CFTC Orders MF Global to Pay $1 Billion in Restitution in Connection with Customer Losses

In one of the largest recent failures of a Futures Commission Merchant that has been the subject of controversy following

Source: CFTC
Source: CFTC

A significant victory as the MF Global Saga tries to reach a positive close for its victims. An official press release from the Commodity Futures Trading Commission (CFTC) that was just posted on its website indicates that the agency has obtained a federal court consent Order against Defendant MF Global Inc. (MF Global), requiring it to pay $1.212 billion in restitution to customers of MF Global to help ensure customers recover their losses sustained when MF Global failed in 2011, according to the announcement.

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As per the release, the consent Order, entered on November 8, 2013 by U.S. District Court Judge Victor Marrero of the U.S. District Court for the Southern District of New York, also imposed a $100 million civil monetary penalty on MF Global, to be paid after MF Global has fully paid customers and certain other creditors entitled to priority under the bankruptcy law. The Trustee for MF Global obtained permission from the bankruptcy court to pay restitution in full to customers to remedy any shortfall with funds of the MF Global general estate.

As part of an ongoing story that has received wide coverage from both the industry and the world media, including Jon Corzine’s testimony regarding the case, the consent Order arises out of the CFTC’s complaint, filed on June 27, 2013, charging MF Global and the other Defendants with unlawful use of customer funds (see CFTC Press Release 6626-13, June 27, 2013).

Admission of Liability

In the consent Order, MF Global admits to the allegations pertaining to its liability based on the acts and omissions of its employees as set forth in the consent Order and the Complaint. The CFTC’s litigation continues against the remaining defendants: MF Global Holdings Ltd., Jon S. Corzine and Edith O’Brien.

mfThe CFTC’s Complaint charged MF Global, a registered Futures Commission Merchant (FCM), with violating provisions of the Commodity Exchange Act and CFTC Regulations intended to protect FCM customer funds and requiring diligent supervision by registrants.

Specifically, the Complaint charged that during the last week of October 2011, MF Global unlawfully used customer segregated funds to support its own proprietary operations and the operations of its affiliates.

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Scale of Justice: Source CFTC
Scale of Justice: Source CFTC

In addition to the misuse of customer funds, the Complaint alleged that MF Global (i) unlawfully failed to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts, (ii) made false statements in reports it filed with the CFTC that failed to show the deficits in the customer accounts, (iii) used customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid in violation of CFTC regulation, and (iv) failed to diligently supervise the handling of commodity interest accounts carried by MF Global and the activities of its partners, officers, employees and agents.

Multi-Jurisdictional Support

According to the official announcement, the CFTC appreciates the assistance of the U.S. Attorneys’ Offices for the Southern District of New York and the Northern District of Illinois, the Federal Bureau of Investigation, the Securities and Exchange Commission, and the Financial Conduct Authority in the United Kingdom. The case had been building since the 2011 demise of MF Global, with the CFTC stepping up its efforts to make sense of the news that shocked the world when the company collapsed.

Gretchen Lowe, Acting Director of the CFTC’s Division of Enforcement, who recently took over the helm of the division, stated in the official press release, “Division staff have worked tirelessly to ensure that 100 percent restitution be awarded to satisfy customer losses. The CFTC will continue to ensure that those who violate U.S. commodity laws and regulations designed to protect customer funds will be vigorously prosecuted.”

CFTC Division of Enforcement staff members responsible for this case are Sheila Marhamati, David W. Oakland, Chad Silverman, K. Brent Tomer, Douglas K. Yatter, Steven Ringer, Lenel Hickson and Manal Sultan. Staff from the CFTC’s Division of Swap Dealer and Intermediary Oversight, Division of Clearing and Risk, and Office of Data and Technology have also assisted in this matter.

While certain customer funds have already been recovered, and other amounts not protected under bankruptcy law and unrecoverable, there were literally hundreds of millions of dollars that had went missing around the time of the company’s bankruptcy, which then brought to light the need for more stringent rules on how segregated funds should be handled as prescribed by the regulatory guidelines and interpretations issued by the CFTC, and following the relevant Dodd-Frank reform. Accordingly, rules pertaining to the protection afforded to customers’ funds held at FCM remain an area of concern that the CFTC has been actively pursuing.

 Full copy of the announcement appears on the CFTC website.

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