Report: MF Global Broke Law, Did Not Keep Client Funds Separate

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The bankruptcy of MF Global has attracted a lot of attention on the internet, for obvious reasons.  It seems that its head, former New Jersey Senator and Governor Jon Corzine, was not a popular man with, well, pretty much anyone.  (And having had him speak at my business-school graduation, I can see why.)  The unholy glee in his fall has been surprisingly well distributed across the many corners of the internet.


But I held off--in part because I was mired in that somewhat excessive post on elites and expectations, and in part, because I wasn't sure exactly what to say.  It seemed a shame to kick a man when he was down.  But the execution of the bankruptcy seemed to have gone pretty smoothly.  Absent worries that this was the start of the second US banking panic, a la 1932, I didn't have much to say.

Well, that was yesterday morning.  Today, as Jeffries denies that it's the next MF Global, the process starts to look less smooth.  And breaking news reveals that the reason that MF Global couldn't sell the company, and had to file for bankruptcy instead, is that a potential buyer allegedly discovered that they'd been intermingling client accounts and company funds:

MF Global Holdings Ltd, the futures broker that filed for bankruptcy protection on Monday, did not separate its customers' accounts from the firm's funds as required by law, its main exchange regulator said on Tuesday.

"CME has determined MF Global is not in compliance with Commodity Futures Trading Commission and CME customer segregation requirements," CME Group Inc Chief Executive Craig Donohue said. Futures brokers must keep customer accounts separate from each other and from the firm's own money.
This is not some minor regulatory infraction.  At least as I understand the law, this is the regulatory equivalent of a felony offense.  No wonder the buyer bolted.

Of course, it's too early to know how much to make of this.  There's a basically benign interpretation, which is that MF Global was guilty of nothing more than sloppy bookkeeping and poor management.  This would have been a minor but probably resolvable issue in the context of a normal sale--but since MF Global was in trouble and needed to sell itself off before markets open on Monday, there simply wasn't time to prove that the problems were small and easily resolved.

There's also a really, really bad explanation, which is that MF Global had been dipping into client accounts in order to cover losses at the firm.  If that's the case, then I assume that someone--maybe even top management--goes to jail.  As well they should.  Brokers who filch client funds violate both the law and their moral duties to their clients--and they endanger a system which relies heavily on trust.

But as I say, it's too early to tell which category this falls into.  One thing, however, is safe to say:  the cloud over Corzine's latest failed venture just got bigger and blacker.

Update:  NPR is reporting that MF Global is admitting having dipped into client funds. If true, someone's going to jail.  And they should be pretty senior.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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