MF Global Holdings Ltd. (MF) moved hundreds of millions of dollars from its futures client accounts to its own securities brokerage before its Oct. 31 bankruptcy, according to person familiar with the audit of the company.
MF Global ran futures and securities brokerages and was required to segregate funds posted as collateral by futures clients. The company filed the eighth-largest U.S. bankruptcy after a wrong-way $6.3 billion trade on its own behalf on bonds of some of Europe’s most indebted nations.
The Commodity Futures Trading Commission, Securities and Exchange Commission and U.S. Justice Department are investigating cash movements at the firm before the bankruptcy filing. The CFTC has been probing about $600 million in futures client funds that disappeared as the firm prepared for bankruptcy. Regulators haven’t located the money.
“Segregation of customer funds is at the core of customer protection in the commodity futures and options markets and must be maintained at all times,” Jill E. Sommers, the most senior CFTC commissioner overseeing the probe, said in a Nov. 10 statement.
Jeremy Skule, an MF Global spokesman, declined to comment.
CME Group Inc., the world’s largest futures exchange, audited MF Global during the week before the bankruptcy and found the accounts were properly segregated. The shortfall in client funds was discovered during the weekend before the bankruptcy. Gary Gensler, CFTC chairman, said he first learned of the missing funds during a 2:30 a.m. call on Oct. 31.
Transfers at MF Global were made “in a manner that may have been designed to avoid detection,” CME said in a Nov. 2 statement.
The Wall Street Journal and New York Times reported earlier today on MF Global’s shift of client money.
Discrepancies over missing customer funds doomed a potential acquisition of MF Global 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 bankruptcy.
“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.
James Giddens, the liquidator of MF Global, will use “whatever legal means are available” to maximize the assets of the estate, Kent Jarrell, his spokesman, said today. U.S. Attorney Patrick Fitzgerald in Chicago issued subpoenas in the MF Global probe, a separate person familiar with the matter said.