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Freeh Report Raps Corzine for Ignoring Weak Controls as MFG Lost Billion-Plus

Tuesday, April 9, 2013
By Richard Hill

Louis Freeh, the Chapter 11 trustee for MF Global Holdings Ltd., parent of bankrupt futures commission merchant MF Global Inc., told the U.S. Bankruptcy Court for the Southern District of New York in a report April 4 that chief executive officer Jon Corzine failed to strengthen long-known internal control weaknesses at MFG, making it impossible for the company to monitor liquidity drains and setting the stage for its failure In re MF Global Holdings Ltd., Bankr. S.D.N.Y., No. 11-15059, 4/4/13).

In the end, Freeh said, the business strategy Corzine implemented at the vulnerable firm was “disastrous.”

Freeh also had strong words for MFG chief operating officer Barry Abelow and chief financial officer Henri Steenkamp, saying they and Corzine were “key members” of MFG management whose conduct contributed to losses of between $1.5 billion and $2.1 billion at the firm.

Freeh said he has prepared a complaint against certain former MFG executives, whom he did not identify, alleging breaches of fiduciary duty. However, he reported, after discussing the matter with a mediator involved in litigation against Corzine related to MFG's collapse, he agreed to postpone filing the complaint pending the completion of mediation efforts.

Corzine took over MFG 20 months before it filed for bankruptcy on Oct. 31, 2011. At the time of the filing, the FCM told regulators it could not account for at least several hundred million dollars in customer deposits, a number later revised to up to $1.6 billion by the trustee representing the customers. Freeh said the cause of the shortfall fell outside the scope of his report.


Seeds of Destruction
Ultimately, according to Freeh's report, a historic shift to proprietary trading--specifically, investing in European sovereign debt financed through euro “repurchase to maturity” transactions--under Corzine's direction “ultimately sowed the seeds of the company's destruction.”

The Euro RTM trades generated the expected income, but also jeopardized the firm's liquidity and left it highly leveraged and vulnerable. When the European economy faltered in the summer of 2011, counterparties made margin calls on MFG the firm had trouble meeting, attracting the scrutiny of credit rating agencies and regulators. That, in turn, frightened Wall Street investors and led customers to withdraw their assets, leaving the firm unable to meet margin calls. Eventually, unable to sell itself to another firm, it filed for bankruptcy.

Freeh said that management, led by Corzine, “ignored operational and risk deficiencies” in the firm that led it to take on more risk than it could handle. “Despite having written policies in place … the company's controls remained defective in practice,” he said. “In the end, the scale of the company's trading put pressure on the company's deficient controls without producing any significantly improved revenues.”

Corzine and his spokesman could not be reached for comment April 5. In several hearings before House and Senate committees, Corzine has apologized for the fate of MFG customers but said he did not know what happened to their missing funds (237 Securities Law Daily, 12/9/11). He also described essentially the same scenario as Freeh--a run on MFG's assets and other market pressures, leading to the firm's demise.


Customer Resolution
In January, the bankruptcy court approved a settlement between three trustees, including Freeh, who represented various constituencies related to the failure of MFG that will result in U.S. customers of the firm recouping a significant percentage of their deposits (22 SLD, 2/1/13).

In November, the House Financial Services Oversight and Investigations Subcommittee also released a report on the MFG debacle (221 SLD, 11/16/12). It concluded that Corzine caused the bankruptcy of MFG and that financial regulators compounded his mistakes by failing to share critical information as the firm foundered. The lawmakers also cited two credit rating agencies for failing to do due diligence on the firm as it engaged in ever-riskier activities.

By Richard Hill

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