If the collapse of the commodities brokerage firm MF Global were a murder mystery, the revelation that $1.6 billion of customer money had disappeared would be the equivalent of finding the corpse.  Jon Corzine, the former chief of MF Global, at a Senate hearing last year.  Who did it? And given that customer assets, by law, must be segregated from a firm’s assets and operations, how could it have happened?  This week, MF Global’s liquidation trustee, James W. Giddens, went a long way toward solving the mystery in a 181-page account of MF Global’s decline and fall.  Contrary to vague and self-serving assertions that MF Global’s affairs in its last week were so chaotic that no one really knew what was happening, some people at the firm obviously knew only too well, and took desperate measures that ignored clients’ interests. In doing so, they violated the most basic obligation of any brokerage firm, which is to protect customers’ assets.  More broadly, the report makes clear that the notion that customer assets are safely segregated, at least at commodities brokers, is an illusion thanks to a lax calculation of customer assets allowed by the Commodity Futures Trading Commission, which regulates commodities brokers.  Mr. Giddens cautioned that his report was by no means complete, and that he wasn’t in a position to draw conclusions about potential civil and criminal liability. But it seems clear that serious violations of law were committed, and the report will surely add to pressure on the Securities and Exchange Commission, the commodities commission and the Justice Department — the agencies investigating MF Global for potential enforcement and criminal proceedings.  That MF Global was an accident waiting to happen under the leadership of Jon Corzine, a former Goldman Sachs chief executive, United States senator and New Jersey governor, is evident from the structure of the firm. Merely describing lines of authority requires a chart that resembles a convoluted family tree.  Responsibility for accessing funds in segregated customer accounts and transferring them elsewhere rested with one employee, Edith O’Brien, an assistant treasurer in Chicago who reported to the firm’s treasurer in New York, who in turn reported to the chief financial officer, Henri Steenkamp. The treasury division’s main responsibility was meeting Mr. Corzine’s increasingly frantic demands for liquidity to support his high-risk and ultimately disastrous bet on the debt of shaky European nations.  Regulatory compliance — making sure that customer funds were safe — was the responsibility of the financial regulatory group, which reported to Christine Serwinski, the North American chief financial officer, who also reported to Mr. Steenkamp as well as an executive based in London. Ms. Serwinski was responsible for daily reports on segregated customer funds to the commodities commission and weekly reports to the S.E.C. Mr. Steenkamp, in turn, reported to Mr. Corzine.  It’s apparent from Mr. Giddens’s report that as MF Global’s financial woes deepened last summer and fall, protecting customer assets was among the least of Mr. Corzine’s priorities. Mr. Corzine testified to Congress that he never knowingly asked anyone to break the law, and nothing in the report explicitly contradicts that. At the same time, he made demands for cash that appear to have left employees no alternative but to divert customer assets.  None of this would have been possible if regulators actually required firms like MF Global to keep customer funds safe. Instead, the commodities commission allows firms to use an alternative method for calculating customer funds in foreign accounts that vastly understates what belongs to customers. Cash, for example, doesn’t count. The difference between what MF Global actually owed its customers and what it needed to segregate under the alternative method was calculated at the firm on a daily basis and often exceeded $1 billion. Although MF Global reported only the alternative calculation to regulators, it prepared its own segregation report every day that showed the true extent of its liabilities.
A report on the collapse of MF Global reveals a questionable series of moves that indicate the firm failed in its duty to protect the assets of its clients.