WASHINGTON - (AP) - MF Global, the failed securities firm led byJon Corzine, admitted using clients' money as its financialtroubles mounted, a federal official says.
An MF Global executive admitted that to federal regulators in aphone call early Monday after regulators discovered money missingfrom clients' accounts, according to an official familiar with theconversation.
The official spoke on condition of anonymity because he wasn'tauthorized to discuss an investigation by federal regulators. Government rules require securities firms to keep clients' moneyand company money in separate accounts. Violations can result incivil penalties.
The investigation of MF Global Holdings Ltd. is preliminary. Aformal investigation by the company's main regulator, the CommodityFutures Trading Commission, requires a vote by its fivecommissioners.
It isn't clear whether the violations could lead to criminalcharges. At a news conference, Manhattan U.S. Attorney PreetBharara would not comment on whether a criminal investigation isunderway involving the revelations at MF Global.
Earlier Tuesday, the head of the Chicago Mercantile Exchangesaid that MF Global had violated rules requiring it to keepclients' money in separate accounts.
Craig Donohue, CEO of CME Group Inc., which operates exchangeswhere derivatives are traded, said MF Global was "not incompliance" with requirements set by CME and the CFTC. "While we are unable to determine the precise scope of thefirm's violation at this time, we are investigating thecircumstances of the firm's failure," Donohue said.
Derivatives are investments whose value is based on the value ofsome underlying asset. MF Global was one of the biggest players inthe derivatives market.
CME Group is involved in the investigation because it regulatescompanies that trade on its exchanges. Government regulatorsempower companies that run exchanges to enforce trading rules. Whenserious violations are alleged, these companies and regulators bothinvestigate.
MF Global filed for bankruptcy protection on Monday, after a bigbet on European debt threatened to topple it.
The firm did not respond to a request for comment. InteractiveBrokers, which was considering buying MF Global until the problemscame to light, declined to comment. Corzine, a former New Jersey governor and chief of GoldmanSachs, took over MF Global last year. He led MF Global to make moretrades for the company's own profits, a practice known asproprietary trading. Proprietary trading helped turn Goldman into atrading powerhouse in recent years.
Under Corzine's leadership, MF Global bet $6.3 billion on debtissued by Italy, Spain and other European nations with troubledeconomies. Those bonds have lost value in recent weeks as fearshave intensified that some European countries might default. Regulators said in September that MF Global was overvaluing someof its European debt investments. It required the company to raisemore cash, according to court papers filed on Monday.
MF Global reported its biggest ever quarterly loss last week,mainly because of losses on proprietary trading. Credit ratingagencies downgraded the company's bonds to junk status. Andbusiness partners demanded that it put up more cash to guaranteeits trades. The result was a cash crunch that forced MF Global intobankruptcy court.
MF Global is the first big Wall Street casualty of the Europeandebt crisis, which has roiled financial markets for months. Greececan't afford to pay its debts without outside help. Europeanleaders have been wrangling over the details of bailouts forGreece, Ireland and Portugal.
Europe's debt problems threaten the financial system becauseEuropean banks hold billions in debt issued by Greece and othertroubled countries. Losses on those bonds could topple the biggestEuropean banks. MF Global's failure highlights that threat on asmaller scale.
The Securities and Exchange Commission and the CFTC have saidthey and other regulators were monitoring MF Global's situation fordays "in anticipation of a transaction that would include thetransfer of customer accounts to another firm."
The regulators said MF Global had reported "possibledeficiencies" in client accounts, but they did not reveal that thecompany had diverted client money.
That proposed deal fell through after regulators and thepotential buyer, Interactive Brokers, couldn't make the numbers addup. The discrepancies led to MF Global's admission at 2 a.m.Monday, the official said.
Trading of MF Global shares was permanently suspended on the NewYork Stock Exchange Tuesday afternoon.