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One of the most catastrophic corporate failures in the global FX industry could be considered also the milestone which resulted in the US authorities embarking on an all-encompassing redesign of market infrastructure for institutional firms, and a $20 million capital adequacy requirement for retail FX companies wishing to provide services to North American customers.
The high profile demise of MF Global, which left investors high and dry over three years ago, has been the subject of contention for the US Commodity Futures Trading Commission (CFTC) ever since, and today, it is clear that the US regulator continues its intention to punish those culpable as well as go some way further toward restitution to those who lost their investments, clearly attempting to secure the entirety of funds, thus demonstrating further that US customers enjoy highly comprehensive levels of security due to stringent regulations and the ability of authorities to liquidate firms and distribute restitution to those who sustained losses.
Today, the CFTC has announced that it has obtained a federal court consent order against Defendant MF Global Holdings Ltd. (MFGH) requiring it to pay $1.212 billion in restitution or such amount as necessary to ensure that claims of customers of its subsidiary, MF Global Inc. (MFGI), are paid in full.
US authorities have made their position clear with regard to misappropriation of customer funds, and this factor being instrumental in the firms demise which climaxed in late October 2011, when MF Global experienced a catastrophic ruin of its financial condition, directly caused by improper transfers of over $891 million from customer accounts to a MF broker-dealer account to cover losses created by trading losses, has served as a metaphorical red rag to a bull in terms of regulatory pursuit thereafter.
The CFTC previously filed and settled charges against MFGI for misuse of customer funds and related supervisory failures in violation of the Commodity Exchange Act and CFTC Regulations. MFGI was required to pay $1.212 billion in restitution to its customers, as well as a $100 million penalty. MFGH’s restitution obligation is joint and several with MFGI’s restitution obligation, pursuant to which a substantial portion of the restitution obligation has already been paid.
The consent Order, entered on December 23, 2014, by Judge Victor Marrero of the U.S. District Court for the Southern District of New York, also imposes a $100 million civil monetary penalty on MFGH, to be paid after claims of customers and certain other creditors entitled to priority under bankruptcy law have been fully paid.
The consent Order arises out of the CFTC’s amended Complaint, filed on December 6, 2013, charging MFGH and the other Defendants with unlawful use of customer funds. In the consent Order, MFGH admits to the allegations pertaining to its liability based on the acts and omissions of its agents as set forth in the consent Order and the amended Complaint.
The CFTC’s amended Complaint charged that MFGH controlled MFGI’s operations and was responsible for MFGI’s unlawful use of customer segregated funds during the last week of October 2011. In addition to the misuse of customer funds, the amended Complaint alleged that MFGH is responsible for MFGI’s failure to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts, filing of false statements in reports with the CFTC that failed to show the deficits in the customer accounts, and use of customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid, in violation of CFTC regulations.
Regardless of previous litigation which began against the individual directors of MF Global that commenced in 2013 that has resulted in very severe penalties, the CFTC’s case continues against the remaining Defendants, Jon S. Corzine and Edith O’Brien.
The CFTC appreciates the assistance of the U.S. Attorneys’ Offices for the Southern District of New York and the Northern District of Illinois, the Federal Bureau of Investigation, the Securities and Exchange Commission, and the Financial Conduct Authority in the United Kingdom.
The consent Order recognizes the cooperation of MFGH and requires MFGH’s continued cooperation with the CFTC.
Staff from the CFTC’s Division of Swap Dealer and Intermediary Oversight, Division of Clearing and Risk, and Office of Data and Technology assisted in this matter. CFTC Division of Enforcement staff members responsible for this matter are David W. Oakland, Chad Silverman, K. Brent Tomer, Douglas K. Yatter, Steven Ringer, Lenel Hickson, and Manal Sultan.
For the official announcement from the CFTC, click here.