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After a Delay, MF Global’s Missing Money Is Traced

Ben Protess and Azam Ahmed|The New York Times
Wednesday, 1 Feb 2012 | 10:20 AM ET

Investigators have determined what happened to nearly all of the customer money that disappeared from MF Global around the time of its bankruptcy last Oct. 31, but have not publicly disclosed their progress, fearing that doing so might cripple efforts to recover the cash and pursue potential wrongdoing, people briefed on the investigation said.

MF Global
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MF Global

While authorities have traced hundreds of millions of dollars to banks, MF Global’s trading partners and even the firm’s securities customers, investigators remain uncertain about whether they can retrieve the money.

Some recipients were entitled to payouts from MF Global, which could make clawing back the money difficult. For instance, securities customers withdrawing their money as MF Global began to collapse were paid from accounts that belonged to futures clients, according to other people briefed on the matter.

But the Commodity Futures Trading Commission, the regulator leading the investigation, will examine whether anyone accepted customer cash without verifying the source of the money, one of the people briefed on the matter said.

This person and others who discussed the case did so on the condition of anonymity because the investigation is not public.

The findings shift the pressing question surrounding the collapse of MF Global from what happened to the money to how to recover it and who is at fault.

Answers will not come easy. A significant impediment has been clashes among the parties trying to resolve the MF Global mess: three federal agencies and two bankruptcy trustees.

At the center of the squabbling are e-mails sent by top executives at MF Global — communications that have been withheld from federal authorities, according to the people briefed on the matter. Investigators suspect the e-mails, sent just before the firm collapsed, contain clues about who transferred the money from protected customer accounts.

The clashes stem from the conflicting interests of those involved. James W. Giddens, the trustee overseeing the liquidation of the brokerage unit, is charged with returning money to wronged customers. That mission is at odds with the interests of Louis J. Freeh, the trustee overseeing the liquidation of the firm, who is seeking to recover money for MF Global’s creditors.

Mr. Freeh’s lawyers have declined to share a number of internal MF Global e-mails with Mr. Giddens and federal investigators, including the Commodity Futures Trading Commission, which has asked for access to the documents, the people briefed on the investigation said. In turn, Mr. Giddens has been slow to hand over account statements that Mr. Freeh, a former F.B.I. director, needs to conduct his court-ordered investigation and determine what creditors are owed.

Mr. Freeh’s reluctance stems in part from the fact that the lawyers working on his behalf have not made their way through the mountain of e-mail, people involved in the case said. The lawyers are loath to waive attorney-client privilege, which shields the documents from outsiders, until they have completed their review.

Despite the obstacles, federal authorities say they are making progress.

As of late December, investigators had obtained more than 10,000 e-mails, interviewed more than 50 witnesses and subpoenaed about 20 people, another person briefed on the case said.

Jill E. Sommers, the Commodity Futures Trading Commission official charged with overseeing the MF Global case, said in a December statement that transfers from customer accounts “have been identified, and subsequent transfers of those funds are currently being traced.”

Now, authorities have traced more than 90 percent of those subsequent transfers, people briefed on the investigation said.

“We understand the frustration of customers, but the C.F.T.C. must take the necessary time — however long it takes — to get to the bottom of what happened at MF Global and take appropriate actions,” the agency said in a statement on Tuesday.

Customers, including farmers, hedge funds and other small traders, have been very frustrated with the pace of the investigation and the dearth of updates about their missing money.

While a number of the 38,000 customers have been paid nearly three quarters of their money, others have yet to receive a dime. Paul Jordan, a retired business executive, has not received any of the money from accounts trading on foreign exchanges, an amount that totals about $500,000, he said. His patience is wearing thin.

MF Global: Did SEC Delay Release of Critical Documents?
Discussing the SEC's role in the MF Global investigation, with Marc Melin, Opalesque Futures Intelligence editor and CNBC's Rick Santelli.

“The thing that really irritates me is that I’m not a super wealthy individual,” said Mr. Jordan, 65. “I’m thankful that some funds have been paid out, because bankruptcies can last for years, but I would have hoped by this time that it would be pretty clear where the funds are and exactly what happened to them.”

In contrast, when customer cash was missing from Sentinel Management Group, a Chicago brokerage firm that collapsed in 2007, the trustee overseeing that case found the money within a week. Within a month, the trustee, Fred Grede, announced that the money had turned up at the Bank of New York Mellon.

While MF Global presents a greater challenge than Sentinel, given its size and the amount of money missing, the precedent underscores the importance of keeping customers informed.

“To me, transparency is the key,” Mr. Grede said.

Even regulators are growing anxious about how long the investigation is taking.

“Futures customers — including farmers, ranchers, and manufacturers — have been suspended in excruciating limbo, wondering when they will receive their funds,” Scott O’Malia, a member of the futures commission, said in a speech on Tuesday. “This situation is intolerable and unacceptable.”

While the commissioners are briefed weekly on enforcement cases, over the last three months they have only been briefed twice as a group on the status of the MF Global investigation, according to people close to the commission. Instead, commissioners are seeking their own separate briefings on the case.

Some argue that the lack of cohesion deprives investigators of the collective insight of staff members when the agency faces perhaps its greatest test.

In November, investigators said they began to worry that money may have vanished into a web of counterparties and creditors who are entitled to MF Global’s money. The concern implies that the money may not be missing, but is gone for good.

But at least some of the customer money MF Global misused was transferred to JP Morgan Chase, MF Global’s main bank. Investigators also suspect that MF Global made improper transfers of customer money to the Depository Trust & Clearing Corporation, a clearinghouse that did business with MF Global. The clearinghouse may have passed on the money to MF Global’s trading partners, who would have rightful claims to money from MF Global. A major part of futures customer money also went to securities customers who were closing accounts in October.

Ultimately the task of recovering money falls to Mr. Giddens, who collected the final claims on Tuesday, the last day customers were permitted to file forms outlining what they are still owed.

He has not said how far his investigation has come. He has deployed a team of 60 lawyers and hired 100 consultants from Deloitte and 60 forensic accountants from Ernst & Young to help sift through some $327 billion in wire transfers in and out of MF Global the month before its collapse.

As Mr. Giddens’s team hunts for the money, it is quietly coaxing some recipients to return it.

“We are pressing our investigative team to now come up with actionable intelligence that the trustee can use to determine the location of remaining customers assets, and most importantly, if we can get those assets back under the trustee’s control for return to customers,” Kent Jarrell, a spokesman for Mr. Giddens, said in a statement. “The trustee will use all appropriate and legal means to get those assets.”

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