MF Global Clients May Never See $1.2 Billion Recovered

MF Global, the company that was headed up by prominent Democrat and former New Jersey Governor Jon Corzine, may never know what happened to the $1.2 billion in mission client money even though investigators thought they were making progress in unwinding the company's actions immediately prior to the bankruptcy:

Previously it looked as though regulators and probably the company's CEO Jon Corzine knew where that shortfall ended up without saying where they thought it went publicly. Some news outlets reported that, for example, roughly $200 million of the missing customer money went to JP Morgan. And today, The Journal's Scott Patterson and Aaron Lucchetti make the case for why that missing $1.2 billion is gone forever. One hypothesis floated again is that MF Global employees dipped into customer money to improperly use in other parts of the company. Another theory is that the company simply lost customers' funds on bad bets outside of the European bond market: "Investigators also are examining other scenarios that have gained traction in recent weeks, such as the possibility that MF Global suffered steep losses on investments made using customer money."

That's right; no one knows what happened to the money and they are characterizing the money as having been "vaporized". If the trustee in bankruptcy can't find the money, then the clients whose money was stolen will have to figure out the next steps. I can't imagine them not suing Corzine and other key figures in the company for fraud and breach of fiduciary responsibility in both their individual and corporate obligations.

Still, the money wasn't vaporized; it was misappropriated and stolen from client accounts. That's a criminal matter, and I concur with the view that a grand jury should be investigating filing charges against key individuals at MF Global, up to and including Corzine.

MF Global so completely ignored general accounting principles and the first rule of investments and brokerages - to keep corporate and client funds separate. Their malfeasance is overwhelming and Congress will once again hold hearings on the situation on February 2.

Corzine Continues Getting Grilled on Capitol Hill

Disgraced former New Jersey Governor Jon Corzine continues to avoid making the big gaffe that might land him in a perjury trap over testimony given on the MF Global debacle, but he's not out of the woods just yet.

Corzine thought he could turn MF Global in to a new and improved Goldman Sachs. He brought in the same kind of attitude and risk-taking that he brought at Sachs. But because MF Global didn't have the size and track record, once those risks (namely the sovereign debt in Europe) became monetized, the company didn't stand a chance and everyone wants to make sure they got their money covered. Forced to pony up additional collateral the company was left scrambling to find someone to buy them out, and it was in that process that the potential buyers found all kinds of discrepancies - most notably the fact that client funds were being used for corporate purposes.

That was the first of many red flags that sent the company into bankruptcy.

And it was Corzine who was pushing to get MF Global more heavily invested in the European sovereign debt, because he thought he could make a bunch more money there than on other less risky propositions. He and his board ignored and side stepped risk managers who pointed out the problems with the strategy.

Yet, CME Chairman Terrance Duffy contradicts Corzine's testimony:


Corzine denies knowing about the transfers of client funds, even as evidence is emerging to the contrary.

CME Group Inc. Executive Chairman Terrence Duffy told a Senate panel Tuesday that Corzine might have known about a transfer of $175 million from customer accounts earlier than that. CME Group operates exchanges on which MF Global traded. It also was responsible for auditing some of MF Global's books.

According to Duffy, an MF Global employee told a CME auditor that "Mr. Corzine was aware" of the transfer. Duffy said he referred the matter to the Justice Department and the Commodity Futures Trading Commission. Both are investigating MF Global's failure and the disappearance of the customer money.

If true, Duffy's accusation would raise the possibility that Corzine misled Congress about when he learned that client money was missing.

The transaction Duffy described wasn't necessarily illegal. Brokers such as MF Global are allowed to borrow from customer accounts temporarily in some circumstances -- to reduce their own risk, for example.

But such cases are a narrow exception. A firm couldn't use customer money to pay trading partners if its speculative trades lost value. Even in cases where borrowing clients' money was legal, the firm would have to replace it with a safe, cash-like investment such as a U.S. Treasury security.

If that can be confirmed, then Corzine's got bigger problems considering he's testified that he didn't know about any transfers and that may lead to obstruction of justice and perjury charges.

And to think that Corzine thought he might get tapped by President Obama to be Treasury Secretary. Obama's probably thanking his lucky stars he didn't make that move.

Corzine; MF Global Executives Testify Before Congress Again Today

It's another day of testimony before Congress for disgraced former New Jersey Governor Jon Corzine and several top MF Global executives. They'll again have to state that they have no idea where nearly $1.2 billion in customer money went. They'll claim that they aren't responsible for the accounting of the monies, despite being in a position to not only be responsible for the company policies, but are fiduciaries for their clients and made the decisions that sank MF Global in the first place.

