MF Global Scrutinized on Money Move

Here is the link to the story or you can read it below:   http://dealbook.nytimes.com/2011/12/28/mf-global-scrutinized-on-moving-of-money/

Federal authorities investigating the demise of MF Global think that the firm began improperly moving customer money to a middleman on Oct. 27, according to people briefed on the matter. 

The transfers, which indicate the brokerage firm misused client money earlier than previously believed, represent a new line of inquiry in the hunt for more than $1 billion in missing money.

In MF Global’s last days, the brokerage house was frantically winding down trades to shore up its balance sheet and stave off bankruptcy. Investigators are examining whether the firm — as part of that effort — began moving client money to the Depository Trust & Clearing Corporation, a financial intermediary responsible for closing out some of MF Global’s transactions, these people say

The new details bolster claims that MF Global was careless with customer money, regardless of the company’s intentions. Authorities previously found that MF Global had used roughly $200 million of client funds to replenish an overdrawn account at JPMorgan Chase in London on Oct. 28, the last business day before the firm filed for bankruptcy.

Now, investigators are also looking at billions of dollars of transfers from MF Global to the Depository Trust & Clearing Corporation, a fraction of which is believed to be customer money. People briefed on the matter say the middleman passed some of the money to banks and other firms that traded with MF Global, which was once run by Jon S. Corzine, the former governor of New Jersey.

In addition, federal authorities are reviewing whether MF Global used customer money to pay the clearing corporation as part of a margin call. Financial intermediaries routinely require extra collateral when firms run into trouble. A different clearinghouse in London forced MF Global to pay roughly $300 million to back some of its bond holdings during its last week.

It is unclear how much customer money was transferred to the Depository Trust & Clearing Corporation, and whether officials at MF Global knew they were using client money.   Haphazard recordkeeping and the flood of transactions in its final days might have concealed whether MF Global was deploying the customer cash for firm needs.

A spokesman for the clearing corporation declined to comment.

Kent Jarrell, a spokesman for the trustee overseeing the liquidation of MF Global’s brokerage unit, said that the trustee “has not made a determination about customer cash that went through” Depository Trust.

“We will make a legal determination about whether customer money can be recovered,” Mr. Jarrell said. If it can be recovered, “we will use all legal avenues to do so,” he added.

As MF Global transferred funds to the clearing corporation, regulators started to raise concerns about the customer money after a routine inquiry. In the firm’s final week, senior officials at the Commodity Futures Trading Commission asked MF Global employees to identify the whereabouts of the money. In response, the firm provided a document that highlighted specific MF Global units, according to a person briefed on the matter.

But one of the units, MF Securities, was not listed on the firm’s broader organizational chart, the person said. That discrepancy raised red flags among regulators that the firm might have been misusing customer money.

A person close to MF Global says that the firm’s broker-dealer unit used to be called MF Securities, and people in the company often referred to it by that name. Even so, regulators at the Commodity Futures Trading Commission pushed for assurances that the money was safe. MF Global asked for more time.

Three days later, on Oct. 30, MF Global alerted federal authorities to the shortfall.

Since then, regulators and the trustee, James Giddens, have been searching for the money. The shortfall is now estimated at $700 million to $1.2 billion. The situation has left customers like farmers and hedge funds without a third of the money in their MF Global accounts.

In Congressional hearings, Mr. Corzine and his top deputies have defended their actions, saying they were unsure what happened to the money. No one has been accused of any wrongdoing. A spokesman for the Commodity Futures Trading Commission, which is leading the investigation, declined to comment.

Regulators are focusing on transactions in the firm’s last days to determine when MF Global violated a strict rule that prohibits the mingling of customer money and firm funds.

On Oct. 28, the firm moved roughly $200 million to JPMorgan, after overdrawing an account in London. People briefed on the investigation have said that the money belonged to customers.

“At that time, I was trying to sell billions of dollars of securities to JPMorgan Chase in order to reduce our balance sheet and generate liquidity,” Mr. Corzine told lawmakers on the oversight panel of the House Financial Services Committee. “JPMorgan Chase told me that they would not engage in those transactions until overdrafts in London were cleaned up.”

After the transfer, JPMorgan, one of MF Global’s main banks, questioned Mr. Corzine about the source of the money. Mr. Corzine said he was assured that the cash was legitimate.

The transfers to Depository Trust are of particular interest to regulators. Authorities believe that the transactions represent one of the earliest misuses of customer funds by MF Global.

In part, MF Global transferred money to the clearing house to unwind large positions in its proprietary trading portfolio. The brokerage firm, for example, may have used some funds to cover losses when it sold corporate debt and commercial paper holdings.

The vast majority of the transfers were related to a common transaction on Wall Street known as repurchase and reverse repurchase agreements. In these arrangements, MF Global exchanged securities and short-term cash with investors like hedge funds or banks and promised to return the money and securities at a later date.

As MF Global started to deteriorate, the firm moved to unwind the transactions to reclaim money they posted to support the agreements, an amount of capital thought to be in the hundreds of millions of dollars. The transactions largely took place through the Depository Trust.

But trading partners and clearinghouses — dealing with a large amount of transactions and concerned about the welfare of MF Global — did not immediately return the cash to the brokerage firm, according to the people briefed on the transactions. Without the capital in hand, MF Global may have tapped customer funds to continue unwinding its portfolio, the people said.

At the same time, the clearing corporation ordered MF Global to hand over more cash against its remaining trades, as part of a margin call. The amount of money MF Global was required to post is unclear, but the brokerage unit may have used customer cash to meet those new demands, the people said.