DealBook: Red Flags Were Raised on Client Cash, MF Global Inquiry Is Told

Andrew Harrer/Bloomberg News Christine Serwinski, the former North American chief financial officer, was on vacation during much of MF Global’s final week.

Federal investigators are conducting a final round of interviews with former MF Global employees, as they weigh whether to file criminal charges against some senior executives and grant another one immunity from prosecution.

In interviews with investigators, two former back-office employees said they had raised red flags about the firm’s possible misuse of customer money in the final week before it filed for bankruptcy, according to people briefed on the matter. The employees disclosed that a report produced early on Friday, Oct. 28, MF Global’s final day of business, showed a deficiency in customer cash accounts.

Despite the warning, MF Global continued to transfer customer money without fully disclosing the potential problem to regulators, said the people, who spoke on the condition of anonymity because they were not authorized to speak publicly. The revelations raise questions about potential communication breakdowns between the employees tracking the customer money and those transferring the funds.

The wire transfers are at the heart of a seven-month effort to recover more than $1 billion in customer money that disappeared from MF Global.

Federal investigators have homed in on Edith O’Brien, a former treasurer at MF Global official who oversaw some of the transfers. In interviews last month with former employees, investigators focused their questions on Ms. O’Brien’s actions and behavior during the week leading up to the firm’s bankruptcy filing on Oct. 31, one of the people briefed on the matter said.

Ms. O’Brien has sought immunity from prosecution. After conducting a number of interviews with Ms. O’Brien’s lawyers, federal prosecutors and the Federal Bureau of Investigation are nearing a decision about her request for immunity, the people briefed on the matter said.

The latest steps by investigators come as other new details emerge on MF Global’s collapse. On Monday, the trustee overseeing the return of customer money, James W. Giddens, is expected to issue a detailed report on the firm’s demise. The report will outline where customer money was transferred and what certain key employees were doing during that tumultuous period, according to people with knowledge of the report.

Until now, Mr. Giddens has indicated only that he had traced the missing customer money to an array of banks and some of MF Global’s trading partners. He has been reluctant to disclose specifics, fearing it might compromise negotiations to recover the money.

In the days before MF Global filed for bankruptcy, the firm misused client funds to meet its own obligations. Since then, farmers, hedge funds and other customers have been without at least a third of their money.

The trustee’s report has prompted some concern among federal investigators, who fear it could put pressure on them to wrap up their case quickly. But the report, which comes at the request of the bankruptcy judge, does not appear likely to jeopardize the investigation since much of the information is already known.

No one at MF Global, including Ms. O’Brien, has been accused of wrongdoing. And despite revelations that a potential deficiency in customer money was detected on Oct. 28, some investigators have expressed doubt about bringing a criminal case, people close to the matter have said.

Investigators have scoured tens of thousands of e-mails and documents without unearthing a smoking gun. They instead chalk up some of the wire transfers to sloppy record-keeping and mass confusion at the firm.

Regardless of whether a criminal case materializes, civil regulators are pursuing their own investigations. The Securities and Exchange Commission, for instance, is examining whether top MF Global executives failed to publicly disclose the firm’s exposure to European sovereign debt, people briefed on the matter have said. The positions, once fully detailed, prompted the firm’s investors and rating agencies to panic.

The future of the criminal investigation, being led by prosecutors in New York and Chicago as well as the F.B.I., may hinge in part on Ms. O’Brien. On Oct. 28, she oversaw a crucial transfer of $175 million to replenish an overdrawn account at JPMorgan Chase in London. The money used belonged to customers, though it is unclear whether Ms. O’Brien knew its origin at the time.

Some investigators are hesitant to grant Ms. O’Brien immunity, fearing she might be responsible for the breach of customer accounts. But they also say that with the promise of immunity, she may reveal fresh information about wrongdoing at higher rungs of the firm.

Ms. O’Brien has remained mum. When appearing before Congress in March, she declined to testify, invoking her constitutional right against self-incrimination.

Other back-office employees are cooperating with federal investigators. In recent weeks, employees in Chicago and New York have delivered so-called proffers, in which they detail their knowledge to the investigators.

Some employees have focused on the internal report that showed a deficiency in customer cash accounts amounting to hundreds of millions of dollars. The internal report, produced on Oct. 28, reflected end-of-day figures for Oct. 27, a person briefed on the matter said.

The employees who are said to have noticed the deficiency, Matthew Hughey and Mike Bolan, reported to Christine Serwinski, the firm’s North American chief financial officer. The two were unable to immediately confirm whether the deficiencies were real or the result of an accounting error, according to one of those briefed on the matter.

The new details raise concerns about whether Ms. O’Brien’s staff and Ms. Serwinski’s team were isolated from one another during the crucial period. Some say tensions have mounted between the two units in the aftermath of the collapse, with each pointing fingers at the other.

Some people close to the case have said Ms. O’Brien’s staff sent wire transfers on Oct. 28 without checking the reports showing the level of customer cash. Others have countered that Ms. O’Brien was not given access to reports on that final day of operations.

Adding to the disorder, the people say, was that Ms. Serwinski was on vacation much of that final week. One of her deputies, a person briefed on the matter said, also spent part of the week away at a conference.

Article source: http://dealbook.nytimes.com/2012/06/03/red-flags-were-raised-on-client-cash-mf-global-inquiry-is-told/?partner=rss&emc=rss