Federal regulators have discovered that hundreds of millions of dollars in customer money has gone missing from MF Global (NYSE:MF) in the last few days, prompting an investigation in to the brokerage firm, which just yesterday filed for Chapter 11 bankruptcy protection.
The discovery that money was missing caused a deal to sell a major part of MF Global to rival brokerage firm Interactive Brokers Group to fall through at the last minute yesterday. MF Global has staked its survival on completing the deal. Instead, the firm was forced to file for bankruptcy.
Regulators are now investigating whether MF Global diverted customer funds in order to support its own trades in a last-ditch effort to avoid collapse. However, regulators’ inability to locate the money might simply reflect poor internal controls and record keeping at MF Global.
At first, as much as $950 million was thought to be missing, but that figure fell to less than $700 million late Monday as the firm sorted through its bankruptcy. Additional funds may re-appear in a similar manner over the next few days. Still, the investigation could uncover something more intentional.
In either case, the fact of the missing funds could prove MF Global violated a tenet of Wall Street regulation: that customers’ funds be kept separate from company money. One of the most basic duties of any brokerage firm is to keep track of customer accounts on a daily basis. For millions to go missing, no matter what the reason, is unacceptable.
Though no formal charges have been brought and regulators have not yet accused MF Global or CEO Jon Corzine any wrongdoing, the inquiry threatens to further tarnish their reputations. Arriving at MF Global last year after a failed bid for the New Jersey governorship, Corzine sought to bolster profits by increasing the number of bets the firm made using its own capital. Under his direction, MF Global bought big holdings of debt from Spain, Italy, Portugal, Belgium, and Ireland at a discount, bonds that would have become very profitable when Europe had solved its fiscal problems.
However, Corzine’s bet came to light in a regulatory filing, and MF Global was seen as having taken an inordinate amount of risk with little room for error. By Friday evening, MF Global was under pressure to put up more money to support its trading positions. Ultimately, MF Global was toppled by investor anxiety over Europe’s debt crisis.
The fact that the bonds have lost little value and mature in less than a year fell on deaf ears. Other financial institutions have been buffeted in recent months by their sovereign debt holdings issued by weak European countries, but two ratings agencies cut their ratings on the firm to junk last week on concerns over MF Global’s exposure to Europe.
In a bid for survival, Corzine and his advisers were hoping to sell at least some of the firm. On Friday, asset manager BlackRock was hired to help MF Global wind down its balance sheet, which included efforts to sell its sovereign debt. BlackRock was able to value the portfolio, but didn’t have time to find a buyer before other obstacles arose.
Interactive Brokers discovered the missing customer money late Sunday, causing them to abandon the deal. Later on Monday, when explaining to regulators why the deal had fallen through, MF Global disclosed the concerns about the missing money. However, regulators had already suspected a potential shortfall days earlier.
While it is possible that banks are holding the customer funds, with many hesitating last week to send MF Global the money, the firm has yet to produce evidence that all of the outstanding money is deposited with banks. Regulators are looking into whether the customer funds were misallocated.