The embattled securities firm MF Global moved millions in missing client funds last week and tried to avoid detection as the company slid toward bankruptcy last week, a regulator said Wednesday.
MF Global, which filed for bankruptcy protection Monday, is the eight-biggest U.S. bankruptcy and the first major Wall Street firm to fail because of bets on European debt.
MF apparently made "substantial transfers" of customer money after an on-site audit last week, said the regulator, CME Group Inc. CME is a private company that oversees firms such as MF Global on behalf of U.S. regulators.
The money was moved in a way that "may have been designed to avoid detection," CME said in a statement.
MF Global's failure is the latest public setback for Jon Corzine, who was head of Goldman Sachs and governor of New Jersey before joining the company. He had hoped to build MF Global from a brokerage into an investment bank.
CME's statement suggests that MF Global executives rushed hundreds of millions out of client accounts as bankruptcy loomed. The company acknowledged that the money was missing early Monday morning.
"If they transferred funds that fast, it was brazen — an act of desperation to try to save themselves at all costs," said Mark Williams, a former Federal Reserve examiner who is now a lecturer at Boston University.
Williams said it's possible that the transfer of money was made earlier but was missed by CME auditors. He said the company apparently lacked strong systems to monitor risk or prevent such illegal transfers.
"If they had good controls, there's bells and whistles that go off when you're trying to transfer money like that," he said.
About $600 million of client cash is still missing, according to two officials with knowledge of the probe. The FBI is expected to investigate whether the firm's actions violated criminal laws, according to two other people familiar with the situation. All four people spoke on condition of anonymity because they were not authorized to discuss the matter.
Under Corzine's leadership, MF Global started making more trades for its own profit, a practice known as proprietary trading. Those bad trades triggered its worst-ever quarterly loss.
MF Global's credit was downgraded to junk status after it acknowledged the loss last week. Its stock plunged, and business partners required it to put up more money to guarantee its bets. The result was a cash crunch that forced MF Global into bankruptcy.