M E M O R A N D U M: Evidence of Intent to Commit an Actual Fraud in the Collapse of MF Global Date: April 2, 2012 TO: The Honorable Eric

Holder Attorney General of the United States Offices of the United States Attorney General 950 Pennsylvania Avenue, NW Washington, D.C. 20530

The Honorable Debbie Stabenow Chairwoman United States Senate Committee on Agriculture, Nutrition & Forestry 133 Hart Senate Office Building Washington, D.C. 20510 The Honorable Randy Neugebauer Chairman United States House of Representatives Subcommittee on Oversight and Investigations Committee on Financial Services 1424 Longworth HOB Washington, D.C. 20515 The Honorable Frank Lucas Chairman United States House of Representatives Committee on Agriculture 2311 Rayburn HOB Washington, D.C. 20515

The Honorable Pat Roberts Ranking Member United States Senate Committee on Agriculture, Nutrition & Forestry 109 Hart Senate Office Building Washington, D.C. 20510 The Honorable Michael E. Capuano Ranking Member United States House of Representatives Subcommittee on Oversight and Investigations Committee on Financial Services 1414 Longworth HOB Washington, D.C. 20515 The Honorable Colin Peterson Ranking Member United States House of Representatives Committee on Agriculture 2211 Rayburn HOB Washington, D.C. 20515

The Honorable Patrick J. Fitzgerald US Attorney, Northern District of Illinois United States Attorneys Office Northern District of Illinois, Eastern Division 219 South Dearborn Street, 5th Floor Chicago, IL 60604

The Honorable Preet Bharara US Attorney, Southern District of New York United States Attorneys Office Southern District of New York One St. Andres Plaza New York, NY 10007

Introduction Through information recently brought to light in Congressional hearings and documents provided to the Commodity Customer Coalition (CCC), we believe that sufficient evidence exists of intent to commit an actual fraud to support probable cause to arrest one or more employees of MF Global for several state and Federal financial crimes. We are submitting this information, along with our theory of how intent is proven, to all investigative bodies who are conducting inquiries into the collapse of MF Global.

Our assertion that intent to commit an actual fraud occurred in the MF Global collapse centers on the combination of two different sets of transfers. Documents obtained by the CCC show that in the final week of October 2011, MF Global converted customer wire transfer requests to payments by check. At the same time, MF Global sent wire transfers to counterparties from that same customer segregated account to satisfy proprietary obligations. Specifically, we are referring to a wire transfer of $200 million from MF Globals customer segregated account to a proprietary MF Global account held by JPMorgan in the UK. This account in London was overdrawn by $175 million. At the same time MF Global was wiring this money to its creditors out of customer segregated funds, it was sending money by check to customers seeking withdrawal of their funds, despite the fact that customers asked for wire transfers and MF Globals standard practice was to send customers their funds by wire. These activitiespaying creditors quickly while returning customer funds as slowly as possibleprovide strong evidence that MF Global knew or should have known that it was sending customer funds (not excess segregated funds) to its creditors in its final days. Though MF Global maintained excess proprietary funds in the customer segregated account (as is common industry practice), they would not have made such a drastic change in standard business practices unless they knew that there could be issues with their own transfers out of segregation. Moreover, we now know that a CME spot audit of MF Global revealed that the firm maintained only $117 million in excess segregation as of October 27th. It is highly unlikely that a firm under great liquidity stress would be able to increase the amount of capital contributed to its customer segregated account, especially within 24 hours. This knowledge, along with several badges of fraud in MF Globals actions, provides enough evidence of actual fraud that prosecutors ought to be bringing charges immediately. Checks issued to customers from the customer segregated bank account could take a week or more to clear that bank account. By slowing customer redemptions from a wire transfer (which clears instantaneously) to a check sent via US mail, MF Global artificially reduced the amount of assets they were required to keep in segregation on paper, while not reducing the amount of assets in the customer segregated bank account. Checks that are issued to customers from their MF Global accounts are immediately debited in the customers account at MF Global through Sungards GMI software, MF Globals derivatives accounting software. This would have given MF Global a lower number to report in their Friday segregation calculation, tabulated by netting customer debits, debts and liabilities against customer positions, cash, collateral and assets. Comparing this number against their balance from Harris bank, which would not have shown debits from checks which had not yet cleared, would have distorted the segregation report in MF Globals favor. In other words, MF Global was engaged in a form of check-kiting in order to keep its business going while avoiding scrutiny from its regulators. The CCC has acquired evidence from customers who had their wire transfer requests converted to checks in the days preceding MF Globals bankruptcy. This evidence demonstrates that MF Global made a decisionin the C-suite or in the Treasury Operations Groupto convert wire requests for customers to checks. This decision, coupled with the wire transfer from MF Global to JP Morgan on Friday, October 28, 2011, and the resulting benefits of that decision, provides substantial probative evidence of an intent to fraudulently misuse customer property in order to satisfy the obligations of the firm. Proving Fraud: Oblique Intent and Badges of Fraud As the MF Global bankruptcy has demonstrated, proving intent to commit fraud is a daunting task. The Corzine defense of a lack of intent surrounding transfers from the customer segregated account, relying on ignorance or incompetence, is an effective strategy. This defense has been echoed by every member of the C-suite who has given 2

