When we learned of the MF Global client theft scandal, in the aftermath of its sudden bankruptcy filing, the one thing we predicted would happen (in addition to Jon Corzine never going to prison) was that many more brokers, banks and broadly financial intermediaries would be discovered having dipped in client accounts, or otherwise "commingled" capital in direct violation of the first rule of banking. Sure enough, a little over two months since, the second notable company to have been alleged to have abused client capital for own purposes has emerged. And it comes to us courtesy of sleep Canada whose "banks are all fine." As the Winnipeg Free Press reports, "One of Canada's investment regulators has accused Barret Capital Management, a firm specialized in futures and options on metals and other exchange-traded commodities, of using client money for its own purposes. The Investment Industry Regulatory Organization of Canada warned Monday that Barret clients are at risk due to the firm's "ongoing misappropriation of their money to fund losing trades and ongoing misinformation about the value and holdings in their accounts." IIROC has set a hearing for Tuesday morning to suspend Barret's membership in the organization and stop Barret from dealing with the public. In requesting the expedited hearing, the regulator alleged Barret made "significant misrepresentations to clients including through manipulating account values, misrepresenting account values and holdings by way of false account statements or otherwise providing false information to clients and by manipulating on and off book payments to clients." Where the story gets even more interesting is when one takes a look at just what it is that the company engages in, and how it fits into the scenario analysis conducted in the MF Global aftermath.

From the company's blog, which has all about 5 entries:

Barret Capital is an Investment Dealer that specializes in futures and options on metals, energies and all other Exchange-traded commodities, located in Toronto Ontario.

And the website's About Us section:

Dedicated to guiding commodity investors in Canada to safer, more focused investments in hard assets like gold and silver Buying hard assets like gold and silver will protect you from the instability of today's market place. As a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investors Protection Fund, we are a full service boutique firm dedicated to guiding novice and experienced commodity investors in Canada towards smart investments, including buying and selling gold, silver and other hard assets. Our expert brokers, staff and management will guide you from beginning to end, ensuring that you become an educated commodities trader who makes more profitable trades in the exploding gold, silver and commodities market. We offer our commodity investors in Canada the following services: Buying and selling gold, silver, and other commodities

Buying in derivatives or hard assets

Providing on-demand market quotes

Offering delivery and storage options

Placing stop-loss orders

Offering online account views

Providing regular research reports

Consulting from bullion specialists

Liquidating holdings If you are a commodities investor in Canada, contact us today to learn more on how buying and selling gold and silver can help you profit from a booming commodities marketplace.

And finally, per the President's message, the fallout may next impact carrying broker Laurentian Bank:

At Barret Capital Management Inc., we pride ourselves in being a full service, commodities futures Investment Dealer located in the heart of Toronto, Ontario. The decision to choose Laurentian Bank Securities as our carrying broker was an integral one, as Barret Capital Management Inc. is able to provide its clients with the best of two worlds: personal attention to your financial objectives that you'd expect from a boutique commodities futures firm, along with the breadth of knowledge, information and integrity that a large carrying full service brokerage bank can provide. Our Toronto commodities futures brokerage is special because we believe in building real relationships with our clients. At the end of the day, taking care of your individual interest is at the core of everything we do.

What all this means is that as expected MF Global may have been the first, but certainly will not be the last, to use client capital to prop up its books. And while Barret is not Goldman, it is merely the next company which could no longer perpetuate the lie. Of course, the bigger one is, the harder it is to be caught. Once caught, however, the ripple effects spread fast and furious.

In Barret's case, this latest incursion in fiduciary duty will simply make paper investors even more skeptical of keeping precious metal "investments" in a paper intermediary, something we warned about when we discussed the fallout from MF Global on HSBC gold claims. Because those too are just the beginning.

Finally, while still unclear what the premise behind the regulatory allegation is, readers will recall our final warning that as in MF Global's case, the fundamental weakest link in the system, was the rehypothecation of assets to make funding appear sufficient and credible, when in reality it is nothing but hot air. Specifically, we said: "Canadian banks, which as it also turns out, defended themselves against Zero Hedge allegations they may well be the next shoes to drop, as being strong and vibrant, yet which have all the same if not far greater risk factors as MF Global."

This was merely the first. We expect many more, Canadian, and otherwise banks, to follow suit, in a world in which broker funding is virtually nonexistent at this moment.