Sentinal Ruling: You Have No Legal Right To Your Money.

Jon Corzine stole $1.6 billion from segregated client accounts during the collapse of MF Global, and now he has a legal precedent to officially support him thanks to the August 9th  Sentinel Management Group decision.

This egregious ruling not only sets precedence for futures brokerages, it sets precedence for every depository institution.   In other words, your funds--customer funds--are now the legal property of the mega-banks. That's right. The banksters can legally use your money to fund its casino transactions with legal impunity.  Not that it makes much difference in an environment where the rich and powerful are above the law.

But, for what its worth, this 7th circuit court decision--that puts Bank of New York Mellon ahead of former customers of Sentinel in the line of those seeking the return of money lost--punishes innocent account holders everywhere. Because, to be sure, the appeals court that affirmed an earlier district court ruling that the bank had a "secured position" on a $312 million loan it gave to Sentinel, which turned out to have been secured by customer money, did so in order that its ruling will be applied in perpetuity.

“Basically, there is a new 7th Circuit opinion saying that there is no reason to impose a constructive trust on a lender's takings of customers' funds from client commodity firms that were used (inappropriately) to secure the firms' borrowings, as long as the lender can say that it did not know WITH CERTAINTY that customers' funds were being repledged. Negligence and misappropriation (vs. knowing criminal intent) are now a sufficient excuse for letting the lender keep the money and go to the head of the line for distributions in bankruptcies of the client commodity firms. Spread the word.” -- Walker Todd of AIER, former legal counsel, Federal Reserve Banks of New York and Cleveland

Links:

Sentinel indictments: Feds say 2 reaped $500 million in fraud

"Federal authorities announced Friday the indictment of Eric Bloom and Charles Mosley, the former chief executive and head trader, respectively, of bankrupt Sentinel Management Group Inc., on charges of defrauding some 70 customers of more than $500 million.

The case, described as one of the largest criminal financial fraud cases prosecuted in federal court in Chicago, stems from the sudden August 2007 collapse of Sentinel, a long-standing, well-connected money-management firm based in Northbrook that allegedly misled clients by exposing their accounts to a portfolio of highly risky derivatives.

$1.6 Billion in Missing MF Global Funds Traced

Email Ties Corzine to Missing Funds

Read more...

The Bankruptcy Law Changes of 2005, Rehypothecation, MF Global, and Crisis.

Did you know that the changes made to the bankruptcy laws reordered the subordination of creditors? It's true. Bondholders used to be the most senior of creditors in a bankruptcy. Now, derivative holders are the most senior. That means derivative counterparties gained a strong bankruptcy privilege, according to Prof. Dr. Enrico Perotti, professor of international finance at Amsterdam Business School.

The special bankruptcy treatment extended to mortgage-backed repos and derivative transactions in 2005 played a crucial role in the financial crisis of 2008. Because they were the two main sources of systemic risk in the financial crisis of 2008.

Professor Perotti outlined how over the 2002-2005 period, bankruptcy laws were changed in all EU countries and the US, and secured financial credit (repos) and derivative counterparties gained a strong bankruptcy privilege, amounting to de facto “superiority”, as counterparties could gain immediate repossession of collateral in default (so-called “safe harbor claims”, as opposed to having to accept the “automatic stay” which protects the debtor in Chapter 11 for example)..

With that in mind, consider that banks/ securities brokerage, rehypothecate assets, including 401k, IRA, and even general savings accounts allow the rehypothecation of their assets. Check the fine print of your account agreement.

What is rehypothecation?

It is the practice that allows collateral posted by, let's say, a hedge fund to its prime broker to be used again as collateral by that prime broker for its own funding. In other words, if a firm rehypothecates its assets with its client's assets - co-mingling client funds - and then uses these funds to buy derivatives, the derivative holder can lay claim to the brokerage assets if that firm declares bankruptcy. If this is allowed to continue, it will set a precedent that will enable creditor firms to raid and steal your assets.

This is part of the reason JP Morgan was able to seize MF Global's assets the moment they claimed bankruptcy.

So, it's possible that the next time a firm fails, whomever is the counterparty on the bankrupt organization's credit default swap, will have precedent to step in and steal client money to settle their claims.

For a  less alarmist view which goes into great detail, see:

Revisiting Rehypothecation: JP Morgan Markets Its Latest Doomsday Machine (or Why Repo May Blow Up the Financial System Again)

Read more...