MF Global has been in the news since October 30th, when it announced a huge shortfall in customer accounts. It now looks like there is roughly $1.2 billion in customer funds missing; and we’ve had several Congressional hearings looking into the matter. The issue of the missing customer funds is extremely significant and deserves all the attention it is getting and then some.
Early in my career, when I was first out of college, I spent the first six years of my post-college life working for a series of broker/dealers based in Colorado and California. Unfortunately I graduated from college shortly after the market crash in ’87 and there just were not a lot of jobs for finance majors at the time, so I accepted a position with a small broker/dealer based in Denver. Little did I know that the smaller broker/dealer market was going through a contraction phase as well. While I was in Denver, two of the smaller broker/dealers I worked for closed; and later on, almost 5 years after I moved to Atlanta the firm in California closed as well. During my career as a stock broker, I lived through 3 broker/dealers closing; and not once did one of them ever loose any customer funds. Every single one of them understood the importance of segregating customer funds from company funds.
The act of a brokerage firm taking funds from customer and client accounts for its own use is not something that is not done lightly or by low level employees. It is something that requires approval from the top levels of a firm. In my opinion in the MF Global situation, it was either an act of extreme desperation or arrogance. Either someone at the top was extremely desperate to save the firm, or someone was arrogant enough to think that they were far smarter than the market and they would be proven right while the naysayers would be proven wrong. Either way, it was an action that was authorized and undertaken by top level employees, not some low level clerk who made a key punch error.
The missing client funds at MF Global raise a lot of questions and issues that deserve to be answered; and people need to be held accountable for their actions. The New York Times Deal Book asked 10 Questions for Jon Corzine prior to his 1st Congressional testimony. In his statement prior to testifying in front of the House Agricultural Committee, Jon Corzine claimed to not know what happened to the client funds. During his testimony he repeatedly said that he “never intended to do anything improper” with client funds. He even attempted to imply that the missing client funds might ultimately be the result of a key punch error by a clerk.
I do not buy it, I do not believe Jon Corzine’s statements. He is a former CEO of Goldman Sachs, a former US Senator who helped draft and voted on the Sarbanes-Oxley legislation, and the former Governor of New Jersey. If anyone should have understood the importance of maintaining segregated customer funds, it should have been Jon Corzine. If anyone should have understood the importance of today’s regulatory environment and internal controls and procedures for a brokerage firm, it should have been Jon Corzine. If anyone should have understood the importance of trading relationships to a broker/dealer, it should have been Jon Corzine. If anyone should have ever understood what happens when the street looses confidence in a broker/dealer’s ability to trade, it should have been Jon Corzine. Unfortunately the picture that is emerging is of someone whose only focus was on gunning the trading profits of the firm. There is no evidence to indicate that he was every really concerned with what he should have been focused on.
We are unfortunately left with a growing list of questions, and a shortage of answers. However, as more people are called to testify we are starting to see some light that will hopefully lead us to some clarity. Through my consulting firm, I have investigated fraud on multiple occasions. One of the most important items in getting to the bottom of things it to look for the contradictions, and where people are contradicting each other. While we do not yet have all the answers, we are starting to see some clues as to what may have happened.
CME Chairman Terrance Duffy testified that auditors for the CME have spoken to MF Global employees who say that Jon Corzine knew of the taking of customer funds for company use. While we are seeing some minor disputes between trustees liquidation the various subsidiaries of the parent company, there will probably prove to be minor distractions. The real fireworks will probably start when some of the “lower level” employees start realize the finger of blame is being pointed at them, and they speak out in order to defend themselves. After all, let us never forget that this is not simply an accounting issue relating to funds transfers between big corporations; this involves real money, in real peoples accounts, many of whom are farmers living back in the Heartland of this country. Back there they do not look at it as a failure to properly segregate their accounts, they look at it as if their money was stolen; they are wanting answers and they want heads to roll.
I think we are only getting started on the issues and fireworks surrounding MF Global. When Congress comes back from the holiday break, and as the election moves forward in 2012, I expect to see this issue pick up in a way that make Lehman Brothers look tame.
We’ll be back with more as things develop.