The embattled securities firm MF Global moved millions of US dollars in missing client funds last week and tried to avoid detection as the company slid toward bankruptcy, a regulator said on Wednesday.
MF Global, which filed for bankruptcy protection on Monday, is the eighth-biggest US bankruptcy and the first major Wall Street firm to fail because of bets on European debt.
MF apparently made “substantial transfers” of customer money after an on-site audit last week, said the regulator, CME Group Inc. CME is a private company that oversees firms such as MF Global on behalf of US regulators.
The money was moved in a way that “may have been designed to avoid detection,” CME said in a statement.
MF Global’s failure is the latest public setback for Jon Corzine, who was head of Goldman Sachs and governor of New Jersey before joining the company. He had hoped to build MF Global from a brokerage into an investment bank.
CME’s statement suggests that MF Global executives rushed hundreds of millions of dollars out of client accounts as bankruptcy loomed. The company acknowledged that the money was missing early on Monday morning.
About US$600 million of client cash is still missing, two officials with knowledge of the probe said. The FBI is expected to investigate whether the firm’s actions violated criminal laws according to two other people
US regulators started raising concerns about MF Global’s European sovereign debt exposure as early as June, a source familiar with the matter said, four months before the company’s collapse.
While the event hit volumes in the commodities market earlier in the week, bankruptcy court proceedings on Wednesday offered hope that customers would be able to trade again by the end of the week as their positions and much of their collateral were transferred to other brokers.
As for the broader economic implications, US Federal Reserve Chairman Ben Bernanke said they are limited.
“It appears to be an idiosyncratic case,” Bernanke told reporters. “We are monitoring the possible impacts on funding markets and elsewhere and so far we have not seen any significant impact on financial stability.”
However, the meltdown of Corzine’s firm should spark reforms to separate retail from investment banking operations, “Bond King” Bill Gross said.
The bankruptcy was another example of how Wall Street has “lost its way,” he added.
“Do we have a better example today than MF Global in terms of the mingling of those two particular aspects of capital allocation?” Gross, who runs the US$242.2 billion PIMCO Total Return portfolio, said at a Charles Schwab Corp conference in San Francisco.
“So the closer we get back to separating the two, I suppose the better from the standpoint of reform,” he said.