Articles Posted in MF Global

The trial in which a number of hedge funds and creditors are partly blaming PricewaterhouseCoopers for the collapse of MF Global is about to begin in U.S. District Court in New York. The plaintiffs, alleging malpractice involving “erroneous accounting advice,” are seeking over $3B in damages. Former MF Global CEO Jon Corzine, also an Ex-Goldman Sachs (GS) co-chairman and formerly both a New Jersey governor and US senator, is expected to testify in court.

MF Global, once a global financial derivatives broker, is no longer in business. The firm failed in 2011 after customers left when they learned that Corzine had placed big bets on European sovereign debt during a volatile time for the markets. This caused a $1.6B shortfall in client accounts.

Yet, because MF Global employed repo-to-maturity instruments to bet on the debt, this let the firm report the bets as gains, which enhanced the way its revenue looked. Also, clients’ funds were commingled with MF Global’s funds even though they should not have been mixed together.

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Jon S. Corzine, the former head of MF Global Inc. has arrived at a securities settlement with the US Commodity Futures Trading Commission in which he will pay a $5M penalty for his involvement in the firm’s illegal use of nearly $1B in customer money and for not properly supervising the way these funds were handled. A federal judge has approved the deal.

The regulator sued Corzine in 2013 and he must now pay the civil penalty out of his own funds rather than have an insurer cover the costs. Also part of the deal, Corzine has agreed to a permanent bar from heading up a futures broker or registering with the CFTC. This means that he will no longer be allowed to trade other people’s funds in the future industry unless the trades are below specific threshold limits.

Corzine’s settlement with the SEC comes after he’d resolved most of the private litigation against him related to MF Global. Investors and the industry were flummoxed when the almost $1B in customer couldn’t be accounted for. Fortunately a trustee has since recovered the missing funds for the investors, which are both individuals and hedge funds, to whom the money belonged. The money, which were segregated customer funds, was inappropriately used to fund the futures commission merchant’s proprietary operations and that of its affiliates, pay FCM customers for withdrawals involving customer funds, and pay brokerage firm securities customers.

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According to the New York Times, Ex-MF Global Chairman and CEO Jon S. Corzine has reached a tentative agreement with the Commodity Futures Trading Commission in the regulator’s civil case against him. The CFTC sued him 2013 after MF Global failed and the futures brokerage firm was accused of misusing $1B in customer funds. 
 
Corzine, 69, used to be the governor of New Jersey, a Democratic US Senator, and the co-chief of Goldman Sachs (GS). Although the settlement is not yet final,  sources tell the NY Times that Corzine could be expected to pay up to $5M in penalties, which is a lot more than what the CFTC could win against him at trial. The regulator would like Corzine to pay the penalties out of his own fund and not use insurance money. He also would be expected to accept a lifelong ban from trading other people’s funds in the futures industry.
 
Corzine has not been charged with any criminal wrongdoing related to the MF Global financial debacle. Although the CFTC has not said that Corzine was directly connected to the misuse of funds at the brokerage firm, the regulator felt that he failed to “diligently supervise” the firm as it placed clients’accounts  in peril.
MF Global went into a financial tailspin after Corzine made a $6.3B bet on European sovereign debt. Rather than restore the brokerage firm to profitability, the firm began to fail and the improper transfer of customer monies increased as executives sought to enhance liquidity. MF Global was eventually liquidated in bankruptcy. 
 

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Now that it has repaid the majority of its customers, MF Global Inc. wants the U.S. Bankruptcy Court in Manhattan to let it pay $295 million to its creditors. Most of the funds would go toward unsecured creditors, who would get a first distribution of approximately 20%. Holders of priority claims, as well as administrative and secured claims that were resolved, would get all of the money owed to them.

Giddens is also seeking to set up a reserve fund of over $400 for unresolved claims while placing a cap on how much each claim would get. MF Global has paid back the majority of its customers. Most of them got everything owed to them.

The brokerage firm and parent company MF Global Holdings Ltd. went into crisis when investors left after finding out that Jon S. Corzine, the CEO at the time and formerly a Goldman Sachs (GS) chairman and ex-governor of New Jersey, made big bets on European sovereign debt. Their departure created an approximately $1.6 billion shortfall in the accounts of customers that should have been kept separate from the firm’s money pool. The shortfall has since been recovered.

U.S. District Court Judge Victor Marrero has ordered MF Global to pay customers over $1.2 billion. The defunct brokerage firm left an about $1.6 billion shortfall for approximately 38,000 customers when it filed for bankruptcy protection in 2008.

Now, with this court order, along with the attempts of a liquidation trustee to get back the missing funds, customers are going to get almost all of their money back. Also, in addition to paying certain creditors and customers, MF Global will pay a $100 million penalty.

The brokerage tanked financially after it revealed that it had placed bets worth billions of dollars on high risk European debt. As customers started to leave MF Global in bulk and trading partners demanded bigger margin payments, the firm used customer funds for its own purposes (more than a billion dollars was taken out of their accounts) and did not replace them. This is not allowed. Also the estimated shortfall was about $1.6 billion.

