MF Global Inc.: Customer Money Became Company Cash

In the MF Global CFTC customer funds case, a federal court ordered MF Global Inc. to pay $1,212,000,000 in restitution, or enough to pay all allowed customer claims in full, over its misuse of segregated customer funds. The Commodity Futures Trading Commission’s enforcement action turns on a distinction familiar to treasury, operations and compliance staff: the cash showing in an account and the cash the firm can spend are different things.

When Customer Cash Paid the Firm’s Bills

MF Global used customer money to support its own operations and those of its affiliates during its final week in October 2011. The later civil consent order against its former chief executive found that customer funds also covered payments to broker-dealer securities customers and withdrawals for customers with secured funds. The firm was using one customer’s protected money to meet other obligations.

MF Global Inc. was a futures commission merchant. That business accepts customer orders and collateral, or extends credit to secure trades. An introducing broker brings in orders without taking that collateral. Holding the money puts the futures commission merchant at the center of customer-fund segregation and custody.

The segregated accounts held both customer money and money belonging to the firm. The former chief executive’s order describes a company policy of maintaining positive excess cash in those accounts. It also finds that, on a number of days, MF Global used more than that available excess to meet its own liquidity needs. We see the absurdity: the firm treated the accounts meant to protect customers as cash available to rescue its own business.

MF Global Inc. entered liquidation on October 31, 2011. The company’s 2013 consent order held it liable for customer-fund misuse and supervisory failures.

The Transfers That Exceeded the Cushion

The Treasury transfers show how a firm can spend beyond its own money in a customer account. According to the Commodity Futures Trading Commission’s account of the former assistant treasurer’s consent order, she directed, approved or caused seven transfers from customer segregated accounts into MF Global’s proprietary accounts on October 27, 2011 and October 28, 2011.

Those transfers totaled hundreds of millions of dollars, more than the excess segregated funds last reported to her. The order found that she knew the money would move from customer segregated accounts into proprietary accounts and that the transfers caused or contributed to a customer-account deficiency. She supervised the Treasury Department responsible for the firm’s cash management.

The former chief executive’s order supplies a separate warning that reached management. JP Morgan had sought written assurances that a $175 million transfer from MF Global complied with the Commission’s rules. The court found that the chief executive knew about that request, the worsening liquidity crisis and the firm’s use of more than its available excess cash.

For an insider, the calculation behind the transfer matters as much as the wire itself. The recipient and amount show where the cash went. The reported excess and approval trail show what the people releasing it understood about whose money they were using.

Restitution Followed the Customer Claims

The company order required restitution sufficient to pay the allowed claims of both domestic and foreign futures customers. Its figures described the shortfall still outstanding at the time: approximately $562 million for the futures account class and approximately $650 million for the foreign futures account class.

The bankruptcy estate advanced its own funds to fill the customer shortfall. The 2014 order against MF Global Holdings Ltd. made the parent responsible for the same restitution obligation. It expressly gave Holdings dollar-for-dollar credit for the trustee’s satisfaction of the subsidiary’s obligation. Both companies owed the customer repayment, and the same payment counted toward both obligations. One customer shortfall. A shared obligation to fill it. The orders also imposed separate $100 million civil penalties on the subsidiary and the parent, payable after the creditors whose claims had priority.

MF Global Allowed Customer Claims Distributions

MF Global allowed customer claims distributions covered 100% of allowed claims, according to the Commodity Futures Trading Commission’s fiscal year 2015 enforcement results. The agency’s January 2017 resolution announcement confirmed that restitution under the company orders had been paid to satisfy all customer claims.

The Chief Executive’s Personal Civil Penalty

The former chief executive’s 2017 civil consent order set his personal penalty at $5 million for his role in the firm’s unlawful use of nearly $1 billion of customer funds. He had to pay it himself, without reimbursement, including through insurance. The order permanently barred him from working for a futures commission merchant or registering with the Commodity Futures Trading Commission.

The court found that he controlled the employees responsible for wire transfers, made management and hiring decisions, influenced proprietary investments and supervised the people handling liquidity, cash management and customer protection. The order held him responsible for MF Global’s segregation violations as the person controlling the firm. Its supervision finding reached back before the final week:

The former assistant treasurer’s separate resolution imposed a $500,000 civil penalty and an eighteen-month ban on working for a futures commission merchant or registering with the Commission. Her order addressed knowingly helping the company violate its customer-fund duties through the transfers. The two individual outcomes followed different roles in the same cash failure.

What the Records Let an Insider Explain

The useful account of a customer-fund transfer joins the customer requirement, the actual funds, the destination and the authority behind the payment. We work with insiders to connect segregation calculations, reconciliations, depository records, transfer approvals and the reports describing what remained.

MF Global’s own excess-cash policy and the bank’s request for assurances make those connections concrete. A policy describes the cushion the firm intends to keep. A calculation shows what it believed remained. A transfer approval shows the decision to spend. Read together, they can explain how the firm’s funding needs reached into customer money.

The banking side has its own responsibilities. In the separate Peregrine Financial Group customer-funds action against U.S. Bank, the Commodity Futures Trading Commission alleged that the segregated account was treated as a business account, describing approximately $36 million in transfers or withdrawals for noncustomer purposes. The civil order required the bank to pay $18 million for Peregrine’s domestic futures customers. That case puts the depository’s handling of the account alongside the futures firm’s decisions about the money.

For someone at a bank or futures commission merchant, knowledge of the account’s purpose can explain a payment that looks ordinary in isolation. We bring that operational knowledge into the case. The Commission’s 2013 customer-protection rule strengthened access to account information and controls over the firm’s own cushion in customer accounts, the same control points the MF Global transfers exposed.

I Work for a Futures Commission Merchant. Am I Eligible for an Award?

An employee of a futures commission merchant can qualify for a CFTC whistleblower award. We assess your eligibility and the information you hold with you. Under the Commodity Exchange Act, the Commission’s whistleblower program provides a total award of 10% to 30% of qualifying monetary sanctions collected.

The False Claims Act has a separate reward program. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know Who Could Move the Money

If your work in treasury, operations, compliance or banking lets you explain why customer money left an account, speak with our whistleblower experts about the transfers you saw. We build your strongest CFTC whistleblower case around your knowledge of the cash and the decisions behind it, bring in CFTC whistleblower lawyers who understand customer-fund segregation, and stand beside you throughout the case.