Rogue Trader’s Wheat Bets Cost MF Global $141.5m$

MF Global, the broker spun off from Man Group last year, became the latest financial services company to suffer at the hands of a rogue trader as it conceded that Evan Dooley, a Memphis-based trader, had cost it $141.5 million (£71.2 million) in unsuccessful bets on wheat prices.

Kevin Davis, MF Globals chief executive, described Mr Dooleys unauthorised losses as an “absolutely awful event” and blamed them on the groups risk-control systems, which had allowed him to trade well beyond his means on the brokers own account. He had been instantly dismissed and the failure in the groups order-entry system had been fixed, Mr Davis added.

Mr Dooley is understood to have bet that the price of wheat, which has soared in recent months on the back of growing global demand and declining supply, is due for a fall.

He had bet on the price of wheat declining by entering into about 4,000 futures contracts, which would require him to deliver about 20 million bushels of wheat at an agreed time and price. The greater the decline in the price between agreeing the contract and delivering the wheat, the cheaper the cost of satisfying the delivery and the larger the profit Mr Dooley stood to make. But instead, the price of wheat kept on rising, as demand from countries such as China continued to grow and crops withered in Europe, North America and Australia.

Wheat futures on the Chicago Board of Trade, which jumped 77 per cent in price a bushel in 2007, had risen by a further 40 per cent in the year to Monday and Mr Dooley could no longer hide his rising losses from senior management, who finally confronted him on Wednesday morning.

As MF Globals traders worked to cover Mr Dooleys “short” positions in the hours after the confrontation they helped to push demand for wheat futures even higher yesterday, sending the cost of a bushel for May delivery up by $1.35, or 11 per cent, to a record $13.495. It may have risen even further, but the exchange had imposed a $1.35 daily limit on price increases.

Jon Najarian, a futures and options trader in Chicago, said: “We knew something was up but we werent quite sure what. Suddenly all these MF guys were everywhere, trying to recoup some of their losses.”

MF said that the loss represented about 6 per cent of the groups equity, but emphasised that its capital position remained strong.

Mr Davis said: “There is absolutely no position at all right now. The position was liquidated within hours after the markets reopening yesterday morning. [The problem] was fixed and addressed, we believe we have closed out the problem that led to this situation.”

Mr Davis added that the company had launched an internal inquiry into the events surrounding the trades and would decide what course of action to take after it is concluded. The groups trading loss emerged barely a month after Société Générale revealed that Jérôme Kerviel, one of its traders, had lost 4.9 billion euros (£3.8 billion) from bets on European stock indices such as the CAC, Dax and EuroStoxx50.

MF was spun out of Man Group, the hedge fund, in a $2.92 billion offering in July last year. Man retained an 18.6 per cent stake.

MFs shares fell by $5.63, or 19.2 per cent, to $23.65 in midday trading. Man Group shares fell 20p to 572½p.

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