MF Global = Full Tilt Poker?

Something very sketchy took place at futures brokerage MF Global

in the weeks and months leading up to the firm's bankruptcy filing. Now $700 million in client money is missing. Bloomberg

that the CME Group

is confirming that MF Global violated requirements to keep its clients' collateral separate from its own accounts. This is basically the "third rail" of the brokerage business: You don't mix your own money with your clients' money! CME Group's CEO Craig Donohue told analysts on a conference call today that MF Global was not in compliance with Commodity Futures Trading Commission rules. Now, regulators are looking for hundreds of millions of dollars that appear to be missing from client accounts. The CME Group, the world's largest futures exchange, is the self-regulatory organization for MF Global, and conducted audits of MF and monitored its positions. The now bankrupt futures brokerage is headed up by Jon Corzine, the former governor of New Jersey and former co-Chairman of Goldman Sachs

. Corzine was attempting to turn MF into a smaller version of Goldman Sachs and was taking on huge risks with firm capital in order to boost revenues. Corzine personally structured a $6.3 billion trade in European sovereign debt - a risky position if there ever was one. As the position soured on MF, the firm was hit by margin calls and demands from regulators to boost capital ratios. After MF reported a massive loss on October 25, the firm's credit rating was slashed and clients began pulling there money. As MF's liquidity dried up, Corzine went looking for a buyer. On Sunday night, it appeared that a deal would be struck with Interactive Brokers Group

. The proposed transaction, however, was scrapped at the last minute when Interactive Brokers discovered the missing money from client accounts. Yesterday, MF filed for Chapter 11 bankruptcy. For Corzine, the collapse of his firm may just be the tip of the iceberg. The regulatory investigation into the missing client funds could potentially turn up criminal wrongdoing at the firm. Rumors are

that MF Global used its client money to cover its own wrong way bets. While it is still early in the investigation, and reports suggest some of the money may show up in the coming days, there is at least the possibility of MF Global committing outright fraud in an effort to save the firm. The implications of this investigation on the wider securities industry could be significant. Clients at other small brokers and banks may be justifiably spooked by what may be uncovered at MF Global and could subsequently begin pulling money out in droves. After all, if Corzine & Co. were able to co-mingle client funds, couldn't the same thing be going on at a myriad of other institutions. At this point, the entire fiasco is starting to parallel what happened at online poker site Full Tilt Poker earlier this year. For the securities industry, such a comparison could mark a new low. Full Tilt Poker was the second largest online poker site in the world and was sponsored by numerous professional players, who also had ownership stakes in the business. In April, the U.S. government shut down the site to American players and seized Full Tilt's domain. While this was a huge blow to the poker community, no one doubted that they would be getting their money back from Full Tilt Poker which had claimed that it segregated players' accounts. This in fact was not true, and Full Tilt Poker only had a fraction of the players' deposits in its accounts - much of the rest of it had been paid out as dividends to the site's owners. As a result, hundreds of millions of dollars in player funds have never been returned. It looks very likely that a somewhat similar situation is going to play itself out at MF Global. Instead of paying management dividends, however, it appears that the firm misappropriated client funds in order to meet liquidity needs which arose from Corzine's disastrous bet on European sovereign debt. Should we be surprised by any of this? Shady dealings in poker and futures trading? Shady dealers like Full Tilt Poker and MF Global? No, actually, it sounds about right...