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MF Global Finds Its Phantom Reporting Error

The mystery surrounding an accounting glitch in the securities broker's final days is finally solved. Or is it?
Vincent Ryan, | US
June 6, 2012

Would you allow your treasury department to make a manual adjustment to a cash account on the fly without sufficient backup documentation? Would you even allow it to happen without multiple levels of authorization or the review of a senior finance executive, especially if the report was being filed with regulators?

MF Global, the commodity futures dealer that crashed spectacularly last year and "lost" $1.6 billion of customer money, apparently did.

A new report by one of the company's bankruptcy trustees sheds light on the mystery of an accounting "error" that bedeviled executives for three days prior to the firm's bankruptcy - an error that may have kept some MF Global executives form realizing that customer funds were being raided to stave off illiquidity.

I wrote about the hunt for the reporting glitch in April, citing a Chicago Mercantile Exchange timeline of MF Global's final week. What was labeled a reporting glitch then, however, was actually an erroneous, $540 million manual adjustment by treasury staffers - one they should have never been allowed to make.

Now you might be saying that except for the size of the adjustment, "So what?" Well, this was no ordinary account. It was the "customer-segregated" account that securities regulators tracked on a daily basis, and it was the account that held customer funds along with a buffer - an amount of money over and above customer funds that had to be maintained at all times. And the size of the adjustment? It made the difference between a deficit and a surplus, and the firm's being in compliance or not.

This collective delusion lasted from a Friday morning through a Sunday night with apparently no one in treasury or the company's financial regulatory group able to prove that no adjustment should have been made. At one point treasury even thought that maybe the adjustment "was incorrectly booked backwards," according to the trustee, because the customer account deficit was so large. (They hypothesized that $540 million had been debited to the account instead of credited.) And during all that time the senior finance leadership (even the company's general counsel) seemed to take treasury staffers at their word - that there was no deficit in customer accounts and that there was some kind of hitch with bank reconciliations.

To be sure, we may never know the whole truth. The bankruptcy trustee admits that "witnesses' descriptions regarding this matter are confusing and contradictory." I have no doubt. The fascinating descriptions of MF Global's final days read like a screenplay for a Keystone Kops movie. "Everyone was running around uncertain what they were supposed to do or how to do it," as one congressman described the federal government's response to Hurricane Katrina.

Of course, I'm assuming that MF Global executives weren't trying to cover up the customer account deficits to buy time until a buyout of the firm was completed. For now, I am willing to do so. A finance department in disarray sounds more plausible anyway.