Bradley Abelow, MF Global's president and chief operating officer, and Henri Steenkamp, the chief financial officer, are also scheduled to testify to the Senate Agriculture Committee.

All three say they don't know where the money is, according to prepared remarks and Corzine's previous testimony to a House panel last week. Nor do they take responsibility for authorizing the movement of money out of customer accounts.

Depending on the circumstances, transferring money from customers' accounts could violate securities laws and, in some cases, could amount to a crime. Federal authorities have begun criminal investigations. And regulators are looking into whether the firm broke securities rules.

MF Global collapsed into the eighth-largest bankruptcy in U.S. history on Oct. 31 after a disastrous bet on European debt. Corzine stepped down as CEO on Nov. 4.

Corzine told the House Agriculture Committee last week that he didn't know what happened to the money. He said he didn't become aware of the shortfall until Oct. 30, one day before the firm filed for bankruptcy protection.

In his prepared testimony, Steenkamp says he had no direct involvement in the transfer of funds.

"Direct involvement with operational matters such as bank accounts or fund transfers has never been part of my duties," Steenkamp says.

Abelow says he cannot explain what happened to the money without having access to MF Global documents, which a trustee now controls.

They'll try to distance themselves from the scandal, but that's frankly impossible to do. They are going to do their best to avoid falling into a perjury trap, so the amount of information that they can shed on the inner workings at MF Global in the runup to the collapse will be at a minimum.

Anything they say can and will be used against them in what is likely to be a series of criminal and civil suits, but so too is the fact that they simply claim ignorance, being outside the loop of those responsible for the transactions that led to the missing $1.2 billion.

Corzine, despite his attempts to fall on his sword, continues to claim that he isn't a responsible party in the missing money. Is it possible that some underling undertook the illegal actions that led to the missing money? Absolutely. However, it was a policy initiated by Corzine to expand trading on sovereign debt that pushed MF Global to the brink. Corzine took the risks, removed those involved in managing risks and were warning about the downside, and pushed ahead despite the sovereign debt risks increasing MF Global's exposure.

Former NJ Governor Jon Corzine Can't Explain Where MF Global Money Went

Nearly $1.2 billion in client money disappeared from MF Global accounts without a trace, and Jon Corzine doesn't have a clue where the money went. The former New Jersey governor and alleged wunderkind at Goldman Sachs who headed up the late MF Global can't explain where the money went.

Corzine, who was CEO at MF Global during the collapse, said he was “stunned” to learn that client accounts could not be reconciled as the firm went down.

“I simply do not know where the money is, or why the accounts have not been reconciled to date,” he said. “I do not know, for example, whether there were operational errors at MF global or elsewhere, or whether banks and counterparties have held onto funds that should rightfully have been returned to MF Global.”

Corzine said in his statement he would not invoke his Fifth Amendment rights.

“Considering the circumstances, many people in my situation would almost certainly invoke their constitituional right to remain silent — a fundamental right that exists for the purpose of protecting the innocent,” Corzine said.

“Nonetheless, as a former United States senator who recognizes the importance of congressional oversight, and recognizing my position as former chief executive officer in these terrible circumstances, I believe it’s appropriate to respond to your inquiries.”

Corzine noted, however, he had little contact with the company since his departure, and likely would not be able to explain much about what has happened during the liquidation of MF Global, which went under after Corzine directed what turned out to be disastrous investments in European debts.

Curiously, he hasn't invoked his 5th Amendment rights against self-incrimination. That may be a boldly stupid call on his part, considering that he's open to both criminal and civil actions in the bankruptcy of the financial firm as a result of his flawed strategies and calls. Corzine wouldn't have knowledge of the operations at MF Global as it wound down after his departure following the bankruptcy notification, but he should have knowledge of what happened in the weeks and months leading up to the bankruptcy and inability to determine where client money was.

That's a core responsibility of all financial firms. You are not allowed to commingle firm funds with those of the clients. Yet, that's apparently what happened, and the clients got screwed.

Corzine would love to rewrite history, and claims that he reduced MF Global's leverage from the time he took over to his departure. He then glosses over the key problem with the MF Global debacle, the pending sale in bankruptcy, and the failure to reconcile hundreds of millions of dollars of client accounts (the numbers have ranged from as low as $600 million to more than $1.2 billion.

Fact is that Corzine was claiming that the company was stable and in good financial position for a restructuring/sale in bankruptcy, when that wasn't the case. That should open him to civil and criminal liabilities.

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.

