Federal investigators appear to have tracked down part of the $1.2 billion in missing customer cash at MF Global -- JPMorgan Chase (JPM) got it. The brokerage firm transferred roughly $200 million in client funds to JPMorgan three days before declaring bankruptcy on Oct. 31, The New York Times reports.
The details are somewhat tortuous, so here's an abridged version of what seems to have happened. MF Global had a bank account with JPMorgan, which also cleared trades for the firm. When large financial losses at MF Global and a subsequent credit downgrade caused panicked investors to withdraw their funds, the futures trading firm was unable to pay its creditors.
As a result, MF Global overdrew one of its proprietary trading accounts with JPMorgan in London. The banking giant asked for the money, and MF Global repaid the company using customer funds. The firm is also suspected of using money belonging to its clients, many of which were farmers, ranchers and other business owners, to settle its debts with other trading partners.
These developments raise at least three key questions. First, did JPMorgan know that the $200 million it received from MF Global consisted of customer funds that, by law, were supposed to be segregated from the firm's assets? It looks that way. According to the The Wall Street Journal, one day after MF Global made the transfer, JPMorgan sent the company a letter asking it to certify that the funds didn't belong to customers, which would violate securities rules. WSJ reports:
The letter suggests that officials at JPMorgan, which cleared some trades for MF Global, had become concerned that the securities firm might have gotten the money by dipping into customer funds. Commodity Futures Trading Commission rules prohibit futures brokers from using customer money for their own trading purposes....
The letter indicates that JPMorgan officials knew the money came from segregated customer accounts, because it specifically asked whether the transfer of funds from customer accounts was compliant with regulations.
Second, what did former know about the shift of customer funds to JPMorgan and other counterparties of the firm? He testified under oath that he has no knowledge about what happened to the money. That claim came into question last week when a top executive at CME Group (CME), the futures trading exchange that oversaw MF Global, told a congressional panel that Corizne may have known where some of the funds went. . He also has testified that other MF Global executives assured him that none of the funds transferred to JPMorgan or other counterparties included customer money. But here's where things get fuzzy. The Times notes that in late October, JPMorgan officials specifically contacted Corzine to ask MF Global for a written guarantee that the $200 million transfer was proper. MF Global, through its general counsel, refused. Days later, that same lawyer told securities regulators about the shortfall in customer funds, blaming accounting errors.
Third, what happened to the $200 million transferred to JPMorgan? For now, that remains unclear -- along with the fate of the other $1 billion in missing funds. The search goes on.