Monday, November 21, 2011

Trustee Liquidating Failed MF Global Finds $1.2 Billion Shortfall

MF Global's problems have doubled. The trustee liquidating the company's assets has found that the shortfall is $1.2 billion, which is double the estimates that had been floating around for the past couple of weeks since the financial firm announced its bankruptcy.
The court-appointed trustee overseeing the liquidation of MF Global’s brokerage now estimates that the shortfall in the firm’s customer funds could be more than $1.2 billion, double previous estimates.

Regulators currently suspect that MF Global improperly used customer money for its own purposes in the days before filing for Chapter 11 protection, according to people briefed on the matter.

The decision to release the updated figure on Monday came after authorities concluded that much of the customer money had left the firm, these people said.

By MF Global’s estimates to regulators, roughly $600 million in customer money was missing. But as forensic accountants pored over MF Global’s books in recent weeks, they began to question those estimates.

By Sunday, the accountants from Deloitte and Ernst & Young had discovered an even larger gap in customer funds.

The trustee, James W. Giddens, held a four-hour conference call on Sunday evening with staffers in New York City and Chicago before deciding to publicly reveal the new number, according to a spokesman, Kent Jarrell. Officials from the Commodity Futures Trading Commission and the CME Group, MF Global’s primary exchange, were consulted on Sunday night.
Turns out that the initial estimates were far closer to the amounts actually missing; yet even the $950 million initially estimated fell several hundred million short of the tally.

This is yet another discrepancy that MF Global officials and Jon Corzine have to address. Where did all the client money go? Two possibilities: One is that company used the money to meet trading partners’ demands for extra cash, which could come back (but that would require seeing some kind of paper trail). The other is that it was used to cover trading losses, which would be unrecoverable. Both would appear to be actionable for sanctions, and the latter is criminal.

The company's books are a shambles, and it appears that there was no kind of accounting controls or oversight, despite regulators being on hand to view the books just days before the company imploded when the sale of the company prior to bankruptcy imploded.

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