MF Global Inc. had a shortfall in customer-segregated funds beginning on Oct. 26, 2011, and that shortfall grew until the broker-dealer’s bankruptcy filing five days later, according to a preliminary report by James W. Giddens, trustee for the MF Global liquidation.
Giddens filed the report Feb. 6 with the United States Bankruptcy Court for the Southern District of New York. His filing followed by three days an announcement by the Chicago futures exchanges that a $100 million fund would be established to protect agricultural customers from future problems at commodities brokerages, slated to start March 1.
CME Group Inc., which owns the Chicago Mercantile Exchange and the Chicago Board of Trade, said the fund would provide more security to protect food producers who hedge the value of their crops.
MF Global was one of CME’s biggest customers. Approximately $1.2 billion in customers’ funds were reported missing. In February Giddens upped the estimate to $1.6 billion.
Former New Jersey Governor and former Goldman Sachs CEO Jon Corzine was MF Global’s CEO at the time of its collapse.
Used Funds for Other Activities
The Securities Investor Protection Corporation is involved in the MF Global case. The SIPC was created by Congress in 1970 and acts as trustee or works with an independent court-appointed trustee in a missing asset case to recover funds. The SIPC reports the investigation to date has found that funds believed to be in excess of segregation requirements in the commodities segregated accounts were used for other daily activities of MF Global.
In the past, such transfers were in amounts of less than $50 million, but as liquidity demands increased and could not be met from internal sources, much larger amounts were used, apparently with the assumption funds would be restored by the end of the day. By October 26, as the result of increasing demands for funds or collateral, funds did not return as anticipated.
‘Chaotic Situation’
In a press statement, the SIPC quoted Giddens:
“For three months our investigative team has worked to understand what happened during the final days of MF Global when cash and related securities movements were not always accurately and promptly recorded due to the chaotic situation and the complexity of the transactions.
“With these preliminary investigative conclusions in hand, we will analyze where the property wired out of bank accounts established to hold segregated and secured property ultimately ended up. We will then determine whether there is a sound and legal basis for recoveries against third parties that will help make customers whole. These will be very complex legal and factual determinations, which we will make consistent with our duty as the advocate for the former customers of MF Global Inc.”
Tracing Transactions
Investigators working for Giddens have traced most of the cash transactions, totaling more than $105 billion, made in and out of MF Global Inc. in the last week before bankruptcy.
They are also tracing securities transactions totaling more than $100 billion during its final week of operations. The securities included complex instruments, such as off-balance sheet repurchase transactions involving sovereign debt securities and derivatives.
