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MF Global Update: The Black Hole in a Dark Cave

Posted by Larry Doyle on April 11, 2012 7:56 AM |

In a day and age when money transfers on Wall Street are processed and tracked with tremendous precision, the MF Global back office operations might only be compared to a caveman enterprise during the Dark Ages.

How might a firm such as MF Global, taking risks that literally brought the house down, have such inadequate back office capabilities? Great question, but for further ‘enlightenment’ on this dark and murky topic, let’s review a recently released CFO report, Lax Treasury Practices Aided MF Global Fall, Experts Say:

Poor accounting of the movement of funds between bank accounts and outdated treasury systems contributed to the chaos of the final days of securities dealer MF Global — and ultimately to the loss of $1.6 billion in customer funds. 

According to corporate treasury experts, the congressional testimony of key executives at MF Global shows that the commodities firm’s treasury department was poorly organized and insufficiently automated — and that those flaws as much as anything may have led to the improper transfer of money out of so-called customer-segregated accounts.

The defects in MF Global’s treasury operations were exposed when, in the company’s final week, margin calls from futures clearinghouses, customer demands for withdrawals, and requests from counterparties for added collateral sparked a frantic hunt for liquidity.

Federal officials are investigating how a series of money transfers among MF Global’s different bank accounts at JP Morgan & Co. and between subsidiaries of MF Global’s holding company may have caused the “loss” of customer funds. The theory is that someone at the firm overrode internal controls that safeguarded customer funds and transferred money that was designated as belonging to customers — with a few of those transactions exceeding $100 million.

But MF Global, it appears, lacked sufficient documentation and proper accounting for the movement of money in and out of customer accounts.

“It’s pretty clear that MF Global did not have a treasury workstation — they were keeping track of fund transfers on a spreadsheet and using e-mails and phone calls,” says Bruce Lynn, a managing partner at The Financial Executives Consulting Group. “They were in the 1980s.”

For example, when money is transferred from a bank account, there should be a contemporaneous entry on the books of the corporation, says Lynn, or at least that is best practice. MF Global may have been transferring the money but then not reconciling or accounting for the transfer until nearly a month later. “There is a black hole for days and weeks, and that is just sloppy,” says Lynn.

That careless recordkeeping around MF Global’s bank accounts could also have contributed to executives’ delayed realization that customer-segregated accounts were actually underfunded and not misreported.

Lynn doubts the wire transfers that tapped customer-segregated funds stemmed from a mixup of the accounts, as recent media reports suggest. MF Global was probably using a web-based system provided by JP Morgan & Co. called JP Morgan ACCESS to manage its accounts, he says.  In such a system, semirepetitive payments — like the wiring of money to an account overseas — would  already be set up and a transfer would just require filling in an amount and pushing a button. “It’s highly unlikely the wrong account numbers were used,” says Lynn.

While investigators may yet find that there were criminal or civil violations by top executives at the firm, Lynn says that the misuse of customer funds probably didn’t happen the way some members of Congress think it did. “[In hearings], congressmen made it sound like [CEO Jon] Corzine sneaked in in the middle of the night and flipped a switch and overrode some internal controls, but that’s not the way it happened,” he says. More likely, the company’s culture didn’t place a high value on internal compliance. “Did [Corzine] create an atmosphere where people paid attention to these things? I don’t think so,” Lynn says.

“I swear [Edith O’Brien] has an e-mail in her back pocket — an explicit acknowledgement that it was OK to send the money out,” says Lynn. “Even if it wasn’t policy, self-preservation would make any treasury professional get an executive [to sign off].”

Are shoddy operations, much like ignorance, an excuse for financial impropriety? Perhaps only in an incestuous world of crony capitalism. Whom can we count on to shed some light on the MF Global cave?

I am all for granting Ms. O’ Brien immunity so we can learn more about the interaction between those in the front office — especially Mr. Corzine — and those occupying the cave in back.

Is it just me, or do you notice a striking similarity between the two individuals pictured in my commentary?

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • DavidC

    I used to know someone that managed a ski resort, and they spent a considerable amount of time in court defending law suits when people got hurt. The ski resort used a manual system for tracking equipment maintenance and repairs, using pink forms whenever something was broken or needed to be fixed. Once the equipment was repaired the single form was destroyed, and no permanent record was kept. The attorneys for the plaintiffs always wanted reports on equipment maintenance and repairs, which were not available. When asked to explain why they didn’t keep records, the manager would say ‘We make the forms pink to stand out. I don’t want old ones laying around, because anytime I see a pink form anywhere I know something needs to be fixed. As soon as it’s fixed it gets destroyed so that anything that isn’t settled gets immediate attention’.

    I told the manager that I could easily create a database system they could use to track these items. He looked at me like I was absolutely out of my mind, and said ‘Are you crazy?!? The last thing we want is to keep records of this stuff, they’ll use that information to kill us in court!’

    Excuse me for being cynical, but perhaps MF Global’s lack of systems was more than just a cultural shortcoming.

  • Peter S.

    Were past transfers, along with current transfers, a combined concern that resulted in MF Global unwillingness to sign a letter demanded by JP Morgan confirming that “no past, present, or future,” transfers contained customer funds? Why did JP Morgan ask for historical reassurance regarding customer funds transferred to the firm?

  • Obsvr-1

    shoddy book keeping and confusion during duress may be an excuse from a ma and pa shop, or fly by night shyster, but for a Multi-billion dollar public corporation, with regulatory oversight — Complete and Utter Bull $hit

  • Jack

    Let’s not forget what Joe Biden and Barack Obama thought of Jon Corzine…

    Obama-Biden Talking about Jon Corzine

    • Peter S.

      Thousands of investors were duped by the firm.

  • coe

    Jack – and so “Jon was right” was he? yet another example, LD, of your easy target of “regulatory capture”, and what I tend to despise – the cult of celebrity that infects much of today’s society…It is stunning to believe, yet absolutely believable that MF Global had mediocre controls over their Treasury functions and that the Regulators missed it – or worse…btw, I don’t think you give cavemen justice by comparison to Corzine, LD…they did invent fire, didn’t they…they just didn’t burn the bridge re the ethics of running a business and being honorable with customer funds…what a great person for Obama/Biden to initially seek out to solve the country’s economic malaise…you cannot make this stuff up!

  • Bill

    IRS requires tax payers to keep records. What would happen if somebody under reported his income substantially and blamed it on bad records? Answer: he’d be down on one knee in front of a federal judge begging to stay out of jail, unless he happened to be Tim Geithner, Tom Daschle, Charlie Rangel, or some other member of the DC mafia, like John Corzine.






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