If you’re looking for lessons on risky business and recidivism, MF Global has them in spades.
Plenty has been written about Jon Corzine’s chronic habit of begging for forgiveness rather than asking for permission when taking outsized trading positions that ended in big losses. The financial services industry allows it if you wear your failure as a badge of honor and never apologize.
Some media are nervous about putting boldfaced names of industry veterans like Corzine and MF Global investor Chris Flowers next to details about the missing $600 million in customer assets. They push an innocuous version of why the millions still haven’t been found — it’s a timing problem or there’s too much confusion and complexity — in spite of so much evidence now to the contrary.
For example, the CFTC told the bankruptcy court that the MF General Counsel emailed them hours after the bankruptcy filing on October 31 to say there was a "significant shortfall" in customer segregated funds. The SEC and CFTC issued a joint statement on November 1 characterizing the problem as “possible deficiencies in customer futures segregated accounts.” CME Group issued a statement on November 2 saying, “the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection.”
Bad behavior at MF Global long preceded Jon Corzine.
The MF Global 2009 proxy statement describes how investor Chris Flowers was instrumental in pushing, via a board seat for his lieutenant David Schamis, a bold, aggressive, new strategy for the “sleepy” futures clearing merchant. Flowers brought Corzine to MF Global in 2010 to sex up the place, cut costs, and make bets that would turn around three years of losses and allow him to recoup the investment he made to save the firm after an out of control wheat trader cost it $141 million in 2008.
MF Global, the brokerage firm that collapsed Oct. 31 after admitting that more than $600 million in client assets were missing, has a checkered past.
Bad acts go back to its roots as Refco, a Chicago futures brokerage that collapsed and filed bankruptcy in late 2005. After Man Financial spent $323 million to acquire Refco’s client assets and accounts following the bankruptcy, the Refco team was thrown in with the rest of the recent Man Group brokerage acquisitions until 2007. That’s when Man Financial spun off the brokerage business in an IPO and renamed it MF Global.
The U.S. Department of Justice accused Refco executive officers Phillip Bennett, Tone Grant, Santo Maggio, and Robert Trosten, and other former Refco insiders of directing a series of transactions every year from 1999 through 2005 (and quarterly starting in 2004) to hide customer trading losses, conceal the firm's proprietary trading activities, fraudulently shift expenses off Refco’s books and artificially pad Refco's revenues. The Refco executives’ objective was to achieve, through fraud, the 2004 leveraged buyout of Refco and the 2005 initial public offering of Refco stock, the Justice Department said.