Given the initial coverage, you might think that the sad story of MF Global’s demise is all about John Corzine.
It’s a familiar story: The tragic flaw of hubris drives a former governor, U.S. Senator, and Goldman Sachs CEO to bet the farm and bankrupt a company that’s been around since James Man started a sugar trading business in 1783. Only a “master of the universe” type would joke to the press, just days after taking over the publicly traded company in March 2010, “I hadn’t heard of this company a week ago.”
Corzine surely blundered, but he was far from alone.
The second most obvious storyline is that regulators ignored the MF Titanic heading for a sovereign risk iceberg. Press reports have characterized CME Group as MF Global’s “primary regulator” but I’m not sure that’s a job the exchange operator wants. That honor belongs officially to the Commodity Futures Trading Commission. CME Group has been actively communicating with the media in an attempt to get ahead of any criticism for its role.
An already bad MF Global bankruptcy story spun out of control and careened off the road late Monday. That’s when MF Global executives admitted to the regulators that Interactive Brokers had refused to catch Corzine’s Hail Mary pass and buy the company because the numbers just didn’t add up. Regulators found hundreds of millions of dollars belonging to customers had gone missing, and were investigating whether MF Global had used some of those funds to support its own bets, The New York Times reported.
And this is where we come to the party that up until now hasn’t received its fair share of scrutiny: PricewaterhouseCoopers, which as MF Global’s auditor was supposed to be the first-response regulator.
A week after I wrote in my BankThink column that the relationship between PwC and MF Global was too cozy for my taste, the regulators are catching up. Late Thursday, Bloomberg reported that regulators had subpoenaed PwC for “information on the segregation of assets belonging to clients.”
The CFTC’s action against PwC probably came as a result of a shocking CME Group announcement late Wednesday: "It now appears that the firm [MF Global] made … transfers of customer segregated funds in a manner that may have been designed to avoid detection." These transfers, CME Group said, appeared to have taken place after its audit team showed up last week at MF Global to take a look and found everything to be in order.
CME Group couldn’t have been hoodwinked like that if PwC had been doing its job all along. You can't circumvent controls unless there are none or there are holes. It was PwC’s job to review controls and the adequacy of policies and procedures to support them.
Since MF Global is a broker-dealer and a Futures Commission Merchant, PwC’s job went well beyond a standard audit. The auditor for a firm like this must annually review the procedures for safeguarding customer and firm assets in accordance with the Commodity Exchange Act. The annual audit must include a review of a firm’s practices and procedures for computing the amounts that, by law, have to be set aside in clients’ accounts each day. MF Global also had to send regulators an annual supplemental report from PwC. This report would describe any material inadequacies existing since the date of the previous audit and any corrective action taken or proposed.