fb-pixelMF Global may have improperly diverted customer cash - The Boston Globe Skip to main content

MF Global may have improperly diverted customer cash

NEW YORK - MF Global improperly diverted customers’ cash for its own use in the days before its bankruptcy, an act that regulators believe may help explain why $600 million of customer funds remains missing, people briefed on the investigation said.

Investigators have now zeroed in on hundreds of millions of dollars in suspect borrowing at the commodities and derivatives brokerage firm, which at the time of its collapse was run by Jon S. Corzine, the former Democratic governor of New Jersey. At least some of that money was used to cover trading losses at MF Global, regulators suspect, meaning the money is no longer simply missing. It is gone.

Advertisement



MF Global, like other brokers, can use customer cash if it puts up sufficient collateral. But the firm did not provide enough backing in late October, essentially taking free loans, said the people briefed on the investigation, who spoke on the condition of anonymity because the inquiry is continuing.

As customers rushed to withdraw money while the firm was teetering on the brink of bankruptcy, that questionable borrowing exacerbated a liquidity crisis at the firm.

It is unclear what MF Global did with all of the money or whether it can be recovered. The firm may have used some of the cash to keep its own lenders at bay, which means the money could be sitting in an account at another firm.

And some of the $600 million may yet materialize. As a patchwork of federal agencies and the trustee overseeing the firm’s liquidation reconstruct MF Global’s books, they expect to find that in the chaotic last days the firm failed to record when some customers received their money.

But a big chunk will probably be much harder to recover, the people said, because it was used to pay off losses, rather than back trades.

Advertisement



The search for the missing money has touched the breadth of the commodities futures business, from Wall Street hedge funds to Midwest farmers. As hundreds of examiners pore over records around the clock, comb through 38,000 customer accounts, and interview former employees, brief moments of hope have emerged, only to be proven false.

An MF Global spokesman declined to comment. Neither the firm nor Corzine have been accused of wrongdoing.

A lawyer for MF Global, Marc E. Kasowitz, said the company and its employees were cooperating with regulators as well as with the trustee.

“Any characterization at this point of what occurred at MF Global is premature and inappropriate,’’ Kasowitz said in a statement.

The failure of the brokerage firm set off a wave of panic among its tens of thousands of customers. Many of them are farmers and small-business owners, who use these markets to protect themselves from swings in the prices of crops and metals.

In a bankruptcy hearing in New York yesterday, a judge approved the transfer of about 60 percent of the cash sitting at MF Global to its 23,000 rightful owners, totaling about $520 million.

The trustee, James W. Giddens, plans to begin disbursing the money before Thanksgiving.

Like many other futures shops, MF Global routinely borrowed money from customers and replaced it with assets like US Treasury securities. Firms often keep a cushion of cash to protect customer funds, which they are allowed to tap under certain restrictions.

Advertisement



But according to the people briefed on the investigation, MF Global depleted this buffer and then dipped into the customer accounts to the tune of hundreds of millions of dollars. And in the days before the collapse, the firm stopped backing the loans it took from customers.

It is unclear whether MF Global officials knowingly used customer money or if they believed the buffer was intact. If investigators determine that MF Global intentionally tapped the customer funds, they could file both civil and criminal charges.

MF Global’s customers who acted fast got their money back. The rest now must wait in line and may never fully recover their funds. Bankruptcy experts doubt the trustee will be able to claw back money secured by clients who rushed out the door.

The process will almost certainly be painful. The trustee has transferred some money backing open trades from MF Global to other brokers. And soon, the trustee will begin the transfer of 60 percent of cash accounts back to its owners.

But as proof of how complex and messy these affairs can be, customers with cash as well as open trades do not yet qualify to get their any of their cash back.

Jason Skole, an investor in Boca Raton, Fla., had about $200,000 trapped at MF Global when the firm declared bankruptcy, a fraction in open trades and the majority in cash. “You don’t worry about any insurance in this industry because your money is protected, but it’s not,’’ Skole said. “It’s a terrible situation. It’s doesn’t make for a good Thanksgiving or Christmas.’’

Advertisement