FINANCIAL TIMES: MF GLOBAL LEAVES INDUSTRY SCARRED
- By Hal Weitzman
Roe of CCC: "There should be a criminal consequence," he says. "The
system itself is at risk if there isn't."
Exactly six months after MF Global filed for bankruptcy, former
customers of the failed futures brokerage are still waiting to find
out how much of an estimated $1.6bn in missing funds will be returned
to them.
The lack of information about exactly what occurred at the collapsed
futures brokerage has caused a sense of frustration across the
industry. It has shattered confidence and kept many of the traders
affected away from the markets, particularly among the roughly 36,000
former customers of MF Global who remain out of pocket, their funds
frozen by the bankruptcy court.
Most customers have received 72 per cent of the money from their
accounts from James Giddens, the bankruptcy trustee.
Mr Giddens said last week that his staff's research into what happened
to the missing money "is substantially concluded". However, it is far
from clear that it will all be recovered and returned to customers.
US Congress has held multiple hearings on the issue, federal
regulators are investigating and a grand jury has convened in Chicago.
Yet there are increasing doubts that these probes will uncover
evidence of intentional misuse of customer money.
There was excitement last month when politicians in Washington
released an email that appeared to be a "smoking gun" linking the
shortfall in customer funds to Jon Corzine, the former US Senator and
New Jersey governor who ran MF Global, and who denies any wrongdoing.
The email, written by Edith O'Brien, MF Global's assistant treasurer,
referred to a $200m transfer that may have included customer funds as
having been "Per JC's direct instructions".
However, when she was hauled before Congress, Ms O'Brien refused to
testify. Mr Corzine's lawyers deny he authorised any illegal
transfers. The email was, therefore, inconclusive.
Many in the industry are now resigned to the idea that ultimately
there will be no criminal charges. "There may be civil action, based
on failure to supervise," says Gary DeWaal, general counsel at
Newedge, the world's biggest futures broker. Mr Giddens said last week
he favoured such action. But Mr DeWaal is sceptical. "That could lead
to a fine, but it wouldn't really harm anyone except the creditors,"
he says.
The lack of a more decisive conclusion worries many in the industry.
"When you have a systemic breakdown of this magnitude, it's one of two
choices: it was bad actors or a bad system," says a senior US futures
executive. "So if all the investigations prove that no one really
acted improperly and there were no bad actors, all you're left with is
the idea that there's a broken system."
CME Group, the US's biggest futures exchange and the organisation
responsible for overseeing MF Global, is keen to avoid that
perception.
Without saying it directly, CME has, some feel, gone as far as it
dares towards accusing the failed futures brokerage of fraud.
Two days after the bankruptcy, the exchange accused MF Global of
moving customer funds "in a manner that may have been designed to
avoid detection". Terry Duffy, CME executive chairman, subsequently
claimed the bankrupt firm "falsified reports" by telling the exchange
it had excess funds in customer segregation days before it collapsed.
Proving that reports were deliberately rather than mistakenly false,
however, is likely to be tricky. In his report about the final days at
MF Global, Mr Giddens described a shambolic scene in which employees
were overburdened by having to meet vast funding needs.
"The company's computer systems and employees had trouble keeping up,"
Mr Giddens wrote. "A number of transactions were recorded erroneously
or not at all."
That picture is echoed by a senior investment banker who was invited
in to look over the firm's books in its dying hours as it tried
desperately to sell itself. "It was a complete mess in there," he
says. "If you had seen how chaotic it was, you would understand that
the money probably went missing because of sloppy record-keeping."
If that is the final version of events, many customers will feel
permanently wronged, says John Roe, leader of the Commodity Customer
Coalition, a customer group, and an introducing broker at BT Trading
in Chicago, a firm that had all $15m or so of its client funds at MF
Global.
Mr Roe says his members would be "beyond dejected" if there were no
prosecution.
"There should be a criminal consequence," he says. "The system itself
is at risk if there isn't."
"Someone at MF Global made the decision to swipe customer money," Mr
Roe adds. "They need to pay a price for that. Otherwise, our members
will feel the marketplace isn't what they thought it was."
The MF Global saga has already led to plans to improve protection for
futures customers. Brokers and clearing houses will have to hold more
capital from their customer accounts. The guidelines on how futures
brokerages can invest customer funds have been made stricter.
The danger for the industry, however, is that without a criminal case,
these rule changes will fail to restore customer confidence.
"This was a massive theft," says Jeff Carter, a Chicago futures trader
and blogger.
"The futures industry battles the equity industry for dollars. Brokers
compete against each other.
If I am a customer and have a choice between trading crude oil futures
or a crude oil ETF, the equity broker has a huge leg up against the
futures broker if no one from MF stands trial – specifically, top
management."
Mr Roe says not even fully refunding customers can guarantee customer
confidence. "Whether or not we get our money back, there was misuse of
customer funds and so the damage in some respects has already been
done," he says.
"If nothing happens, this means people can misuse customer funds and
have no criminal liability, that they can get away with it
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