Regulators hunting for about $600 million in customer money that went missing shortly before MF Global Holdings went bust have been taken aback by how poorly kept the securities firm's records are.
"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 (subscription required) with the Wall Street Journal. "We're trying to figure out what numbers are the real numbers."
According to reports from some who saw MF Global’s trading records and balance sheet before the company filed for bankruptcy on October 31, the firm’s books had incomplete transactions, and numbers that just didn't seem to add up.
From the WSJ:
"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.
Regulators say nearly $600 million is missing from customer accounts.
Routine information about assets and positions on MF Global's books apparently took hours to produce, whereas such information should be accessible instantly. MF Global itself says problems with its trading records and balance sheet largely resulted from the chaos that submerged the firm as it shrank its assets by roughly half in a desperate bid to survive a run on the company.
Yet MF Global's books and records were regularly reviewed by CME Group, the Chicago-based exchange operator that regulates futures firms. In a statement, James W. Giddens, the bankruptcy trustee for MF Global's U.S. brokerage unit, promised to conduct a "deliberate, thorough and independent" investigation "around the clock." Giddens said the trustee now trying to recover funds has received "thousands of inquiries" from investors.
While MF Global’s unraveling is quite different from the white collar crime of the century – Madoff’s Ponzi scheme -- there are some similarities too.
Millions of dollars (billions in Madoff’s case) gone missing, investors rightly enraged and wanting to know where their money is, and regulators who somehow missed all the signs that something in the books wasn’t right.
Further, MF Global is the fourth Federal Reserve primary trader to fail in the past four years.
Surely it is time that someone, be it the Fed or another regulator, start providing more effective oversight. After all, there is no amount of cutting-edge technology that can help a firm, or regulators, if processes aren't being followed correctly at all levels, and if the intent to spot something wrong isn't there in the first place.