Regulators Investigating MF Global for Missing Money

[scandal 951]

The news surrounding the MF Global collapse is getting worse. Now the money is gone

I spent a good part of my day today reacting to the mess this is causing. MFG (who absorbed the luckless Refco when they cratered a few years ago) and NewEdge (who were formed from the fusion of Fimat, Carr and Calyon) have been the bedrock of Futures execution and clearing. I doubt there's a firm on the street trading Futures and options that doesn't have at least some portion of their business at MF Global. This sucks, big time.

http://dealbook.nytimes.com/2011/10/31/regulators-investigating-mf-global/

Regulators Investigating MF Global for Missing Money

By BEN PROTESS, MICHAEL J. DE LA MERCED and SUSANNE CRAIG

9:55 p.m. | Updated

Federal regulators have discovered that hundreds of millions of dollars in customer money has gone missing from MF Global in recent days, prompting an investigation into the brokerage firm, which is run by Jon S. Corzine, the former New Jersey governor, several people briefed on the matter said on Monday.

The recognition that money was missing scuttled at the 11th hour an agreement to sell a major part of MF Global to a rival brokerage firm. MF Global had staked its survival on completing the deal. Instead, the New York-based firm filed for bankruptcy on Monday.

Regulators are examining whether MF Global diverted some customer funds to support its own trades as the firm teetered on the brink of collapse.

The discovery that money could not be located might simply reflect sloppy internal controls at MF Global. It is still unclear where the money went. At first, as much as $950 million was believed to be missing, but as the firm sorted through its bankruptcy, that figure fell to less than $700 million by late Monday, the people briefed on the matter said. Additional funds are expected to trickle in over the coming days.

But the investigation, which is in its earliest stages, may uncover something more intentional and troubling.

In any case, the unaccounted-for cash could violate a fundamental tenet of Wall Street regulation: Customers’ funds must be kept separate from company money. One of the basic duties of any brokerage firm is to keep track of customer accounts on a daily basis.

Neither MF Global nor Mr. Corzine has been accused of any wrongdoing. Lawyers for MF Global did not respond to requests for comment.

Now, the inquiry threatens to tarnish further the reputation of Mr. Corzine, the former Goldman Sachs executive who had sought to revive his Wall Street career last year just a few months after being defeated for re-election as New Jersey’s governor.

When he arrived at MF Global — after more than a decade in politics, including serving as a Democratic United States senator from New Jersey — Mr. Corzine sought to bolster profits by increasing the number of bets the firm made using its own capital. It was a strategy born of his own experience at Goldman, where he rose through the ranks by building out the investment bank’s formidable United States government bond trading arm.

One of his hallmark traits, according to the 1999 book “Goldman Sachs: The Culture of Success,” by Lisa Endlich, was his willingness to tolerate losses if the theory behind the trades was well thought out.

He made a similar wager at MF Global in buying up big holdings of debt from Spain, Italy, Portugal, Belgium and Ireland at a discount. Once Europe had solved its fiscal problems, those bonds would be very profitable.

But when that bet came to light in a regulatory filing, it set off alarms on Wall Street. While the bonds themselves have lost little value and mature in less than a year, MF Global was seen as having taken on an enormous amount of risk with little room for error given its size.

The collapse of MF Global underscores the extent of investor anxiety over Europe’s debt crisis. Other financial institutions have been buffeted in recent months because of their holdings of debt issued by weak European countries. The concerns about MF Global’s exposure to Europe prompted two ratings agencies to cut their ratings on the firm to junk last week.

The firm played down the effect of the ratings, saying, “We believe that it bears no implications for our clients or the strategic direction of MF Global.”

Even by Sunday evening, MF Global thought it had averted its demise after a disastrous week. Over five days, the firm lost more than 67 percent of its market value and was downgraded to junk status, which prompted investor desertions and raised borrowing costs.

Mr. Corzine and his advisers frantically called nearly every major Wall Street player, hoping to sell at least some of the firm in a bid for survival.