testimony before Congress. No doubt, a smoking gun of an MF Global executive commanding the misuse of customer funds may never be found. However, such overt evidence is not necessary. Edith OBriens now-famous e-mail, combined with evidence that MF Global made a conscious decision to alter its standard practice and to disregard customers requests, constitute sufficient badges of fraud to help prosecutors demonstrate that MF Global knowingly, intentionally, and fraudulently used customer funds in order to pay its proprietary obligations. Courts have developed several badges of fraud as tests for circumstantial evidence of fraud in transactions. One example, found in section 4(b) of the Uniform Fraudulent Transfer Act includes 11 common badges of fraud. All or parts of this Act have been adopted by most US jurisdictions1. Enough badges of fraud can be compelling proof of an actual fraud.2 Based on the circumstantial evidence presented by these badges of fraud, a court may make a finding of actual intent.3 That evidence which proves such intent gives rise to several civil and criminal causes of action in various jurisdictions. MF Globals actions surrounding transfers out of its customer segregated account clearly display the following badges of fraud. BADGE OF FRAUD: Deviations from the Normal Course of Business The first badge of fraud displayed by MF Global is a deviation from usual methods or the normal course of business. In the days leading up to the MFG bankruptcy, requests for wire transfers from customers were converted to checks and sent by US mail. No notice was given to the customer. Checks also experienced significant delay in reaching their owners. Of course, virtually all of these checks bounced. In my experience, both as a former employee and guaranteed introducing broker of MF Global, a conversion of a valid wire transfer request to a check never happened. We believe that the decision to change this standard business practice would have to come from the C-Suite. The outgoing checks were signed by Ms. Christy Vavra and Ms. Edith OBrien (see exhibit D for the check obtained by the CCC), the two most senior members of the Treasury Operations Group of MF Global, Inc. As a result of testimony before the Oversight and Investigations Subcommittee of the House of Representatives Committee on Financial Services (House O&I Subcommittee) last week, we now know that Jon Corzine instructed Ms. OBrien to transfer $200 million from the customer segregated account to an MF Global account at JPMorgan in London. Therefore, at a minimum, Ms. OBrien would have been aware that customer requests for wires were being converted to checks and large transfers were leaving the segregated account for MF Globals benefit. Therefore, at least Ms. OBrien knew or should have known that customer funds were likely being used by the firm. Furthermore, Ms. OBrien knew or should have known that the CME spot auditcompleted only the day prior to Mr. Corzine tendering this transfer requestindicated that MF Global had $117 million in excess segregation. Additionally, the CFO of MF Global Inc. (Ms. Christine Serwinski) testified on March 28, 2012 that the fact that the instruction to move funds to JPMorgan came from Mr. Corzine was extraordinarily unusualanother example of deviation from the normal course of business.

1 2

43 States and the District of Columbia, http://uniformlaws.org/LegislativeFactSheet.aspx?title=Fraudulent%20Transfer%20Act st See Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254-55 (1 Cir. 1991). 3 th See Robertson v. Dennis (In re Dennis), 330 F.3d 696 (5 Cir. 2003).

