James W. Giddens, the trustee for the liquidation of MF Global Inc., today filed a report on his independent investigation into the bankruptcy of MF Global and the events that led up to it. Although he has no law enforcement or regulatory authority, he finds that specific people and entities could and should be held liable for their part in segregated customer funds being used to fund margin calls in the broker-dealer’s last days.
“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 released with the report.
Specifically, Giddens points to the firm’s negligence in updating its Treasury department and infrastructure as then-CEO Jon Corzine attempted to transform the broker-dealer into an investment bank. “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,” Giddens said.
He goes on in the report to say that he believes claims, including claims for breach of fiduciary duty and negligence, could be brought against former MF Global CEO Jon Corzine, former MF Global CFO Henri Steenkamp, and former MF Global Assistant Treasurer Edith O’Brien, among others. He already is working with commodity customers’ counsel regarding a class action suit.
Further, Giddens is in discussion with JPMorgan Chase regarding transfers he believes may be voidable or otherwise recoverable.
Ultimately, the report details the events and finances of the firm over the last couple years of its existence and concludes its business changed dramatically after Corzine took over as the firm’s CEO. It was under the personal direction of Corzine that MF Global began trading European sovereign debt securities, and that led to the firm’s demise.
Additionally, Giddens also filed a number of recommendations to regulators that came as a result of his investigation, including:
- Abolish the alternative calculation method and implement a requirement to segregate an amount in excess of 100% of customer funds.
- Eliminate the segregated versus secured distinction in Commodity Futures Trading Commission (CFTC) Regulation 30.7, ensure consistency of customer protection when trading overseas, and monitor compliance abroad closely.
- Create a protection fund for futures and commodities customers under a certain threshold, and implement suitability standards for customers of Futures Commission Merchants (FCMs).
- Provide for civil liability for officers and directors in the event of a commodities segregation shortfall.
- Consider simplifying some CFTC rules for bulk transfers and claims in an FCM liquidation proceeding.
- Enact legislation explicitly authorizing Trustee standing on behalf of customers.
Finally, the trustee filed a motion for the bankruptcy court to approve counsel’s fees through February 2012, which totaled approximately $17 million