2nd UPDATE: CME Group Discloses Subpoenas In MF Global Probes

Federal prosecutors probing the collapse of MF Global Holdings (MFGLQ) convened a grand jury to augment a wide-ranging investigation into the broker-dealer's demise, according to a Tuesday disclosure by futures exchange operator CME Group Inc. (CME).

CME in a filing said it received a grand jury subpoena issued by the Northern District of Illinois to supply "information and witnesses" in the U.S. government's inquiry into the downfall of MF Global, where $1.6 billion in customer money remains unreturned four months after the event.

The subpoena was issued to CME Nov. 1, with a similar subpoena from the Commodity Futures Trading Commission's enforcement division arriving Nov. 3, according to a spokeswoman for the exchange operator.

The Wall Street Journal reported in November that federal prosecutors in Chicago and New York had issued subpoenas in an effort to gather records related to MF Global's Oct. 31 bankruptcy filing, which quickly drew in investigators from the Federal Bureau of Investigations as well as financial market regulators.

A spokesman for the Illinois District Court declined comment. Representatives for the CFTC were not immediately available for comment.

CME's spokeswoman said the exchange operator, which audited MF Global's handling of customer funds and supervised its behavior, was "cooperating with investigating authorities." CME has not been accused of any wrongdoing in the matter and the spokeswoman said CME's participation in the ongoing probes had been previously disclosed.

The exchange operator's role as auditor of MF Global's books and supervisor of its conduct has drawn scrutiny following the firm's collapse. Auditors from CME combed MF Global's books just days before the firm went bankrupt but found nothing amiss until MF Global notified the exchange and federal regulators of a $900 million shortfall in client funds Oct. 30. The gap prevented the sale of MF Global to a rival and sealed its fall into bankruptcy the next day.

Executives at CME maintain MF Global staff illegally tapped into client funds to help shore up the broker-dealer's capital position during its final days.

"Grand juries have enormous investigative powers," said Andrew Leipold, a professor with the University of Illinois College of Law. "My instinct is that setting one up the next day [after MF Global's bankruptcy] is pretty fast for anybody to move."

Such bodies typically consist of 16 to 23 members, who review evidence brought by federal prosecutors to decide whether a crime has been committed, and whether an indictment should be issued. Grand jury proceedings are secret.

The disclosure comes as CME continues to battle fallout from the MF Global debacle, now regarded as one of the worst calamities to befall the U.S. futures-trading industry. The Chicago firm presides over more than 90% of domestic futures trading, where farmers and ranchers hedge production and asset managers speculate on commodity prices and interest rates.

CME has been enmeshed in the MF Global matter from the start, coordinating a massive migration of its customers to other brokerage firms in early November, putting up a financial guarantee aimed to help return some money to MF's former clients and participating in investigators' probes of the episode. Tuesday CME also disclosed a separate Jan. 31 request for documents from the Securities Investor Protection Corp., which took over liquidation of MF Global's estate following the futures firm's downfall.

So far, former customers have recouped about 72 cents on every dollar they had with MF Global.

Regulators are also looking into how CME handled the audit process for MF Global as part of their inquiry into the collapse, and some in Washington have called for the exchange group's regulatory functions to be hived off into a separate entity to eliminate any potential conflicts of interest. CME has maintained the exchange operator is best suited to supervise its own members.

Tuesday CME also acknowledged a raft of lawsuits that former customers have aimed at the exchange company, as well as MF Global executives and its former bank J.P. Morgan Chase & Co. (JPM). Three suits have been filed this year in New York federal court alongside an earlier suit lodged in Michigan state court, seeking damages for "aiding and abetting breach of fiduciary duty," according to CME's Tuesday filing.

The lawsuits are expected to be consolidated in federal court in New York, according to CME's filing, and the exchange company believes it has "strong legal and factual defenses to the claims."

-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com

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