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CME Knew of Shortfall in MF Global Client Funds Before Commodity Regulator

Examiners from CME Group Inc. (CME), the world’s largest futures exchange, found unexplained wire transfers at MF Global Inc. and a $900 million shortfall in client funds during the weekend the failing broker was talking with possible buyers, a person briefed on the matter said.

CME, which was the overseer of MF Global, noticed the shortfall by Oct. 30 -- about a day before U.S. regulators said they were told of the missing funds and the broker filed for bankruptcy protection, according to the person, who spoke on condition of anonymity because the review isn’t public.

The futures exchange hasn’t publicly disclosed when it first suspected funds were missing. In a Nov. 2 statement, CME said MF Global didn’t inform CME or the Commodity Futures Trading Commission about the shortfall until Oct. 31. Transfers at MF Global were made “in a manner that may have been designed to avoid detection,” CME said in the statement.

Laurie Bischel, a CME spokeswoman, declined yesterday to comment further on the timeline of the exchange’s oversight of MF Global.

CFTC chairman Gary Gensler was informed of the shortfall in a 2:30 a.m. telephone call from MF Global executives on Oct. 31, Gensler said on Nov. 3.

CME found that the wire transfers involving client funds took place after Oct. 26, when the exchange had conducted a review of MF Global that found the client accounts were properly segregated, the person briefed on the matter said.

Acquisition Talks

Discrepancies over missing customer funds doomed a potential acquisition by Interactive Brokers Group Inc., said Hans Stoll, an Interactive Brokers director and a professor of finance at Vanderbilt University in Nashville, Tennessee. The deal could have averted the bankruptcy filing.

“The board certainly considered that purchase and stepped away from it at a point where it became clear there were lots of uncertainties about the accounts and segregated funds,” Stoll said in a Nov. 1 interview.

MF Global sought bankruptcy court protection after making bets on European sovereign debt and getting margin calls. The firm listed liabilities of $39.7 billion and assets of $41 billion in Chapter 11 papers.

The probe of MF Global’s cash movements is being conducted by the Justice Department, the CFTC, the Securities and Exchange Commission and the bankruptcy trustee’s staff in cooperation with the Securities Investor Protection Corp., James W. Giddens, the trustee, said on his website.

Fluctuating

The CFTC began investigating the missing funds on Oct. 31 and has issued subpoenas, including to PricewaterhouseCoopers LLP, the auditor of MF Global Holdings Ltd., the parent company of broker-dealer subsidiary MF Global Inc. The amount of missing funds has fluctuated since Oct. 31, and the CFTC is currently investigating about $600 million that should have been held in segregated accounts, according to a separate person with knowledge of the regulatory probe.

The agency took the rare step of publicly announcing its investigation, saying it was in the public interest to confirm the enforcement action. Gensler recused himself because of his ties to Jon S. Corzine, MF Global’s former chief executive. Gensler and Corzine worked together at Goldman Sachs Group Inc.

“This isn’t just a lost and found inquiry; it’s a full-on effort to get to the bottom of what appears to be a massive hide-and-seek ploy,” CFTC Commissioner Bart Chilton, a Democrat, said Nov. 10.

To contact the reporter on this story: Silla Brush in Washington at sbrush@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net

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