By Shah Gilani

Did you hear the story about MF Global?

No, not the headlines about its bankruptcy - the real story.

If you haven't heard it yet, it goes something like this.

MF Global became a primary dealer only eight months ago.

"Primary dealer" is an elite status. It means the firm is one of only 22 government bond dealers that trades directly with the Federal Reserve's New York trading desk.

Only, the Federal Reserve doesn't regulate or oversee MF Global, the Commodities Futures Trading Commission (CFTC) does - or rather is supposed to.

But, even more incongruously, the CFTC isn't the first overseer of MF Global . It ceded that responsibility to the CME Group Inc. (Nasdaq: CME), which owns and operates the largest futures exchanges in the United States. The designated self-regulatory organization for more than 50 futures brokers, CME was supposed to be the cop on the beat.

However, the not-so-funny thing about the relationship between MF Global and the CME Group is that MF Global recently boasted on its Website that it "was the top broker by volume at CME's metals and energy exchanges in New York and in the top three at its Chicago exchanges."

So, is it any wonder that the CME just last week audited MF Global's segregated customer funds and found them to be in compliance?

These are the same supposedly segregated funds which the CME is now saying may have been tampered with. According to the CME:

"It now appears that [MF Global] made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection insofar as MF Global did not disclose or report such transfers to the CFTC or CME until early morning on Monday October 31, 2011."

How much money are we talking about? About $633 million - or 11.6% out of a segregated fund requirement of about $5.4 billion.

Do you see what I'm driving at?

So the real story is, the Federal Reserve, which doesn't regulate MF Global but regulates all banks in the United States, lets a futures commission merchant with investment bank wannabe desires become an insider in its dealings. Meanwhile, a private for-profit enterprise that runs the self-regulatory apparatus that oversees its own customers steps in for a federal agency that's supposed to be in charge of commodities, futures and derivatives markets.

And that's only the tip of the iceberg.

Let me jump on the Securities and Exchange Commission (SEC) next, because you aren't going to believe this, either.

Subterfuge at the SEC

It's come to light recently that the SEC has been blatantly violating federal law for decades.

Since at least 1992 through 2010, the SEC has destroyed more than 9,000 documents that by law were supposed to be saved and turned over to the National Archives and Records Administration and kept for 25 years. (a new article in Rolling Stone)

The documents were records of enforcement cases where, after preliminary inquires, it was decided not to pursue full-blown investigations.

When the SEC has information - an anonymous tip or insights from a whistleblower, for instance - that could lead to an investigation, the subjects are pursued as "matters under inquiry," or MUIs.

A couple of examples of MUIs that went nowhere include: The several tips the agency received that Bernie Madoff was running a Ponzi scheme; the anonymous tip on Ernst and Young letterhead that said Lehman Bros. Holdings Inc. (PINK: LEHMQ) was cooking its books; or the MUIs on insider trading, fraud, and market manipulation at Goldman Sachs Group Inc. (NYSE: GS), Bank of America Corp. (NYSE: BAC), American International Group Inc. (NYSE: AIG), and SAC Capital Advisors, to name a few others.

But since none of these MUIs morphed into full-blown investigations, the SEC decided to destroy all records pertaining to these inquiries rather than hand them over to the National Archives, as federal law requires.

When confronted with the unauthorized disposal of federal records, thanks to a couple of steadfast and honest lawyers in the enforcement branch of the SEC, the agency said it was "not aware of any specific instances of the destruction of records."

What's shocking and sickening is that even while addressing the Archives' inquiry into the missing documents, the SEC somehow forgot to disclose to the keeper of federal records its policy to "destroy all such documents" when no further action is warranted.

Too bad for the SEC an internal investigation by SEC Inspector General H. David Kotz brought to light the agency's directive to destroy certain MUIs, along with the discovery of MUIs on old hard drives that somebody accidentally forgot to erase and destroy.

Why wouldn't the SEC keep records of enforcement activities? Why would they destroy critical data and information that could be used in the future to pursue cases that re-surfaced and could lead to bone-crushing conspiracy or racketeering charges, if not even the simple garden variety securities law violations?

With any luck, we just might find out.

The SEC could and should face criminal charges for breaking federal law.

There's a powerful push by a quiet group of angry journalists to get to the bottom of this, and I'm one of them. So, expect to hear more about this as we press on for the truth.

In the meantime, it's high time we take a good look at regulators and not just regulations to see where the cracks are in the prudential governance of markets, financial institutions, and most importantly, individuals who are responsible for decisions that break the law or grossly impact markets and our economy.

After all, it's not just regulations we need to worry about - it's the regulators too.