$10m fine reveals depth of MF Global's failure

The US Commodity Futures Trading Commission has imposed a $10 million fine on the broker MF Global, drawing a line under the 2008 rogue trading incident that cost it $141.5 million.

The CFTC said the broker's internal safeguards had failed four times between 2003 and 2008. In addition to the February 2008 loss, it had failed to obtain proper client authorisation for trades, failed to confirm reported prices actually represented the market, and falsified trading cards to conceal illegal trades.

On February 26 2008, Evan Dooley, a Memphis-based MF Global broker, put on a series of large short positions in May 2008 Chicago winter wheat futures, totalling 16,174 contracts – equivalent to 28% of all contracts traded on the exchange that day. Existing position limits were disabled to speed up customer order processing, the broker said at the time. Dooley's positions rapidly became loss-making as the futures price moved dramatically the following day, hitting the exchange's limit and putting him $141.5 million in the red – a loss MF Global was forced to accept.

At the time, the CFTC said it believed the losses were "an isolated event". But, according to yesterday's announcement, Dooley had been trading beyond his limit for some time – the month before, on January 27 and 28, he had made a $37,000 profit through another set of trades also beyond his trading limit. His supervisor noticed the trade, but took no corrective action beyond discussing it with him – possibly, the CFTC suggests, because Dooley was funding his illicit trades with a loan from his supervisor that was being repaid from his profits, giving the supervisor a financial interest in letting Dooley continue.

The CFTC did not mention another recent conflict of interest at the broker: the Thomas Gilmartin case, in which MF Global ended up paying $77 million in December 2007 to settle a complaint brought by the CFTC, which claimed its lax internal controls had allowed hedge fund Philadelphia Alternative Asset Management (PaamCo) to conceal its losses in MF Global accounts.

MF Global failed to notice its head of offshore fund trading, Thomas Gilmartin, was also a PaamCo shareholder – leading to a significant conflict of interest, the CFTC argued.

Chief executive Kevin Davis stepped down after the Dooley losses, to be replaced by former CBOE chairman Bernard Dan.