[ by Melanie Gretchen ]

Did MF Global have it coming?

As the holding firm unwound last October, accountant Matthew Hughey, in its Chicago office was asked by a regulator how much cash the firm had left.  His answer: I don't know.  Or as he put it, "This will require a significant effort," in an e-mail to colleagues on 10/27/12.  The firm declared bankruptcy 4 days later.

What regulators didn't know was that officials had been wrestling with the firm's finances for months. In fact, employees couldn't keep track of exactly how much money the firm had at any given moment, even before the company began to wobble, according to Mr. Hughey's e-mail.  Even now, regulators and lawmakers are still trying to work with gaps in the New York company's procedures for moving and keeping track of money.

Efforts that may produce further light on the situation:

• A private lawsuit, which is expected to be updated early next moth, may delve into how such issues are tied to the more than $1 billion that went missing from customer accounts as MF Global failed last October, according to people involved in the suit.
• A House financial services committee report, set for release in the next few weeks, may investigate how regulators handled MF Global and the deficiencies in internal computer systems and procedures at the firm.
• The CFTC and the SEC have launched a probe into the company

Straight from the Horses' Mouths. For their part, former CEO Jon Corzine and CFO Henri Steenkamp have told lawmakers that they believed internal controls at the company were sound when they signed securities filings in 2011, as required by the Sarbanes-Oxley corporate-governance law.  Here are a few discrepancies that said otherwise:

• Structural problems: A bankruptcy trustee said in a June report that MF Global's trouble keeping up-to-the-minute track of customer money partly reflected a loose organizational structure, i.e. midlevel employees had wide leeway when handling requests from elsewhere in the company to move hundreds of millions of dollars at a time.
• Money moves: An April 2011 spreadsheet called "Outgoing Wire Approved Individuals" lists nearly 3 dozen back-office employees with authority to move money, sometimes with no limit on the size of the transfer as long as a higher-ranking official approved.
• Firm limits: MF Global set no "dollar threshold" on how much employees could move from accounts used to invest the firm's own money and certain customer funds, according to the spreadsheet.
• Balance of power: Only 2 employees were allowed to move more than $500,000 at a time out of an account used to pay commissions owed by MF Global. It isn't clear if the same procedures were in place when MF Global collapsed.
• Internal problems: The firm failed to shore up internal systems that officials knew were weak, according to some people close to the investigation or who worked at MF Global, because it had limited resources and was still overhauling systems in response to a 2008 rogue-trading loss.

The Root of the Problem. The firm's resource problems date back to when the firm was spun off from Man Group PLC in 2007.  At that time, MF Global had only "skeletal resources" in risk management, technology and other back-office functions, according to a former employee involved in later efforts to modernize its systems.

For further details, go to [WSJ, 10/29/12]  .