* Broker did not separate customer accounts -CME Group
* MF cannot account for large portion of client money
* No known shortfalls in brokerage accounts -MF lawyer
* Some commodity customers upset, panicked -interviews
* FBI shows preliminary interest in the regulatory probe
By Ann Saphir and Jonathan Spicer
CHICAGO/NEW YORK, Nov 1 MF Global Holdings Ltd
failed to protect customer accounts by keeping them
separate from its own funds, said a top U.S. exchange regulator,
another shock for commodity markets scrambling to contain
fallout from the brokerage's bankruptcy.
The revelation on Tuesday by CME Group Inc suggests
Jon Corzine's MF Global violated a central tenet of futures
brokerages. It could erode confidence in a market that for
decades has enjoyed a sterling reputation for safety.
MF Global cannot account for a large amount of customer
money that was supposed to be kept separate from other funds,
sources said, and regulators are scrambling to review the
broker's accounts. The cause of the shortfall -- including
whether the company pilfered client funds or merely cannot
account for the money -- was not clear.
The Federal Bureau of Investigation is showing preliminary
interest in regulatory probes, a person briefed on the matter
MF Global did not keep customer accounts separate from the
firm's funds, said Craig Donohue, CEO of exchange operator and
market regulator CME Group. Even though the client money could
eventually be accounted for, the regulator believes the firm
broke the segregation rules.
Another regulator, the Commodity Futures Trading Commission,
voted to issue subpoenas to the firm, the Wall Street Journal
Neither MF Global nor Corzine has been accused of any
The New York Times reported late on Monday that federal
regulators discovered that hundreds of millions of dollars in
customer money -- supposed to be segregated and protected from
the rest of the business -- had gone missing.
At the U.S. Bankruptcy Court in Manhattan, MF Global's lead
attorney, Ken Ziman, said all of the funds in the company's
broker dealer are accounted for.
To management's best knowledge, "there are no shortfalls" in
brokerage accounts, said Ziman, of law firm Skadden, Arps,
Slate, Meagher & Flom, as MF Global's first bankruptcy hearing
began on Tuesday.
The fall of the brokerage led by ex-Goldman Sachs Group Inc
boss and former New Jersey governor Corzine sent
shockwaves through commodity markets.
"This episode is making the industry really scared," said
Pinaki Rath, managing director of Singapore-based trader Gold
Matrix Resources. "We are talking to other brokers on how we can
guard against future failing of a clearing member."
While MF Global began what could be a complicated process of
liquidating customer positions, some customers feared that
millions of dollars were tied up in bankruptcy. Others expected
lawsuits, according to interviews with brokers, funds and
"We're basically putting out fires," said an MF Global
employee. "Our customers are upset and we're upset that they are
A company spokeswoman declined to comment.
On Tuesday night, the Investment Industry Regulatory
Organization of Canada announced the suspension of MF Global
Trading in Australian agricultural futures and options on
the ASX 24 platform resumed on Wednesday after being suspended
following the collapse of MF Global, exchange operator ASX Ltd
"We are now in the process of reviewing all of the
companies' information available to us from the records of MFGA
and MFGS, with a view to ensuring that customer positions are
identified and reconciled," administrator Deloitte said in a
note to MF Global's Australian customers.
MF Global had $7.3 billion in customer assets on Aug. 31,
according to Commodity Futures Trading Commission data. It was
the eighth-largest U.S. futures broker and had a big presence in
commodity markets worldwide. The company filed for Chapter 11
bankruptcy on Monday after failing to find a buyer.
Bets Corzine made on euro zone sovereign debt led to a
plunge in the company's stock last week and credit rating
agencies cut its debt to junk. Its collapse over less than a
week was reminiscent of, although smaller than, investment bank
Lehman Brothers in 2008.
Asked if CME's clearinghouse would be on the hook for
losses, CEO Donohue said it would not be. But the same may not
go for customers, he said.
Said Michael Greenberger, a former director of the CFTC'S
trading and markets division, and a law professor: "I'm sure
that customers of MF Global are not feeling very good right now
and (are) madly investigating their rights and the facts of this
CME, widely known as a commodities futures and options
exchange, is listed as one of MF Global's main exchange
regulators and is responsible for ensuring that its clearing
members stay in compliance with rules on customer funds.
"We do have a big problem with a hole in the segregation and
that is a serious first-of-a-kind problem that we've ever seen
here," a source familiar with the CFTC told Reuters. "We're
trying to figure out what MF Global did with it and where is
Said another federal official: "The only thing we're
concerned about is, the money is not where it's supposed to be
under federal law. Where it is, that's what we're looking into."
"SHOT OUT OF A CANNON"
At a hearing on Tuesday, Judge Martin Glenn approved MF's
request to use $8 million in cash collateral held by lender
JPMorgan to keep the company running for 10 days.
MF agreed in exchange to grant JPMorgan a lien on certain
legal actions and to pay the banker's legal and other
professional fees up to $250,000.
Ziman described the hectic weekend that preceded the
company's Monday bankruptcy filing. The downgrade of its assets
and a subsequent disappointing earnings call created a
"circumstance that can be described as a rock rolling down a
hill," he said. "Except for us, the rock was shot out of a
Ziman said one of the reasons the company sought to use cash
collateral was to give it time to better understand the
relationships and cash flows between MF's bankrupt entities and
its non-bankrupt subsidiaries.
About $5 million of the package will be reserved for
"discretionary" spending to seek longer-term financing.
MF Global's lawyers are looking for debtor-in-possession
financing now, Ziman said.
The other $3 million will go toward administrative costs,
including continuing to pay all of MF's employees.
Ziman said MF has more than 2,800 employees worldwide, but
only 13 at its parent company, MF Global Holdings. He did not
say how many are employees of MF's U.S. entities.
Judge Glenn approved the cash collateral deal, despite some
skepticism, saying the relatively small bridge financing package
"may be a bridge to nowhere."
KPMG, appointed as administrator to MF Global's British arm,
said it was closing out positions under a system set up to
prevent a repetition of the work-out of the Lehman collapse.
Richard Fleming, KPMG's head of restructuring, said he was
confident clients would see their money again.
The bankruptcy filing put a sudden end to Corzine's drive to
transform the more than 200-year-old MF Global into a mini
Goldman and made it the most prominent U.S. victim of the euro
zone debt crisis.
Commodity traders pointed to MF Global's turmoil and
Greece's surprise referendum to explain why U.S. oil prices fell
more than 2 percent.
"MF Global has caused the markets and all of their traders
lots of heartburn," said Todd Horwitz, chief strategist at The
Adam Mesh Trading Group.
The London Metal Exchange and the U.S. Options Clearing
Corporation suspended MF Global, following a similar move by the
CME Group, which operates the Chicago Mercantile Exchange.
The New York Stock Exchange has begun the process of
delisting MF Global shares.