UPDATE: Former US Trader Indicted For Unauthorized 2008 Wheat Trades

A former trader has been charged with fraud for causing $141 million in losses to brokerage firm MF Global in 2008 by executing unauthorized trades in Chicago Board of Trade wheat futures, U.S. prosecutors said Wednesday.

The indictment is the latest twist in a case that, in addition to the $141 million in trading losses, rattled commodity markets, decimated the stock of MF Global Holdings Ltd. (MF) and resulted in fines against the brokerage from the U.S. futures regulatory agency and the CME Group Inc. (CME), which owns the Chicago Board of Trade.

Evan Brent Dooley, 42, of Olive Branch, Miss., was charged with 16 counts of wire fraud and two counts of violating the Commodities Exchange Act's speculative position limits. Dooley could not immediately be reached for comment.

A spokesperson for MF Global said, "We applaud the U.S. attorney's office and grand jury for indicting Mr. Dooley and support their efforts to bring him to justice."

Dooley allegedly induced MF Global to open a trading account and act as his financial guarantor by providing false information about his finances on his account application. While trading for his own account in CBOT wheat, he placed orders "exceeding his ability to pay for potential losses resulting from those trades," according to a statement from the U.S. District Attorney for the Northern District of Illinois.

Dooley, who worked from MF Global's Memphis office and from home, in February 2008 established a substantial "short" position in CBOT wheat, which represented bets that prices would fall. The market moved against him, and prices soared as his position was liquidated.

The path toward Dooley's demise started with success in the market.

During the overnight trading session starting Jan. 27, 2008, Dooley, with about $482 in his MF Global account, bought and sold approximately 1,500 wheat futures contracts and realized a gross profit of roughly $37,000, according to prosecutors. He made the trades even though he could not cover potential losses and "intentionally shifted the risks of his trading activity onto MF Global," they said.

Dooley allegedly lied when MF Global told him his trades were "out of line" and said they resulted from an unintentional error. He covered his tracks to maintain MF Global as his financial guarantor and keep his access to the CME Globex electronic trading platform, on which CBOT wheat trades overnight, prosecutors said.

Dooley's unauthorized trades caught up with him Feb. 26, 2008, when he allegedly bought and sold about 31,964 wheat futures contracts. He began the overnight trading session with a negative balance of about $3,000 in his account and, by the next morning, held a short position valued at $872 million.

Dooley's trades during the overnight session exceeded regulatory limits for a single month and for all months combined, prosecutors said.

CBOT wheat prices skyrocketed, confounding traders, as Dooley tried to offset his short positions. CBOT wheat prices were already lofty at that time, around $13 a bushel, because of global production problems. MF Global deactivated Dooley's account and liquidated the remainder of his position when they discovered his unauthorized trades.

MF Global, at one time the world's largest non-bank futures brokerage, saw its share price drop 93% following news of the rogue trades, which in turn prompted a $141.5 million charge and a dilutive refinancing. Then-CEO Kevin Davis, who had presided over a series of deals that built the company, left the company in the fall of 2008 and turned over leadership to Bernard Dan.

Dan, a former chief executive of the CBOT, resigned his position last month in a management shuffle that saw former New Jersey governor and Goldman Sachs Group Inc. (GS) chairman Jon S. Corzine take over as CEO.

Over the last two years MF Global has worked to rebuild its balance sheet and assure regulators and investors that it is tightening up risk management procedures, but aftershocks continue.

In December, the Commodity Futures Trading Commission fined the company $10 million for a series of supervision failures related to the rogue wheat trades and other transactions in the natural gas market. A separate $495,000 fine from exchange operator CME Group Inc. (CME) followed.

Each count of wire fraud carries a maximum of 20 years in prison and each count of violating the Commodities Exchange Act carries a five-year maximum sentence. Both offenses carry a maximum fine of $250,000 fine on each count and restitution is mandatory.

-By Tom Polansek, Dow Jones Newswires; 312-341-5780; tom.polansek@dowjones.com

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