Thursday, Congressional leaders held their fourth panel discussion on MF Global. Called to testify were executives of rating agencies Standard & Poor’s and Moody’s. Also called to testify earlier in the day were former MF Global Chief Risk Officer, Michael Roseman, and his replacement to the same post Michael Stockman.
THE WARNINGS
News coming to light over the past few months after the MF Global debacle, reaffirmed by testimony yesterday, show a pivotal point at the end of 2010. At the end of 2010, Michael Roseman informed MF Global executives, including Jon Corzine, of his concerns regarding the European sovereign debt investments that MF Global had made. His concerns were shrugged off by management and deemed “implausible.”
Shortly after voicing his concern, Mr. Roseman was relieved of his duties at MF Global. When pressed upon the issue by lawmakers, Mr. Roseman conceded that his warnings contributed to him being replaced.
His replacement, Michael Stockman, appeared to acquiesce to the firm’s investment strategy until July 2011. MF Global’s chief risk officer urged senior executives and the company’s board to scale back the $6.3 billion proprietary bet on European sovereign debt by highlighting the risk involved with “repurchase-to-maturity” trades. After the meeting, MF Global executives agreed to forego adding onto their long positions in the European sovereign bonds and instead opted to let their existing positions roll off as they reached maturity. When asked whether he believed he was brought in to be the “yes-man” that Mr. Roseman was not, Mr. Stockman replied that he did not believe so. Congressional leaders disagree.
THE RATINGS AGENCIES
Ratings agencies were also grilled by Congressional leaders on Thursday.
Jon Corzine, in December, testified that the investment themselves did not lose money and the bonds they held did not come from countries that have defaulted. While Moody’s and S&P maintained MF Global’s good credit rating, Rapid Ratings International, a smaller ratings firm, had downgraded the firm much earlier.
Both Moody’s and S&P’s actions in the time leading up to the collapse are under scrutiny. On October 20th, Jon Corzine met with S&P analysts and said the $6.3 billion bet on European sovereign debt was of no threat to the firm. Four days later on October 24th, MF Global’s Chief Financial Officer Henri Steenkamp told S&P, via e-mail, that “MF Global’s capital is in its strongest position ever as a public entity.” However, that very same day Moody’s downgraded MF Global to near-junk status. The following day, October 25th, Steenkamp reiterated his “strongest position ever” comments during an earnings call.
During a five day span in late October just days before the collapse, both Corzine and MF Global’s CFO Henri Steenkamp had reassured S&P and investors that the firm was in its strongest position ever, after having two separate Chief Risk Officers warn them of the impending danger and a second ratings agency downgrade them to near junk-bond status.
SO, WHERE IS THE MONEY?
As of this moment, investigators believe they have traced around 90 percent of the $1.2 billion in customer money that went missing as MF Global crumbed on October 31. Authorities, however, show no signs of releasing that information as they feel it may damage recovery efforts. 38,000 people have received around ¾ of their money, but some have not seen a dime, including some with investments of over half a million.
Where the money is, and its ability to be recovered are questions that seem yet to be answered. Some of the people that received money from the firm, as it was crumbling, are entitled to payouts and getting the money back from those customers may be difficult or impossible. Additionally, some of those who were paid out, were paid out from customer accounts that belonged to futures clients.
Investigators believe that customer funds were transferred to JP Morgan Chase. Investigators suspect that as the company was crumbling, customer money was transferred to the Clearinghouse Depository Trust & Clearing Corporation, as well as JP Morgan Chase, and that money was then transferred to MF Global’s trading partners. Those trading partners, whose accounts were “coincidentally” closing in October, would have rightful claims to the money they receive, leaving no opportunity for investigators, and the investors left with nothing, an opportunity to get it back.
With MF Global’s foundation crumbling, the firm sought to make sure that its friends and partners were covered with other customers’ money.
The CFTC has said they will investigate anyone who accepted customer cash without verifying the source of the money or knew that it was coming from customer accounts.
FIGHTING AMONGST INVESTIGATORS
A significant hurdle in the race to get customers their money: squabbling between bankruptcy trustees and federal agencies. E-mails sent by top executives at MF Global have been withheld from federal authorities. These e-mails are believed to contain identities and clues about who transferred the money. These squabbles rest mainly in conflicting duties and objectives between the parties.
James W. Giddens, the trustee overseeing the liquidation of the brokerage unit, is responsible for returning money to the customers while Louis J. Freeh, the trustee overseeing the liquidation of the firm, is responsible for returning money to the firm’s creditors.
Freeh’s attorneys have declined to share internal e-mails with Mr. Giddens and the federal investigators, including the CFTC. Mr. Giddens has been reluctant to hand over the account statements Mr. Freeh needs in order to conduct the investigation to determine what creditors are owed.
MOVING FORWARD
The investigation will continue, even as federal agencies and bankruptcy trustees fight over documentation and priority.
Recently, U.S. Bankruptcy Court Judge Martin Glenn denied the request of former commodity customer Sapere Wealth Management LLC to have the bankruptcy of the company’s parent, MF Global Holdings, Ltd., converted from a Chapter 11 to Chapter 7 liquidation or conduct their own probe. The parent and the brokerage are in different bankruptcy proceedings handled by the two different trustees mentioned above. The parent filed for bankruptcy on October 31st with almost $40 billion in debt and has received 71 claims totaling 188.7 million from November 4th to January 31st.
The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790. U.S. District Court, Southern District of New York (Manhattan).
The parent bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
The largest claim against the parent is an employee suit, Thielmann v. MF Global Finance USA, 11-02880, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
