proper procedures were used, wouldn’t you expect that the sending bank might notice that the transfer was a huge amount from a segregated customer account? Maybe it would notice that the customers of MF Global didn’t owe that much to JPM Commodities Broker? Wouldn’t you expect them to wonder if that was supposed to happen?

You would be right. The Anti-Money Laundering Act and other laws require banks to have a computer program that should find such transactions, maybe not in real time, but very quickly. Banks are required to file reports of suspicious activities, and to take steps to prevent transactions in some settings. But those laws don’t protect customers.

JPMorgan keeps the money if it a) followed the required security provisions of its agreement with MF Global, and b) proves it acted in good faith. UCC § 4A-202(b)(ii). “Good faith” means honesty in fact and the observance of reasonable commercial standards of fair dealing; 4A-105(a)(6). Under my little hypothetical, a reasonable person might think the bank didn’t act in good faith. Lawyers and judges aren’t reasonable people.

The money isn’t coming back, and no one is going to jail.

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