Since MF Global filed for bankruptcy protection at the end of October, much of the media attention has been focused on the scandal of the $1.2 billion in investor money that the firm cannot account for. That money, which reportedly belongs to about 38,000 investors, may have been used for MF Global’s own (questionable) investments in European debt.

But now, as the end-of-year charity giving season is in its final throes, another kind of fallout from the MF Global bankruptcy is coming to light: its effect on charity donations. According to sources, the country’s eighth-largest bankruptcy is likely to affect charity giving in a number of ways:

• Individual donors who invested with MF Global and lost money (when the firm misplaced those funds) may be less likely to contribute to charities than they were in recent years. Because many smaller investors lost significant amounts of money (relative to their total net worth), tens of thousands of potential charity donations might have been wiped out by MF Global’s collapse.
• Corporate charity organized by the CME Group will likely not occur. In years past, sources note, the CME Group kept a trust (called the CME Trust) of $50 million to compensate investors who were unfortunately hooked into (and who lost money by) fraudulent investment schemes. In the past, most of that money got donated to charities at year’s end; this year, however, the entire trust went toward compensation of MF Global investors who lost money.
• Some charities invested money with MF Global. In addition to the individual clients who lost money, organizations (including nonprofits and charities) put their money with this firm, as it was meant to be a relatively safe investment option. Now the firm’s bankruptcy will translate to a direct loss of funds for charity investors.

Investors & Charitable Grants

It’s no secret that the wealthiest citizens of the U.S. are often the ones behind major charitable grants and donations. But few news sources have discussed the potential effect a major bankruptcy like MF Global’s, which includes debts of more than $39 billion, is likely to have on charitable organizations this year.

What is perhaps even more troubling is that this blow to charities comes during a time when individual donors have cut back on charitable contributions because of unemployment and reduced wages. Naturally, the persistently tough economy also means that more Americans than ever are in need of the support that charitable organizations traditionally offer.

In recent years, the CME Trust donated millions of dollars to Chicago-area educational institutions, including universities, charter schools, and organizations that fund education in the city. Without such donations, those and other groups could face significant financial difficulties in 2012.

Reports from the Christian Science Monitor indicate that former New Jersey Governor and CEO of MF Global Jon Corzine may have known about the use of client money in a loan to one of the company’s European partners.

The report is just the latest in the saga in MF Global’s bankruptcy case, which it filed on October 31, 2011. At the time of the filing, Corzine allegedly claimed that he had been unaware of the missing customer money until the day before the firm entered bankruptcy protection.

The new information (from sources including an executive from the Chicago Mercantile Exchange (CME)), however, suggests that Corzine might have known about the misuse of client funds much earlier. Given the questionable circumstances surrounding the case, Corzine and others involved could face criminal charges for their involvement in the trades.

Brokerage Firms, Client Money, and Bankruptcy

So what does the disappearance of $1.2 billion in client money mean? Here’s a breakdown of how MF Global operated and what the various facets of its bankruptcy might mean:

• MF Global, before its bankruptcy filing, was a brokerage firm. It traded client money (as well as its own funds) on CME exchanges.
• During his tenure as CEO (March 2010 to November 2011), Corzine attempted to convert MF Global into a full investment bank. As such, the company would have been able to engage in more types of financial transactions. As a brokerage firm, MF Global only managed transactions between buyers and sellers of various derivatives. In theory, the company might have been able to pull in greater profits as an investment bank.
• Legally, brokerage firms and other investment institutions are not permitted to use client money for company expenses. In other words, MF Global could invest its own funds but could not dip into client accounts—for precisely the reason that a bad bet could translate to the disappearance of such money.
• MF Global apparently broke that rule (and possibly the law), by investing client funds in questionable places.
• Because of heavy losses linked to investments in European debt, MF Global filed for bankruptcy protection in late October. As its financial standing became a matter of public record, it became clear that the firm lost client money on ill-advised investments.

At present, it isn’t clear how the bankruptcy judge and trustee overseeing the MF Global case will handle the problem of the missing funds. In this situation, clients who invested with MF Global are among the firm’s bankruptcy creditors and as such will lose money if MF Global’s debts are discharged by the bankruptcy court.

The bankruptcy court will rule on how money will change hands regarding this incident. If investigators have reason to believe that insiders at MF Global broke the law (in addition to the rules that regulate brokerage firms), the Justice Department may try Corzine and others in criminal court.