February 23, 2024

DealBook: Trustee Report Details Possible Claims Against Corzine and Others

James Giddens, trustee for MF Global Holdings.Andrew Harrer/Bloomberg NewsJames Giddens, trustee for MF Global Holdings.

A court-appointed trustee said in a report on Monday that he might pursue claims against Jon S. Corzine and other top executives of MF Global, citing their “negligence” in the collapse of the brokerage firm.

The 275-page report sheds new light on the firm’s disastrous last days, detailing its rapid downfall. In addition to Mr. Corzine, the trustee also cited Henri Steenkamp, the chief financial officer, and Edith O’Brien, an assistant treasurer who has become the focus of government investigations. The report states that the trustee believes there are “claims for breach of fiduciary duty and negligence, that may be asserted” against the three officials.

The report also focuses on banks like JPMorgan Chase that received customer money in the chaotic days before the firm went under. The trustee, James W. Giddens, said he would decide whether to pursue litigation to recover money for customers, who are missing some $1 billion, within 60 days.

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Based on interviews with more than 100 people and the review of hundreds of thousands of documents, the trustee’s report is the most comprehensive telling to date of MF Global’s bankruptcy last October.

The findings focus on the tenure of Mr. Corzine, a former Democratic governor of New Jersey who became MF Global’s chief executive in early 2010 and immediately began transforming it from a sleepy commodities brokerage firm into a something more akin to a mini-Goldman Sachs. As part of the transformation, he placed a big bet on the debt of shaky European nations, a gamble that incited a crisis of confidence that paved the way to the firm’s collapse.

“As attempts were made to transform MF Global into a full-service global investment bank, management failed to add to its treasury department and technology infrastructure, which was needed to meet the demands on global money management and liquidity,” Mr. Giddens said in a statement. “My investigation has concluded that management’s actions, along with the lack of sufficient monitoring and systems, resulted in customer property being used during the liquidity crisis to fund the extraordinary liquidity drains elsewhere in the business, including margin calls on European sovereign debt positions.”

The positions prompted rating agencies to cut MF Global’s credit rating in late October, a final straw for a market already on edge. As panic ensued, trading partners and customers demanded money from the firm, which was forced to sell billions of dollars in securities to meet the obligations. Chaos reigned internally, too, as money flowed between divisions and out of the firm.

Since MF Global filed for bankruptcy on Oct. 31, farmers, hedge funds and other customers have been without at least a third of their money. Among those who received cash belonging to futures customers were banks, clearinghouses and even MF Global’s own securities customers.

The report highlights the banks and other companies on the receiving end of transfers involving customer money. Mr. Giddens specifically names JPMorgan Chase, which has already returned some money to the trustee. As MF Global’s main bank, JPMorgan was a central recipient of customer money in that final week. The trustee noted in his report that the bank was cooperating with his investigation.

Other banks in the trustee’s line of sight include Bank of New York Mellon, which is also cooperating with the investigation.

The trustee also said he was investigating the conduct of a major clearinghouse, the Depository Trust Clearing Corporation, that processed trades in the final weeks of the firm’s existence. That conduct includes the clearinghouse’s demands for additional cash from MF Global to clear trades, money that may have belonged to customers.

The report illuminates the vulnerabilities of the firm, including a desperate need for cash prompted by increased risk-taking under Mr. Corzine.

Mr. Corzine, the former head of Goldman Sachs, took over at the mid-level commodities brokerage firm in March 2010, fresh off an election loss for his second term as New Jersey governor. Almost immediately, he began adding risk at the firm to bolster earnings and resuscitate a deeply troubled business model, which relied almost exclusively on matching commodities trades for customers.

Mr. Corzine added new lines of business and began making bets with the firm’s own capital, efforts that were applauded by the market but led to an increased need for cash to finance operations. In particular, the trustee report notes, the bet Mr. Corzine placed on European sovereign debt “presented substantial liquidity risks.”

““The underlying liquidity problems at MF Global, however, did not commence in the fall of 2011,” the trustee states in the report. “Rather, liquidity had been a cause for concern before and throughout Mr. Corzine’s tenure at MF Global, yet systems and tools would enable accurate real time monitoring of liquidity were never implemented.”

Liquidity concerns became worse in the summer of 2011, prompting an assistant MF Global treasurer to write in an e-mail on Aug. 11 that she was having to spend “hours every day shuffling cash and loans from entity to entity,” the report says. Around that time, the Financial Industry Regulatory Authority, Wall Street’s self-regulator, became worried about MF Global’s European debt positions and ordered the firm to build up cash reserves.

The report outlines the disputes that emerged within MF Global about how to resolve the liquidity needs — including through customer money.

While customer money must be kept separate from the firm’s, it is common for a company like MF Global to add its own money to customer accounts as a buffer in the event of a volatile market move. The firm’s money, called excess funds, can we withdrawn by the company at will. But “confusion and differences of opinion existed within MF Global regarding the extent to which excess funds might be available to meet liquidity needs across the MF Global enterprise,” the report said.

Nevertheless, senior management began relying increasingly on this money to stay afloat, the report says. An internal conflict also arose around the use of a loophole that allowed the firm to use customer money sitting overseas, not simply the excess.

The company prepared an action plan in the event of a downgrade from the ratings agencies and other negative news, a move executives knew would cause significant problems. The document lists ways to maintain cash reserves, keep clients and generally stay alive should the market react poorly to the news.

But the trustee’s investigation found the risk analysis “seriously underestimated both the speed and extent of demands on liquidity,” by a magnitude of $600 million to $1 billion.

Article source: http://dealbook.nytimes.com/2012/06/04/trustee-report-details-last-days-of-mf-global/?partner=rss&emc=rss

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