MF Global to Pay $1.21B in Restitution for Unlawful Use of Customer Funds

 WASHINGTON, D.C. — (Mealey's) The U.S. Commodity Futures Trading Commission (CFTC) today announced that it has reached an agreement with MF Global Inc. (MFGI) under which MFGI will pay more than $1.21 billion in restitution for the unlawful use of customer funds by its bankrupt parent MF Global Holdings Ltd., which used the money to cover its losses.  MFGI also agreed to pay $100 million in civil penalties, according to the CFTC’s statement (U.S. Commodity Futures Trading Commission v. MF Global Inc., et al., No. 11-7866, S.D. N.Y.).

Bankruptcy

MFGH filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York in 2011.  MFGI, as an affiliate of MFGH, entered Chapter 11 bankruptcy at the same time.

The CFTC sued MFGI, MFGH, CEO Jon Corzine and Treasurer Edith O’Brien  in the U.S. District Court for the Southern District of New York on June 27, 2013, alleging that MFGI violated the Commodity Exchange Act (CEA), 7 U.S. Code Sections 1, et seq., and violated 17 Code of Federal Regulations (CFR) Sections 1, et seq.

On Nov. 8, the parties stipulated to the settlement under which MFGI agreed to pay 1,212,000,000 in restitution to individual investors whose funds MFGI used unlawfully to cover shortfalls elsewhere in the company.  The order has not yet appeared on the docket.

Penalties

MFGI also agreed to pay $100 million in civil penalties.

Judge Victor Marrero approved the settlement in which MFGI admitted that it had violated 7 U.S. Code Sections 4d(a)(2) and 6(c)(2), 6(a)(2) and 9(2), as well as 17 CFR 1.12(h), 1.20, 1.22, 1.23,1.25 and 166.3.

The CFTC had argued that MFGI unlawfully used customer-segregated funds to support its own proprietary operations and the operations of its affiliates and unlawfully failed to notify the CFTC immediately when it knew, or should have known, of the deficiencies in its customer accounts.

Moreover, the CFTC contended that MFGI made false statements in reports it filed with the CFTC that failed to show the deficits in the customer accounts.  The company also used customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid in violation of CFTC regulations and failed to diligently supervise the handling of commodity interest accounts carried by all of MFGH’s affiliates, the CFTC argued.

MFGH is represented by James B. Kobak Jr. of Hughes Hubbard & Reed in  New York.  The CFTC is represented by Chief Trial Attorney Steven Ringer and Deputy Director Manal M. Sultan of the CFTC in Washington.

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