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MF Global's Collapse Draws FBI Interest

Category: Frauds & Scandals


  Read (2014)
MF Global's Collapse Draws FBI Interest

November 2, 2011 by DEVLIN BARRETT, SCOTT PATTERSON and MIKE SPECTOR

The fallout from MF Global Holdings Ltd.'s collapse intensified as the Commodity Futures Trading Commission voted to issue subpoenas to the securities firm and the Federal Bureau of Investigation planned to examine whether client funds are missing, according to people familiar with the situation.

The two moves are the result of a discrepancy of hundreds of millions of dollars in the New York company's books that was discovered just before MF Global tumbled into bankruptcy Monday, according to people familiar with the matter.

It isn't clear if the discrepancy, about $900 million as MF Global raced to sell itself over the weekend, was caused by money being diverted by company officials desperate to meet margin requirements or collateral calls as the financial situation became dire, these people said. Another possibility is that the gap reflects bookkeeping or accounting errors, as well as a delay in recording transactions in MF Global's books given the securities firm's far-flung trading and clearing operations.

At a bankruptcy-court hearing Tuesday, Bradley Abelow, MF Global's president and operations chief, declined to comment on reports about customer funds. A lawyer for MF Global said: "To the best knowledge of management, there is no shortfall." He said the discrepancy largely is the result of money stranded by banks and clearinghouses.

The FBI's involvement marks an escalation in efforts by government officials to get to the bottom of what happened in the chaotic days before MF Global filed for Chapter 11. MF Global's collapse accelerated during the final week of October, with a surprise quarterly loss, credit-rating downgrades and a last-ditch effort by Chief Executive Jon S. Corzine to find a suitor to save the firm from bankruptcy.

A person familiar with the situation said FBI officials have decided to examine the discrepancy to determine if customer money is missing. If it is, FBI officials would then have to decide whether that constitutes a possible crime. The examination marks a preliminary step in what could become a full-blown criminal probe.

As part of their subpoena vote Monday, CFTC members sought more details about a possible shortfall in customer accounts, according to people familiar with the matter. The agency also instructed MF Global to refrain from document destruction, these people said.

CFTC officials haven't launched a formal investigation into the matter but are considering doing so, according to people familiar with the situation. The CFTC is the primary regulator for MF Global's large futures-trading operation, though the securities firm also is overseen by the Securities and Exchange Commission and Financial Industry Regulatory Authority.

Brokerage firms that clear trades hold customer money and work with exchanges likeCME Group Inc. to post collateral and take care of other operational activities. Customer funds are supposed to be segregated into individual client accounts that can be used only narrowly by a brokerage firm to invest in a variety of assets.

Those investments must adhere to various requirements designed to limit risk-taking, while being easy to liquidate if a customer demands money back. Under federal rules, brokerage firms aren't supposed to end the day with any shortfall in customer accounts.

According to a U.S. official, MF Global admitted to federal regulators early Monday that money was missing from customer accounts. MF Global acknowledged a shortfall in a phone call amid mounting questions from regulators as they went through the firm's books.

Interactive Brokers Group Inc., a company that was trying to hammer out a takeover of MF Global, also expressed concerns about the discrepancy, walking away from the deal as a result, according to people familiar with the matter.

Keeping customer funds separate from a brokerage firm's own assets is "sacrosanct," said Sharon Brown-Hruska, a former acting chairman of the CFTC and now vice president at National Economic Research Associates. "This is something that the futures industry has held out as a primary way of protecting customer funds."

Still, the reason for any account discrepancy is far from a settled matter. After being pressed by Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan on Tuesday, MF Global's lawyer, Kenneth S. Ziman of the law firm Skadden, Arps, Slate, Meagher & Flom LLP, said the securities firm normally completed trades on the same day. "That stopped happening" as MF Global's liquidity was being drained.

MF Global was scrambling to exit a huge number of positions as its problems spiraled out of control, a person close to the company added. That made it even harder to keep up with the transactions.

Instead of a "rock rolling downhill," MF Global's tumble into Chapter 11 was more like "a rock shot out of a cannon," Mr. Ziman said.

CME's chief executive, Craig Donohue, said the parent company of the Chicago Mercantile Exchange and New York Mercantile Exchange also is investigating the fallout from MF Global's collapse. So far, officials are "unable to determine the size or scope of the failure" to fully account for client funds, Mr. Donohue said. He added that CME "has determined that MF Global is not in compliance with [CFTC] and CME customer segregation requirements."

After CME and other exchanges took emergency action Monday to halt MF Global and its clients from doing further business, some still were struggling Tuesday to make trades or recover funds from their accounts.

"We're basically staring at a brick wall," said Sean McGillivray, a broker at Great Pacific Wealth Management. He had $5.5 million in client funds at MF Global and has been trying since Monday morning to liquidate the positions and transfer accounts to another clearing firm.

Instead of trading Tuesday, Erez Kreitner went to MF Global's office near the Nymex floor hoping to unfreeze an account with about $100,000 and move it to another firm. "It's stressful," said Mr. Kreitner, an independent trader based in New York. While he expects to get his money back, he has no idea when that will happen.

In the meantime, "if I put in a trade electronically, it says this account [is] not authorized," Mr. Kreitner added. He was surrounded by other traders with the same problem, though the office was calm.

The bankruptcy-court judge reluctantly allowed MF Global to tap $8 million being held in J.P. Morgan Chase & Co. accounts, though he expressed concern that the funds might be a "bridge to nowhere." Mr. Ziman, the lawyer for MF Global, said the money was a "lifeline" to pay salaries, health benefits and "keep the lights on."

Mr. Corzine was at MF Global's midtown Manhattan headquarters on Tuesday along with many other employees, according to a person familiar with the matter. Neither the bankruptcy trustee nor any U.S. regulator had told employees to leave, the person added.

Preet Bharara, the U.S. attorney in Manhattan, declined to comment when asked if his office was investigating MF Global.

MF Global declined to comment Tuesday.

Source: Wallstreet (Victoria McGrane, Jacob Bunge and Liam Pleven contributed to this article.)



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