Cantor Fitzgerald fined $700,000 for customer-fund violation

WASHINGTON Wed Nov 21, 2012 5:02pm EST

WASHINGTON (Reuters) - Cantor Fitzgerald will pay a $700,000 fine to settle allegations it allowed a shortfall in futures-customer funds just months after the collapse of MF Global left a gaping hole in customers' accounts, regulators said on Wednesday.

The Commodity Futures Trading Commission said Cantor Fitzgerald failed to maintain adequate funds in its customer segregated account from January 24 to January 26 due to an "inadvertent transfer" of $3 million from the account, instead of from Cantor's house account. The firm also failed to notify regulators of the shortfall as required.

The transfer accounted for more than half of customer assets in segregation at the end of January, according to CFTC data.

A spokesperson for Cantor Fitzgerald did not immediately respond to a request for comment.

The violations were the latest incidents to rattle confidence in the futures industry after futures brokerages MF Global and Peregrine Financial Group collapsed after misuse of customer funds.

On each of the three days in January, Cantor Fitzgerald employees made required daily computations to determine how much customer money needed to be on deposit to meet segregation requirements. However, they did not realize the account was short until January 27, at which point the firm transferred $3 million back into the segregated account, according to the CFTC.

The shortfall occurred while the primary person responsible for the daily calculations was unexpectedly out of the office, the CFTC said.

"What's really troubling is they didn't even realize they breached segregation" right away, said James Koutoulas, co-founder of the Commodity Customer Coalition, set up in the aftermath of MF Global's collapse in October 2011 to help clients regain their money.

"It's just incredible that these big firms don't have these internal controls."

Under the Commodity Exchange Act, futures brokers are required to keep customers' funds in dedicated accounts to protect them from being used for anything other than client business.

Senior managers at Cantor Fitzgerald did not learn of the shortfall until exchange-operator CME Group discovered it during a routine audit in March. Cantor Fitzgerald was supposed to immediately notify CME and the CFTC of the deficiencies when they were detected.

CME declined to comment.

CUSTOMER CONCERNS

Cantor Fitzgerald was the 64th largest futures commission merchant in terms of segregated customer assets at the end of September, according to CFTC data. It had about $6.4 million in customer segregated assets, compared with Goldman Sachs, which was the largest with about $19.7 billion.

The accidental transfer of money from customer accounts at Cantor Fitzgerald "should be a grave concern" for its clients, said John Roe, who co-founded the Commodity Customer Coalition with Koutoulas.

"If it's that easy to violate the Commodity Exchange Act, then the regulations are a paper tiger," he said.

MF Global failed after allegedly misusing customer funds as it scrambled to meet margin calls to back bets on European debt, leaving customers missing more than $1 billion.

Peregrine Financial failed in July 2012 after its founder tried to commit suicide and confessed to stealing more than $100 million from customers over nearly 20 years.

(Additional reporting by Karey Wutkowski in Washington D.C.; Editing by David Gregorio, Marguerita Choy and Andrew Hay)