MF Global Holdings Ltd.'s management "seriously underestimated both the speed and extent" of the panic that overtook the securities firm in late October, a bankruptcy trustee said Monday, adding that he might pursue claims against the company's former chief executive, Jon S. Corzine.
In a 275-page report filed with a bankruptcy court Monday morning, James Giddens, now winding down MF Global's U.S. brokerage unit, outlined how the aggressive trading strategy pushed by Corzine, a former Goldman Sachs Group Inc. chairman and New Jersey governor, brought MF Global to the brink.
According to Giddens, MF Global suffered from a "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."
Giddens, who is charged with trying to recover an estimated $1.6 billion for customers of the U.S. brokerage, said the report doesn't draw conclusions on possible criminal liability.
He did say he might sue Corzine and other MF Global executives for claims that include breach of fiduciary duty and negligence. In a summary of the report, Giddens singled out the actions of MF Global Chief Financial Officer Henri Steenkamp and former MF Global Assistant Treasurer Edith O'Brien, who was involved with a key money transfer on Oct. 28, the last trading day before MF Global filed for bankruptcy.
Attempts were being made Monday morning to reach the three for comment.
The report also went into significant detail about Corzine's strategy of transforming MF Global from a relatively sleepy commodities brokerage operation into one that took the same kinds of risks and trading positions that have been common at large Wall Street banks such as Goldman Sachs.
Giddens' report noted that Corzine's trading strategy of betting on European sovereign bonds in 2010 and 2011 took on "a level of risk that was orders of magnitude greater than the relative exposure at other, larger institutions." He said the investments peaked in October 2011 at $7 billion, or $700 million more than previously known.
The internal systems and controls at MF Global came undone, Giddens said, as margin calls on the firm's bets overwhelmed MF Global between Oct. 26 and Oct. 30. One of those transfers: $615 million on Oct. 26 to fund the company's proprietary trading.
"As intraday transfers significantly increased, there was a panic regarding segregation compliance within MF Global's Treasury Department," Giddens noted in the summary to his report.
The report also detailed efforts to recover money from various banks and counterparties. For example, Giddens said he is in discussions with J.P. Morgan Chase & Co. about transfers the trustee "believes may be voidable."
He added that J.P. Morgan had returned about $600 million, as The Wall Street Journal reported last week. In the report, Giddens said he would sue J.P. Morgan if the two sides don't reach a settlement within 60 days.
The trustee is also investigating whether clearinghouse Depository Trust & Clearing Corp., or DTCC, "should have been aware that it received customer funds." The trustee is in discussions with DTCC, which has returned $160 million since the bankruptcy filing. DTCC, like many clearinghouses, stood in the middle of many of MF Global's trades with other banks and investment firms
CME Group Inc., the largest U.S. exchange operator and a regulator of MF Global, also holds or controls $175 million in property "against which some customers or other parties have asserted claims," the report said.
The trustee is talking to CME and other clearinghouses about the return of such assets.
Internal risk limits on the European trades were repeatedly breached, according to the report. In April 2011, MF Global Chief Risk Officer Michael Stockman spoke with Corzine about the risks of the trades and told others in the risk department: "Good news is he now aware of gross limits, agrees with concept…"
Still, several weeks later, Corzine directed Stockman to ask the board to increase the limits from $5.8 billion to $9.75 billion. The board approved a risk limit increase to $6.6 billion.
During the final week before the bankruptcy filing, the treasury department located in Chicago was called on to lend hundreds of millions of dollars to the broker-dealer.
That wasn't the first time the treasury unit was required to provide liquidity. According to the report, intraday transfers of funds between units had started to occur at least a year earlier. The report noted that these loans were recorded manually on spreadsheets and journal entries put into the systems, "neither of which were done consistently."
Giddens also filed a motion with the Court for approval of counsel's fees through February 2012, which total approximately $17 million.