On Friday, the asset manager BlackRock was hired to help MF Global wind down its balance sheet, which included efforts to sell its holdings of European debt. BlackRock was able to value the portfolio, but did not have time to find a buyer for it given the other obstacles MF Global faced, according to people close to the talks.

By Saturday, Jefferies & Company became the lead bidder to buy large portions of MF Global, before backing out late in the day.

On Sunday, a rival firm, Interactive Brokers, emerged as the new favorite. But the Connecticut-based firm coveted only MF Global’s futures and securities customers.

While MF Global was resigned to putting its parent company into bankruptcy, Interactive Brokers was also willing to help prop up other MF Global units, including a British affiliate.

By late Sunday evening, an embattled MF Global had all but signed a deal with Interactive Brokers. The acquisition would have mirrored what Lehman Brothers did in 2008, when its parent filed for bankruptcy but Barclays of Britain bought some of its assets.

But in the middle of the night, as Interactive Brokers investigated MF Global’s customer accounts, the potential buyer discovered a serious obstacle: Some of the customer money was missing, according to people close to the discussions. The realization alarmed Interactive Brokers, which then abandoned the deal.

Later on Monday, when explaining to regulators why the deal had fallen apart, MF Global disclosed the concerns over the missing money, according to a joint statement issued by the Commodity Futures Trading Commission and the Securities and Exchange Commission. Regulators, however, first suspected a potential shortfall days ago as they gathered at MF Global’s Midtown Manhattan headquarters, the people briefed on the matter said. It is not uncommon for some funds to be unaccounted for when a financial firm fails, but the magnitude in the case of MF Global was unnerving.

For now, there is confusion surrounding the missing MF Global funds. It is likely, one person briefed on the matter said, that some of the money may be “stuck in the system” as banks holding the customer funds hesitated last week to send MF Global the money.

But the firm has yet to produce evidence that all of the $600 million or $700 million outstanding is deposited with the banks, according to the people briefed on the matter. Regulators are looking into whether the customer funds were misallocated.

With the deal with Interactive Brokers dashed, MF Global was hanging in limbo for several hours before it filed for bankruptcy. The Federal Reserve Bank of New York and a number of exchanges said they had suspended MF Global from doing new business with them.

It was not the first time regulators expressed concerns about MF Global.

MF Global confirmed on Monday that the Commodity Futures Trading Commission and the S.E.C. — had “expressed their grave concerns” about the firm’s viability.

By midmorning on Monday, the firm filed for bankruptcy.

Azam Ahmed contributed reporting.

[mawilson 2,133]

I doubt there's a firm on the street trading Futures and options that doesn't have at least some portion of their business at MF Global.

Including my own firm.

[Mr. Big Dog 10,747]

Including my own firm.

Fancy a bailout?

[Ban Hammer 13,342]

Fancy a bailout?

[mawilson 2,133]

Fancy a bailout?

Sure! Unfortunately, MF is not too big to fail.

[scandal 951]

Sure! Unfortunately, MF is not too big to fail.

Well you can get up to $500K from SIPC. Though you better get in line.....

November 01, 2011 4:09 PM

MF Global Customers Call SIPC Asking for Money After Bankruptcy

Nov. 1 (Bloomberg) -- Customers of bankrupt broker-dealer MF Global Inc. have been calling the Washington offices of the Securities Investor Protection Corp. today asking for their money, a lawyer for the corporation said.

“What customers ask is, ‘When am I getting my money?'” said Kevin Bell, senior associate general counsel of the government-created entity, which is overseeing the liquidation of the brokerage formerly run by Jon Corzine. “You tell them to sit tight, and start gathering their information so they can file claims. Canceled checks, trade confirmations, account statements.”

Websites will be put up by SIPC and trustee James Giddens's law firm, Hughes Hubbard & Reed LLP, and claim forms will be mailed to customers, he said. In the Lehman Brothers Inc. brokerage liquidation, also handled by Giddens as trustee, it took about 30 days to get claim forms out “because of the complexity,” Bell said. The Lehman Brothers Holdings Inc. unit has been in liquidation since 2008 after its parent filed for bankruptcy with $639 billion in assets.

