Well, there’s no doubting the splash Nine Network’s Sunday program made
with its good story on the $150 million fraud on the Commonwealth
Superannuation Fund and JP Morgan Chase by unknown fraudsters.

Sunday’s yarn received good, if grudging play from other papers, with
the Australian Financial Review including evidence from a Senate
estimates Committee hearing last week from a senior official from the
Australian Prudential Regulation Authority who mentioned the case, but
did not reveal any of the players.

There must be some in the AFR now kicking themselves, or rather being
kicked by Editor Glenn Burge, who is wont to act after the event.
Hopefully now the newspapers with their superior resources will crawl
all over the story, rather than ignore it because it was broken on a
despised commercial television program like Sunday.That’s the way with
many journalists these days, if we don’t break it, then it’s not a
story. It’s an attitude particularly strong at Fairfax, where the main
concern remains the paucity of people wanting to walk the redundancy
plank at the Sydney Morning Herald and the Sun Herald.

In fact the SMH ignored the story completely. Talk about being asleep or terminally arrogant.

The SMH finally caught up with the story Tuesday and Chanticleer in the AFR had a good comment piece.
Anyway, here’s another little boost to the story.

The background is that the Federal Police, who didn’t want the story to
go to air according to the Sunday story, are still to arrest anyone in
connection of the fraud.

Do the Federal Police have any idea who initiated the fraud and nearly pulled it off?

And signs are JP Morgan will be in the gun in the US so far as
disclosure is concerned. There has been none, with no mention of the
attempt in any recent filings at the Securities and Exchange Commission
in Washington.

The background to the yarn is that on Christmas Eve last year someone
with an intimate knowledge of the procedures of the $5 billion
Commonwealth Super Scheme, covering around 50,000 public servants,
faxed a request to transfer money from three overseas bank accounts of
the CSS. These were in Greece, Switzerland and Hong Kong. The sum of
$US112 million was mentioned, or around $A150 million.

The request met security checks at the fund’s custodian, JP
Morgan Chase and the transfers were initiated.On Boxing Day, however,
someone stopped the process and blew the whistle.The money was frozen
and is now in the process of being recovered.But the CSS and Morgan say
no money has been lost and that Fund and its members are not out of
pocket.

The fraud is now described as an attempted fraud. But the Morgan Chase
executive in Australia in charge of Investor Services, Laurence Bailey,
says some money is still being recovered.

The fraudsters started the process on Christmas Eve, not only because
of the holiday break, but because Christmas and Boxing Days last year
fell on Thursday and Friday respectively. With the weekend and time
differences, both Morgan and CSS couldn’t have expected to received
confirmation of the transfers, or rather, discovered the full extent of
the fraud until the afternoon/evening of Monday, December 29 at the
earliest.

But because someone was suspicious, either here or overseas Americans
and many Asian and Arab countries do not celebrate Boxing Day and
actually work, the warning bell was rung and the money frozen.

According to sources around $20 million remains to be recovered, but
for both parties to say no funds are outstanding, would indicate that
JP Morgan has made good on the money to the CSS and is recovering the
funds from other banks in the transfer chain.

The Bank of China, whose biggest foreign office is in Hong Kong, has
been a bank mentioned as being involved somewhere in the process.
Now some questions, apart from that of those about the CSS’s procedures, arise.

And by the way APRA, the key regulator apparently has no concerns about
the procedures at the CSS having inspected them in November 2003.

These questions are, what is an Australian Government super fund doing
with bank accounts or monies in bank accounts in Switzerland, Greece
and Hong Kong?

If they were JP Morgan accounts, the question still arises because the CSS had parked large sums of money in each account.

And, the fraudsters had very intimate knowledge of CSS’s procedures,
the location of the accounts and the amounts of money in each of them.
That is an amazingly high level of inside information.It’s the only way
the fraud could have been started and slipped through the checks at
Morgan Chase.

Were they insiders of the CSS or Morgan?

The question of disclosure by JP Morgan Chase is moot. Morgan and CSS
say there was no fraud. only an attempted fraud and the argument is
extended by Morgan apparently arguing internally that frauds on banks
are attempted all the time and there is no point reporting everyone.

But with the Federal Police apparently investigating a fraud, not an attempted fraud, who is fooling whom?
And, if the money left the accounts and started making its way through
the accounts of the various correspondent banks overseas, then that is
a fraud. Recovering the money or paying it back does not erase the
fraudulent act.

In any case, until the money was or was not recovered, the $US112
million became a contingent liability for Morgan Chase, and should have
been noted in the accounts for the financial period that included
December 24-26, 2003.

And, with money still in the process of being recovered by Morgan
Chase, there would seem to be a continuing contingent liability in the
accounts of the US investment bank.

Morgan Chase can argue that they froze the money, but it wasn’t in their accounts and some still remains unrecovered.

A correspondent has sent us this excerpt from a January filing with the SEC in the US
“Litigation reserve and other. During the fourth quarter of 2002,
the Firm established a reserve of $900 million related to costs
anticipated to be incurred in connection with the various private
litigation and regulatory inquiries involving Enron and the other
material legal actions, proceedings and investigations discussed
above. In the second quarter of 2003, the Firm added $100 million to
the reserve related to Enron. Of the $1 billion, $700 million was
allocated to the various cases, proceedings and investigations
associated with Enron. The balance of $300 million was allocated to the
various litigations, proceedings and investigations involving the
Firm’s debt and equity underwriting activities and equity research
practices. The reserve may be revised in the future. As of December 31,
2003, the Enron-related litigation reserve was $524 million, and the
balance of the $300 million set aside at December 31, 2002 was $221
million.
It’s Crikey’s understanding that the US authorities demand to be told
of all frauds, actual or attempted on banks under their control. The US
banking authorities closely check banks where fraud has happened or
been attempted.

Can JP Morgan Chase expected a call from the heavies, plus a please
explain from the SEC, miffed that this fraud was not ‘fessed up to?
And, shouldn’t there be a little more scrutiny of the CSS from Australian authorities?

Peter Fray

Fetch your first 12 weeks for $12

Here at Crikey, we saw a mighty surge in subscribers throughout 2020. Your support has been nothing short of amazing — we couldn’t have got through this year like no other without you, our readers.

If you haven’t joined us yet, fetch your first 12 weeks for $12 and start 2021 with the journalism you need to navigate whatever lies ahead.

Peter Fray
Editor-in-chief of Crikey

JOIN NOW