5 MF Global-Style Meltdowns

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) 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.


After filing for bankruptcy in October 2005 as a result of an $430 million fraud committed by its CEO Phillip Bennett, REFCO was accused by Jim Rogers and his firm Beeland Management that the commodities broker had "wrongfully and fraudulently" handled $362 million in assets that were supposed to be segregated from the company.

At the time, REFCO was the world's largest commodities broker and had, earlier in the year, completed an IPO. Beeland alleged RECFO was supposed to have deposited firm assets into a segregated customer account but that instead the firm held money in the brokerage, which isn't protected from a bankruptcy filing.

In the lawsuit, Beeland said, "As a result of REFCO's scheme to brazenly violate the funds' instructions and deceitfully divert the funds' assets to an insolvent, unregulated entity." A year later, Beeland settled with REFCO and recovered $305 million, or 84% of its claim.

Refco also settled with lenders in its IPO, paying banks like Bank of America ( BAC), Goldman Sachs ( GS) and Credit Suisse ( CS) $650 million.

In November 2005 Refco was sold out of bankruptcy to Man Group, which cultivated the business within its commodities trading arm and later spun it in an 2007 IPO, calling the company... MF Global.

Lehman Brothers

After filing the largest bankruptcy in U.S. history, Lehman Brothers was sued this year by Pulsar Re a Bermuda -based reinsurance division of hedge fund Magnetar Capital over $450 in cash collateral for repurchase transactions it believed it held segregated accounts.

In the lawsuit, which focuses on Lehman's notorious "Repo 105" transactions, Pulsar Re said that the $450 million was transferred to Lehman's commercial paper division in a repurchase transaction, which was later liquidated in bankruptcy. The dispute hasn't fully been settled as of yet.

In October, Lehman reported that it had increased its cash recovery by $250 million, making total cash $25.74 billion. The company went bankrupt in September 2008 with over $600 billion in assets and liabilities. Its creditors will vote on a Chapter 11 plan to disperse funds in December.

Clayton Brokerage

In 1980, Clayton Brokerage of St. Louis was accused of dipping into customers segregated accounts at the Chicago Board of Trade to help fund a fraudulent scheme to manipulate the price of silver futures upwards. The Commodities Futures Trading Commission sued company executives for comingling client funds with the proprietary brokerage account, market manipulation and front-running among a series of violations.

In 1987, the CFTC settled with Clayton Brokerage on its civil suit and barred employees from trading under its jurisdiction for temporary and permanent lengths. In 1983, Donald Dial, a Clayton executive, was also found guilty of sixteen counts of mail and wire fraud, as were other Clayton employees, according to published reports.

North American Clearing

North American Clearing a Longwood, Florida -based securities and clearing broker was accused by the Securities and Exchanges Commission in a civil complaint of fraudulently withdrawing customer funds to pay for daily operating expenses in 2008 as the firm faced ruin.

The firm, with over 10,000 customers and 40 brokers, faced a capital shortfall in 2008 as its holdings of subprime related mortgage assets deteriorated and the firm eventually went bankrupt.

The SEC's complaint accused North American clearing and its director Richard L. Goble, President Bruce B. Blatman and operations principal Timothy J. Ward of fraud and other securities laws violations for falsely withdrawing $3 million from segregated customer accounts through "sham" transactions.

All three were given civil penalties as high as $25,000 and the company was liquidated by the SIPC.

Full Tilt Poker

In September, Full Tilt Poker, the online gambling site directed by poker legends Howard Lederer and Christopher Ferguson was accused by U.S. attorney Preet Bharara of taking $440 million from players poker accounts to fund redemptions and ongoing virtual poker tables.

In their operations, Full tilt guaranteed its online poker playing customers that the money they held in the company to make bets was held separately in segregated accounts from the company's operations.

In the announcement of the investigation, Bharara called the site a Ponzi scheme saying, "Full Tilt was not a legitimate poker company but a global Ponzi scheme. As a result of our enforcement actions, this alleged self-dealing scheme came to light." Prosecutors filed a civil suit for $3 billion to recover profit from the company and seized its bank accounts and websites.

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