“This is like a mini-Lehman,” he said. Claim forms were mailed about 17 days after con man Bernard Madoff's firm went into liquidation in 2008, Bell said. “We have to get control of the books and records. We have to get the names off the books and records.”

When broker-dealers are liquidated, customer accounts often go to other firms, sometimes in “bulk transfers,” Bell said. Barclays Plc took over accounts from Lehman's brokerage, giving 72,000 brokerage customers access to $40 billion in frozen assets.

European Debt

MF Global Holdings Ltd., the broker-dealer's parent, said it failed after getting margin calls spurred by disclosure of more than $6 billion of European government debt investments. It told regulators that client accounts had “deficiencies,” the Commodity Futures Trading Commission and Securities and Exchange Commission said yesterday.

The New York-based parent company broke rules about keeping clients' collateral separate from its own accounts, futures exchange CME Group Inc. said today.

Giddens said yesterday he is “taking steps” to protect customers and set up an “orderly and fair” process to satisfy their claims. He and his team plan to be on the company's premises to provide oversight, he said in a statement yesterday. SIPC had lawyers in New York and has “flown in” an operations vice president to work with Giddens, Bell said.

“The trustee is trying to get a clamp on the assets,” Bell said. “We're looking at the next 10 days being very hectic.” He declined to comment on any missing funds.

Liquidation Approved

A judge approved the liquidation of MF Global Inc. yesterday after SIPC said the broker-dealer might not be able to meet its obligations to customers who have accounts with the company.

“The defendant has failed or is in danger of failing to meet its obligations to its customers,” SIPC, which compensates customers for as much as $500,000 of their losses, said in court papers. “Specifically, the defendant is unable to meet its obligations as they mature.”

SIPC's proceeding against MF Global is being transferred to U.S. Bankruptcy Court in Manhattan because MF Global consented to SIPC's application to liquidate it, according to Josephine Wang, general counsel for SIPC.

MF Global Holdings listed debt of $39.7 billion and assets of $41 billion in Chapter 11 papers. The company described itself as “one of the world's leading brokers in markets for commodities and listed derivatives,” providing access to more than 70 exchanges.

Fed Relationship

MF Global was one of about 20 dealers authorized to trade U.S. government securities with the Federal Reserve Bank of New York, before the Fed said yesterday it ended that relationship.

SIPC, created by Congress in 1970 after brokerage failures in the late 1960s, gets money from brokerage firms to pay investors. Chartered to guard investors against broker theft or brokerage failure, SIPC is overseen by the SEC.

The lawsuit is Securities Investor Protection Corp. v. MF Global Inc., 11-cv-7750, U.S. District Court, Southern District of New York (Manhattan). The parent's bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

[mawilson 2,133]

Well you can get up to $500K from SIPC. Though you better get in line.....

We actually wired most of our money out of MF a few weeks ago. Total coincidence - it's not like we knew they were going tits up, just got lucky.

When I said we were doing business with MF, I didn't mean we were trading with them - it was a different kind of business.

[scandal 951]

We actually wired most of our money out of MF a few weeks ago. Total coincidence - it's not like we knew they were going tits up, just got lucky.

Awesome. We had MFG as a GCM on some of our exchange DMAs. We're getting all those moved now, but it's going to take time to straighten everything out.

Apparently they were playing fast and loose with customer funds. The FBI is now about to launch an investigation into the commingling of funds. This is getting more and more serious with each new press report.

This is from MF Global's "Client Asset Protection" statement:

Probably the cardinal safeguard of both futures and securities customers’ funds required by the relevant provisions of the Commodity Exchange Act, the Securities Exchange Act of 1934 and the rules and regulations of the CFTC and the SEC is that they be segregated from the funds of the FCM/broker-dealer and may not be used to meet any obligations of the FCM/broker-dealer. A brief description of these provisions is set forth below.

