MF Global, Securities, and Commodities Firms' Industry Standard Fiduciary Duty to Safeguard Clients' Funds

It truly is hard to believe that in these days and times that I can be reviewing an investment firm’s securities account’s transaction documents for a California municipality and find a sizable funds transfer out of the municipality’s investment account to a title company in Florida, and learn upon further investigation that the transfer was for the purpose of the broker buying a condominium for his personal use. Not surprisingly, subsequent illegal transfers were found for the purchase of several luxury cars, and of course – you guessed it: a private plane. (I actually was a little relieved to see the plane purchase

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because I was wondering how the poor broker was going to get from his office in California to his condo in Florida.)

As many sets of eyes as are supposed to be overseeing these types of transactions, it is truly remarkable that these types of frauds and thefts can happen. Yet they do.

To make sure that we all understand this, let’s state the nationwide industry standard practice and procedure, and what should be innate common knowledge for anyone in any aspect of the financial services business, regarding an investment company's fiduciary duty toward safeguarding clients' funds: You don’t commingle client money with the investment management company’s money. (Please note: For this article, I will use the generic term “investment management company” to describe any firm that holds funds received from clients and invests those funds for the client’s benefit. Therefore, it could be a stock broker, investment banker, commodities broker, hedge fund, bank wealth management department, or any similar entity.)

The only way that client money should reach the general ledger operating account of an investment management company is when the client pays a fee, commission, etc., to the company, generally for a service rendered.

As glaring as some examples of fraud are – such as those cited supra, some are not always so easy to detect. For example:

● When you are examining funds transfers out of an investor’s account at one institution and into an account at another financial institution, the transfer documents you are viewing may or may not actually specify the ownership of the receiving account. Accordingly, the account receiving the funds may or may not belong to the party that owns the account the funds are coming out of. The funds might be going into an account owned by the investment management company, a rogue employee of the investment management company, or some other entity.
● I have seen numerous funds wire transfers where the receiving account number is “000000” which makes no sense. This warrants further investigation.
● Sub-accounts are sometimes used for fraudulent purposes. There are legitimate uses for sub-accounts, but the problem comes in when they are used to obscure an owner’s name.
● If a transfer out of a client’s account is going into an account name that appears to bear no logical relationship to the client, then you should drill down until the details are learned.
● Any transfers between unrelated client accounts warrant further examination.
● Some experience and competence in analyzing and deciphering confusing bank wire transfer records is always very helpful in these types of analyses.
● Sometimes, a debit from an account will not match up in amount with the credit to the receiving account. This can mean that the difference went to an illegal account not belonging to the client, and the credit ticket or record has been destroyed.
● Missing account statements are a red flag since you can’t make your way from point A to Point B without seeing the intervening steps.
● Accounts that routinely go negative are also a red flag.

Keep these basic tenets and guidelines in mind when examining potentially fraudulent situations, and engage highly experienced and competent assistance in analyzing account statements, transactions records, wire transfer records, and accounting records.

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ABOUT THE AUTHOR: Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ. Clients have included over 75 banks, and governmental clients such as the IRS, FDIC, USAID. Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental financial regulator. B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School. Called on by clients in 30 countries for work involving 61 countries. Widely published, often called on by the media.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.