NEW YORK ( TheStreet) -- The ongoing saga of MF Global's (MF) bankruptcy took a turn Tuesday when reports surfaced that funds held in segregated customer accounts were missing. The revelation took Wall Street off guard, since keeping client assets quarantined from firm assets is sacrosanct at brokerage firms.
In a call with analysts Tuesday, CME Group (CME - Get Report) group Chief Executive Steven Donahue said that the commodities broker had violated requirements to hold customer money in separate accounts at the exchange from brokerage accounts.
Donahue said, "CME has determined that MF Global is not in compliance with CFTC and CME customer segregation requirements. While we are unable to determine the precise scope of the firm's violation at this time, we are investigating the circumstances of the firm's failure."
According to New York Times reports, Interactive Brokers (IBKR) discovered the missing money on Sunday, which amounts to up to $700 million, forcing MF Global into bankruptcy rather than a sale.Late Tuesday, The Wall Street Journal reported that MF Global had admitted to regulators that money had been taken from client accounts and that the Federal Bureau of Investigation may probe the firm for missing funds and criminal violations. Both reports cited unnamed sources familiar with the situation. In U.S. bankruptcy court Tuesday, MF Global's lawyer Kenneth Ziman said that "to the best knowledge of management, there is no shortfall," according to reports of the proceedings by Bloomberg. It also reported that the Securities Investors Protection Corporation (SIPC) hadn't confirmed whether or not client money was missing. SIPC Monday initiated the liquidation of MF Global after the company filed bankruptcy, "within hours of being notified by the SEC that a SIPC case was necessary to protect the investing public," it said. Developments at MF Global may become another instance of when client accounts aren't quarantined from riskier brokerage accounts. Segregated accounts are supposed to be a safe place for money at a brokerage because -- in the event of a firm's demise -- money held in accounts is returned to customers instead of becoming part of a claim in bankruptcy court. But a panicking firm also can't touch segregated client money in a last-ditch attempt to cover expenses or trading positions. Here's a list of some of the more infamous brokerage blowups that involved accusations of playing with client money.