Corzine’s MF Global Seeks to Reorganize as Broker-Dealer Unit to Liquidate

By Tiffany Kary, Linda Sandler and David McLaughlin - Nov 1, 2011 11:11 AM GMT+0700

MF Global Holdings Ltd., the holding company for the broker-dealer run by ex-Goldman Sachs Group Inc. (GS) co-chairman Jon Corzine, filed for bankruptcy protection as it seeks to reorganize after making bets on European sovereign debt. Its broker-dealer unit, MF Global Inc., faces liquidation.

The firm listed debt of $39.7 billion and assets of $41 billion in Chapter 11 papers filed yesterday in U.S. Bankruptcy Court in Manhattan. MF Global’s board met through the weekend to consider options including sale, a person with direct knowledge of the situation said.

The filing came as MF Global told regulators of potential “deficiencies” in some customer accounts, according to a statement by the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission. Regulators are investigating whether hundreds of millions of dollars are missing from client accounts, according to a person with knowledge of the matter.

“They were trying to get a deal but at the end of the day the majority of their business is built on trust,” Scott Peltz, the national leader of RSM McGladrey’s Financial Advisory Services Group in Chicago, said yesterday in an interview. “They had a huge position in European debt, which led to a lot of the troubles. There will be questions about that.”

Sought to Transform

Corzine, 64, a former governor of New Jersey who helped run Goldman Sachs from 1994 to 1999, sought to transform MF Global into a midsize investment bank after arriving there in March 2010. He increased the firm’s risk and used its own money to trade, including investments in European sovereign debt that rattled markets.

MF Global’s filing is the fifth-largest financial-industry public company bankruptcy by assets, coming after Lehman Brothers Holdings Inc., Washington Mutual Inc., CIT Group Inc. and Conseco Inc., according to BankruptcyData.com. It’s the eighth-largest bankruptcy by assets of any public company, according to the research group.

MF Global owns $6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish debt, the company said in an Oct. 25 presentation. Concerns that it might lose money on the holdings amid Europe’s debt crisis led to demands from regulators to boost capital, credit downgrades, margin calls and bankruptcy, MF Global President Bradley Abelow said. The regulators yesterday said they advised bankruptcy as the “safest” course of action.

SEC and CFTC

“For several days, the SEC, CFTC and other regulators had been closely monitoring developments affecting MF Global Inc.” in anticipation of a transaction, the SEC and CFTC said in their e-mailed statement. “Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm.”

The regulators said they determined that a bankruptcy proceeding “would be the safest and most prudent course of action to protect customer accounts.”

MF Global’s Abelow said the company aims to complete “a successful, rapid reorganization” of its finances in court, while maintaining a “business-as-usual atmosphere.”

Broker-Dealer Unit

The company’s regulated U.S. broker-dealer unit, MF Global Inc., which didn’t file for bankruptcy, was sued yesterday in U.S. District Court in Manhattan by the Securities Investor Protection Corp. The SIPC seeks to liquidate the unit so as to protect customer assets.

Broker-dealers aren’t eligible to file for Chapter 11 bankruptcy, and need to either sell assets, as Bear Stearns Cos. did in 2008 to JPMorgan, or liquidate, as did Lehman Brothers’ brokerage unit and Bernard Madoff’s firm.

SIPC trustee James Giddens was approved yesterday by a federal judge. Giddens is also liquidating Lehman Brothers’ brokerage following its parent-company’s bankruptcy in 2008, the largest in U.S. history.

SIPC Suit

The SIPC, which is overseen by the SEC, acts in brokerage insolvency cases to recover investor funds. Liquidations are overseen by SIPC so as to return or replace customer securities. SIPC, created under the Securities Investor Protection Act, insures losses of as much as $500,000 per customer in registered securities.

“The defendant has failed or is in danger of failing to meet its obligations to its customers,” the SIPC said in court papers of MF Global. “Specifically, the defendant is unable to meet its obligations as they mature.”

The firm has drawn almost all of a $1.2 billion credit line that was amended last year to give it more liquidity, Abelow said. The broker-dealer unit has borrowed about $210 million of a $300 million secured credit line, he said. JPMorgan Chase & Co. (JPM) is the agent for the two credit lines.

MF Global’s finance unit, MF Global Finance USA Inc., also filed for bankruptcy, listing debt of as much as $50 million and assets of as much as $500 million. The holding company asked the bankruptcy court for permission to continue intercompany transactions between its bankrupt businesses and non-bankrupt units, allowing MF Global to maintain its deposits, investments and bank accounts.

Protecting Assets

“The boards of directors of both entities authorized the filing of the Chapter 11 petition in order to protect their assets,” the companies said yesterday in a statement. MF Global U.K. Ltd. separately entered administration in Britain with administrators appointed from KPMG LLP, the Financial Services Authority said.

MF Global reported a $191.6 million quarterly loss on Oct. 25 and Moody’s Investors Service and Fitch Ratings cut its credit rankings to junk. Before the bankruptcy filing, MF Global was suspended yesterday from doing new business with the New York Federal Reserve, according to a statement on the regulator’s website, and trading in the stock was halted.