BADGE OF FRAUD: An Attempt to Keep the Transfer Secret4 As a result of testimony before both the House O&I Subcommittee and the Senate Committee on Agriculture, Nutrition and Forestry, we know that CME Group sent a notice to MF Globals Finance and Treasury Operations Groups in Chicago on October 27, 2011 stating that any transfer would need to be approved by CME Group. No evidence exists of which we are aware that anyone at MF GIobal requested approval from CME Group for the $200 million transfer to JPMorgan. This demonstrates MF Global intentionally concealed this transfer from regulators as long as they could. BADGE OF FRAUD: Existence of a Special Relationship Between Debtor and Transferee JPMorgan was MF Globals largest creditor. They were also a custodian of some of MF Globals segregated funds. JPMorgan provided MF Global with billions of dollars in revolving lines of credit, as well as numerous bank accounts in several countries. Reports in the media, which have been confirmed by a spokesperson from JP Morgan (http://www.reuters.com/article/2012/01/04/us-mfglobal-goldman-idUSTRE80301V20120104), indicate that MF Global sold hundreds of millions of dollars in securities to Goldman Sachs that were cleared through JPMorgan on October 27, 2011. JPMorgan did not immediately tender the proceeds of this transaction to MF Global. Additionally, MF Global had a $175 million overdraft in an account held by JPMorgan in the UK. A memo from the House O&I Subcommittee staff on their most recent hearing references an email from MF Global Holdings, Inc. Treasurer, Vinay Mahajan, stated that JPMorgan was holding up vital business operations in the US. He went on to add that the overdrawn account in the UK must be fully funded ASAP. As MF Global was deeply indebted to JPMorgan, waiting on hundreds of millions of their own assets to clear JPMorgan and JPMorgan was holding up vital business operations of MF Global, a clear special relationship between the debtor (MF Global) and the transferee (JPMorgan) exists. BADGE OF FRAUD: The Debtor Was Insolvent or Became Insolvent Shortly After the Transfer Since JPMorgan was holding up asset transfers over and above the overdrawn account in London, as well as the existence of a deficit in customer segregated assets, MF Global Inc. was insolvent on Friday October 28, 2011. The firms parent company filed for Chapter 11 protection on Monday, October 31, 2011. MF Global, Inc. entered into a SIPA Liquidation Proceeding as well on October 31st and revealed a shortfall in customer funds estimated at $1.6 billion. The debtor was insolvent before, during and after both the issuance of Mr. Kaplans check and the transfer of funds to cover the overdraft in their London JP Morgan account. BADGE OF FRAUD: The Cumulative Effect of a Series of Transactions After the Onset of Debtors Financial Difficulties MF Global stood to benefit tremendously from slowing customer redemptions. It bolstered the price which they could command from a buyer of their futures business. In the hours immediately preceding their Chapter 11 filing, MF Global was very close to a deal to sell their FCM accounts to Interactive Brokers. Slowing redemptions through checks not only would raise the sale price, it would hide the hole in segregated accounts, which ultimately killed the deal. By issuing checks, it effectively allowed MF Global to take a short term loan from customer property to maintain firm liquidity. Testimony before the Senate Committee on Agriculture, Nutrition and Forestry revealed that the Board of Directors of MF Global Holdings, Inc. commissioned a study on liquidity stresses that would be applied to the firm as the market
4 st

Groman v. Watman (In re Watman), 301 F.3d 3 (1 Cir. 2002).

reacted to its second quarter earnings. This plan has become known as the break-the-glass plan (review the plan: http://goo.gl/w47sa). It was composed by the members of Finance, Treasury and Risk Operations Groups from MF Global, Inc., including their CFO Henry Steenkamp. Commissioned in August 2011 and completed in mid-October 2011, the plan detailed several scenarios in which business would be affected by revelations in their second quarter earnings (slide 2). In only one of those scenariosthe highly improbable event that investors, ratings agencies and lenders had no response to their miserable earnings report and over-leveraged exposure to the European sovereign debt crisiswould business as usual be possible. In each of the other scenarios, some type of contingency plan would be required to prevent the insolvency of the business. MF Global believed that it had sufficient liquidity to manage through one month under a severe stress event (slide 3). Of course, they did not even last one week. The plan indicates that they were very concerned about client redemptions and had contingency plans to mitigate them. One of those was to communicate to key clients about safety of their excess and margin balances (slide 10). Also on slide 10, it is clear that MF Global was not concerned with mid market and retail client redemptions (like Mr. Kaplans account) until after the first week. The slide notes that these redemptions would be orderly in the T8+T30 date range, which we assume means after the first week and through the first month of the crisis. It follows from these facts that MF Global did not anticipate the amount of redemptions they received from all customers. Clearly, they needed a way to slow the drain on segregated funds and the wire to check conversion was the means to do that. In his testimony before the House O&I Subcommittee, Mr. Steenkamp indicated that the final days were not unlike a run on the bank. We have repeatedly heard this metaphor to describe the environment in which MF Global found itself in the final week of October. This analogy is inadequate, as customer money at an FCM should be in the segregated account at all times, as CFTC Chairman Gensler testified before the Senate Banking Committee. There is nothing the firm should have to do to make these assets available for transfer or payment to their owners. If the segregated customer account is whole and truly segregated, there is no reason to slow a run on this account from customers. All of the assets should have been there. Segregated accounts at FCMs arent exactly analogous to bank accounts, where a run on the bank can exceed reserve requirements that the bank must hold to satisfy customer withdrawals. Evidence of Conversion from Wire Transfers to Checks Please note: redacted copies of this evidence are attached to this memorandum for public use. Original copies will be made available only to law enforcement agencies. One customer who requested a wire transfer and received a check was Steven Kaplan. Mr. Kaplan was a customer of my firm, BTR Trading Group, which at the time was a guaranteed introducing broker of MF Global. Normally, Mr. Kaplan would have requested a redemption from his account through the offices of BTR Trading Group. Given the severity of the news on MF Global, Mr. Kaplan requested the closure of his account and the wire transfer of his funds directly from MF Global. On October 27, 2011 at 11:35 AM Eastern Standard Time, Mr. Kaplans request was transmitted via fax to MF Globals Chicago office and copied via US mail to its New York offices. Please see the request as faxed in Exhibit A in the appendix to this Memorandum. Mr. Kaplans request for a wire transfer was valid. It contained both the routing and account number of a checking account in his name. It was transmitted to MF Global almost 90 minutes prior to the daily 5

