Bloomberg News

MF Global Told CME It Used Customer Funds, Timeline Shows

December 19, 2011

(Updates with CFTC commissioner comment in 20th paragraph.)

Dec. 16 (Bloomberg) -- MF Global Holdings Ltd. used about $700 million of customer funds to “meet liquidity issues” in the days prior to its bankruptcy, according to CME Group Inc., which had auditing authority over the failed futures broker.

CME Group detailed its dealings with MF Global in documents released yesterday by the oversight panel of the House Financial Services Committee. Christine Serwinski, chief financial officer for North America at MF Global, and Edith O’Brien, a treasurer, told Mike Procajlo, an exchange auditor, at around 1 a.m. on Oct. 31 in Serwinski’s Chicago office that the customer money was transferred on Oct. 27 and Oct. 28 and possibly Oct. 26, according to a CME Group timeline.

“About $700 million was moved to the broker-dealer side of the business to meet liquidity issues in a series of transactions on Thursday, Friday and possibly Wednesday,” Serwinski and O’Brien told Procajlo hours before the firm filed for the eighth-largest bankruptcy following record quarterly losses and $6.3 billion in trades on European sovereign debt.

The timeline, the most detailed account yet of what may have happened to as much as $1.2 billion of missing customer money, was released as Jon Corzine, the firm’s former chairman, chief executive officer and architect of the European trades, faced his third congressional panel in the past week. The former senator and governor of New Jersey said he doesn’t know what happened to the money.

New York-based MF Global’s failure marks the first time a futures broker’s bankruptcy has led to the loss of customer funds, according to Terrence Duffy, CME Group’s executive chairman.

‘Not a Permitted Use’

“A statement that $700 million was taken implies a rule violation,” said Ronald Filler, who was a managing director in the global futures business at Lehman Brothers Holdings Inc. for 16 years. “That is not a permitted use of customer funds under Commodity Futures Trading Commission rules,” said Filler, who is now a professor at New York Law School, specializing in derivatives and futures brokers issues.

Messages at Serwinski’s home telephone number and a request to speak to O’Brien through the office of James Giddens, the MF Global bankruptcy trustee, weren’t immediately returned. Laurie Bischel, a CME Group spokeswoman, declined to comment on Procajlo’s involvement in the matter.

MF Global had its credit rating cut to junk on Oct. 27 by Moody’s Investors Service and Fitch Ratings as its shares plunged and bonds began trading at distressed levels amid a crisis of investor confidence over the Europe trades.

Cover Margin Payments

The downgrades “sparked an increase in margin calls” that were “threatening overall liquidity,” Bradley Abelow, MF Global’s president and chief operating officer, said in the company’s bankruptcy filing.

Customer funds were also used to make a $175 million loan to MF Global’s U.K. subsidiary, Duffy said yesterday.

Regulators are investigating whether MF Global intentionally used customer funds to cover margin payments on the European government bond trades. That may bolster their ability to retrieve the missing money, people with knowledge of the matter said this week.

Allegations Made

Investigators including the Securities and Exchange Commission, the Justice Department, the Commodity Futures Trading Commission and the bankruptcy trustee are reviewing the brokerage’s accounts seeking proof of fraud, which would allow them to recover some of the lost money, said the people, who declined to be identified because the probe is continuing.

A revised MF Global customer segregation report was sent to CME Group on Oct. 31 that showed $891.5 million in missing customer money as of Oct. 28, the CME Group chronology shows.

Corzine, 64, told lawmakers yesterday that the firm’s back- office staff “explicitly” informed him that the $175 million transfer made before the company filed for bankruptcy was legal.

He was responding to allegations made at a U.S. Senate hearing Dec. 13 when Duffy told lawmakers Corzine had known of the loan using client money. At yesterday’s hearing of an oversight panel of the House Financial Services Committee, Corzine denied the suggestion that he may have authorized improper use of customer money.

Moving Money

Once customer money is moved from the customer segregated accounts to the broker-dealer unit of a broker it can lose its designation as protected funds, Filler said.

“No one knows it belongs to the customer” and treasury officers may mistakenly think the funds are available for general use, he said.

Investigators are attempting to determine which transactions involving customer funds were illegitimate, Jill E. Sommers, the senior CFTC commissioner overseeing the investigation said in a telephone interview this week.

If a transaction that was legitimate in the beginning “becomes illegitimate” later in a chain of transactions, then the chances of recovering the funds could be slim. “It may be gone,” Sommers said.

The CFTC should ban derivatives brokers from investing client funds in anything other than U.S. debt, commissioner Bart Chilton said today. Recent changes in regulations governing client funds, approved after MF Global filed for bankruptcy, don’t provide enough protection for clients, he said.

‘Confidence and Trust’

Steps need to be taken to put “confidence and trust back into our U.S. derivatives markets,” Chilton, a Democrat, said in a statement.

The missing money doomed a sale of MF Global’s futures brokerage to Interactive Brokers Group Inc., Hans Stoll, a board member of the potential acquirer, said last month.

According to the CME timeline, the Interactive Brokers deal fell apart between 4:37 a.m. and 6:45 a.m. on Oct. 31. MF Global filed for bankruptcy at 9 a.m. that morning.

--With assistance from Lorraine Woellert and Clea Benson in Washington. Editors: Alan Goldstein, Pierre Paulden

To contact the reporters on this story: Matthew Leising in New York at mleising@bloomberg.net; Silla Brush in Washington at sbrush@bloomberg.net.

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Lawrence Roberts at lroberts13@bloomberg.net


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