Regulators Probe MF Global

Did Jon Corzine lie?

The Securities and Exchange Commission has reportedly initiated a preliminary probe into whether the brokerage and its head, Corzine, made misleading statements about the $6.3 billion bet that helped sink the company.

However, that may be difficult to prove. Executives usually must be found to have knowingly made false statements before they face legal liability. The SEC was unavailable for comment.

FOX Business reported Monday and Tuesday that MF Global faces probes by the SEC, and that MF Global and Corzine are on the radar screen for making possibly misleading statements to Wall Street about the firm's liquidity and the riskiness of its euro bond trades before it collapsed into bankruptcy.

The FBI has also confirmed it may launch a probe of the brokerage over missing customer funds, which market regulators now estimate at $633 million.

Among other developments, the CME Group said last night that the U.S. bankruptcy court overseeing MF Global’s bankruptcy filing approved the transference of all MF Global accounts to other firms. It declined to state the names of the firms. This is considered an important step for MF customers in their fight to get their money back.

The CME Group says the 150,000 customer accounts that were frozen by the bankruptcy trustee, James Giddens, will also be transferred. The 150,000 accounts are those found to have a shortfall in customer funds.

Among the potentially misleading claims in question is the statement MF Global made in its last quarterly filing that its "liquidity position remains strong." The firm had reported just $1.3 billion in book value, a razor thin cushion supporting a $41 billion balance sheet.

Corzine also said on the latest earnings conference call that the structure of the firm's risky euro bond bets "essentially eliminates market and financing risk." The Commodity Futures Trading Commmission (CFTC), the market regulator assisting in examining the books of MF Global, now tells FOX Business the amount of money missing in customer accounts is in the $633 million range, out of $5.4 billion in segregated funds. The CFTC also said missing funds were found in commodity customer accounts at the broker dealer, which was the top broker by volume at the Chicago Mercantile Exchange (CME) before it collapsed into bankruptcy earlier this week.

The CFTC and CME Group, the world’s biggest futures exchange, continue to assert MF Global violated its rules on segregating customer accounts, meaning, it is alleged to have co-mingled customer funds with other accounts, violating a cardinal rule on Wall Street.

FOX Business reported yesterday that the CME Group says the discovery of the missing funds at MF Global arose after it conducted a routine audit of the broker dealer last week.

The CME says MF Global may have moved those funds after its audit in a manner that was “designed to avoid detection” of market regulators. It says “MF Global did not disclose or report such transfers to the CFTC or CME until early morning on Monday, October 31, 2011.”

The CME adds MF Global reported the missing funds to market regulators on Monday morning, Oct. 31.

MF Global was cut to junk status by credit rating agencies on heightened fears it made wrong way bets on European sovereign debt, notably bonds from Italy, Belgium, Ireland, Portugal and Spain. That downgrade triggered margin calls to back trades, draining MF of liquidity. MF Global informed market regulators on Monday morning about the missing money, says the CFTC and CME Group.

MF Global did not return calls for comment. Its outside lawyers also did not return calls for comment.

The former Democrat governor of New Jersey, Corzine was hired by MF Global as chairman and chief executive in March 2010. Corzine then oversaw an expansion of MF Global into more aggressive trading in Euro debt, as well as mortgage-backed securities and swaps. The New York Federal Reserve had listed MF Global as a primary dealer, which means it could sell government securities.

Earlier this week, a lawyer for MF Global said in bankruptcy court that, to the best of management’s knowledge, the shortfall is in fact accounted for.

However, a CFTC official says "it doesn't matter if MF's lawyer says the shortfall is accounted for—that’s like saying there's a line item, but so what, that still doesn't mean the cash is actually there.” The CFTC has ordered MF Global to not destroy any documents, and to preserve all customer records.

The Securities Investor Protection Corp., the federal unit that protects customer money in the event of a brokerage’s collapse, said as of yesterday the missing money was unaccounted for. SIPC is overseeing MF Global’s liquidation.

Giddens, the trustee, is in the process of hiring forensic accountants to pore through MF Global’s books to find the missing customer funds, and to determine why it collapsed, SIPC’s head Stephen Harbeck tells FOX Business.

Harbeck indicated to FOX Business that the SEC had alerted SIPC to the missing funds at MF Global’s commodities line of business on Monday. The securities unit is not missing customer cash or securities.