Monday, November 14, 2011

Investigators Continue Searching For $600+ Million Missing From MF Global Accounts

Investigators have a tall task ahead of them in trying to piece together all the illegalities at Jon Corzine's MF Global financial firm. They're still trying to figure out where more than $600 million in money went, and the condition of the company's books is atrocious. It also isn't the first time that the firm was sanctioned for violations of various securities laws and rules:
On Friday, the bankruptcy trustee overseeing the liquidation announced that nearly all 1,066 of the company's employees were losing their jobs, although as many as 200 could stay to oversee the dissolution of the company. MF Global says the disarray in its financials is due to hasty unwinding of positions as its massive bets on European sovereign debt began to collapse, but it has a long history of regulatory violations pertaining to risk and records management.

Over roughly the past decade, MF Global was sanctioned half a dozen times and fined a total of $12 million, including a $10 million fine levied in 2009 for "significant supervision violations" that occurred during the five years prior, according to CFTC enforcement archives. One 2008 infraction alone cost $141 million in trading losses on wheat futures.

"They're going to have to figure out what did people know and when did they know it," Elson says. MF Global had undergone a routine audit only days before its bankruptcy filing and nothing was found to be amiss. "Why was this not caught, and if it had been caught, what would have been the consequences?" he says.

Clients might have to steel themselves for a long wait and the possibility of a loss of funds. Elson points out that sorting out the fallout from the collapse of Lehman Bros. was a protracted process and says this could follow a similar timeline. A worst-case scenario would be customers losing what were supposed to be safe investments and triggering a crisis of confidence that spreads to other trading firms.

That no one seems to know where the money went is a bad sign for everyone involved. Accounts are frozen and no one can really proceed until the money is accounted for. This isn't just about aggressively interpreting securities laws; it's about illegality within the company and a complete and utter disregard for one of the fundamental rules in the financial sector - never commingling client funds with those of the financial firm.

MF Global already admitted as much; but the condition of the books is so bad that it's going to take investigators time to figure out who knew what and when, and how much money is involved.

Corzine remains on the hook since it was his decision to push the firm into taking positions on European sovereign debt that pushed the company into insolvency and the firm lacked the credit to back its positions. Bradley Abelow, who was Corzine's Chief of Staff while Corzine was New Jersey governor, was the firm's COO and should have done a better job managing the company's risk. However, Abelow wasn't a key player in determining the firm's trading policy.

Thus far, all of the company's broker-dealers have been fired, but some may be hired back to help wind down the accounts.

As far as the firm's clients and creditors are concerned, there's a huge mess waiting to happen. Some creditors are claiming that JP Morgan Chase tried to cut to the head of the line; Chase is MF Global's largest creditor and proffered a $8 million emergency loan on the day of the bankruptcy. Expect lots of lawsuits as the creditors try to jockey for position to recover some value from the firm.

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