Baucus Takes Regulators to Task after More Farmers Fall Victim to MF Global-Type Scandal
Senator Tells Commodity Futures Regulator: Youre the Cop on the Beat and You Need to Do Your Job
Posted: Wednesday, August 1, 2012
Posted: Wednesday, August 1, 2012
(Washington, D.C.) - Montana's senior U.S. Senator Max Baucus took regulators from the Commodities Futures Trading Commission (CFTC) to task today for failing to properly investigate all futures commission merchants following the MF Global Scandal in late 2011.
"You're the cop on the beat. You've got to do your job, and I don't think you have been," Baucus told Commissioners Jill Sommers and Gary Gensler at a hearing before the Senate Agriculture Committee.
In July 2012, Iowa based futures broker, Peregrine Financial Group, filed for chapter 7 bankruptcy. It was discovered that more than $200 million in customer money that should have been kept in separate, segregated accounts is missing. This follows a much larger scandal at global brokerage firm MF Global last year, where upwards of $1.6 billion in customer funds went missing.
In December of 2011, Baucus called on Sommers and Gensler - in a letter and an in-person meeting - to fully investigate all futures commission merchants, including Peregrine, and ensure customer accounts were properly segregated. In January 2012, CFTC gave Peregrine Financial a clean bill of health - months before its collapse.
"I asked you if you were looking into all futures commission merchants to make sure there wouldn't be another MF Global, and you told me you were. But, it was all self-certified without an audit, without digging in and looking behind the veil to find out exactly what's going on. You just asked them 'how you doing?' and they said 'oh yeah we are fine' - and of course that isn't enough. You've got to dig down deeper and find out whether or not that's true," Baucus urged.
Baucus also highlighted a May report compiled by an independent agency, Atlas Ratings, that ranked Peregrine near the bottom of all U.S. futures commission merchants using only information made public by the CFTC and other regulators.
"If this outfit can get all this data and reach a conclusion that Peregrine is in rough shape, why can't the CFTC?" Baucus said. "There's something wrong here."
Farmers and ranchers across the country use futures contracts, with firms such as MF Global, to limit their risk in the commodities market. Under normal bankruptcy proceedings, these types of contracts are supposed to be protected by strict segregation rules: customer funds entrusted to futures commission merchants are required to be kept in separate accounts and the futures commission merchant is not allowed to use them for its own purposes.
In the case of MF Global and Peregrine Financial, however, customer funds are missing.
MF Global filed for bankruptcy on October 31, 2011. Upwards of $1.6 billion in customer funds were found to be missing and $869 million in cash accounts belonging to customers was frozen. To date, bankruptcy court has approved $4.685 billion to be distributed to those customers, or 75 percent. Bankruptcy trustee Louis J. Freeh said today that U.S. customers "eventually will be made whole," in testimony submitted to the Senate Agriculture Committee.
The CFTC, SEC, Justice Department, and the bankruptcy trustee are investigating the shortfall and trying to locate the missing funds. Violation of segregation rules, if it occurred, is subject to civil and criminal penalties
Peregrine Financial Group filed for bankruptcy on July 10, 2012. To date, more than $200 million in customer funds are missing. On July 13, 2012, Peregrine's CEO was arrested on charges of lying to federal regulators in connection with a massive fraud and more charges are expected to follow.
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