FBI probing MF Global's use of client money

WASHINGTON (AP) - November 2, 2011

An /*MF Global*/ executive told regulators early Monday that the company had diverted client money, according to an official familiar with a separate probe by regulators. It isn't clear where the money ended up or what it might have been used for, the official said.

All three people spoke on condition of anonymity because they weren't authorized to discuss the matter publicly.

MF Global filed for bankruptcy protection Monday, after a big bet on European debt threatened to topple it. It became the first big Wall Street casualty of the European debt crisis.

And it's the latest public embarrassment for /*Jon Corzine*/.

He was ousted as chairman of Goldman Sachs Group Inc. in 1999 by executives including /*Henry Paulson*/, who later became Treasury secretary. Later, he lost his bid for a second term as New Jersey governor after sinking millions of his own money into the campaign. Frustrated voters had hoped his banking experience would help him clean up the state's finances.

MF Global was seen as Corzine's shot at redemption on Wall Street. He hoped to turn it into a major investment bank and restore his stature in the financial world.

After taking over MF Global last year, Corzine led MF Global to make more trades for the company's own profits, a practice known as proprietary trading. Proprietary trading helped turn Goldman into a trading powerhouse in recent years.

Under Corzine's leadership, MF Global bet $6.3 billion on debt issued by Italy, Spain and other European nations with troubled economies. Those bonds have lost value in recent weeks as fears have intensified that some European countries might default.

Regulators said in September that MF Global was overvaluing some of its European debt investments. It required the company to raise more cash, according to court papers filed on Monday.

MF Global reported its biggest ever quarterly loss last week, mainly because of losses on proprietary trading. Credit rating agencies downgraded the company's bonds to junk status. And business partners demanded that it put up more cash to guarantee its trades. The result was a cash crunch that forced MF Global into bankruptcy court.

The European debt crisis has roiled financial markets for months. Greece can't afford to pay its debts without outside help. European leaders have been wrangling over the details of bailouts for Greece, Ireland and Portugal.

Europe's debt problems threaten the financial system because European banks hold billions in debt issued by Greece and other troubled countries. Losses on those bonds could topple the biggest European banks. MF Global's failure highlights that threat on a smaller scale.

The regulators' investigation of MF Global Holdings Ltd. is preliminary. A formal investigation by the company's main regulator, the Commodity Futures Trading Commission, requires a vote by its five commissioners.

At a first-day hearing on MF Global's bankruptcy, a lawyer for the company denied that executives were aware of any money missing from client accounts.

"To the best knowledge of the management, there are no shortfalls. All funds can be accounted for," said Ken Ziman, a lawyer with Skadden, Arps, Slate, Meagher & Flom LLP. Ziman said some funds have not yet been cleared by trading partners and exchanges.

Earlier Tuesday, the head of the Chicago Mercantile Exchange said that MF Global had violated rules requiring it to keep clients' money in separate accounts.

Securities firms are required to keep clients' money and company money in separate accounts. That makes it easier to repay clients if a broker fails.

Craig Donohue, CEO of < CME Group Inc., which operates exchanges where derivatives are traded, said MF Global was "not in compliance" with requirements set by CME and the CFTC. He said they are still trying to "determine the precise scope of the firm's violation at this time."

Derivatives are investments whose value is based on the value of some underlying asset. MF Global was one of the biggest players in the derivatives market.

CME Group is involved in the investigation because it regulates companies that trade on its exchanges. Government regulators empower companies that run exchanges to enforce trading rules. When serious violations are alleged, these companies and regulators both investigate.

MF Global and Corzine did not respond to requests for comment. Interactive Brokers, which was considering buying MF Global until the problems came to light, declined to comment. The FBI also declined to comment.

The Securities and Exchange Commission and the CFTC have said they and other regulators were monitoring MF Global's situation for days "in anticipation of a transaction that would include the transfer of customer accounts to another firm."

The regulators said MF Global had reported "possible deficiencies" in client accounts, but they did not reveal that the company had diverted client money.

The proposed sale through after regulators and the potential buyer, Interactive Brokers, couldn't make the numbers add up. The discrepancies led to MF Global's admission at 2 a.m. Monday, the official said.

Trading of MF Global shares was permanently suspended on the New York Stock Exchange Tuesday afternoon.


Hays reported from New York. Associated Press writer Larry Neumeister and AP Business Writer Pallavi Gogoi in New York contributed to this report.

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