Posted by: Dan Beucke on November 1, 2011 at 2:39 PM
If the collapse of MF Global wasn’t enough for critics who accuse Wall Street of being one big casino, this should do it: Reports say that the big brokerage was mingling customer funds with its own in violation of rules for the Commodity Futures Trading Commission and the CME exchange where the firm did business.
It was just last month, you may recall, that U.S. prosecutors alleged Full Tilt Poker, one of the biggest online poker operations, used “customer” (i.e., player) money to pay its directors, in what they called “a global Ponzi scheme.” (Lawyers for Full Tilt issued denials. No response yet from Jon Corzine, MF Global’s co-chairman, or a company spokesperson, according to Bloomberg.)
It’s unclear how much customer money was involved at MF Global, though more than $600 million was unaccounted for as of late Monday, according to the New York Times Dealbook blog. MF Global bet $6.3 billion on European debt and lost big. Keeping customer accounts separate from the firm’s is supposed to mitigate the risks in those big dice rolls. As the Bloomberg story puts it:
It’s kind of considered the third rail of the brokerage industry that when you’re holding your customers’ funds in their names, you don’t touch them — even in an emergency situation when you’re running short of cash,” Darrell Duffie, a professor at Stanford University’s Graduate School of Business, said in a telephone interview.
This begs the obvious question: if MF Global did tap customers, will Corzine or other company executives be hearing from U.S. Attorney Preet Bharara’s office?
Update, 5:35 p.m.: The Wall Street Journal just reported the FBI is planning to investigate MF Global in the wake of “questions about a possible shortfall in client funds.”
Update, 6:35 p.m.: A lawyer for MF Global told a bankruptcy judge this afternoon that “to the best knowledge of management, there is no shortfall” in customer funds. The Securities Investor Protection Corp., which has appointed a trustee to liquidate MF Global’s brokerage assets, doesn’t know yet: “I certainly hope it’s true, but it’s far too early for me to know one way or the other,” SIPC CEO Stephen Harbeck told Bloomberg.