The extent of the damage is far from clear nearly two weeks after the bankruptcy filing of MF Global, the stock and commodities broker formerly led by ex-New Jersey Governor Jon Corzine.
Around $600 million of client money appears to be missing, and a team of forensic accountants is now looking for the source of the discrepancy. That’s left MF Global clients frustrated and angry, and unable to access their accounts.
“I didn’t know he was a crook, this Jon Corzine,” said Ken Ries, an Iowa futures broker who used MF Global to trade wheat and soybean futures on behalf farmers of farmers in his community. “We were established with MF Global way before he came on board. I don’t know how a man could do as much damage as he does in 20 months.”
Some of Ries’ clients’ accounts have been partially transferred to other brokers, but much of the money remains effectively frozen, raising the uncomfortable possibility that these farmers will never fully recover the capital MF Global held on their behalf.
On Thursday, the court-appointed trustee overseeing the liquidation of MF Global, James Giddens, announced a claims process is being set up for clients whose funds, formerly held by MF Global, are now effectively frozen.
“We will not know the extent of any deficiency in funds which should have been segregated by MF Global for your benefit,” Giddens wrote. “While the investigation is proceeding around the clock we are unable to estimate when it will be complete.”
MF Global was a major player on the commodities markets, not only helping farmers sell crops at a stable price, but also transacting oil and gold deals for hedge funds and other large investors. Now customers who never questioned the trust they placed in MF Global have received a rude awakening.
From Client to Creditor
MF Global’s customers fall into two categories: about 400 stock market investors, and around 50,000 commodities and futures clients. The two groups are not protected equally.
Clients with stock market accounts may be eligible for up to $500,000 compensation through the Securities Investor Protection Corporation, a non-government entity, if the money missing from MF Global’s ledgers cannot be found.
But there is no similar protection for commodities clients, according to Michael Greenberger, a former official with the Commodity Futures Trading Commission and now a professor at the University of Maryland Law School.
“If the investigators cannot find all the missing money, customers of MF Global would then be thrust into a bankruptcy proceeding as a normal creditor,” Greenberger said. “Rather than get 100 cents on a dollar, they probably could expect to receive pennies on the dollar.”
The situation is all the more troubling, Greenberger said, because the law requires that brokerages keep their clients’ accounts separated and liquid, so they can be redeemed at any time.
“That is a fast and highly followed first rule of commodity trading,” he said, adding that any violation could constitute a criminal offense.
Searching for the Cash
But no accusations have been made, and it could be a long time before investigators determine how much money is missing, or whether it’s missing at all. A team of forensic accountants is now combing through MF Global’s books, looking for clues.
Michael Kessler, a Manhattan forensic accountant who's not involved in this case, said the first thing they are likely to do is check the documentation for all recent trades and withdrawals, focusing on large accounts and questionable transactions.
“When you first enter into the financial review, you’re gonna narrow into your specific allegations. You’re gonna review those,” Kessler said. “Once you get their modus operandi, you’re gonna basically expand the entire scope of your audit to see if it’s affecting other accounts, because maybe there’s only three or four accounts that have been affected by this.”
Investigators will need to do lots of tedious number-crunching, but also rely on their intuition to choose where to focus their attention.
“You have to follow your gut feelings,” Kessler said. “It’s impossible to describe but you know when it comes up.”
Repairing the Damage, Looking for Lessons
Last week, Corzine resigned as MF Global’s CEO, and gave up the $12 million bonus for which he was eligible. Corzine is still a wealthy man, and he and other company leaders could be a target of lawsuits if investors do not recover their cash.
But John Coffee a professor of securities law at Columbia Law School, cautions that it is too soon to anticipate a government suit to recover customer funds.
“The [bankruptcy] trustee can go after the directors, but the trustee has to find that they have breached their fiduciary duty,” Coffee said. “The fact that a firm fails does not mean that the board of directors breached their fiduciary duty. Some firms fail because the market turns against them.”
In retrospect, Corzine’s decision as MF Global's leader to borrow lots of cash to buy European debt certainly looks foolish, since it prompted the margin calls that drove MF Global to bankruptcy. But Coffee sees lessons for the agencies that oversaw MF Global as well.
“I think this shows the regulators are a couple steps behind the more aggressive actors in the financial marketplace,” Coffee said. “The regulators were not successful in restricting leverage by MF Global. They do not appear to have stayed within the normal boundaries for a brokerage firm.”
Observers say the damage could have been much worse if MF were a so-called “systemically important” company.
“We're lucky it wasn't too big to fail,” Greenberger said.