by Allison Collins | Published June 5, 2012 at 8:45 AM
The liquidating trustee for MF Global Inc. filed a report Monday, June 4, stating that he believes there may be claims against former MF Global chief executive Jon Corzine, as well as other MF Global officers.
James W. Giddens, the Securities Investment Protection Act trustee for MF Global, filed a report Monday on his findings regarding the failure of MF Global Inc., whose parent, MF Global Holdings Ltd., sought Chapter 11 protection on Oct. 31.
Giddens' report focuses on the underlying reasons for and the consequences of MF Global's collapse.
"In light of these conclusions, I have determined there may be valid claims against individuals and entities. In my capacity as Trustee, I will make every effort to ensure that such claims result in the greatest possible returns to customers in an efficient and fair manner, whether those claims are pursued by my office or others," Giddens said in a statement.
The investigation is complete, according to Kent Jarrell, Giddens' spokesman, adding, "Now it's time to move on to resolution."
Giddens will decide in the next 60 days if he will pursue litigation to recover customer property, Jarrell said.
Giddens believes that charges, including breach of fiduciary duty and negligence, may be filed against Corzine, former CFO Henri Steenkamp and former assistant treasurer Edith O'Brien, among others.
In addition, Giddens is in discussions with J.P. Morgan Chase & Co., but if those discussions don't lead to an agreement, he may commence litigation. Legal proceedings are also under way in the United Kingdom to restore property that should have been segregated for customers trading on British and other non-U.S. exchanges, according to the statement.
The probe shows that the company changed dramatically after Corzine took over as CEO and chairman of MF Global Holdings in March 2010, shifting from being a modest customer and proprietary security business into a full-service global investment bank, with new lines of business that increased demands for daily liquidity, according to the report. Under Corzine's direction, the company began trading European sovereign debt securities.
Despite those increased liquidity demands, however, the company's treasury department didn't expand or modernize and the firm never implemented systems or tools for accurate real-time monitoring of liquidity. Instead, it tracked liquidity and the ability to transfer funds by informal means, including orally, according to the report.
As MF Global's liquidity needs intensified, senior management looked to futures commission merchants as a source of liquidity.
The U.S. Commodity Futures Trading Commission requires that customer funds be kept in segregated accounts, not to be used for other purposes. But CFTF regulations allow a futures commission merchant to deposit its own funds into customer accounts, according to the report.
MF Global referred to firm funds in customer accounts as "Firm Invested in Excess," which the company decided it could use for intraday loans. But instead of making loans, it made fund transfers that were to be returned before the end of each day, according to the report.
Moody's Investors Service downgraded its rating on MF Global to one notch above junk status on Oct. 24 in the belief that the company would announce lower-than-expected earnings, court papers said. MF Global did, in fact, post a $191.6 million net loss in the second quarter, compared with a $94.3 million net loss for the same period last year.
Standard & Poor's put MF Global on credit watch negative on Oct. 26, and Moody's reduced MF Global to junk status on Oct. 27, which sent customers to the bank to withdraw their property. At the same time, counterparties and exchanges demanded increased collateral.
"MF Global's computer systems and employees had difficulty keeping up with the unprecedented volume of transactions," according to the report.
The events during the final week of MF Global's operations increased the demands to use futures commission merchants to fund securities trading. On Oct. 26, an unprecedented intraday transfer of $615 million was needed from the futures commission merchants to fund proprietary securities trading, an amount that was not returned to the FCM before the close of business.
Although some of the transfer was ultimately repaid, MF Global was out of regulatory compliance with respect to the segregated funds from Oct. 26 to Oct. 30, according to the report.
A $175 million transfer from futures commission merchants to MF Global UK on Oct. 28 to clear an overdraft balance at J.P. Morgan Chase in London made things worse, the report said.
"The actions of management and other employees, along with lack of sufficient monitoring and systems, resulted in FCM customer property being used during the liquidity crisis to fund the extraordinary liquidity drains elsewhere in the business," the report states.
Giddens requested on March 15 to make a $685 million distribution to the brokerage's former customers. Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York in Manhattan signed an order approving the distributions on April 24.
Under his proposed plan, former MF Global commodities futures customers who traded on U.S. exchanges would receive $600 million. About $50 million would go to customers who traded on foreign exchanges, and $35 million would be handed to certain customers holding physical items such as gold bars, court papers said.
Giddens has determined virtually all of the commodities claims, but objections to the determinations still need to be resolved in the bankruptcy court. He also has to reserve a sufficient amount until the objections are resolved.
The SIPA trustee will seek to make interim distributions while maintaining that reserve, according to a statement. Distributions should start next week, according to Jarrell.
Giddens is consulting with commodities customers' class-action counsel about actions against officers and directors and other employees, according to his statement.
MF Global Holdings, a provider of brokerage services for commodities and listed derivatives, filed for Chapter 11 with affiliate MF Global Finance USA Inc. on Oct. 31. 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, former FBI director and former federal judge Louis Freeh of Freeh Group International Solutions LLC was appointed as Chapter 11 trustee to MF Global Holdings.
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