MF Global Holdings Ltd, the securities firm led by former New Jersey governor Jon Corzine, admitted using clients’ money as its financial troubles mounted, a US official said. The FBI is expected to investigate whether the firm’s actions violated criminal laws, according to two people familiar with the situation.
MF Global is the first big Wall Street casualty of the European debt crisis. It filed for bankruptcy protection on Monday, after a big bet on European debt threatened to topple it.
An MF Global executive told regulators on early on Monday that the company had diverted client money, according to an official familiar with a separate probe by regulators. It is not clear where the money ended up or what it might have been used for, the official said.
All three people spoke on condition of anonymity because they were not authorized to discuss the matter publicly.
Under Corzine’s leadership, MF Global bet US$6.3 billion on debt issued by Italy, Spain and other European nations with troubled economies. Those bonds have lost value in recent weeks as fears have intensified that some European countries might default.
Regulators said in September that MF Global was overvaluing some of its European debt investments. It required the company to raise more cash, according to court papers filed on Monday.
MF Global reported its biggest ever quarterly loss last week, mainly because of losses on proprietary trading. Credit rating agencies downgraded the company’s bonds to junk status and business partners demanded that it put up more cash to guarantee its trades. The result was a cash crunch that forced MF Global into bankruptcy court.
The regulators’ investigation of MF Global is preliminary. A formal investigation by the company’s main regulator, the Commodity Futures Trading Commission (CFTC), requires a vote by its five commissioners.
At a first-day hearing on MF Global’s bankruptcy, a lawyer for the company denied that executives were aware of any money missing from client accounts.
“To the best knowledge of the management, there are no shortfalls. All funds can be accounted for,” said Ken Ziman, a lawyer with Skadden, Arps, Slate, Meagher & Flom LLP.
Ziman said some funds have not yet been cleared by trading partners and exchanges.
On Tuesday, the head of the Chicago Mercantile Exchange said that MF Global had violated rules requiring it to keep clients’ money in separate accounts.
Securities firms are required to keep clients’ money and company money in separate accounts. That makes it easier to repay clients if a broker fails.
Craig Donohue, CEO of CME Group Inc, which operates exchanges where derivatives are traded, said MF Global was “not in compliance” with requirements set by CME and the CFTC.
He said they are still trying to “determine the precise scope of the firm’s violation at this time.”
CME Group is involved in the investigation because it regulates companies that trade on its exchanges. Government regulators empower companies that run exchanges to enforce trading rules. When serious violations are alleged, these companies and regulators both investigate.
MF Global and Corzine did not respond to requests for comment. Interactive Brokers, which was considering buying MF Global until the problems came to light, declined to comment. The FBI also declined to comment.
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