June 8, 2012 7:49 pm

Trustee report details MF Global collapse

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For James Giddens, the trustee charged with recouping the $1.6bn still owed to MF Global customers, it was the culmination of months of intense investigation including thousands of reviewed documents and hundreds of interviews.

Mr Giddens, a high-profile bankruptcy lawyer, this week released a 275-page report explaining what his legal team believes led to the broker-dealer’s dramatic failure at the end of October last year.

At the same time the court-appointed trustee said he may sue Jon Corzine, MF Global’s erstwhile chief executive, and other former staff members, for “breach of fiduciary duty and negligence”.

While a spokesman for Mr Corzine strenuously denied “the trustee’s suggestion that Mr Corzine was negligent”, Mr Giddens’ report could not have been easy reading for the former CEO. Mr Giddens pinpointed “management’s actions” and insufficient monitoring systems as key causes of MF Global’s chaotic collapse.

Mr Corzine “should be plenty worried [about civil suits]”, says Thomas Rohback, a specialist in complex corporate litigation at Axinn Veltrop & Harkrider. “Even if he’s able to successfully defend himself it’s not going to be simple or inexpensive.”

The broker-dealer filed for bankruptcy on October 31 after making complex bets, known as “repo to maturity” trades, on certain eurozone government bonds. The trades were initially profitable, but MF Global had to stump up money to fund them.

The bets were part of Mr Corzine’s strategy to transform and boost earnings at the company, which was already struggling when the former Goldman Sachs CEO and New Jersey governor assumed leadership in March 2010, the trustee said.

“Mr Corzine was very hands-on with respect to the sovereign debt trades,” Mr Giddens wrote in his report, adding that MF Global struggled to find a senior officer who could supervise the CEO’s trades. A special subcommittee of the company’s board of directors was eventually set up to oversee them, the trustee said.

But MF Global’s new trading ambitions were not matched with new monitoring or money management systems, the trustee alleged. That meant the broker-dealer was ill-equipped to deal with nervous trading partners’ demands for additional funds towards the end of 2011, as the eurozone crisis deepened.

Mr Giddens’ report details hundreds of flurried transactions in the days leading up to MF Global’s collapse, as the company tried to come up with sufficient cash.

Inadequate systems would eventually contribute to the company dipping into segregated customer accounts for its own purposes, the trustee alleged.

Insiders close to Mr Corzine bristle at the notion that the former CEO did not try to put adequate monitoring systems in place. During Mr Corzine’s tenure, the company spent tens of millions of dollars on compliance consultants and accountants, plus a new software system, people familiar with the operations say.

To customers still waiting for their money, it must seem that the only thing more complicated than reconstructing the tangled trades that led to MF Global’s collapse, and Mr Corzine’s subsequent fall from grace, is recouping their missing funds.

The trustee is now in talks with several entities – including JPMorgan Chase, one of MF Global’s banks, and legal teams representing other parts of MF Global.

Indeed, Mr Giddens was not the only bankruptcy trustee to opine on MF Global this week. Louis Freeh, acting for MF Global’s holding company, issued 119 pages of his own. As well as tracing the flow of money between the broker-dealer’s many segments, the report alleges that MF Global reduced regulatory capital by shifting some of its complex trades to an unregulated subsidiary.

For his part, Mr Giddens says his team now knows where the money is.

About $900m is locked up in domestic accounts, much of that in the hands of JPMorgan, which handled some customer money on behalf of MF Global. The trustee said he may sue JPMorgan if discussions do not result in an agreement.

Some $700m related to customers’ trading on foreign exchanges is in Britain. That money is now part of a tug of war between MF Global’s US brokerage business, as represented by Giddens, and the administrative team handling the UK subsidiary’s claims. Administrators of the UK subsidiary are also in discussions with Mr Freeh, underscoring the cross-border complexity of MF Global’s bankruptcy case.

Mr Corzine is now believed to be spending time with family, keeping in close contact with his lawyers while Mr Giddens decides whether to file a civil suit.

The trustee is also said to be considering whether to team up with the more than a dozen class action suits already filed by MF Global customers against Mr Corzine. Mr Giddens will make his decision within 60 days.

Despite the unflattering picture of MF Global management painted in the trustee reports, and the possibility of civil suits, many in the industry believe there will be no criminal charges for staff. If charges are forthcoming they are likely to be related to perjury, rather than fraud.

Mr Corzine and other senior officers have already made prominent appearances in front of a US government inquiry into the broker-dealer’s collapse.

“Complicated things are difficult to create criminal cases out of,” said Richard Scheff, a defence attorney at Montgomery McCracken who specialises in white collar crime. “The more complex, the more you can use arguments about intent.”

“Complexity will affect any criminal and fraud claims but it will have less impact on a negligence claim,” he added. “That said, when you have complexity on your side you beat that drum as loud as you can.”

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