MF Global accounts shock leaves clients scrambling

Jon Corzine

CHICAGO/NEW YORK, (Reuters) – MF Global Holdings Ltd  failed to protect customer accounts by keeping them separate  from its own funds, said a top U.S. exchange regulator, another  shock for commodity markets scrambling to contain fallout from  the brokerage’s bankruptcy.

Jon Corzine

The revelation yesterday by CME Group Inc suggests Jon  Corzine’s MF Global violated a central tenet of futures  brokerages. It could erode confidence in a market that for  decades has enjoyed a sterling reputation for safety.

MF Global cannot account for a large amount of customer  money that was supposed to be kept separate from other funds,  sources said, and regulators are scrambling to review the  broker’s accounts. The cause of the shortfall — including  whether the company pilfered client funds or merely cannot  account for the money — was not clear.

The Federal Bureau of Investigation is showing preliminary  interest in regulatory probes, a person briefed on the matter  said.

MF Global did not keep customer accounts separate from the  firm’s funds, said Craig Donohue, CEO of exchange operator and  market regulator CME Group. Even though the client money could  eventually be accounted for, the regulator believes the firm  broke the segregation rules.

Another regulator, the Commodity Futures Trading  Commission, voted to issue subpoenas to the firm, the Wall  Street Journal reported.

Neither MF Global nor Corzine has been accused of any  wrongdoing.

The New York Times reported late on Monday that federal  regulators discovered that hundreds of millions of dollars in  customer money — supposed to be segregated and protected from  the rest of the business — had gone missing.

At the U.S. Bankruptcy Court in Manhattan, MF Global’s lead  attorney, Ken Ziman, said all of the funds in the company’s  broker dealer are accounted for.

To management’s best knowledge, “there are no shortfalls”  in brokerage accounts, said Ziman, of law firm Skadden, Arps,  Slate, Meagher & Flom, as MF Global’s first bankruptcy hearing  began yesterday.

The fall of the brokerage led by ex-Goldman Sachs Group Inc  boss and former New Jersey governor Corzine sent shockwaves  through commodity markets.

While MF Global began what could be a complicated process  of liquidating customer positions, some customers feared that  millions of dollars were tied up in bankruptcy. Others expected  lawsuits, according to interviews with brokers, funds and  lawyers.

“We’re basically putting out fires,” said an MF Global  employee. “Our customers are upset and we’re upset that they  are upset.”

A company spokeswoman declined to comment.

Last night, the Investment Industry Regulatory  Organization of Canada announced the suspension of MF Global  Canada Co. Trading in Australian agricultural futures and  options on the ASX 24 platform will resume on Wednesday after  being suspended following the collapse of MF Global, exchange  operator ASX Ltd said.

MF Global had $7.3 billion in customer assets on Aug. 31,  according to Commodity Futures Trading Commis-sion data. It was  the eighth-largest U.S. futures broker and had a big presence  in commodity markets worldwide. The company filed for Chapter  11 bankruptcy on Monday after failing to find a buyer.