Inside the Hunt for MF Global Cash

Officials Chasing Missing $600 Million Complain of Poor Record Keeping: 'Books Are a Disaster'

ENLARGE

RAY BARTKUS FOR THE WALL STREET JOURNAL

By

SCOTT PATTERSON And

AARON LUCCHETTI

November 11, 2011

Regulators hunting for about $600 million in customer money that went missing shortly before MF Global Holdings Ltd. collapsed said they are being stymied by the poor condition of the securities firm's records.

"Their books are a disaster," Scott O'Malia, a commissioner at the Commodity Futures Trading Commission, one of the regulators leading a hunt that has stretched 10 days so far, said in an interview. "We're trying to figure out what numbers are the real numbers."

Several people who reviewed MF Global's trading records and balance sheet before or after the New York company filed for Chapter 11 bankruptcy protection Oct. 31 said they saw incomplete transactions, numbers that didn't seem to add up and other inconsistencies.

"I always knew the records were in shambles, but I didn't know to what extent," said Thomas Peterffy, chief executive of Interactive Brokers Group Inc., which had for years considered doing a deal with MF Global. The company walked away from a handshake agreement to rescue MF Global after discrepancies in its books emerged, according to people involved in the discussions.

Investigators are hunting for lost millions.

Characteristics: Regulators say nearly $600 million is missing from customer accounts.

Last seen: Late October

How it disappeared: Officials are combing records in an effort to find out what happened.

Where the money is now: Unknown

An executive at another company that considered making a bid for parts of MF Global as it was going downhill said officials at his firm "couldn't get a good sense of what was on the balance sheet."

Routine information about assets and positions on MF Global's books took hours to produce, the executive said. Such information should be accessible instantly, he added.

A spokesman for MF Global said the firm is cooperating with regulators and the bankruptcy trustee trying to find the missing money. After the bankruptcy filing, the trustee essentially took charge of the firm's U.S. brokerage and its employees, a person familiar with the matter says.

But the slog is even more difficult because the bankruptcy filing limited the company's ability to access its bank accounts, according to people familiar with the firm's position.

MF Global officials have said any problems with its trading records and balance sheet, including snarls that led to the $600 million discrepancy, largely resulted from the chaos rocking the firm as it shrank its assets by roughly half in a desperate attempt to survive a run on the company.

MF Global's books and records were regularly reviewed by CME Group, the exchange operator that regulates futures firms like MF Global, including a full audit that concluded in August, according to a CME representative.

CFTC Commissioner Bart Chilton disputed how much help regulators are getting from MF Global. Efforts to get information from the firm since the bankruptcy filing have been "difficult and disappointing," he said.

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"I think they haven't been cooperative," Mr. Chilton added in an interview. He compared efforts to locate the missing money to "a magical mystery tour."

MF Global's spokesman says the firm's employees are cooperating as much as they can given the information they have access to.

Speculation about where the missing money went ranges from banks and clearinghouses that made margin calls on MF Global trading positions to the securities firm's U.K. subsidiary to losses suffered as the firm raced to escape from positions.

"The longer it goes without anyone finding the money, the odds go up that the money is out the door," said Craig Pirrong, a finance professor at the University of Houston.

In a statement Thursday, James W. Giddens,the bankruptcy trustee for MF Global's U.S. brokerage unit, vowed to conduct a "deliberate, thorough and independent" investigation "around the clock." Mr. Giddens said the trustee has received "thousands of inquiries" from investors, adding that officials "understand [their] dismay."

A person familiar with the situation said the bankruptcy trustee's office has begun going through all of MF Global's assets, one at a time, to make sure they were legitimate and properly booked.

Federal Bureau of Investigation officials also are continuing their probe.

FBI agents have some powerful tools that the CFTC and other regulators don't, including search warrants.

People who have reviewed MF Global's trading records and balance sheet said it is possible the disarray was attributable to the fact MF Global had built itself through acquisitions that weren't fully integrated.

1) What is the main idea of the article? 2) According to MF Global officials, how did the firm "lose" so much customer money? 3) What were the consequences of MF Global's inadequate accounting? 4) The article states: " Routine information about assets and positions on MF Global's books took hours to produce". What does that say about the firm's accounting system? Is this a red flag? Should this type of information be readily available? 5) Which government agencies audited MF Global and why did they not uncover where the money was? According to the article, which government agency has most power in investigating MF Global? 6) What do people involved with the case think is the reason for the missing money? Do you think this was intentional? 1) What is the main idea of the article? 2) According to MF Global officials, how did the firm "lose" so much customer money? 3) What were the consequences of MF Global's inadequate accounting? 4) The article states: " Routine information about assets and positions on MF Global's books took hours to produce". What does that say about the firm's accounting system? Is this a red flag? Should this type of information be readily available? 5) Which government agencies audited MF Global and why did they not uncover where the money was? According to the article, which government agency has most power in investigating MF Global? 6) What do people involved with the case think is the reason for the missing money? Do you think this was intentional