According to bankruptcy trustee Louis Freeh, former MF Global Holdings (MFGLQ) CEO Jon Corzine and other former executives did not act in good faith when they were in charge of the company. The ex-FBI director is suing them in bankruptcy court for gross negligence and breach of fiduciary duty. (Corzine is also a former Goldman Sachs (GS) CEO and he previously served as a US Senator and the Governor of New Jersey). Also named as defendants are the firm’s ex-COO Bradley I. Abelow and ex-CFO Henri J. Steenkam. MF Global’s collapse left customers wondering where about $1.6 billion dollars of their funds had gone missing.

Per Freeh’s lawsuit, after becoming CEO, Corzine and the other executives “dramatically changed” MF Global’s business plan but failed to update certain systems, including poor controls that made it impossible for the company to figure out liquidity levels. Corzine then allegedly made the company place large bets on bonds put out by countries in Europe. Freeh believes that the executives knew the risks involved but ignored them.

The case comes after Freeh submitted a report about Corzine and other executives. The former FBI director had said he was going to hold off and try resolving the securities claims via mediation, but even with this process still ongoing, Freeh believes that moving ahead with the lawsuit is in creditors’ best interest.

According to a report from Republican oversight panel members of the House Financial Services Committee, as MF Global teetered on the brink of failure, regulators were confused about how to deal with the crisis. The findings come from a number of Congressional hearings with MF Global executive and other officials during a yearlong probe, including interviews with numerous ex-MF Global employees and over 240,000 documents. The Republicans released the report without the backing of House Democrats.

E-mails that went back and forth between the regulators in the hours leading up to the financial derivatives broker’s bankruptcy exhibited what the Republicans describe as a “disorganized and haphazard” approach to oversight, as well as communication issues.
Some of the Republicans behind this 100-page report believe that regulators gave former MF Global chief executive John S. Corzine a lot of leeway. Meantime, Democrats have said that the report is a way for Republicans to embarrass Obama administrative watchdogs.

Representative Randy Neugebauer, who is the oversight panel’s chairman and led the investigation, commented that it wasn’t that more regulation was necessary in the handling of the MF Global crisis but that the regulators needed to actually do their job and work together better. For example, per the report, after the Commodity Futures Trading Commission had instructed MF Global to transfer $220M to stop up a hole in customer accounts, which the firm agreed to do, the Securities and Exchange Commission and other regulators complained that the order was given without first consulting them. The report also cites other incidents of missed communications and frustration among the different agencies toward each other.

Some Republicans are suggesting that SEC and CFTC would better serve investors and customers if they streamlined themselves or merged into one agency. However, this is not the first time that lawmakers have tried to combine the two regulators. Such efforts in the past have always hit a wall of opposition.

The report on MF Global is the most significant attempt by the government to address errors made by the broker and the bulk of the blame continues to be pointed toward Corzine, who fought back against attempts to limit his authority over European trades, including the demands of auditor PriceWaterhouseCoopers (PWC) that MF Global account for sovereign debt holdings in a manner that would have lowered profitability. However, authorities continue to remain wary of filing criminal charges against MF Global’s top executives because they believe that loose controls and chaos and not criminal actions, are why over a billion dollars in customer money disappeared. (The report also names the Federal Reserve Bank of New York, contending that it should have been more careful when deciding to approve MF Global’s application to sell securities on the New York Fed’s behalf.)

House Report Faults MF Global Regulators, New York Times, November 15, 2012

Financial Services Subcommittee Report Finds Decisions by Corzine, Lack of Communication Between Regulators Led to MF Global Bankruptcy and Loss of Customer Funds, Financial Services, November 15, 2012
Read the Report (PDF)

More Blog Posts:
$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker fraud Blog, December 10, 2011

MF Global Holdings Ltd. Files for Bankruptcy While Its Broker Faces Liquidation and Securities Lawsuit by SIPC, Institutional Investor Securities Blog, October 31, 2011
Ex-MF Global CEO John Corzine Says Bankruptcy Trustee’s Bid to Join Investors’ Class Action Securities Litigation is Hurting His Defense, Institutional Investor Securities Blog, September 5, 2012 Continue Reading ›

According to Jon Corzine, the ex-CEO of MF Global Holdings Ltd. (MFGLQ), bankruptcy trustee James Giddens’s efforts to be part of some of the investor class action lawsuits against the firm’s former and current executives are negatively impacting his defense. Corzine, who is also Goldman Sachs Group Inc.’s (GS) (GS) former co-chairman, left his position at MF Global last year, mere days after the brokerage giant failed in the wake of losses it sustained on European sovereign debt and its overwhelming inability to account for about $1.6 billion in customer funds. MF Global would go on to file for bankruptcy protection.

Rather than file his own securities lawsuit, Giddens has decided to work with the lawyers of the firm’s customers. He won’t join them as a plaintiff but he will “assign” his legal claims to their attorneys and fully participate in their cases. Giddens considers it totally “appropriate” for his office to join forces with the plaintiffs’ securities fraud lawsuits, and he believes that this cooperation agreement is the “most efficient, expedited and cost-effective” means of getting back additional assets for MF Global clients and creditors.

