What Happened to MF Global’s Customer’s Money?

May 22, 2012
by Jason M. Breslow Digital Editor

It has been seven months since the collapse of MF Global, yet thousands of former clients have yet to fully recover money they invested with the firm. An estimated $1.6 billion in customer funds went missing in the days leading up to MF Global’s bankruptcy. The story behind the firm’s failure is clearer today, yet many important questions remain unanswered.

Who were MF Global’s customers?

MF Global was a brokerage firm that specialized in futures and derivatives, and its clients consisted mainly of farmers, grain operators, and hedge funds who turned to the firm to trade in commodities like wheat and corn.

Steven Meyers, who traded with the firm futures on behalf of farmers and ranchers in the Midwest, told FRONTLINE he trusted the brokerage because of its global reach. “It gives you some comfort in the fact that you’re always going to have that liquidity, you’re dealing with somebody that’s … everywhere in the world.” Meyers said he had $5 million in client money invested with MF Global, but was unable  to get the funds out before the firm filed for bankruptcy in October.

At the time of its bankruptcy, MF Global counted 38,000 account holders on its rolls. To date, those customers have filed roughly 25,000 claims with James W. Giddens, one of two court-appointed trustees overseeing the brokerage’s liquidation.

What is known about where the money went?

Seven months after MF Global filed for bankruptcy, the questions of where customer money disappeared to, and why, remain hard to answer. Investigators are reported to be looking at a number of suspicious wire transfers by MF Global in its final days — including the movement of $325 million and a separate transfer worth $220 million.

In a March memo, [PDF] investigators with the House Financial Services Committee detailed a transfer of $200 million from MF Global to help cover a $175 million overdraft at JPMorgan, one of the firm’s creditors. According to the memo, that money was taken from customer funds, although investigators did not say whether Jon Corzine, the firm’s former CEO, was aware of the funds’ origin. JPMorgan has maintained [PDF] it received “multiple clear assurances from senior MF Global officials” that the transfer did not include customer money.

Have customers been able to recoup any money?

Approximately $3.9 billion from accounts frozen when MF Global entered bankruptcy has been returned. For customers in the U.S., that has translated to a recovery of about 72 cents for every $1 they had invested.

Customers will soon recover additional funds after JPMorgan Chase agreed on Friday to pay $168 million to the trustee overseeing the return of client money. In a statement, the trustee said the money represented “proceeds of excess collateral” that JPMorgan “held” from MF Global, but did not say whether it was part of the missing $1.6 billion.

In recent weeks, several Wall Street firms have offered to purchase customer claims for as much as 90 percent of their face value. In essence, the offers represent a wager by the firms involved that nearly all money owed to customers will ultimately be repaid, allowing them to split the difference.

Who is investigating?

Several federal investigations have been launched into MF Global, including probes by the Commodity Futures Trading Commission (its main regulator), the Securities and Exchange Commission, the Federal Bureau of Investigation, and Justice Department prosecutors in both Chicago and New York. The brokerage has also been the focus of several congressional hearings.

At what point would a transfer of customer funds be considered criminal?

Tampering with customer funds is a crime under the Commodity Exchange Act of 1936, which makes it illegal to “embezzle, steal, purloin, or with criminal intent convert to such person’s use or to the use of another, any money, securities, or property having a value in excess of $100” from a customer of a commodities broker. The punishment is up to 10 years in prison and as much as a $1 million fine.

Building a case can be difficult, though, as federal prosecutors must establish willful wrongdoing in order to bring criminal charges.

In December, Corzine testified before Congress that he did not know where customer money had disappeared to. Is that possible? 

It is completely possible that a CEO would be unaware about missing customer money, according to Michael Greenberger, a professor of law at the University of Maryland and a former director of the Division of Trading and Markets at the CFTC.

The problem, he said, is that executives are not required to know about the stability of their firms’ customer accounts. That needs to change, Greenberger argued, because “the whole trust in the futures market has dissipated” in the wake of MF Global. “People are so alarmed at the prospect that not only is there risk in the markets … but now there’s a risk that you’ll lose money that’s actually yours.”

If missing money was sent to firms such as JPMorgan, as Congressional investigators have alleged, why can’t regulators simply demand those funds be returned?

They can, but the trouble, said Greenberger, is that they must definitively establish that the money did indeed belong to customers. As the MF Global case has shown, that can be tough task. Customers can attempt to recoup it on their own by seeking a court order for the return of their money, but that process can take years of litigation.

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