MF Global declined 67 percent last week and its bonds started trading at distressed levels amid its disclosures of bets on European sovereign debt. MF Global held talks with five potential buyers for all or parts of the company, including banks, private-equity firms and brokers, said the person familiar with the situation, who asked not to be identified because the talks were private.

Evercore Hired

The firm was getting advice from Evercore Partners Inc. (EVR) as it sought buyers. Skadden, Arps, Slate Meagher & Flom LLP is representing the company as bankruptcy counsel. The case was assigned to U.S. Bankruptcy Judge Martin Glenn, who handled Borders Group Inc.’s bankruptcy.

MF Global, based in the U.S. with offices in at least seven other countries, has about 2,870 employees. Revenue was $2.2 billion in fiscal 2011, with a net loss for the parent of $81.2 million.

The broker of commodities, derivatives, equity and foreign exchange had $7.2 billion of customer funds in segregated accounts as of Aug. 31, according to the Commodity Futures Trading Commission. It was one of 22 primary dealers authorized to trade U.S. government securities with the New York Fed and is a member of more than 70 financial exchanges, according to its website.

Unsecured Creditors

A list of unsecured creditors filed by MF Global includes New York-based JPMorgan, as trustee for holders of $1.2 billion in debt, and Deutsche Bank AG (DBK), as trustee for holders of more than $1 billion in notes due in 2016 and 2018.

JPMorgan itself holds less than $80 million of the debt, said Joseph Evangelisti, a spokesman for the bank. JPMorgan also has $26 million in collateral belonging to MF Global that “may be subject to liens in favor” of the bank, MF Global said.

Armin Niedermeier, a spokesman for Frankfurt-based Deutsche Bank, declined to comment on the filing.

Other unsecured creditors include Headstrong Services LLC, owed $3.9 million; Comcast Corp.’s CNBC, owed $845,397; New York-based law firm Sullivan & Cromwell LLP, owed $596,939; Oracle Corp., owed $302,704; and Bloomberg Finance LP, owed $276,064. Bloomberg Finance is a unit of Bloomberg LP, the parent of Bloomberg News.

Deadline Extension

MF Global asked for a Jan. 30 deadline to file its full list of debt and assets, seeking a 75-day extension of the usual two-week window given under bankruptcy law.

The company “is one of the largest brokers in markets for commodities and listed derivatives,” making it large and complex enough to require more time, MF Global said in court papers.

MF Global’s $325 million of 6.25 percent notes due 2016 fell 1.25 cents to 48.75 cents on the dollar at 3:49 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Regulatory Authority. The notes, which were sold in August at face value, dropped to as low as 35 cents on the dollar after the company filed for bankruptcy.

Shareholders

MF Global’s largest common shareholders as of Sept. 30 were Pyramis Global Advisors LLC, with 8.4 percent, and RS Investments in San Francisco, with 7.8 percent, according to court papers. RS has sold its entire stake, Erin Burke, a spokeswoman for the firm, said in an e-mail.

Fine Capital Partners LP held 7.4 percent and Cadian Capital Management LLC had 6.2 percent, the company said. J.C. Flowers & Co. owns 1.5 million preferred shares, MF Global said.

Sugar Brokerage

MF Global, formerly part of Man Group Plc (EMG), has its roots in a sugar brokerage founded by James Man in England in 1793. MF Global became a public company in a 2007 spinoff. It was built up before the spinoff by acquiring the assets of bankrupt brokerage Refco Inc. in 2005.

Corzine reached out to Goldman Sachs about selling all or part of the company, according to two people with knowledge of the firm’s deliberations. Macquarie Group Ltd. examined MF Global’s books, according to a person with knowledge of the situation. David Wells, a spokesman for Goldman, didn’t return a call seeking comment. Paula Chirhart, a spokeswoman for Macquarie in New York, declined to comment.

Barclays Plc was among banks that looked at MF Global, another person said. Kerrie Cohen, a spokeswoman for the U.K.- based bank in New York, declined to comment.

Potential Bidder

Hannah Grove, a spokeswoman for State Street Corp. (STT), which was also reported to be a potential bidder, declined to comment.

“We’re investing in the future of this business,” Corzine said in a May statement that announced new hires in MF Global’s commodities and derivatives areas. In August, the company sold $325 million in senior unsecured notes to repay part of the $1.2 billion revolving credit facility, according to company statements.

MF Global increased net capital at the U.S. unit after Finra raised concerns about the risks to its European debt portfolio, it said in September.

“We are confident that we have the resources, capital, liquidity and expertise to successfully manage our European exposures to their end date maturity of December 2012,” Diana DeSocio, a spokeswoman for the broker, said in an Oct. 24 statement.

Along with the creditors holding millions of dollars in bonds are vendors owed much smaller sums.

Tim Jones is the president of Cedar Knolls, New Jersey- based Ticker Consulting LLC, which advises financial companies such as MF Global on electronic-trading and risk-management systems. Jones, who has an unsecured claim of about $22,800 for services he provided to MF Global, said that in bankruptcy there’s always a chance a debt can’t be collected.

“I’ll move on,” Jones said. “My W-2 will be a little bit light, and hopefully I can find places to make that money up.”

The case is MF Global Holdings Ltd. (MF), 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Tiffany Kary in New York at tkary@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net; David McLaughlin in New York at dmclaughlin9@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.