For All Futures Customers of a U.S. FCM Trading U.S. Futures or Options:

Section 4d(a)2 of the Commodity Exchange Act provides that a U.S. FCM must keep all money, securities and property of its customers used to margin their futures or options trades on U.S. exchanges and all monies accruing to its customers as a result of such trades segregated from the funds of the FCM. CFTC Regulations 1.20 to 1.30 provide specific requirements for the handling of customer funds.

Apparently they did a pisspoor job of following their own policies, not to mention the law.

[scandal 951]

Another day, and the mess keeps growing. We, at least, have a new GCM and are live and trading again on the accounts moved over from MFG, although setting up post-trade and clearing operations is going to take a few more days. And the freezing of margin funds at MFG really sucks. Segregated funds, hah!

MF Global customers fume as funds, trades frozen

By Theopolis Waters and David Sheppard

CHICAGO/NEW YORK | Wed Nov 2, 2011 10:25pm EDT

CHICAGO/NEW YORK (Reuters) - Joe Ocrant, a veteran livestock trader, is livid.

His accounts frozen, unable to trade with his bankrupt broker and denied access to the Chicago trading floor, his frustration over the failure of 230-year-old MF Global was turning to rage as regulators said it may have misappropriated

some $600 million in customer funds.

Ocrant remained hopeful that somehow his collateral at MF Global would be returned. In the meantime, like so many others, he was left idle, unable to transfer or liquidate his trades.

"I am aggravated and upset.... I feel fairly confident my customers will be made whole. The question is how long the feds will tie the funds up so they can't be used," said Ocrant, president of livestock-focused fund Oak Investment Group.

It was a common tale across the markets.

As the initial chaos surrounding the collapse and bankruptcy of one of the commodity market's leading brokers slowly subsided, former customers fumed over the slow and frustrating process of moving their traders over to rival brokers or returning the cash used to back them.

Some hope for a more rapid resolution appeared near after U.S. Bankruptcy Judge Martin Glenn in New York late on Wednesday approved the transfer of customer accounts to other brokers, which should speed the process.

Before MF Global brokers stopped processing transactions earlier on Wednesday, customers faced a Hobson's choice: close out positions they might otherwise maintain, or put up a second hefty dose of collateral.

A total of 150,000 customer accounts were effectively frozen on October 31, more than a third commodity accounts, according to the court filing on Wednesday. That is too much diversity for any single broker to take on, and six other brokers were named likely to take the accounts.

MF Global, as a clearing broker, was responsible for taking the collateral required to back the trades it placed on exchanges. Getting that collateral back was proving difficult.

Tales of vague responses, unanswered telephones and confusing plans spread among the many independent introducing brokers, local traders and small-scale hedgers that made up a sizable share of MF Global's business.

"I'm confident that eventually this will be sorted out but for the moment when you call MF Global and the call doesn't get answered for two to three hours, how do you think customers feel? They can't open new positions which is not good in these volatile markets. You either liquidate it or sit on it," says Matthew Bradbard of MB Wealth Commodity Brokerage in Florida.

COLLATERAL DAMAGE

In theory, up until earlier on Wednesday, customers could call MF Global brokers and close out their trading positions or arrange to have them transferred to another broker, a process that was being partly facilitated by the exchanges.

In practice, MF Global has not been able to cope with the mad scramble to liquidate or hand over positions.

"The problem is there are only five people on their 'give-in' desk at MF and 30,000 screaming customers," said one hedge fund manager.

Additionally, with MF Global in bankruptcy, the collateral it was holding to back those trades -- typically 5 to 10 percent of the face value of the contracts, some $5,000 or up to nearly $20,000 per contract -- was stuck at the broker.

As a clearing broker, MF Global would have been holding three types of customer funds in its segregated accounts: 1) the minimum margin required to clear trades on the exchange; 2) additional margin over and above that sum that the broker itself may have required of smaller or less credit-worthy customers; 3) any excess funds over and above the collateral that customers would have simply left on account.

Brokers have been loath to take on new positions without the payment of new margin.

Sean McGillivray, Vice-President at Great Pacific Wealth Management in Grants Pass, Oregon, relayed a typical story.

