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Corzine sued over MF Global collapse

by Kelsey Butler | Published April 24, 2013 at 9:35 AM

Less than three weeks after issuing a report blaming former CEO Jon Corzine for the collapse of MF Global Holdings Ltd., the company's Chapter 11 trustee has sued the executive and two other board members.

In a Monday, April 22, complaint, Chapter 11 trustee Louis Freeh of Pepper Hamilton LLP faulted Corzine, chief operating officer Bradley Abelow and former chief financial officer Henri Steenkamp for the brokerage firm's demise.

Freeh alleged the defendants had "breached their fiduciary duties of care, loyalty and oversight over the company and failed to act in good faith."

The trustee further alleged that when the defendants were at the helm of MF Global Holdings, they "changed the company's business plan without addressing existing systemic weaknesses that ultimately caused the plan to fail."

"As part of the new business plan, and in violation of his fiduciary duties to MF Global as the chief executive officer of [MF Global Holdings and MF Global Inc.], defendant Corzine engaged in risky trading strategies that strained the company's liquidity and could not be properly monitored by the company's inadequate controls and procedures. Defendants Abelow and Steenkamp, Corzine's hand-picked deputies and the company's most senior officers, breached their fiduciary duties by failing to ensure that the company's procedures and controls were adequate and could accommodate the company's new business plan."

Freeh alleged the defendants were aware of deficiencies in liquidity controls and procedures and knowingly exposed the company to excessive risks.

The trustee asserted these events inflicted material damages on the company, and that between Corzine's arrival at the company in March 2010 and its Oct. 31, 2011, petition date, MF Global Holdings lost in excess of $1 billion in value, not including shortfalls in customer funds.

The suit seeks monetary damages in an amount to be determined at trial, plus attorneys' fees, costs and expenses, for three counts of breach of fiduciary duty.

The legal action reiterates many claims Freeh made in an April 4 report, in which he said Corzine's strategy to begin engaging in significant proprietary trading, or using the company's own funds to trade and profit from anticipated changes in market prices, ultimately led to MF Global's downfall. Freeh cited the "negligent conduct" of the former New Jersey governor and senator.

Two earlier reports last year reached similar conclusions.

Following his appointment as chief executive, Corzine "initiated a new and aggressive trading strategy, investing heavily in European sovereign debt, which was financed through repurchase to maturity transactions," Freeh said in the 174-page report.

Under the strategy, broker-dealer unit MF Global Inc. would purchase the securities, and MF Global U.K. Ltd. acted as agent for the purchase. The transactions involved financing the company's purchase of European sovereign debt issued by countries such as Ireland, Italy, Portugal and Spain and were meant to "capitalize on volatility and unrest in the European markets," the report said.

"Because of the way these trades were structured, the company immediately recognized the income while simultaneously removing the transactions from the company's balance sheet. These transactions were meant to serve as a profit 'bridge' until the company began to produce earnings from other, new lines of business," Freeh said in the report.

"When combined with other factors, strategic decisions and management lapses surrounding the company's business, the [trades] ultimately sowed the seeds of the company's destruction," the trustee said. "Although the trades generated the expected up-front 'income,' these trades also jeopardized the company's available liquidity and left the company highly leveraged as a result of these off-balance-sheet transactions. When the European economy deteriorated during the summer of 2011, clearinghouses and other counterparties began making escalating margin demands, draining the company's liquidity and drawing the attention of regulators and credit rating agencies."

Freeh stated that between September 2010 and June 2011, MF Global Holdings' board approved a number of requests from Corzine to increase risk limits for investing in European sovereign debt.

The trustee pointed out that against the advice of chief risk officer Michael Stockman -- who in the summer of 2011 suggested the company cease investing in the sovereign trades, also known as European RTMs -- management looked for additional sources of liquidity to support the new trading strategy.

"As these events unfolded, Corzine and his management team failed to strengthen the company's weak control environment, making it almost impossible to properly monitor the liquidity drains on the company caused by Corzine's proprietary trading strategy," Freeh said. "Among other significant gaps, the company lacked an integrated global treasury system, preventing management from obtaining an accurate real-time picture of the company's liquidity. The inadequate controls also prevented the company from knowing, during the last week of its existence, that customer segregated funds at the [futures commission merchant] were being used to meet the [broker-dealer's] liquidity needs and satisfy an obligation of [MF Global U.K.]. These glaring deficiencies were long known to Corzine and management, yet they failed to implement sufficient corrective measures promptly."

Freeh's report was the result of an investigation based on interviews with former employees and board members of the brokerage firm, as well as company documents.

Calls to Freeh and Corzine representatives were not immediately returned Tuesday.

Freeh's dispatch was the third report blaming Corzine and his team for MF Global Holdings' unraveling.

James Giddens, MF Global Inc.'s Securities Investor Protection Act trustee, and a U.S. House subcommittee last year issued reports with similar findings. Giddens concluded there might be "valid claims against individuals and entities."

He later agreed to assign to customer class-action plaintiffs the estate's claims against former MF Global officers, directors and employees. Recoveries in the class action would be distributed through the SIPA case.

MF Global Holdings, a provider of brokerage services for commodities and listed derivatives, filed for Chapter 11 with affiliate MF Global Finance USA on Oct. 31, 2011.

The Securities Investor Protection Corp. initiated a liquidation of MF Global Inc., the debtor's U.S.-regulated broker-dealer subsidiary, the same day.

In November 2011, Freeh, a former FBI director and federal judge, was appointed as Chapter 11 trustee to MF Global Holdings.

Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan on April 5 signed an order confirming a liquidation plan for MF Global Holdings proposed by Freeh and a creditor group.

Freeh and creditors led by Silver Point Capital Fund LP, Knighthead Master Fund LP and Cyrus Capital Partners LP calculated the assets of nonbankrupt unit MF Global Inc. -- valued between $6.86 billion and $6.98 billion -- would likely allow for the payment of $6.86 billion in customer claims, with anything possible from a shortfall of $6 million to a surplus of $120 million.

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