MF Global Collapse Spurs Multiple Investigations
By NYSSCPA.org Staff
Posted on 11/3/11

In a series of events Reuters said called to mind Lehman Brothers’ collapse during the height of the 2008 economic crisis, futures brokerage firm MF Global Holdings Ltd., helmed by former New Jersey Gov. Jon S. Corzine, rapidly imploded this week, filing for Chapter 11 bankruptcy on Monday. The troubled firm failed to find a willing buyer over the weekend after its credit rating was slashed to junk over exposure to European sovereign debt, Reuters reported.

Information revealed in the aftermath of the company’s breakdown -- like a discrepancy of hundreds of millions of dollars in the New York company's books discovered just before the company tumbled into bankruptcy -- has attracted the attention of the FBI, which is investigating whether the firm violated criminal laws, according to the New York Times.

Specifically, about $633 million has disappeared from client accounts, and it isn’t immediately clear whether the missing money had been diverted by company officials desperate to meet margin requirements or collateral calls as the financial situation became dire, or whether the gap reflects bookkeeping or accounting errors and a delay in recording transactions in MF Global's books, the Wall Street Journal reported.

Craig Donohue, CEO of the Chicago Mercantile Exchange, said Tuesday he believes it was the former, asserting MF Global was not in compliance with the requirement that firms keep client money in accounts separate from the company’s, to make it easier to repay clients if the broker fails, according to the Associated Press.

Federal financial regulators the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) have launched investigations of their own. The CFTC voted Monday to issue subpoenas to investigate missing client money, and discouraged MF Global from document destruction, according to the Wall Street Journal. Thursday, SEC Chair Mary Shapiro announced the regulator would conduct a broad investigation of “every aspect of how MF Global did business,” Reuters reported.

But among the multiple investigations into what happened to the money, there’s a bright spot for customers just hoping to recover their funds: Fox Business reported Thursday the U.S. bankruptcy court overseeing MF Global’s bankruptcy filing approved transference of all MF Global accounts to other firms -- an important step for MF customers in their fight to get their money back.

When Trouble Began

Corzine took command of the already struggling MF Global just over a year ago, according to the Newark Star-Ledger. Before Corzine’s entrance, MF Global had been hit hard by a rogue trading scandal in 2008, decreasing revenue and clients, said the Star-Ledger. Corzine, the CEO of Goldman Sachs before launching his political career, spoke openly about turning MF Global into a "mini-Goldman," an effort which involved, the Ledger said, investing $6.3 billion in sovereign European debt -- a move the New York Times said Corzine directed, and defended as not particularly risky as recently as last week. Corzine was trying to transform MF Global from a brokerage focused on placing customers' trades on exchanges into an investment bank betting with its own capital, according to Reuters.

The trouble began when MF Global revealed it had $6.3 billion in European sovereign debt in countries like Italy and Spain, a position that was nearly five times the firm’s total equity, according to the New York Times.

Italian and Spanish bonds, in contrast to near-zero yields on U.S. debt, offered interest rates of 2–3 percent, which in theory could produce higher yields and buttress profits as other businesses shrank, according to the New York Times. The sovereign debt owned by MF Global was backed by the European Financial Stability Facility, the European Union’s bailout fund, and would only lose money if the country that issued the bond defaulted, the Newark Star Ledger reported.

As the European sovereign debt crisis intensified in October, ratings agencies Moody’s and Fitch cut the grades on MF Global’s debt, citing questions about the firm’s risk controls given the size of its position, the New York Times reported. The downgrade caused trading partners to ask that the firm post more money against this portfolio, forcing it to draw $1.3 billion in credit in an ultimately futile effort to stay afloat, the Times reported. Simultaneously, the downgrades sent the company's stock prices plummeting by more than two thirds, according to ABC News.

The revelation that millions of dollars in customer money was missing doomed an expected buy-out from a rival brokerage firm, leading MF Global to declare bankruptcy, according to the New York Times. Regulators were alerted Monday, when the firm had to explain why the buy-out was nixed, said the Times.