Was There a Madoff Inside of MF Global?

There's a new theory floating around Wall Street about the money missing from customer accounts at MF Global: it was Madoff-ed.

According to a top executive at a larger Wall Street firm, his top guys believe that the money didn't go anywhere. It just never existed.

The idea is that the "missing" funds were phony trading profits that were booked in client accounts even though the underlying trades never really occurred. MF Global may have reported to clients that they had made profits for trades that never actually occurred.

This was how Bernard Madoff's scam worked. He told clients that they had gains based on investments that he never actually made. He just pocketed the money, using it to fund his elaborate lifestyle.

Why would MF Global fake trades?

The answer might be quite simple. The firm was in dire financial straits. It may have felt pressure to keep customers on board by showing how ably the firm managed their money. A scheme like this need not involve the entire firm-or even the senior management. If this is indeed what happened, a small group of rogue traders at MF Global may have been able to carry off the rouse for quite some time. Perhaps perpetually-if not for the bankruptcy at MF Global.

"Maybe there's a mini-Madoff inside of MF Global. A guy who just faked the trades," the executive speculated.

As Warren Buffett says, when the tide goes out, you see who is swimming naked. Could this be a case of naked traders who doctored phony profits for their customers?

Some people I've talked with are skeptical about this theory. It seems incredible to imagine that a scheme like this could grow to involve as much as $1.2 billion.

There's no public evidence to support anything like this. Right now it's just a theory. But it's a theory that at least begins to explain what happened to the money of MF Global's customers.

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