Roughly $1.6B in customer cash went missing after the MF Global collapsed. This was almost 25% of customer funds. Who were these customers? Farmers, grain operators and hedge funds who used MF Global to trade in commodities.
Initially it was believed that these funds would be hard to recover. Luckily, it appears most claims will be settled for 90% of face value. Does anyone want to take a 10% haircut? Of course not, but at this point getting 90 cents on the dollar is better than 0.
When I started reading about this I was a bit shocked. I was under the impression that MF Global could not touch this money. If a broker-dealer goes bankrupt, client accounts are supposed to be segregated and safe, held at a custodian.
But in this case, it appears executives stole money from these accounts in hopes that they could save the business. The firm was highly leveraged and largely went bankrupt in October from bets that went south on European debt. Essentially these funds would have been used as collateral for their creditors, to pay off creditors or used to double down on existing trades.
In the end, MF Global may have intended to pay the money back to customers, just like Madoff or any other Ponzi scheme. In my next post, I will update the current prosecution against MF Global and how you can protect yourself against this type of broker-dealer raiding.
