MF Global Settlement Over Losses in Doubt After Bankruptcy

By David Glovin and David Voreacos - Nov 9, 2011 6:24 AM GMT+0700

A $90 million settlement of an investor lawsuit against MF Global Holdings Ltd. and its former parent, Man Group Plc (EMG), over a 2008 wheat-trading loss was cast into doubt by the futures broker’s bankruptcy filing.

A Manhattan federal judge is scheduled to decide on Nov. 18 whether to approve the settlement. The case is a class-action, or group, suit against MF Global, Man Group, underwriters of MF Global’s initial public offering in July 2007, and some of the firm’s officers and directors.

The settlement allows investors to back out of the deal if they’re not paid the full $90 million, court records show. Lawsuits against the firm were automatically halted after MF Global filed for bankruptcy protection on Oct. 31. A bankruptcy judge must decide whether MF Global may contribute to the accord. MF Global’s portion of the settlement, which covers shareholders from July 2007 to February 2008, is $2.5 million.

“If the bankruptcy court gives us approval, we’ll go forward,” Mark Rosen, a lawyer for the investors, said in an interview today. “It’s not in our hands right now. It’s in the hands of the bankruptcy court.”

Rosen wouldn’t say what investors would do if the bankruptcy court refuses to permit the suit against MF Global to proceed. Man Group is contributing $32.5 million to the settlement of litigation with a group of public pension funds. Court records don’t identify other contributors.

Lawyers for Man Group and MF Global’s underwriters didn’t return calls seeking comment on the prospects for the settlement.

Wheat Futures

MF Global sought bankruptcy protection last month after disclosing investments related to $6.3 billion in European sovereign debt. Its operating unit, MF Global Inc., is being overseen by a trustee probing possible fraud. The Federal Bureau of Investigation is also investigating, according to a person familiar with the matter.

Jon Corzine, a former New Jersey governor and ex-Goldman Sachs Group Inc. (GS) co-chairman, quit as MF Global’s chief executive officer on Nov 4.

MF Global listed $39.7 billion in debt and $41 billion in assets and said it has about $26 million in cash. About $593 million of customer funds are unaccounted for, according to a person with knowledge of probes into the collapse.

The investor lawsuit follows an earlier scandal. Shares of the broker fell 28 percent on Feb. 28, 2008, after the firm disclosed that Evan Brent Dooley, an employee in the office in Memphis, Tennessee, lost $141.5 million making bad wheat futures trades.

Risk Management

Investors said they lost $1.14 billion after shares fell. MF Global’s underwriters included Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM)

Dooley, who was fired by MF Global, was indicted by a federal grand jury in Chicago for wire fraud and violations of the Commodity Exchange Act. He’s accused of persuading MF Global to open a trading account in his name and acting as guarantor by misrepresenting his financial condition. The case is pending.

The investor complaint accuses MF Global of lying in its public filings about its “highly touted risk management.”

It focuses on Dooley’s trading and what the complaint said was “wholly inadequate” back-office systems that were “overwhelmed” after the 2005 acquisition of assets from Refco Inc. Refco went bankrupt two months after its August 2005 IPO that raised $670 million. CEO Phillip Bennett was convicted of hiding hundreds of millions of dollars in bad debt.

‘Key Risk Areas’

“Controls over key risk areas such as broker trading and broker execution of trades requested by customers were either nonexistent or, at best, ineffective,” the complaint said.

The complaint cited an “overstretched risk management back office” and a failure to require brokers to adhere to internal margin trading requirements and Commodity Futures Trading Commission regulations.

Aside from the Dooley trading losses, the lawsuit cited a $77 million settlement by the firm and an employee over trading losses involving an offshore hedge fund.

The CFTC filed a fraud lawsuit claiming that MF Global helped a Philadelphia hedge fund, Philadelphia Alternative Asset Management Co., hide trading losses from investors. The fund collapsed in 2005, and a receiver worked to recover assets for investors.

In December 2007, MF Global and the employee settled, agreeing to pay $69 million for the receivership estate, $6 million in legal costs and $2 million in a civil penalty to the CFTC.

The case is Rubin v. MF Global, 08-cv-2233, U.S. District Court, Southern District of New York (Manhattan). The bankruptcy 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: David Glovin in Manhattan federal court at glovin@bloomberg.net; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.