Published November 15, 2011
It is conventional wisdom that the money troubles of MF Global that resulted in the loss of $600 million in customer funds began to occur during the frenzied few days that led up to the firm’s bankruptcy two weeks ago.
The FOX Business Network has learned that a bizarre series of events that led to the firm’s downfall actually began as early as two weeks before MF Global’s Oct. 31 implosion and bankruptcy filing, according to former executives at the now-bankrupt company.
These instances may provide evidence that the firm’s financial troubles began much earlier than it appears, and that MF Global’s compliance systems and other controls were woefully inadequate to deal with a new business model that involved heavy risk taking in global securities markets, and ultimately led to the firm’s downfall.
The employee complaints about financial difficulties come amid continued legal turmoil surrounding MF Global’s implosion. The US Attorney’s office, the FBI, the Commodity Futures Trading Commission and others are investigating the circumstances surrounding the firm’s demise, as well as nearly $600 million still missing from customer accounts. MF Global recently announced that it has fired most of its employees in order to proceed with a liquidation of the firm; some of those employees on Monday sued the company on the grounds that they weren’t given adequate notice under New York State law.
Meanwhile, regulators and officials from MF Global’s bankruptcy trustee continue to search for the missing customer money. People at MF Global say the money may be held as collateral at several big banks.
But investigators are dubious. One plausible scenario being investigated involved people at MF Global using the customer funds to plug financial holes, including meeting so-called margin requirements on borrowed money.
Investigators are looking at whether the firm misappropriated customer money in the days preceding MF Global’s Oct. 31 bankruptcy filing, when disclosures about the firm’s exposure to troubled European debt caused a “run on the bank” -- when MF Global’s stock price began to free fall, customers abandoned the firm, and banks and lenders started pulling lines of credit.
But there is growing evidence that this confusion began much earlier than those confusing final days of MF Global’s existence, and the money problems inside the firm go beyond the co-mingling of customer money with funds used to pay other bills, which is strictly prohibited under securities laws.
Consider the following:
• FOX Business has learned that at least two former MF Global brokers have approached lawyers telling them that they stopped getting paid commissions for their work; they didn't receive commissions for the third quarter.
• These same employees say that they were fired two weeks before the firm filed for bankruptcy.
• Several days before the firm filed for bankruptcy on October 31 they were sent huge checks that were disproportionate to the amounts they should have been paid, somewhere in the amount of $250,000 each.
• Soon thereafter they were asked by management to return the money and they received a check for the appropriate amount that could not be cashed because of the bankruptcy filing.
An MF Global attorney declined to comment.
One problem for MF Global’s management, including its former CEO Jon Corzine, is whether they had in place the proper compliance systems needed to monitor a new business model instituted since Corzine took over as CEO last year.
This business model involved taking huge bets in various markets, but as FOX Business was first to report, MF Global had yet to fully upgrade its compliance procedures. Failing to upgrade compliance in connection with a changed business model could in itself violate securities laws, industry experts say.
An attorney for Corzine didn’t return calls for comment.
Jeff Liddle, a prominent Wall Street employment attorney, says much of the law surrounding employment issues involving bankrupt companies is murky. Liddle says he doubts the fired MF global employees suing because they weren’t given appropriate notice will win because the New York law requiring notification doesn’t cover bankruptcies.
But Liddle says it’s unclear if employees who received checks as MF Global was about to file for Chapter 11 bankruptcy are under law required to receive the money they are owed. “That’s a grey area under the law,” Liddle says.