Long before the brokerage firm MF Global
An analysis of regulatory enforcement actions shows MF Global has drawn more sanctions from the U.S. commodity futures regulator than each of its 14 closest peers in that market over the past decade. MF Global has also drawn the second-highest amount in fines, for alleged lapses in risk supervision and recordkeeping.
MF Global and the U.S. Commodity Futures Trading Commission both declined to comment.
And five private lawsuits against the firm allege, among other things, that MF Global was a vehicle used by two Ponzi schemes, including one that was later dubbed mini-Madoff.
None of the violations took place on the watch of Jon Corzine who took the helm of MF Global in 2010. A former chief of Goldman Sachs
The broader issue of internal control and risk-taking at MF Global before its meltdown is emerging as a central avenue of inquiry both for lawyers filing claims on behalf of investors, and for regulators seeking to find some $600 million (377 million pounds) missing from MF Global.
The issue of internal controls will be part of our independent investigation, said Kent Jarrell, a spokesman for the trustee overseeing MF Global's bankruptcy.
While MF Global clients headed for the exits in the final weeks as fears grew about risky bets on European debt, regulators and investors had already raised concerns about how the company was run. Among them was the CFTC, which repeatedly sanctioned the company for risk supervision failures.
Among more than a hundred brokers overseen by the CFTC, MF Global ranked eighth largest by customer money, with $7.2 billion in segregated client accounts, according to an August 2011 CFTC database. Larger brokers in the top 15 included heavyweights such as Goldman Sachs, Newedge USA and JP Morgan Securities
Between 2000 and early 2011, the CFTC sanctioned MF Global for six alleged violations, involving lax supervision and recordkeeping, and levied penalties totalling more than $12 million, according to the agency's data. Only Morgan Stanley
In the same time period, the CFTC sanctioned Citigroup
CFTC's public records between 2000 and 2011 do not list any enforcement actions for the eight other firms among the top 15 futures brokerages in the country, as ranked by the agency.
(For a graphic ranking the largest futures brokerage click: http://link.reuters.com/maw84s )
These records cover only civil actions brought by the CFTC. Because many of the larger firms on the list do business across several asset classes that fall under the purview of other regulators, the CFTC data does not include enforcement efforts by other agencies.
Separately, many of the big financial firms on the list have also been a target of private lawsuits questioning their business practices.
Asked to comment on MF Global's record with the CFTC, a former veteran agency official, who declined to be identified by name, said: The violations reveal a pattern of weakness in MF Global's (internal) supervision as compared to its peers. A CFTC spokesman declined to comment on how MF Global's record may compare to that of the other firms regulated by the agency.
MINI-MADOFF RED FLAGS
In several lawsuits, trustees of failed businesses that traded through MF Global have also alleged lax oversight at the brokerage.
Among them is a lawsuit involving Nicholas Cosmo, a Long Island financial manager dubbed mini-Madoff.
To keep his $400 million Ponzi scheme from unravelling, Cosmo made thousands of disastrous trades through his account at MF Global, according to a lawsuit filed by the trustee of Cosmo's bankrupt operation against the brokerage earlier this year.
Cosmo had already had run-ins with the law by the time he opened an account at MF Global in 2008. In the late 1990s, Cosmo had been convicted of fraud, barred from the securities business and ordered to seek therapy for a gambling problem.
But MF Global's background checks failed to spot those problems, the lawsuit says. Cosmo went on to lose more than $19 million of his investors' money in futures bets placed through his MF Global account, according to the complaint.
MF Global's failure to detect and limit Cosmo's trading appears to be part of a corporate pattern of lax controls that failed to detect fraudulent activities, says the complaint, filed in a U.S. bankruptcy court on Long Island.
MF Global says it is not liable for Cosmo's losses, arguing it had no reason to know that Cosmo was running a Ponzi scheme. Cosmo was sentenced to 25 years in prison in October for defrauding his clients.
A lawsuit filed just last week over MF Global's descent into bankruptcy also claims sloppy oversight.
Joseph DeAngelis, an MF Global shareholder, alleged that the firm's highly deficient internal controls left it dangerously exposed to the European debt crisis. A spokeswoman for MF Global declined to comment on the lawsuit.