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Unauthorized Trades Cost MF Global $141.5 Million

By Jennifer Yousfi
Managing Editor

Shares of MF Global Ltd. (MF) – the largest broker of exchange-traded futures and options – plunged more than 25% yesterday (Thursday) when it was discovered that a rogue trader had run up $141.5 million in losses.

While the amount was nowhere near the $7.2 billion a rogue trader lost Societe Generale (OTC:SCGLY) just last month, the loss is still a crippling blow, as the firm was forced to honor the trades.

Memphis-based broker Evan Dooley, 40, is alleged to have made several unauthorized trades on wheat futures, which resulted in the losses. While Dooley's actions didn't cause a sizeable enough loss to earn him a spot in the Rogue Trader Hall of Shame [Editor's note: Please see the sidebar below.], he did end his trading career – MF Global said it terminated him effective immediately.

The loss caused Fitch Ratings to place MF Global on a negative watch, The Associated Press reported. While Fitch feels the brokerage firm is likely to have enough liquidity to cover a loss that represents approximately one-third of the MF Global's pre-tax earnings, Fitch noted the rogue trades and resulting loss "questions the robustness of risk measurement" and represents "a substantial portion" of the company's profit.

"All it takes is somebody with enough understanding of how these trading, settlement and risk-management systems fit together and where the gaps are to create a problem," Adam Honore, an analyst at Boston-based financial services consulting firm Aite Group LLC, told Bloomberg News. "SocGen was another example, and this is not going to be the last."

Honore's comments mirror those made by Money Morning Investment Director Keith Fitz-Gerald just Societe Generale scandal broke.

"Despite the fact that the world is now clamoring for more oversight and controls, we suggest that no amount of regulation will help," Fitz-Gerald said, soon after the Societe Generale scandal broke.

At the time, Fitz-Gerald predicted we would see more rogue trades in the future.

"Clever traders will always find ways to game the system and their supervisors will unwittingly encourage this behavior by maintaining the outrageous bonus structures and payouts for which Wall Street is now synonymous," Fitz-Gerald said.

MF Global, formerly the brokerage unit of Man Group PLC – the world's biggest publicly traded hedge-fund manager – was spun off in a $2.92 billion initial public offering (IPO) in July.
The London-based Man Group retained an 18.6% stake in the company.

MF Global stock lost $8.09, a 27.63% decline, to close at $21.19 yesterday.

News and Related Story Links:

  • Forbes:
    Fitch Puts MF Global on Negative Review

Rogue Trader Hall of Shame

Here are a few of the rogue traders infamous for losing sizable sums for their employers:  

  • Jerome Kerviel: In January 2008, Societe Generale SA (OTC: SCGLY), France's second largest bank by market value, incurred a $7.2 billion trade loss from an "exceptional fraud" perpetrated by a rogue trader.
  • Nick Leeson: In 1995, Leeson was a trader in Singapore who lost $1.8 billion, bringing down venerable British bank, Barings PLC. He was sentenced to six and a half years in prison.
  • Joseph Jett: In 1994, Kidder Peabody had to adjust its first-quarter earnings to reflect $210 million in false profit from bond trader Jett. Jett was forced to forfeit $8.2 million in bonuses, was fined $200,000, and barred from any future association with financial trading. General Electric Co. (GE) sold Kidder Peabody to Paine Webber the following year.
  • Yasuo Hamanaka (a.k.a. Mr. Copper):  In 1998, Sumitomo Corp. revealed a $2.6 billion loss, which it blamed on Hamanaka, formerly the company's chief copper trader. He was sentenced to eight years in prison.
  • John Rusnak:  In 2002, Allied Irish Banks PLC (AIB) discovered that Rusnak at Allfirst Financial Inc. had hidden $691 million in losses for more than five years. Rusnak could have faced as many as 30 years in prison but was sentenced to seven and a half years. Allfirst was subsequently bought by M&T Bank Corp. (MTB).

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