More Details Emerge About MF Global Debacle

New details continue to emerge about the conditions that set in motion the collapse and bankruptcy of MF Global. It turns out that one of the items that led to the financial firm going bankrupt was a change in the rule done in December 2000 that allowed these kinds of firms to expand where they could invest their own money.

Before 2000, the rule permitted futures brokers to take money from their customers' accounts and invest it in a number of approved securities limited to "obligations of the United States and obligations fully guaranteed as to principal and interest by the United States [U.S. government securities], and general obligations of any State or of any political subdivision thereof [municipal securities.]" That is, relatively safe securities with high liquidity.

The banks, however, pushed the CFTC to expand the investment options that would allow firms to practice "internal repo." In this scheme, money is taken from customer accounts and invested short-term in a variety of securities, with the futures brokers reaping the not-insignificant financial rewards from their customers' money.

And, lo and behold, such efforts were successful. In December 2000, the CFTC agreed to amend Regulation 1.25 "to permit investments in general obligations issued by any enterprise sponsored by the United States, bank certificates of deposit, commercial paper, corporate notes, general obligations of a sovereign nation, and interests in money market mutual funds" — in other words, riskier investments that could make more money for Wall Street.

Then, in February 2004 and May 2005, Regulation 1.25 was further amended and refined to the liking of Ferber and the banks. In the end, the door was opened for firms such as MF Global to do internal repos of customers' deposits and invest the funds in the "general obligations of a sovereign nation."

This practice, of course, may well be the centerpiece of the MF Global disaster. We now know that Corzine — who was CEO of Goldman Sachs from 1994 to 1999 — bet $6.3 billion on the distressed long-term bonds of countries such as Italy and Spain, although it's unclear if clients' funds were used. Bart Chilton, a CFTC commissioner, told Bloomberg News on Nov. 10 that the loss to customers' accounts may have resulted from a "massive hide-and-seek ploy."

Time to turn back the clock on those regulations and reinstate them to the pre-2000 rule, which not only protected the customer accounts, but limited the bank/financial firm exposures to sovereign debt crises.

The push for ever greater profits from the banks blinded them to the downside and banks thought that the US government would backstop them (and for a chosen few, they were right). But that's the wrong tact for the banking/financial industry to take. There's plenty of money to be made without pushing into financial instruments that could potentially take down entire firms and destabilize the economy because of how entangled firms are with sovereign debt of foreign nations and unstable economic conditions. The pre-2000 rules made plenty of sense, and the reason they were changed was an attempt to maximize profit all while ignoring the downside risks.

Those downside risks are now being realized and it's time to reestablish the old rule.

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.

MF Global Fires Over 1,000 People As Liquidation of Corzine's Company Continues

MF Global, the financial company that Jon Corzine took over with the hope of turning it into another Goldman Sachs, has fired its entire workforce of 1,066 people.

A total of 1,066 employees of bankrupt broker and dealer MF Global Inc. have been fired, according to a statement issued Friday by James Giddens, the court-appointed trustee for the liquidation of the company.
Marketwatch reports that between 150 and 200 former employees are being hired to assist in the wind down of the business and processing of bankruptcy claims, according to Giddens.
MF Global is not conducting business, and will not be reorganized. About 17,000 customer account positions and approximately $1.5 billion in customer account funds have been transferred to other future commodities merchants, Marketwatch reports.

The company was laid low by decisions made by Corzine and the inability to account for hundreds of millions of dollars of its clients money.

Investigations continue into Corzine's actions, as well as those of the company and how the money was not properly accounted for.

Trustees for the bankrupt firm are in the process of liquidating what few assets that they have; this includes the office space and closing out company positions.

ames Giddens, the trustee, aims to vacate MF Global's midtown Manhattan offices as soon as possible and rent out smaller, less expensive office space to handle the liquidation, according to the statement Friday. MF Global's Chicago offices will continue to be leased for a limited time period.

Some employees of MF Global in New York and Chicago already had been let go last Friday. Salaries for those dismissed in the trustee's action Friday will be paid through Nov. 15.

The 1,066 released Friday represent a little more than one-third of the 2,847 staff listed by MF Global as of March 31. The broker-dealer unit isn't being restructured and the termination of employees is a "necessary part" of the liquidation, according to the trustee's statement.

"We are saddened by the trustee's actions today to terminate to many of our colleagues," a spokeswoman for MF Global said in a statement.

The mood in MF Global's New York office was described as grim, as human-resources staffers went from floor to floor to speak to employees. Some complained of suddenness of the announcement, with numerous people learning of the terminations via newswires or television.

