Everything is not ‘Fine’ at MF Global Holdings


MF Global Holdings, Ltd. (“MF Global”) filed the eighth largest bankruptcy petition in U.S. history on Monday November 1, seeking to reorganize its debt structure and continue to operate. MF Global, the broker-dealer unit, faces liquidation. The filings occurred after a potential buyer of MF Global’s assets, Interactive Brokers Group, “bolted over a discrepancy of hundreds of millions of dollars in the beleaguered securities firm’s books,” according to the Wall Street Journal (“MF Global Collapses as Books Questioned”).

MF Global was a leading broker of commodities, derivatives, fixed income securities, equities, and foreign exchange transactions. It also engaged heavily in proprietary trading under the direction of its chairman, Jon S. Corzine.

MF Global is the biggest failure of a securities firm since Lehman Brothers filed for Chapter 11 in September 2008. According to Standard & Poor’s Erik Oja, U.S. banks are not endangered, although the MF Global bankruptcy increases the risk of a sell-off of financial stocks.

Jon S. Corzine (former New Jersey Governor and former co-chairman of Goldman Sachs), the Chairman and Chief Executive Officer of MF Global, took over the helm in March 2010. Known as a trader, Corzine led MF Global as it amassed a $6.3 billion leveraged long positions in troubled European debt. Margin calls and related events apparently forced the bankruptcy filing.

On September 1, the Financial Industry Regulatory Authority (FINRA) ordered MF Global to increase its required net capital, saying that it was overvaluing its European debt holdings. FINRA then required MF Global to announce that it held a long position of $6.3 billion in a short-duration European sovereign debt portfolio financed to maturity. On October 24, Moody’s downgraded MF Global to just above junk status.

On October 25, MF Global made the announcement as ordered by FINRA, and also announced a second quarter loss of $191.6 million, prompting further downgraded to junk status by Moody’s and others. However, on that date, “Corzine told investors (in writing) that MF Global’s exposure to European government bonds was fine. These were ‘opportunities’ to make good money, he said, and the position was ‘fully financed.’ He added: ‘We remain confident that we have the resources and expertise to continue to successfully manage these exposures to what we believe will be a positive conclusion in December 2012.'” (“6 things no one will tell you about MF Global,” MarketWatch, Brett Arends).

In its most recent quarterly filing with the SEC, MF Global boasted: “The Company’s risk-management framework is an integral part of our control structure.” According to Arends, MF Global’s risk management was a joke. Mr. Corzine’s stock options encouraged risk-taking. “Stock options are free chips in the casino’.If they win, they get to keep it all. If they lose? No biggie.” In addition to these stock options, Corzine recently received $2.75 million in cash, which included a $1.25 million bonus (“No kidding. The guy just got a bonus,” Arends writes).

Senior managers like Corzine are as clueless as the average guy, says Arends. The difference is the Corzines of the world have the power to make decisions that have a big impact and are not deterred by their ignorance.

According to the book “Goldman Sachs: The Culture of Success,” by Lisa Endlich, Corzine was willing to tolerate losses as long as the rationale for a trade was well thought out. Corzine’s belief that political leaders will ultimately solve the European debt crisis may be correct, but his use of leverage was a big mistake.

MF Global created nothing of value, according to Arends, while 3,000 employees made very handsome salaries by essentially “playing poker against each other.”

The largest investors in MF Holdings include mutual fund companies Fidelity, TIAA-CREF and Dimensional Fund Advisors. Thus, many ordinary investors are exposed to MF Global by virtue of their ownership of these mutual funds. Many U.S. equity mutual funds own MF Global stock.

According to the USAToday, “U.S. regulators are investigating whether hundreds of millions of dollars are missing from client accounts at MF Global.” Regulators are investigating whether MF Global diverted customer funds to support its proprietary trading as it was foundering (“Regulators Investigating MF Global for Missing Money,” CNBC.com). The Securities Investor Protection Corp. (SIPC) said it will liquidate MF Global’s brokerage unit to unfreeze customer accounts.

Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.