Regulator: MF Global broke 'core foundation' rule

AP News
Posted: Nov 03, 2011 12:00 PM
Regulator: MF Global broke 'core foundation' rule

A regulator investigating the collapse of Jon Corzine's securities firm, MF Global, said Thursday that the firm's failure to separate its clients' money from its own assets violated "the core foundation" of investor protection.

Gary Gensler, chairman of the Commodity Futures Trading Commission, told a Senate panel Thursday that "the most troubling aspect about the MF Global situation is the shortfall of customer money at the firm."

MF Global admitted to regulators early Monday that it had diverted hundreds of millions in client money. The company filed for bankruptcy protection Monday. The CFTC and the FBI are investigating whether it broke government rules or criminal laws.

MF Global ran low on cash last week after investors and trading partners grew nervous about Corzine's big bet on European bonds.

Gensler says he and another key regulator "really saw no alternative" to bankruptcy after the company admitted that money was missing from client accounts. He and Mary Schapiro, the chairman of the Securities and Exchange Commission, decided on an early-morning conference call to force MF Global into bankruptcy, he said.

The CFTC regulated most of MF Global's activities. Gensler said the agency has been working with the bankruptcy trustee and financial exchanges to move customers' accounts to other firms.

Another regulator, CME Group Inc., said MF Global appears to have moved the money in mere days and tried to avoid detection. CME, a private regulator that operates financial exchanges, said the transfers apparently occurred after the company passed an on-site audit last week.

More than $600 million was still missing on Tuesday.

MF Global was the eighth-biggest U.S. bankruptcy and the first major Wall Street firm to fail because of bets on European debt. Its collapse is the latest public setback for Corzine, who was head of Goldman Sachs and governor of New Jersey before joining the company. He had hoped to build MF Global from a brokerage into a high-flying investment bank.

Under Corzine's leadership, MF Global started making more trades for its own profit, a practice known as proprietary trading. Those bad trades triggered its worst-ever quarterly loss.

MF Global's credit was downgraded to junk status after it acknowledged the loss last week. Its stock plunged, and business partners required it to put up more money to guarantee its bets. The result was a cash crunch that forced MF Global into bankruptcy.


AP Business Writer Marcy Gordon contributed to this report.