MF Global: Where's the money?

January 31, 2012 05:22 AM

A disturbing point regarding the MF Global debacle that we have made here on several occasions is that the further we get away from the bankruptcy event, the less clear things become. Some are now suggesting that this could be on purpose.  It is hard to argue with that.

Case in point is a Wall Street Journal article from Jan. 30 that ominously states in its headline: “Money from MF Global Feared Gone.”  Worse yet the story states that the money “could have vaporized.”

I am not sure if that is an official legal or accounting term but my American Heritage College Dictionary defines vaporized as “to be converted into vapor;” vapor is defined “barely visible or cloudy diffused matter, such as mist or smoke.”

But the MF Global customer money is not mist or smoke. It is money that by law should have been segregated away from the firm’s money in accounts clearly labeled as such.  There are lots of things you can do with money: you can steal it, you can spend it, you can transfer it, you can lose it and you can give it away but it does not simply disappear.

It seems odd that the Wall Street Journal would protect a source that provides an answer appropriate to a five-year-old with his hand caught in the cookie jar.

Stanley Haar, a money manager and former MF Global customer who is a part of the Commodity Customer Coalition took great exception to the WSJ story in a letter to the WSJ that he also posted on an MF Global customer forum. Haar wrote, “Client money in segregated bank accounts was not "vaporized"; it was stolen via illegal transfers to support MF's proprietary trading positions and to repay creditors such as JP Morgan. Those transfers are and always were illegal.”

That is the crux of the matter and what is so frustrating to customers. Regulators and the MF Global Inc. trustee have been treating this as a mystery instead of a crime, which is what it is. And we know, if not the guilty party then certainly the responsible party. There was an acknowledgement by MF Global Holdings that money was transferred out of segregation into the broker/dealer. That money needed to be returned on day 1.

There is a long held procedure when dealing with trade execution errors in the futures world. It is that you correct the problem first and determine fault later. The error (crime) was that money was transferred out of segregation. That money should have been returned from the parent company, which is the responsible party.  After that you listen to the tapes or do your forensic accounting. Perhaps if the liquidation where in the hands of people experienced in futures execution and back office procedures this would have occurred but it was instead put in the hands of the Securities Investor Protection Corporation (SIPC) under the Securities Investor Protection Act (SIPA).

A point highlighted by Haar in his letter. “Under a properly executed FCM bankruptcy process, customer segregated funds always have absolute priority over all other creditors. Instead, MFGI was placed under a SIPA liquidation, even though 98% of the accounts were commodity accounts not covered by SIPC protection. … the assets under the control of MFGH were not frozen and that entity was allowed to continue operating under Chapter 11 bankruptcy rules. This allowed unknown billions in assets to be dumped into the hands of George Soros, JP Morgan and various hedge funds at bargain prices.”

Haar adds that customer money was stolen twice, first by MF moving customer money out of segregation and later by “the fraudulent way in which the bankruptcy was structured.”

The SIPC web site has a “who we are” page. Nowhere does it say anything about futures. It says, “SIPC provides that customers of a failed brokerage firm receive all non-negotiable securities that are already registered in their names … At the same time, funds from the SIPC reserve are available to satisfy the remaining claims of each customer up to a maximum of $500,000.”

Who SIPC is has nothing to do with futures accounts that cannot access the SIPC reserve.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.