Corzine Resigns From MF Global As Investigations Continue

Things are not looking good for former New Jersey Governor Jon Corzine. First, his new company MF Global imploded after Corzine pushed the company to take risky bets on sovereign debt in Europe and failed to have sufficient collateral to back those bets.

Then, the company failed to provide proper protections for client accounts - commingling funds of clients with company money that is a huge red flag. That only came to light after suitors for the company started poring through the books and saw serious discrepancies. Those discrepancies total more than $630 million that cannot be accounted for.

The potential buyers fled, MF Global declared bankruptcy, and the regulators and investigators are now picking over the ruins.

And what of Jon Corzine? Not only has he resigned as head of MF Global, he's now hired a criminal attorney, which is natural because he's likely going to be facing charges relating to the commingling of funds, leading everyone astray with his reassurances at a time when he knew, or had reason to know, that his company was crumbling all around him.

We're supposed to be grateful that Corzine didn't seek his massive severance package, which totals more than $12 million? Sorry, but he's bankrupted the company; there's no money to collect.

Mr. Corzine resigned from MF Global on Friday morning and will not seek $12 million severance payments.

Federal authorities, including the Federal Bureau of Investigation and the Securities and Exchange Commission, are investigating the $630 million in missing customer money at MF Global.

Mr. Levander could not be reached as he is out of the country, according to his assistant. He did not return an e-mail seeking comment. Daniel O’Donnell, the chief executive of Mr. Levander’s law firm, Dechert, declined to comment.

In Mr. Levander, the chairman of Dechert, Mr. Corzine has retained a New York lawyer who is no stranger to defending prominent Wall Street executives. He represented John Thain, the former chief executive at Merrill Lynch, in a government inquiry related his role in Merrill’s sale to Bank of America. Ezra Merkin, a hedge fund manager who invested with Bernard L. Madoff, hired Mr. Levander to defend him against a New York attorney general’s lawsuit connected to the Madoff case.

“Andy is not just smart but has a deep understanding of the investigative process,” said Steven M. Cohen, a defense lawyer at Zuckerman Spaeder in New York and the former top aide to Governor Andrew M. Cuomo. “He understands how cases are built and therefore how they are defended.”

Other recent high-profile assignments for the bow-tie clad Mr. Levander include his representation of the outside directors of Lehman Brothers and Monster.com, a jobs Web site, in a government investigation relating to the backdating of employee stock options. In 2004, he obtained an acquittal for Michael Rigas, a former Adelphia Communications executive, in a criminal trial. A jury convicted Mr. Rigas’s father and brother in the same case.

Like much of New York’s white-collar defense bar, Mr. Levander is a former federal prosecutor in Manhattan. A graduate of Tufts University and Columbia Law School, Mr. Levander clerked for Judge Wilfred Feinberg on the Federal Appeals Court in Manhattan. He joined Dechert in 2005 after it acquired Swidler Berlin Shereff Friedman, a small New York firm where he had worked.

Corzine also hired another firm to represent him in bankruptcy proceedings and shareholder suits that are already being lodged against the firm and him personally.

This will not end well for Corzine.

UPDATE:
Is there a conflict of interests between the regulators and investigations into Corzine's actions. The head of the Commodity Futures Trading Commission (CFTC), is Gary Gensler. The two have crossed paths numerous times and raises questions as to whether Gensler can do his job to suss out all that went wrong with MF Global and hold Corzine accountable:

Gensler was a partner with Goldman Sachs, rising to rank of co-head of finance before leaving the firm in 1997 for a role in the U.S. Treasury department. At the time, Corzine, a 24-year veteran of the firm, served as its CEO.

The two men met up again on Capitol Hill, when Corzine, then the junior senator from New Jersey, in 2002 helped co-author the landmark Sarbanes-Oxley Act, which imposed massive new regulations in response to accounting scandals that caused Enron, Tyco and WorldCom to implode. Gensler was a senior advisor to Sen. Paul Sarbanes (D-Md.), then chairman of the Senate Banking Committee, for whom the act was partially named.

This week’s turn of events–MF Global’s meltdown and subsequent findings by its regulators that the firm allegedly violated requirements on customer segregated funds–promises to reunite the two men once again, though on opposite sides of the table. A CFTC spokesman did not return a message immediately seeking comment on Corzine and Gensler’s connection and whether it represents a potential conflict.

I don't think this will affect the investigations, since Gensler could recuse himself while others around him in the CFTC can do their jobs.

UPDATE:
Wouldn't you know it that Corzine lobbied to get regulators to reduce their restrictions on the very kinds of transactions that undid MF Global.

