Securities Investor Protection Corp. chief executive and president Stephen Harbeck, who is overseeing the recovery of customer money at MF Global, tells FOX Business there is "no word yet on where the customer money is," adding in an interview, "as of right now, we haven’t verified whether the assets are all accounted for."
Regulators now say an estimated $600 million to $700 million in customer money remains unaccounted for at MF Global. The Commodity Futures Trading Commission also tells FOX Business that customer money is still not entirely accounted for. MF Global collapsed into bankruptcy earlier this week.
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Market regulators have already issued a statement noting that MF Global did not keep its customer accounts segregated at the brokerage, meaning, client money was commingled with other funds.
However, an outside lawyer for MF Global, Kenneth Ziman, said in bankruptcy court Tuesday: “To the best knowledge of management, there is no shortfall."
SIPC's Harbeck, a 30-year-plus veteran of the federal agency tasked with recovering securities customers' money, tells FOX Business: “I certainly hope what he says is true, but it’s still far too early for us to know one way or the other.”
Another market regulator tells FOX Business: "Saying the money is accounted for doesn't mean the money is actually there. A line item doesn't mean there are actual funds behind it."
Market regulators also tell FOX Business that it is difficult to for anyone to say all of the customers' funds are accounted for at this point in time, because the value of what customers may be due from MF Global are tied to complex derivatives trades that are difficult to price. That is complicating their probe, too.
The Chicago Mercantile Exchange, which has oversight of MF Global, also says in a statement that the shortfall in customer segregated funds at MF Global occurred after its routine, onsite audit of MF Global last week. It says the firm "made subsequent transfers of customer segregated funds" so as to possibly "avoid detection."
The CME says in the statement that MF Global at the time of the audit "was in compliance with its segregation requirements. It now appears that the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection" since "MF Global did not disclose or report such transfers to the CFTC or CME until early morning on Monday, October 31, 2011."
And as we reported yesterday, MF Global's head, Jon Corzine, is now on the radar screen for making possibly misleading statements to Wall Street about his firm's liquidity and the riskiness of its euro bond trades before it collapsed into bankruptcy.
Skadden Arps Slate Meagher & Flom, now representing MF Global, didn't return calls for comment.
Among the claims in question is this statement MF Global made in its last quarterly filing. MF Global said its "liquidity position remains strong." Corzine, the former governor of New Jersey who took the reins at MF Global only in the last couple of years, also said on the earnings conference call that the structure of the firm's risky euro bond bets "essentially eliminates market and financing risk."
SIPC's Harbeck, a savvy, sharp federal regulator with a lengthy track record of getting Wall Street customer money back, adds that MF was almost rescued by Interactive Brokers, but a look at its internal controls forced the firm to walk away.
"The initial report on MF Global we got was that Interactive Brokers backed away because they didn’t know what they were getting, in buying MF Global," says Harbeck. "This is not like 'Let’s Make a Deal' where you get to ask for either the box or the curtain."
Harbeck notes that SIPC "appointed a trustee to liquidate the assets in the brokerage, James Giddens, who was the same trustee for the Lehman Bros .bankruptcy. He’s hiring forensic accountants to find the customer money."
Harbeck adds: "One of Giddens' statutory jobs is to issue a report on what happened, why the debtor failed and where did the money go?”
SIPC is now working on bulk transfers of customer accounts to other brokerages, but won’t name them yet.
Harbeck says: "This is a very unusual case for SIPC, because it involves commodities trades, which have a different statutory regime than securities."
Another Wall Street source says that what may have happened at MF Global is that trades normally completed trades on the same day didn't occur, as MF Global faced a run on its liquidity and raced to unwind a large number of positions, leaving trades stranded.