03/13/2012 05:43 pm ET Updated May 13, 2012

MBF Clearing Corp To Be Sued By CFTC Over Use Of Customer Funds

* CFTC says JPMorgan account held unsegregated funds

* Tens of millions of dollars commingled--CFTC

* MBF says no customer funds lost

* Lawsuit filed 4-1/2 months after MF Global bankruptcy

By Jeanine Prezioso and Jonathan Stempel

March 13 (Reuters) - U.S. regulators on Tuesday sued a small futures broker run by famed New York trader Mark Fisher, saying it failed to properly segregate customer funds, and one commissioner called the suit a warning to the industry.

The U.S. Commodity Futures Trading Commission's lawsuit against MBF Clearing Corp, which ceased clearing trades for customers last year, comes at a time of mounting vigilance regarding customer funds after October's bankruptcy of MF Global Holdings Ltd, where an estimated $1.6 billion vanished.

The suit, which will likely be followed by other CFTC enforcement actions, is unrelated to the MF Global bankruptcy, and does not allege that any MBF Clearing customer money was lost.

"The message is clear and will be getting even more clarion: don't screw with customer funds," Bart Chilton, a CFTC commissioner, said in an interview in Boca Raton. "In the wake of MF Global and the loss of those funds, we need to be even more diligent, more proactive and less trusting of firms than ever before."

According to the lawsuit, MBF violated federal law by "routinely" holding between $30 million and $90 million of customer funds between September 2008 and March 2010 in a non-compliant money-market account at JPMorgan Chase & Co .

MBF's alleged violations predate MF Global's collapse. In a statement, MBF said it opened the account solely to protect customer funds after the bankruptcy of Lehman Brothers in 2008. The firm said it pulled its funds out of Lehman and reported what happened to CME Group Inc, another of its regulators.

"Not a nickel of customer money was lost," MBF said.

MBF also said that after the collapse of MF Global in October, it made its own customers whole for any MF Globlal-related losses.


The CFTC typically settles most of its investigations directly and has rarely challenged a broker's fund segregation practices.

The lawsuit seeks civil fines, the disgorgement of fees and other revenue from the alleged improper conduct, a permanent injunction against similar violations and other remedies.

Firms across the industry are waiting for more regulatory fallout from MF Global, which was the eighth largest bankruptcy in U.S. history.

While MBF was very small in terms of its customer funds -- it held less than $100 million over the past several years, less than 2 percent as much as MF Global -- its founder was well known among New York traders, whose shouts, frantic hand gestures and colorful coats dominated the exchanges for decades.

Fisher founded the firm in 1987. At the time, he was already famous for rising from a "runner" on the floor of the New York COMEX exchange at age 12 to join the rnaks of the biggest and most well-known "local" traders on the New York energy and metals exchanges.

His office is housed in the NYMEX building which overlooks the Hudson River on Manhattan's southern tip, even as most trading long ago migrated onto electronic platforms.

The firm still acts as a broker but became a non-clearing FCM late last year and no longer holds customer funds because of what happened at MF Global, Fisher said.

Fisher has since expanded into other ventures.

In November he and fellow commodity industry veteran Dennis Gartman launched two exchange traded notes that allowed investors to convey whether they perceived market "risk on" or "risk off".

JPMorgan had no immediate comment.

A CME spokesman said it does not comment on CFTC actions.


The CFTC accused MBF of failing to maintain sufficient segregated funds on roughly 322 business days between Oct. 3, 2008 and March 26, 2010, and lacking adequate supervision and procedures.

It said that in one "egregious" instance, MBF was "under-segregated" by $63.1 million in mid-April 2009, when it had just $13.1 million of segregated funds rather than the required $76.2 million. About $90.4 million of customer funds was then in the JPMorgan account, the CFTC said.

The account had been opened on Sept. 17, 2008, two days after Lehman Brothers Holdings Inc filed for bankruptcy.

The suit is unlikely to be the last from the CFTC, which is now under pressure from politicians and traders to prevent any other brokers from misusing customer funds.

"We haven't heard the end to the MF Global saga. It will catch up with the full segment of the broker industry," said one high level executive at a futures commission merchant. "It's not just commodities but securities as well. All of these things are just coming down the pike and are feeding on each other."

The case is CFTC v. MBF Clearing Corp, U.S. District Court, Southern District of New York, No. 12-01830.