On January 3, 2012, a copy of the missing audit reappeared under a different index number (the original, as of the time of writing, remains here). While it seems the replacement simply corrects what is an obviously wrong stamped receipt date on the face page of the original, there are a few curious annotations that we will explore. More importantly, after researching the SEC's public database for scanned paper filings, which includes private offering Form D's, exchange filings, firm advertising literature, and other filing types (including broker dealer audits themselves), we are left with more questions than answers.
It seems that sloppy scanning and filing standards combined with preferential treatment for certain large brokers has substantially reduced the value of this part of the SEC's public filing system. Since this is often the sole repository for disclosures about private companies, including broker dealers that do not have public holding companies, investors are being deprived of timely and critical information. Even for those broker dealers that do have public holding companies, such as MF Global Inc., the financial notes of the broker audits disclose different, and oftentimes, more substantial information. Since it is now apparent that Louis Freeh, the former FBI Director cum MF Global Holdings trustee, is running cover for MF's largest creditors, not the least of which is JP Morgan Chase, it is all the more critical that the integrity of the SEC's public filing system be scrutinized. [Update: according to Mr. Freeh's Statement of Disinterestedness filed with the bankruptcy Court here, MF Global Inc.'s auditor, PricewaterhouseCoopers, provides accounting services to him and his firm.]
How many MF Global customers would liked to have known that the broker unit was being left hanging out to dry on Corzine's risky trades? Yet the SEC did not post the broker's audit until mid-September, though the amended receipt date is now acknowledged to be May 31, 2011. It was just a few weeks later in early October 2011, that certain well-informed customers, such as Koch Industries, commenced the run on the broker, after which ordinary customers got the run around with botched wire transfers and bounced checks.
While this article primarily explores broker dealer filings, which are only a small subset of all the paper filings that are scanned into the SEC's public EDGAR database, a look into all of 2011's scanned paper filings reveals that only 45% of the sequentially indexed PDF files that were scanned from hard copies by the SEC remain public (7,949 out of 17,718). [The SEC has kindly left the source code to its PDF scrubbing program here, also archived here on Scribd.]
While there might be an innocuous explanation for the bulk of these deleted filings (notwithstanding the reinstated MF Global Inc. audit), there remains no explanation for several high profile broker audits that were simply erased, never to be seen again, as we previously reported here. These would be audited financial filings or amendments to such filings of JP Morgan Securities, Goldman Sachs & Co., Banc of America Securities (now owned by BNP Paribas), and a more recent find since our previous article, Newedge USA LLC (circa 2005 when it was Fimat USA Inc.). In addition, we reported that these deleted filings occurred during suspicious, potentially game-changing periods, such as when Goldman Sachs changed its fiscal year end, or, for instance, just after JP Morgan Securities became what was once the infamous Bear Stearns & Co. broker.
Though by no means an exhaustive study, in a random sampling of 30 smaller broker filings with the SEC, we found no instances of missing PDF filings of their audits (or amendments thereto). Further, and very curiously, the auditor of three of the aforementioned companies (JPM, Goldman and BoA) is PricewaterhouseCoopers, the very auditor of MF Global. Thus, an obvious question is: are there special procedures large brokers and their auditors are using to withhold from the public potentially damaging information?
Aside from the more isolated cases of deleted filings, there are many inconsistencies from year to year, as to the actual content of the public record of broker dealer filings. [All of MF Global Inc.'s broker filings may be found here (click on the "X-17A-5" links, then "scanned.pdf" in the page that follows).] For instance, in MF Global Inc's 2011 report (as of the year ended March 31, 2011), there is a cover page, an oath by Ms. Christine Serwinski, an auditor's report by PwC, and a statement of financial condition (balance sheet), followed by financial notes.
In the 2010 filing one year earlier, there appears the cover page, the oath, the auditor's report, balance sheet, but no financial notes (wouldn't it be interesting to see those detailed notes, inasmuch as Corzine had just taken the helm?). Instead, what follows the 2010 balance sheet is a report by PwC on MF Global Inc.'s internal controls. In addition, toward the bottom of page 2 of the PDF, a box is checked, indicating that a "Report describing any material inadequacies found to exist or found to have existed since the date of the previous audit" should be included, yet it is not.
This report, along with the internal controls statement, and others, are actually among an extended set of documents required by SEC and CFTC rules to be filed contemporaneously. These documents are not required to be made public by the SEC if the broker follows certain procedures.
