MF Global Customers Say Money Safeguards Failed

By Matthew Leising - Nov 6, 2011 1:31 AM GMT+0700

Customers of MF Global Holdings Inc. whose money is still trapped at the futures broker almost a week after filing for bankruptcy protection say the safeguards meant to protect them failed as exchanges and regulators work to move client positions.

CME Group Inc. (CME), the world’s largest futures exchange that’s also responsible for auditing its clearing members such as MF Global under its authority as a self-regulating organization, said on Nov. 4 it was in the process of transferring about 15,000 positions. Under a court order in the bankruptcy case, no funds or collateral not backing futures positions can be transferred to another futures broker.

“It shows a terrible weakness in the exchanges, the industry and the regulators,” said Elaine Knuth, an MF Global customer since 2005 who trades agricultural commodities for her own account. Her positions total between $100,000 and $500,000, she said. “The whole system broke down.”

MF Global, the holding company for the broker-dealer run by ex-Goldman Sachs Group Inc. co-chairman Jon Corzine, filed for bankruptcy protection on Oct. 31 after making bets on European sovereign debt. Its broker-dealer unit, MF Global Inc., faces liquidation.

The firm listed debt of $39.7 billion and assets of $41 billion in Chapter 11 papers filed in U.S. Bankruptcy Court in Manhattan.

Account ‘Deficiencies’

The filing came as MF Global told regulators of potential “deficiencies” in some customer accounts, according to a statement by the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission.

Corzine, 64, quit as chairman and chief executive officer of MF Global on Nov. 4. Corzine who was paid more than $4 million since joining the firm 20 months ago, won’t seek severance pay, the company said. Corzine’s resignation came four days after the filing as the company’s $6.3 billion bets on European sovereign debt rattled investors.

MF Global customers may have to wait years to get their money back if the futures broker is sued, Frederick Grede, the liquidation trustee overseeing the bankruptcy of futures brokerage Sentinel Management Group Inc. said Nov. 2.

“People should expect that the money on deposit with MF Global will be tied up for some time,” Grede said. A former chief executive officer of the Hong Kong Futures Exchange, he has sought to recover about $600 million of customer money from Sentinel, the futures broker that filed for bankruptcy in 2007. “I still have extensive litigation with regard to the customers” of Sentinel, he said. “It’s been four years.”

Locating Money

MF Global has located $658.8 million in customer funds in a custodial account at JPMorgan Chase & Co., according to two people with knowledge of the matter. The account contained a total of $2.2 billion as of Oct. 31, including both the firm’s own money and customer funds, said one of the people, who declined to be identified because the information is private.

About $593 million of funds remain unaccounted for, said another person with knowledge of regulatory probes into the firm’s collapse. That amount has decreased from the shortfall of $633 million the CFTC cited Nov. 2, the person said.

JPMorgan doesn’t have “any information” about whether the account balances are “related in any way to the ‘missing’ customer funds,” Jennifer Zuccarelli, a spokeswoman for the New York-based lender, said in response to questions from Bloomberg News. “What we can confirm is that the accounts and their balances have been and continue to be wholly transparent to MF Global” and the trustee appointed to locate customer assets.

Losing Trust

CME Group is losing the trust of investors who use the exchange and expect their money to be protected, said a trader with $500,000 in an MF Global account that’s been frozen since Oct. 31, who asked not to be named because he fears reprisals. CME Group said the trapped money may be tied up in the bankruptcy proceedings, said the person, who has been trading since 1987.

“We understand the frustration and the need for accurate information,” Michael Shore, a spokesman for the CME Group, said in an e-mailed statement. “We have been using a number of channels to communicate with customers as soon as information has been available and will continue to provide updates throughout the process.”

The CME is working with the CFTC and the Securities Investor Protection Corp., or SIPC, trustee to transfer MF Global accounts and CME Clearing-held collateral to other qualified clearing firms, as is legally permitted, he said.

CME Group is reducing the initial margin required to back futures trades to ease the bulk transfer of accounts held by MF Global customers, the company said in a statement today.

Temporary Relief

“This is a short-term accommodation to maintain market integrity and provide temporary relief to customers whose accounts have been disrupted by this event,” the Chicago-based exchange owner said in the e-mailed statement.

James W. Giddens, the trustee liquidating the MF Global brokerage, froze 150,000 customer accounts on Oct. 31, including 50,000 commodities accounts that he aims to transfer to other futures brokers. Customers will hear from their future brokers when the transfers are made, the trustee said in a Nov. 3 statement. The trustee and his team will be working through the weekend to complete bulk transfers, and will probably transfer individual accounts next week, Giddens said.

CME Group has said the segregated MF Global account positions will move to two or more of five clearing members, ABN AMRO Chicago Clearing, ADM Investor Services, Dorman Trading, FC Stone, R.J. O’Brien, and Rosenthal Collins Group.

Customer Money

CME Group and the CFTC should have protected customer money in late October when it was clear the firm was in trouble, said an introducing broker who has been an MF Global customer for five years and also requested anonymity for fear of reprisal.

Dave Gary, a CFTC spokesman, didn’t immediately return a call for comment.

Exchanges including CME Group and Intercontinental Exchange Inc. said earlier this week that MF Global customers could only liquidate existing positions and not add new ones. They directed MF Global customers to the firm to broker the close out trades.

Knuth said she wasn’t able to liquidate her positions through MF Global because it was impossible to get through to the firm to place the order.

“It seems like they had one poor clerk handling all the orders. It was insane,” she said, adding that MF Global clients should have been allowed to liquidate trades in an orderly fashion. “It’s not supposed to happen like this, it’s shocking. What disheartens and disgusts me is the true damage it’s done to people’s livelihoods and businesses. They can’t risk having their funds tied up for months or years. There is no recovery from that.”

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.