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A Billion Dollar Mistake or Executives on the Take?

Have you heard about MF Global? If you’ve been following the top business news lately it would be hard to miss. It all started with a ratings downgrade which triggered a liquidity crisis and that then degraded into the firm’s bankruptcy on October 31, 2011. A Halloween fright for their employees, clients and shareholders for sure. Another huge company bites the dust, and why?

Well, the firm’s bankruptcy is only one part of the story. After four months, the media isn’t letting go because this firm ‘lost’ $1.2 billion of their client’s money. The bankruptcy trustee for MF Global has yet to determine where the money went and the consensus is that it will probably never be located. How will they respond to suits by MF Global customers? Was this an epic mistake, theft or perhaps a corporate Halloween trick? Who will pay? MF Global is bankrupt so its shareholders will suffer the brunt of the cost. The actions leading up to today will determine if it’s covered by their Professional Liability insurance…or not.

What does Professional Liability insurance cover?

Professional Liability insurance, also known as Errors and Omissions (E&O) insurance, covers a company and its employees for liability arising out of acts, errors, omissions, or breaches of trust in the rendering of or failure to render professional services. Negligence is conduct that a professional liability policy would cover. Professional Liability insurance however, does NOT cover crime.

Fraud is excluded from every professional liability policy because the intentional nature of fraud makes it against public policy to insure. Some professional liability policies also exclude willful violations of statutes or regulations.

What is the law that has MF Global under scrutiny?

Securities and commodities brokers are required by the regulations of the Commodity Futures Trading Commission to keep customer money safely separate from the firm’s operating account. Use of customer funds to meet a firm’s operating needs is strictly prohibited; this is a basic fiduciary duty.

The MF Global Predicament:

Did MF Global employees try and avoid bankruptcy by intentionally using funds in the customer account to meet margin calls or was the loss of funds a mere clerical error? MF Global’s Professional Liability insurers will need to determine whether the loss of customer funds was the result of negligence or fraud and/or an intentional violation of law.

In the days leading up to its bankruptcy filing, MF Global was audited by its regulator, CME Group Inc. If it is determined that MF Global misled CME Group during this audit, the professional liability insurers will likely invoke the fraud exclusion and/or a willful violation of regulations exclusion. In this situation, some, if not all of MF Global’s loss may be excluded from its Professional Liability policy, but for now there are still a lot of unanswered questions.

For more information, the Motley fool hosted an interesting chat answering readers questions about what happened at MF Global: “In addition to destroying the eighth largest futures broker in the country and putting thousands of jobs at risk, the bankruptcy also revealed a gaping, $1.2 billion hole in the customer segregated accounts at the brokerage. That’s cash that belongs to tens of thousands of farmers, fund managers, and independent traders all over the country.” (Click Here)

Most firms have policies and procedures in place to ensure that their basic duties to customers are not breached. The lesson from MF Global for firms and professionals is that adherence to such policies and procedures is always important, particularly in a crisis, and deviation could result in excluded coverage on a professional liability policy. We encourage all BizInsure customers to discuss any questionable activities with your insurer before you find yourself in an MF Global mess!

BizInsure Guest Blogger: Carolyn Polikoff

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