From the SEC's website:
Rule 17a-5(e)(3) provides that the audited financial statements “shall be public, except that, if the Statement of Financial Condition . . . is bound separately from the balance of the annual audited financial statements . . . the balance of the annual audited financial statements shall be deemed confidential, except that they shall be available for official use . . .”In order to receive confidential treatment for the financial statements other than the Statement of Financial Condition in accordance with Rule 17a-5(e)(3), the broker-dealer should do the following:Bind the Statement of Financial Condition separately from the balance of the annual audited financial statements or place it in a separate package. Complete and attach an “Annual Audited Report, Form X-17A-5, Part III, Facing Page” to the Statement of Financial Condition. Mark the Facing Page “Public.”Bind the balance of the annual audited financial statements separately or place them in a separate package. Complete and attach an “Annual Audited Report, Form X-17A-5, Part III, Facing Page” to these statements. Mark the Facing Page “Confidential Treatment Requested.”The public and non-public portions of the financial statements must be clearly segregated and the Facing Page must be appropriately marked. For example, the Facing Page attached to the Statement of Financial Condition should not be marked “Confidential.” Further, if the Statement of Financial Condition is not bound separately or placed in a separate package, then, in accordance with Rule 17a-5(e)(3), none of the statements will be accorded confidential treatment.Rule 17a-5(e)(3) does not require the submission of a letter requesting confidential treatment. It is not necessary to mark the mailing envelope “Confidential.”
Thus, it appears the SEC has provided a little-known, yet easy way for broker dealers to keep a substantial portion of their annual filings non-public, without having to file a confidentiality request. Several smaller brokers we contacted were not aware of this.
If the internal controls report of MF Global Inc. made it into its 2010 public filing, yet the financial notes did not, was it simply a case of improper separation of the public and private bound filings on the part of the filer? If so, why is the SEC not enforcing substantive error checking, inasmuch as we have found this phenomenon to be quite common for broker filings?
Or, is the SEC selectively determining itself which portions will be public and private, and committing errors (intentional or not) in the process? Recalling the deleted filings of JPM, Goldman, BoA and others, is it possible that what was supposed to be confidential was inadvertently made public, and upon petition from the filer (or its auditor), the entire public filing was simply deleted?
As we noted prior, it is likely a combination of factors that has led to the poor state of the SEC's public broker dealer filings: sloppy and delayed scanning, with special consideration given from time to time to large firms. Procedures regarding record handling at the SEC can also change with the SEC's Commissioner, as was recently discovered as part of the SEC's National Archives scandal, in which NARA learned the SEC was potentially illegally destroying its own records.
In light of these records problems at the SEC, our questions are all the more relevant--as is the previous point of timeliness of record posting. This gets back to the MF Global Inc. filing that began this entire line of inquiry. Here is the original cover page for the 2011 filing:
The stamped filing date is September 2, 2010, which should be September 2, 2011. The handwritten "9/2" at the bottom also confirms the month and day.
Here is the replacement filing:
Rather than change the filing date to September 2, 2011, it is now reflected as May 31, 2011, a full three months prior. Our research indicates it takes on average 10 business days, or two weeks, for the "scanned.pdf" file to appear after initial processing, so this critical report first indexed on September 2, was likely not available on EDGAR until September 16, or thereabouts--well after FINRA had already required a regulatory capital increase of the firm.
The fact that the stamp says "REGISTRATIONS BRANCH" is also a deviation from the filing stamp that broker filings usually receive. Here is MF Global Inc.'s 2010 report, which contains the typical diamond shaped filing stamp (truncated at the top):
Finally, we hinted at the top that there are a few curious annotations in the replacement MF Global Inc. filing. Though the typeset content of both reports appears identical, compared to the original filing, the replacement filing has text that is slightly smaller and more blurred. Also, the right margin is wider, which all suggests it is a photocopy. Thus, we are left to wonder whose hands this copy passed through before being scanned, and just who was interested in the first paragraph of the financial notes, which specifically addresses the definitions of the various MF Global entities:
And further, why would this person have scribbled below the sentence that specifically addresses the European repo-to-maturity trades that were transacted with an affiliate of the broker unit?
Here is the original:
Interestingly, we included only two excerpts from the MF Global Inc. financial notes in our November 9 article, and the sentence above the handwritten scribble constitutes one, the other being this:
These annotations, combined with the three month delay in scanning, along with the atypical filing stamp all suggest that the 2011 MF Global Inc. report has been receiving special attention at the SEC. Yet, the public record reveals very little of this file tampering, and would likely have gone unnoticed had MF Global not been so high profile. Indeed, the deleted filings of JP Morgan Securities, Goldman Sachs & Co., Banc of America and Newedge USA [the old Fimat USA] have gone unnoticed for years.
While the fully electronic filings constitute the bulk of the SEC's public EDGAR database and are the primary focus of investor disclosures, evidence suggests that the SEC maintains its scanned hard copy filings at a much lower standard. The current system is ripe for not only inaccuracies and inconsistencies, but outright abuse by the large brokers and their auditors.