Meantime, Corzine and other ex- and current MF Global executives are complaining that this arrangement would give Giddens complete and total authority over the documents and books they would be able to get in their defense and that this unfairly limits them. Per the former executives’ lawyers, restricting the objectors’ rights to obtain discovery deprives them of the chance to a proper defense, violates due process principals, and is not in line with the goals and requirements of the federal rules that preside over civil litigation. (Also opposing Giddens’s cooperation agreement with the plaintiffs and their lawyers is ex-FBI director Louis Freeh, who is tasked with wrapping up MF Global Holdings Ltd.’s affairs. He believes that the deal oversteps Giddens’s authority and that the bankruptcy trustee is moving claims that belong to the holding company’s creditors and not the brokerage’s customers.)

The criminal probe into brokerage firm MF Global’s collapse and its inability to account for approximately $1.6 billion in customer funds will likely end with no criminal charges filed against anyone. Sources involved in the case are reportedly saying that investors are finding that not fraud, but “porous risk controls” and “chaos” caused the money to go missing.

At the time of MF Global’s bankruptcy filing almost 10 months ago, then-MF Global CEO Jon S. Corzine apologized to everyone saying that he also didn’t know what happen to the money. Meantime, thousands of customers saw their assets frozen.

According to a report by bankruptcy trustee James Giddens’, the brokerage company improperly used customer money that they are forbidden to tap so that it could stay in business and meet margin calls. Yet, still, is no one likely to be charged with wrongdoing?

Rep. John Larson (D-Conn.) and Rep. Chris Murphy (D-Conn.) are calling on the Commodities Futures Trading Commission to crack down on excessive energy market speculation. They believe that this type of speculation on oil that is “based on world events” is “abusive” and has been creating difficulties for Americans.

In their released statement, Murphy said that such speculation ups the price of a gallon of gas by 56 cents. The two lawmakers want the futures and option markets regulator to swiftly implement rules that have already been passed to curb excessive speculation.

In other commodities/futures trading news, last month the U.S. District Court for the Eastern District of Texas ordered two men and their company Total Call Group Inc. to pay over $4.8 million for allegedly producing false customer statements and making bogus solicitations related to an off-exchange foreign currency fraud. In CFTC v. Total Call Group Inc., Thomas Patrick Thurmond and Craig Poe will pay $1.62 million and $3.24 million, respectively. Per the agency, between 2006 through late 2008, the two men solicited about $808,000 from at least four clients for trading in foreign currency options.

Earlier this month, another company, registered futures commission merchant Rosenthal Collins Group LLC, consented to pay over $2.5 million over CFTC allegations that it did not adequately supervise the way the firm handled an account linked to a multibillion dollar Ponzi scam. The account, held in Money Market Alternative LP’s name, experienced “significant change” between April 2006 and April 2009 in how much money it took in. For instance, the CFTC says that even though the account at inception reported a $300,000 net worth and a $45,000 yearly income, deposits varied from $2 million to $14 million a year. RCG is also accused of failing to look into and report excessive wire activity involving the account. As part of the CFTC securities settlement, the financial firm consented to pay a $1.6 million fine and disgorge $921,260, which is how much RCT made in account fees.

Just three days before, the CFTC announced that its swaps customer clearing documentation rule packaging will expand open access to execution and clearing, enhance transparency, lower cost and risks, and generate competition. The rules will not allow arrangements involving swap dealers, designated clearing organizations, major swap participants, and futures commission merchants that would limit how many counterparties a customer can get into a trade with, impair a client’s ability to access a trade execution on terms reasonable to the best terms that already exist, limit the position size a customer can take with an individual counterparty, and not allow compliance for specified time frames for acceptance of trades into clearing. Also, the CFTC is thinking about adopting definitions for swap dealers, major security-based swap participant eligible contract participant, security-based swap dealer, and major swap participant. These entities were created under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Meantime, MF Global Inc. (MFGLQ.PK) liquidation trustee James Giddens reportedly believes that he can make claims against certain company employees. Possible claims again such persons could include allegations of customer funds segregation requirement violations and breach of fiduciary duty. Although MF Global had told regulators that it was unable to account for customer funds of up to $900 million when it filed for bankruptcy protection, investigators are now saying that this figure is closer to somewhere between $1.2 billion and $1.6 billion.

Commodities Futures Trading Commission

Trustee May Sue MF Officials, NY Times, April 12, 2011
CFTC Orders Rosenthal Collins Group, LLC, a Registered Futures Commission Merchant, to Pay More than $2.5 Million for Supervision and Record-Production Violations, CFTC, April 12, 2012
CFTC v. Total Call Group Inc.

More Blog Posts:
CFTC Says RBC Took Part in Massive Trading Scam to Avail of Tax Benefits, Stockbroker Fraud Blog, April 12, 2012
Texas Man Sued by CFTC Over Alleged Foreign Currency Fraud, Stockbroker Fraud Blog, February 23, 2012
CFTC and SEC May Need to Work Out Key Differences Related to Over-the-Counter Derivatives Rulemaking, Institutional Investor Securities Blog, January 31, 2012 Continue Reading ›

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