The case centering on the collapse of the hedge fund,
Philadelphia Alternative Asset Management (Paam), has concluded
after MF Global and Thomas Gilmartin were ordered to pay over
$77m to settle actions by Commodity Futures Trading Commission
(CFTC) and the hedge funds receiver ad litem.
Under the CFTCs sanctions MF Global and Gilmartin were
ordered pay civil penalties of $2m and $250,000 respectively.
The Commission also ordered that Gilmartin never apply for
registration or claim exemption from registration.
The regulatory penalty follows the approval from the US
District Court for the Eastern District of Pennsylvania on
December 26 of a settlement by the receiver ad litem, MF Global
and Gilmartin. The order requires MF Global and Gilmartin to
pay a total of $75m, consisting of $69m to be paid to the
receivers estate which manages penalised investors and
$6m to reimburse the estate for the litigation costs of
pursuing the claims against MF Global and Gilmartin.
A spokesperson for the brokerage said that the losses would be
covered by MF Global insurers, but stressed that the FCM was
happy to have the case behind it.
The punishment will see the end of the bitter legal case
following the collapse of Paam in June 2005. In the aftermath,
the court-appointed receiver for the fund has alleged that
$179m in losses were hidden in a secret account at MF
At the centre of this legal battle was Paul Eustace, manager of
the hedge fund prior to its collapse and Gimartin, the
executive at MF Global who handled the hedge funds
The CFTCs order concluded that Eustace opened trading
accounts at MF Global and when the hedge fund began to record
losses, Eustace and Paam concealed mounting, massive trading
losses in an offshore fund trading account at MF Global by
restricting internet access to that account. Eustace and Paam
also backdated execution dates of certain trades executed
through MFG in order to bolster the apparent profitability of
The regulator concluded that MF Global and Gilmartin failed to
diligently supervise the handling of the fund
accounts and that MF Global and Gilmartin failed to respond to
indications of questionable activity by Eustace. In additional,
the regulator found that MF Global failed to follow its
procedures for opening accounts and transfers of trades and
failed to provide sufficient guidance concerning potential
conflicts of interest. According to the order, MF Global also
failed to have sufficient internal controls, policies and
procedures concerning external communications with third
parties and changes to internet access of account information.
MF Global also failed to institute sufficient internal
controls, policies and procedures to detect and deter possible
wrongdoing. Finally, the order also finds that MF Global and
Gilmartin failed to comply with order taking and recordkeeping
MF Global and Gilmartin have recognised that the
Commission and the Courts consider supervision and
recordkeeping to be serious offenses that will have
considerable consequences. In addressing the misconduct, the
Commission recognised the fine work of the Receiver ad litem in
this matter and the defendants payment of $75 million in
settlement, said Gregory Mocek, director of enforcement
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