As a former United States senator and a former governor of New Jersey, as well as the leader of Goldman Sachs in the 1990s, Mr. Corzine carried significant weight in the worlds of Washington and Wall Street. While other financial firms employed teams of lobbyists to fight the new regulation, MF Global’s chief executive in meetings over the last year personally pressed regulators to halt their plans.

The agency proposing the rule, the Commodity Futures Trading Commission, relented. Wall Street, which has been working to curb many financial regulations, won another battle.

Yet with MF Global in bankruptcy and regulators scrambling to find $630 million in missing customer funds, Mr. Corzine’s effort may come back to haunt him.

The proposed rule would have restricted a complicated transaction that allowed MF Global in essence to borrow money from its own customers. Brokerage firms are allowed to use customers’ money to earn interest, not unlike banks, but this rule would have outlawed using customer funds for a loan to the firm itself.

Corzine's MF Global Missing $633 Million

In the wake of the collapse of MF Global, regulators have found that $633 million is missing. The regulators also found that the company sought to hide transactions from regulators as bankruptcy was looming:

MF Global, the dealer-broker firm run by former Gov. Jon Corzine, made several last minute transfers of customer funds in a manner apparently designed to avoid detection as it headed for bankruptcy, an industry regulator said Wednesday.

The statement, by CME Group of Chicago, came as federal regulators probe whether the company used customer funds for company business.

Federal regulations require that customer and company funds be kept separate. Lawyers for the Chicago Futures Trading Commission, which regulates futures and options trading, said $633 million in customer commodities funds is missing, Bloomberg News reported.

CME Group, the owner-operator of the Chicago Mercantile Exchange, said that any transfer of customer funds occurred after CME completed an audit last week.

"The results of our review indicated that MF Global was in compliance with its segregation requirements," in the audit period, CME said. But the statement added that "It now appears that the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection."

The company, which filed for bankruptcy Monday, did not report the transfers to the Chicago Futures Trading Commission, which regulates futures and options trading, until early Monday morning, CME said.

It would appear that someone authorized these transactions following the audit period so as to cover the losses that were pushing the firm into insolvency and ahead of the bankruptcy sale to another brokerage.

That's criminal action - and those involved, including Jon Corzine must be held accountable.



Corzine pushed the company to get into sovereign debt bets as a way to expand a profit center, and the bets went badly particularly because the company didn't have sufficient collateral to cover the positions if they went bad.

The company failed to maintain adequate controls separating client accounts from the company's own monies.

The sale of MF Global prior to the bankruptcy was scuttled when the potential buyer ended up finding discrepancies. Turns out that the potential sale showed the failures and exposed all kinds of problems with the firm.

Corzine's Big Bets Bust Major Financial Firm; Regulators Want To Know Where Investor Money Went

One of the sacrosanct rules in finance (and law) is that you never commingle investor/client funds with your own. It's one of the few automatic ways that a lawyer can find themselves disbarred.

Yet, we're now learning that the financial firm headed up by none other than former New Jersey Jon Corzine is potentially in hot water over being incapable of accounting for hundreds of millions of dollars of investor funds after MF Global went belly up after Corzine bet big on foreign funds and lost.

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.

Sloppy controls my ass. Banks and financial firms know down to the penny how much is in individual accounts and that MF Global was playing games and can't account for where all the investor money was is not just troubling, but it shows that regulators failed in basic oversight to make sure that the brokerage was playing by the rules.

How did MF Global get in this mess? Corzine bet company money on European debt - and didn't have sufficient capital to back up the bets. He did the same kind of thing at Goldman Sachs where some of those decisions went bust, but Goldman Sachs could absorb some of those losses. Here, he's dealing with a much smaller firm and by buying up big holdings of debt from Spain, Italy, Portugal, Belgium and Ireland at a discount, he thought he could turn around and profit if the Eurozone fixed its mess. However, it wasn't to be.

So, while the bonds may have matured in less than a year - we've repeatedly seen that failure to have proper capitalization can lay low major financial firms. MF Global was taking inordinate risk and lacked sufficient capital reserves; that's where the issue of investor money comes into play. Regulators are now poring over whether the company used those investor funds to paper over and increase the capital behind the bond bet.

The CME and other regulatory bodies are already saying that MF Global broke the rules. The question will be determining the extent of the mess.

And criminal charges should be coming down the road too. You break these kinds of rules, and you're essentially stealing from your clients in the hopes that you can make back your money. It's a losing proposition and the brokerage industry needs to know that these rules aren't to be trifled with.