Since MF Global declared bankruptcy on Monday, he has tried without success to move $5.5 million in funds tied to commodity futures positions to a rival broker, RJ O'Brien, one of the biggest independents after MF Global.

But as he's discovered, while brokers are happy to take the positions, he'll need to stump up new capital for margin.

"For us to move positions without collateral, that's basically worthless," he told Reuters.

He said the allegations of missing money had added complexity to what is meant to be a relatively smooth process of moving funds from one broker to another.

"We seem to be in the dark on the regulatory side, from the MF Global management side and also from the exchange side."

Every day the complexity grows.

With prices gyrating, the amount of margin that traders are required to post fluctuates daily. For loss-making positions, that means an even higher collateral requirement than on Friday, when MF Global was last operating. For profitable trades, that means more money due back from the broker.

SMALL TRADERS HURT MOST

MF Global was a leading broker in the U.S. commodity markets, claiming the No. 1 most active spot on the key New York oil and metals markets and the No. 2 spot at the Chicago Mercantile Exchange's grain and financial pits.

It acquired a sizable number of smaller local customers when it took over much of the business of Refco, a once-mighty broker which failed six years ago.

Those smaller customers are scrambling, since few had relationships with other brokers or extra capital to manage their trades. Many independent commodity brokers have been eager to lift some MF Global customers, but not for free.

"The policy is we'll take positions from MF Global only if the client will margin them," said Pedro Dejneka, director of business development RJ O'Brien, one of the firms that was subsequently named likely to take on some MF Global accounts.

"It's tough for them, not every client from MF Global has the extra money to do this as it's still tied up. You want to be able to help the client out but you just can't take the risk. They need to double-margin."

It is not clear exactly how much money is trapped at MF Global, and the company's brokers have been unable to offer much reassurance to clients.

"I think my broker at MF has been as helpful as he is allowed to be and has been answering in the boilerplate that they're being allowed to say." says George de Luna, an independent energy trader.

"I asked, aren't the accounts segregated and they should be okay? and the broker answered: 'In the theory, yes. That did set off alarm bells."

[mawilson 2,133]

Another day, and the mess keeps growing. We, at least, have a new GCM and are live and trading again on the accounts moved over from MFG

New Edge? ABN Amro?

[scandal 951]

New Edge? ABN Amro?

MLI. Not to be confused with ML-Pro.

[웃 910]

New Questions About MF Global's Leverage

Now you see it. Now you don't.

That's how the Wall Street Journal's Michael Rapoport describes MF Global's debt balance during the course of each of the last seven quarters.

According to Rapoport, MF Global's debt would shrink as the end of the quarter neared. This arguably understated the debt number that would be published on quarterly balance sheets.

Just how big were these mysterious fluctuations? Here's an excerpt from the story:

The Journal analysis shows that MF Global consistently had short-term borrowings that were much lower at the ends of its fiscal quarters than its average and peak levels for the full quarters...In each of the past seven quarters, from late 2009 to mid-2011, MF Global's quarter-end borrowings were an average 16% lower than the quarterly average, according to the Journal's analysis. The quarter-end numbers were lower than the peak for each quarter by an average of 24%, according to the analysis.

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Read more:

http://www.businessinsider.com/the-mf-global-story-just-keeps-getting-worse-2011-11#ixzz1chk1NkfE

[kytwell 179]

I think just a few days ago they were talking about tapping Corzine for Treasury Secretary. These OWS people need to get to DC and march/protest against the real evil.

[Póg mo 1,749]

I think just a few days ago they were talking about tapping Corzine for Treasury Secretary. These OWS people need to get to DC and march/protest against the real evil.

Ya, they need to go after the politicians and leave the men behind the politicians alone.

[kytwell 179]

If the malakas in DC, would get some real campaign finance reform in place, the evil behind them wouldn't be a protected class. All candidates should have to use Federal Dollars to run for office. An equal sum to each candidate. No outside money. If these people and corporations and unions can afford to spend so much money on campaigns, they could use same money to lower healthcare premiums for their employees or invest it to create new jobs.