VOL. 123 | NO. 43 | Monday, March 3, 2008
Memphis Trader Racks up Nearly $142M Loss
By Bill Dries
A rogue trader at MF Global Ltd. rang up $141.5 million in losses on the broker's account last week, costing the company almost a fifth of its market value.
Evan Dooley lost his job Thursday as a commodities trader at the Memphis regional office of MF Global. The end came after he managed to run up the losses in the span of just a few hours Wednesday evening at the East Memphis office.
"It happened very, very quickly," said MF Global Chief Executive Officer Kevin Richard Davis in a conference call Thursday.
The call was part of the widespread reaction to the losses that caused the company to liquidate the wheat contracts bought on the Chicago Board of Trade at a loss of $141.5 million to the company. Less than 24 hours after the trades, MF Global's stock plunged nearly 20 percent, about half of what MF Global projected as its profit for the year.
"We didn't have buying power controls on the account. ... However much capital he had was irrelevant," Davis said. "Suffice to say he had nothing like the sort of capital necessary to support even a fraction of the position he had. The guy concerned didn't have any customers. So it wasn't a question of conflict between what he was doing for himself and what he was doing for his customers. I believe he had one historic customer which hadn't traded for some time. In any event, there's no issue that he was trading for his customers."
The Wall Street Journal reported Thursday that when its reporter reached him, Dooley said, "The computer system failed on a lot of things." He also said the computer had problems "setting limits." He then ended the interview saying he needed to talk to his attorney.
Davis said Dooley ran up the losses because of "a failure in one of our retail auto entry systems" - a risk management safeguard that is designed to stop exactly what Dooley is accused of doing by the company that bills itself as the world's leading broker of exchange-listed futures and options. Dooley has not been charged with any criminal wrongdoing and the company's internal investigation continued into the weekend.
Some internal computers like those in the Memphis regional office didn't have such safeguards, Davis said. They did the day after.
"When you have a multiplicity of customers calling a desk, sometimes the buying power controls stop trading and make it less efficient to execute those customer transactions. In some cases we allowed an office to not have buying power controls. Clearly that was a mistake," Davis said, adding that the Bermuda-based company hasn't had an incident like this in the 32 years it has used electronic trading systems.
Adding to the crisis was a very liquid wheat market. The price has surged in a four-week period because of constraints in the global supply and demand from China, "which was why he was able to put on positions big enough to lose such a quantum of money in such a short period of time," Davis said. "In normal gray market conditions, you've seen basically moves in a day that you would expect to see over a month, quite frankly."
In addition to the internal review, MF Global also is hiring an outside risk management consulting firm to conduct a forensic audit, an audit that looks at issues with potential legal consequences for a business. The investigations are likely to focus on the Memphis operation.
"It isn't an issue that everybody knew about. It was peculiar to a particular region. ... This is an isolated incident, an isolated structure," Davis said.
Asked if he believed Dooley might have tried to circumvent computer safeguards, Davis seemed doubtful but not definitive.
"In the sense that he should not have traded in greater size than he had the money to support - that is the ultimate procedure," he said. "Beyond that, it's too early to say with any clarity which internal rules he may or may not have broken. We are working internally to investigate all circumstances surrounding this matter."
The Associated Press contributed to this report.