cutoff for same day wire transfer requests. MF Global had accepted wire transfers from Mr. Kaplans bank account in the past, including the initial funding of this account (please see Mr. Kaplans original wire to fund his account in Exhibit B). On October 28, 2011, Mr. Kaplan received his daily statement from MF Global. This statement indicated that check number 388057 was issued from his account (please see Exhibit C). This check debited $25,853.46 from his MF Global account, leaving $0.00 in his US segregated 1.25 balance. As a result, when MF Global ran its segregation requirement for October 28, 2011, they would have been required to keep $25,853.46 less in segregation. On November 4, 2011, Mr. Kaplan received a check for the balance of his MF Global account (Exhibit D, Mr. Kaplans check from MF Global and deposit slip). The check was issued on Friday, October 28, 2011, and was signed by Ms. Christy Vavra and Ms. Edith OBrien of the Treasury Operations Group in Chicago. Mr. Kaplan deposited the check and it was returned with insufficient funds on November 9, 2011, as the SIPA Trustee had already frozen MF Globals bank accounts (see Exhibit E). The CCC is in the process of compiling additional evidence from customers like Mr. Kaplan who had wire transfers converted to checks. We have heard reports that customers submitted wires before the noon Central Standard Time wire cutoff only to have them delayed beyond the wire deadline. In those cases, MF Global employees recommended issuing checks and sending them via overnight delivery in place of wiring funds on Monday, October 31, 2011. We have also spoken with introducing brokers of MF Global who may have evidence of millions of dollars of requests for wires that were converted to checks. We will forward this evidence as soon as we are able to obtain it.

Conclusion The decision to stop sending wires to customers from the segregated accounts demonstrates that MF Global was concerned with preserving liquidity. This may have been done to bolster the prospects of selling the firm to Interactive Brokers or because they were concerned that the draining of this account would reveal that customer funds had already been commingled to stave off MF Globals bankruptcy. Regardless, this deviationwhich allowed MF Global to use customer funds during a short window of time while representing lower customer segregated fund requirements to its regulatorsdemonstrates in no uncertain terms that MF Global employees knew or should have known that they were using customer funds as part of the October 28th payment to JPMorgan. Further, as a result of the CME spot audit of October 27th, many MF Global executives knew or should have known that they did not have enough capital in excess segregation to make their October 28th transfer to JPMorgan. Anyone who knew that wires were being converted to checks or who was aware of the CME spot audit knew that customer funds were at risk. Ms. OBrien and Ms. Vavra clearly knew this, as they were involved in the conversion of Mr. Kaplans transfer, the October 28th payment to JPMorgan and should have been aware of the results of the CME spot audit. Particular attention should be paid to MF Globals segregation calculation and the reconciliation of its segregation reports. This will demonstrate if they utilized the delay in checks being cashed by customers to artificially reduce its segregation requirement. In testimony before the House O&I Subcommittee, MF Global, Inc. CFO Ms. Christine Serwinski referred to reconciliation issues with respect to the segregation reports being compiled by the Treasury Operations Group in Chicago. If these reconciliation problems were because employees were noticing that checks were not being accounted for properly in the segregation report, it would confirm that someone tried to use the check float (i.e., an intentional check kiting scheme) to support MF Globals business operations during late October 2011. 6

We hope that this aids in the ongoing investigation. Various anonymously sourced news items have indicated that s sources close to the investigation are not confident that a crime was committed by MF Global. In light of the above onfident facts, we believe many crimes were committed and must be immediately investigated so that thousands of farmers, ranchers and small investors are made whole from this unprecedented theft of customer segregated funds. unprecedented funds Regards,

John L. Roe Commodity Customer Coalition 125 South Wacker Drive, STE 300 Chicago, IL 60606 312-933-6564 jroe@btrtrading.com

ExhibitA CopyofMr.Kaplan'sWireTransferRequest

ExhibitB CopyofMr.Kaplan'sAccountFundingWire TransferRequest

 ExhibitC CopyofMr.Kaplan'sDailyAccountStatement forhisMFGlobalAccountforOctober28,2011

ExhibitD CopyoftheCheckfortheProceedsofMr. Kaplan'sMFGlobalAccount&HisDepositSlip

ExhibitE CopyoftheReturnedCheck