Legal Implications of MF Global Bankruptcy

File under: one more example of what not to do as CEO of an investment bank. Here’s the background from a recent Business Insider article:

Yesterday, 18 months after Jon Corzine took over the helm of MF Global with the goal of building it into a real investment bank, he flew the company into a mountain.

Why?

Because part of becoming a real investment bank, apparently, is betting the company. Jon Corzine bellied up to the global market tables, bet MF Global, and lost.

Specifically, the former head of Goldman Sachs and governor of New Jersey authorized his traders to scarf up $6 billion in bonds issued by Spain, Italy, Portugal, Belgium, and Ireland. The bet, presumably, was that the powers-that-be in Europe would bail out these and other bondholders to the tune of 100 cents on the dollar, because in our global bailout spree, that’s what powers-that-be do.

Oops indeed. Here’s a copy of MF Global’s Chapter 11 bankruptcy filing (October 31, 2011).

And the legal implications? We’re bound to hear more on that in the coming weeks. For now, the following from lawyers and law firms on JD Supra:

–  SIPC Trustee Appointed for MF Global, Inc. (by Reed Smith):

“On November 2, 2011, the [Securities Investor Protection Corporation] Trustee took his first official action and sought authority from the Bankruptcy Court to transfer certain segregated customer commodity positions from MFGI to one or more futures commission merchants (“Transferees”), potentially resulting in the transfer of 50,000 accounts. On November 3, the Trustee issued a notice confirming that he is in the process of effectuating a bulk transfer of the commodity contracts and a portion of the related initial margin (as discussed in the next paragraph) to certain qualified Transferees selected by the Trustee. The Transferees will, in turn, notify each customer of the successful transfer of the customer property. The Trustee also confirmed that there will be a process by which customers can elect to transfer their positions without transferring any of the related initial margin.” Read entire Reed Smith update» 

MF Global U.S. bankruptcy first day hearing leaves questions unanswered (by Reed Smith):

“At the hearing, Debtors’ counsel cited the recent downgrading of MF Global’s credit rating and overall lack of liquidity as the reasons for its bankruptcy filings. Further, and in contrast to recent news reports, Debtors’ counsel denied that any money was misapplied/misdirected and stated that all money was accounted for with MF Global Inc. (the MF Global broker-dealer entity) and the various clearing houses. Counsel was unable, however, to provide any further detail about the funds in question or shed light on any transfers done by the Debtors in the days leading up to the bankruptcy filings. Concerns were raised at the hearing about money from MF Global UK entities being transferred to the Debtors or other U.S. entities, but no clear answer was given with regards to what transfers, if any, took place prior to the bankruptcy filings…” Read entire Reed Smith update»

Implications of MF Global Inc. SIPC Proceeding for Counterparties and Market Participants (by Morgan Lewis):

“On October 31, the Securities Investor Protection Corporation (SIPC) filed for a protective order under the Securities Investor Protection Act (SIPA) for MF Global Inc., a company registered jointly as an Securities and Exchange Commission (SEC) registered broker and Commodity Futures Trading Commission (CFTC) registered futures commission merchant (FCM). James W. Giddens, the SIPC trustee for Lehman Brothers Inc. (LBI), was named SIPC trustee for MF Global Inc. and on November 1, 2011, Judge James M. Peck, the bankruptcy judge for the LBI SIPC proceeding, was assigned to the case.

This follows the Chapter 11 bankruptcy filings of its affiliates, MF Global Holdings Ltd. and MF Global Finance USA Inc. In response to these filings, a number of clearinghouses have announced that they have suspended MF Global Inc.’s membership and have limited the types of trades that they will clear, including MF Global Inc. customer accounts.

…The insolvency of MF Global Inc. will have substantial consequences for commodities customers, investment advisers, counterparties in trades involving to-be-announced securities (TBAs), mutual funds, and introducing brokers.” Read entire Morgan Lewis update»

MF Global enters insolvency proceedings on both sides of the pond (by Reed Smith):

“MF Global, one of the world’s leading broker/dealer firms entered into insolvency proceedings in both the US and the UK on 31 October 2011. US entities MF Global Holdings Ltd. and MF Global Finance USA Inc. filed voluntary petitions for relief under Chapter 11 of the US Bankruptcy Code in the Bankruptcy Court for the Southern District of New York. Also on 31 October, the US Securities Investor Protection Corporation (“SIPC”) initiated the liquidation of MF Global, Inc. a jointly registered futures commission merchant and broker-dealer, under the Securities Investor Protection Act (“SIPA”). The US District Court for the Southern District of New York entered an order granting SIPC’s request for SIPA protections for customers of MF Global, Inc…

…In the US, the SIPC proceeding is in its relatively early stages and is complicated by what the US Securities and Exchange Commission and Commodity Futures Trading Commission have described as ‘possible deficiencies in customer segregated futures accounts held at [MF Global, Inc.]’ In the immediate term, US customers are dealing with a variety of scenarios that include failed transfers of assets and futures positions from MF Global, Inc. to other broker-dealers and failed settlements of outstanding securities trades. Ultimately, the scope of customer’s rights will be determined through the SIPC proceeding and are likely to bec communicated in the coming days and weeks through a series of notices and protocols issued by the SIPC trustee.” Read entire Reed Smith update»

Stay tuned for more – follow additional Securities Law updates here…