MF Global update

Jun 8, 2012

New developments have arisen in the ongoing investigation into MF Global’s collapse. Among them, MF Global trustee James Giddens released his investigative report, the Commodity Futures Trading Commission (CFTC) has taken some action, and some conversations among MF Global employees which suggest knowledge that wrongdoing did exist are being investigated.

Investigation report released

Giddens released his report Monday, June 4 regarding the investigation. The report names three criteria which must be met before all of the $1.6 billion lost can be recovered: (1) the successful recovery of monies sent overseas to the UK branch of MF Global; (2) recovery of monies currently held by third parties such as JP Morgan and other banks; and (3) proper reallocation of improperly mixed customer accounts.

Giddens’ report includes his opinion that claims of negligence and “breach of fiduciary duty” can be brought against John Corzine, ex CEO of MF Global, and other management. Other professional opinions voiced in the report suggest the customer monies held by JP Morgan are recoverable.

Giddens makes several recommendations in his report, including requiring commodities traders to: have specified “cushion” amounts, correct differences in customer protections in firms with overseas divisions, create a protection fund for commodities customers, and provide for the civil liability of officers and directors in the case of segregated funds shortfall. This latter recommendation is akin to the popularly titled “Corzine rule” which has been floating around since the MF Global investigation began.

Giddens did not make any recommendations on criminal liability, calling it outside his purview and up to law enforcement and regulatory groups.

CFTC filed claim

According to an official announcement from CFTC, the group has filed a general creditor claim in the MF Global liquidation. If the ongoing investigation turns up evidence of wrongdoing and results in enforcement action against MF Global, the claim will be used to pursue restitution benefits for customers. This claim does not supersede customer claims against MF Global, but is an attempt at covering all possible options for recovering customer funds.

Conversations investigated

The conversations of a number of MF Global employees, including vice treasurer Edith O’Brien, and Matthew Hughey—described by the Wall Street Journal as a midlevel accountant—are currently under investigation as they suggest knowledge of the problems in the last days of MF Global, contrary to earlier claims.

The conversation under scrutiny took place Oct. 28, 2011, three days before the company filed for bankruptcy. Hughey reportedly went to O’Brien over a $325 million discrepancy he’d discovered in different statements about customer funds. Later that day, MF Global sent CME Group its daily customer accounts report for the previous day, reporting there had been a $200 million cushion. By the weekend, Hughey emailed the employee to whom O’Brien had delegated the earlier reported issue saying they needed to talk “ASAP” about the “$952 million seg issue.” — Kerry Halladay, WLJ Editor