This story originally appeared in the April 1, 2012 edition of the New York Times.
MF Global customers who closed their accounts in the brokerage firm’s final days have been fuming for months about how the firm mailed checks to them, instead of promptly transferring the money electronically as usual. Many of those checks arrived after the bankruptcy filing, and subsequently bounced.
Now customers are taking action, trying to show that MF Global delayed the return of their money to cover the firm’s own bills and stay afloat. They are amassing client documents and submitting them to federal investigators in hopes of building a criminal case against MF Global executives.
While clients of MF Global say that it was unprecedented for the firm to abandon a longstanding business practice to wire money to customers who were closing accounts, the documents are not definite proof of wrongdoing. In recent weeks, federal authorities have come to suspect that MF Global’s actions amount to sloppy record-keeping, rather than criminal fraud.
It is unclear whether investigators are already aware of the checks, or if they will find the information useful.
But customers, who have been waiting months for their money, are growing increasingly frustrated. Although the authorities have found that MF Global transferred roughly $1 billion of client funds to banks and other financial firms, they cannot easily recoup that money.
If prosecutors file criminal charges, customers will have a better chance of getting their money back from the banks and other financial firms that currently have the funds. Under the law, the trustee working on behalf of customers has more leverage to recover the funds in the event of fraud.
“We believe that sufficient evidence exists of intent to commit an actual criminal fraud,” according to a memo from the Commodity Customer Coalition, which represents farmers, grain elevator operators, hedge funds and other MF Global clients.
The group is collecting documents from a wide array of customers. This week, it plans to send documents from one client, Steven Kaplan, to the Justice Department and to Congressional investigators.
On Oct. 27, just days before MF Global filed for bankruptcy, Mr. Kaplan, 63, sent a fax and letter to the brokerage firm to close his account and have the roughly $26,000 in it sent via wire transfer. The next day, MF Global mailed a check to Mr. Kaplan, a retired accountant who lives in West Palm Beach, Fla. According to the documents, he received the check on Nov. 4, four days after the firm had filed for bankruptcy. It bounced.
“It’s been like banging your head against the wall and getting nowhere,” said Mr. Kaplan, who like most other MF Global clients has received only 72 percent of his money. “I thought I was being real smart. I figured, ‘Oh good, I got out.’ ”
The client group, in its memo to investigators and prosecutors, alludes to a similar pattern with dozens of other MF Global customers. Some clients who terminated their accounts in the days leading up to the bankruptcy received checks instead of wire transfers.
The trustee estimated that those who closed their cash accounts before the bankruptcy and received checks are entitled to at least $57 million.
In the memo, the group argues that the firm was trying to slow the return of money to customers so it could use the funds to meet its own obligations. Some of the checks, signed by employees in the firm’s Chicago office, were dated Oct. 28. That same day, MF Global tapped customer accounts to cover an overdrawn account atJPMorgan Chase, transferring $175 million to the bank.
Some of the checks, including Mr. Kaplan’s, were signed by Edith O’Brien, a treasury official in the firm’s Chicago office who has become a central character in the MF Global story.
Ms. O’Brien invoked her Fifth Amendment right against self-incrimination when she was called before Congress last week to testify about crucial transfers of customer money during the firm’s last week. She is also seeking immunity from federal prosecution. Ms. O’Brien and other executives at the firm have not been accused of any wrongdoing.
Building a criminal case has proved difficult for federal prosecutors. It is unclear whether anyone at MF Global knowingly tapped customer money to cover the overdraft at JPMorgan. MF Global, like other firms dealing in futures, kept a buffer of its own money in customer accounts to facilitate day-to-day operations, and may have dipped into the customer money without knowing it.
Even the customer group acknowledged in the memo, “No doubt, a ‘smoking gun’ of an executive commanding the misuse of customer funds is likely to never be found.”
But the group is urging investigators to examine how MF Global accounted for these transfers. MF Global, the group said in the memo, most likely sent the checks and closed out the accounts in its system, which would have reduced the amount of customer funds it was required to keep on hand. But the group said that since the money was sent via check, MF Global might have been sitting on the funds and using them to meet other obligations.