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Net Net: Promoting innovation and managing change

Rep. Grimm: Feds Will Come Close to Finding All the MF Money But Not Recover Every Penny


Jon Corzine will be making his third trip to Capitol Hill Thursday to testify this time before the House Oversight and Investigations Subcommittee. While the cameras are rolling on Corzine in the hot seat a much more important query is going on behind the scenes:

investigators trying to find the missing customer funds.

To get some inside perspective I spoke with one of the subcommittee members, Congressman Michael Grimm (R-New York).

What makes Grimm stand out among his congressional colleagues is the fact he was a FBI Special Agent and was a member of the Financial Fraud Squad. He went undercover as a hedge fund manager during "Operation Wooden Nickel," which is considered one of the most successful White Collar undercover investigations in FBI History.  From stock manipulation, currency scams to money laundering, Grimm has tracked down evidence against more than 50 individuals committing such fraud.

LL: Based on your experience, what kind of investigation are the Feds doing in trying to track down this money?

Rep. Grimm: This type of investigation is probably 80 percent forensic accounting. They will literally break down these segregated accounts.

If I was an agent on the case, I would look at the secured debtors.

Why? Because when they heard MF global was in trouble they went to take their collateral. I would also look at the tickets. Obviously there was probably a frenzy of tickets made and MF probably had some unhedged positions that cost some money because they could not trade out of it.

This is why the agent hires so many accounts and lawyers. There are four programs at the FBI: Accounting, Law, Language (such as Arabic) and General Program. The FBI will bring in the accountants and might hire a forensic accounting team for the investigation and the US attorney's office would work closely with them. The group of them will be back tracking every single trade. It's tedious.  We all know MF was heavily involved in sovereign European debt and we also know when the collateral was being downgraded they were getting margin calls. Every wire transfer will be looked into.

LL: Are you confident they will be able to find the money?

Rep. Grimm: They will come close to finding every penny, some might be lost because of the market. But while they will come close to finding the money they might not be able to recover every penny. The bonds have some value. A receiver will have to come in and make those types of decisions. When we took down a company in one of my cases, the assets were liquidated and the victims got a percentage.

LL: How long will it take investigators to track down this money?

Rep. Grimm: It depends on the amount of trading in the last several weeks. It could be thousands and thousands of trades and transfers. A lot of it depends also if they tried to cover their tracks so it wouldn't be so obvious they were taking segregated funds.  Over the next six months, the FBI will have a good handle on the accounting and where the money was taken and where it is now.

LL: Jon Corzine has been testifying on the Hill. His testimony can be used against him.

Rep. Grimm: In a case like Jon Corzine, I would say I don't think he went into this with intent to defraud or damage his customers. I'm analyzing him as an agent. He was a CEO who was not performing like a traditional CEO. He was out of scope- he was pushing a specific strategy on traders.  I think he was looking to utilize his relationships with the federal government to get some inside track on what would happen in Europe and make a big bet on that information.

Anyone he would garner information from either a Treasury Secretary or whomever, would be used in his hedging position that Europe would not default. Most CEOs have enough experience to know that no one outsmarts the market-- no matter how much info you have. I think he went into panic mode. Someone told him we have margin calls what do we do? Use customer funds.

LL: But in the end that would be Jon Corzine's decision.

Rep. Grimm: Absolutely. And that's why the FBI is so important to this investigation. Finding the money will be a traditional forensic investigation- but what the real role and expertise for the FBI will be the interviewing of the employees. Separating them and doing integration techniques to find out who was calling the shots, who knew what and who participated in the transfers.

I guarantee the FBI investigation will uncover who was doing what. They will be able to see inconsistencies. There is US Code 1001, which is if you knowingly lie to a federal agent you could face punishment of up to at least one year in jail.

I used it all the time when I was an agent. We would bring in an employee such as the Chief Risk Officer and we would ask them questions we already knew the answers to and if they lied on those questions you could charge them with US Code 1001 which would put pressure on them to tell the truth.

LL: What would be considered "material information?

Rep. Grimm: Material information is a broad term and basically that decision comes down to the US attorney and FBI agent. If the material is deemed important to a case then it would be considered as material.

Material evidence does not have to be a smoking gun.

LL: I recently spoke with former Council Economic Adviser Matthew Slaughter who says instead of the ten agencies being a systemic regulator we should just have one. Do you think this portion of Dodd-Frank should be changed?

Rep. Grimm: I have been critical since my first day in Washington on Dodd-Frank. I believe my congressional colleagues had good intentions with Dodd-Frank, but the scope is so vast it will work against itself.

And you hit on one part of it. You have too many cooks in the kitchen which automatically leads to a lack of accountability. The worst part of Dodd-Frank was to try to eliminate systemic risk and I would say to you Dodd-Frank will CREATE systemic risk. A lot of the smaller banks who are trying to keep up with the regulations will go under and the big banks will buy them up making these big banks even bigger creating the systemic risk Congress was trying to avoid. We are working in committees now to dial back Dodd-Frank. This is the 800 pound gorilla on steroids and it will have a tremendous amount of unintended consequences.

LL: Speaking of regulation, are you afraid the pendulum will swing again to over regulation. Isn't the problem enforcing this regulation?

Rep. Grimm: They can try and swing it further. This is not a regulatory problem because if Corzine did in fact decide to break the law and co-mingle these funds and to use those funds to cover a position he should not have taken, we already have many rules and regulations against that.

You could have a hundred thousand rules on the books and if someone wants to break those rules they will. More regulation is not the answer. Smart, concise rules and enforcement of those rules is what's needed. A perfect example of this was Bernie Madoff. It was an outright fraud. It's a question of proper enforcement and if the agencies have what they need to enforce them.

Regulating is a backward approach. The big loser in this is the US industry not the customers we are trying to protect. As a result of all this regulation, the consumers will have less access to their product and pay more. We are going to be at a competitive disadvantage to Asia and Europe.

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."