Peterffy Bought 8M Shares as MF Collapsed

By Matthew Leising and Nina Mehta - Nov 9, 2011 7:37 AM GMT+0700

Thomas Peterffy, whose Interactive Brokers Group Inc. (IBKR) declined to buy assets from MF Global Holdings Ltd., said he purchased 8 million shares in the futures broker as its stock plunged.

Interactive Brokers said in an e-mailed statement that the company, not Peterffy, purchased the stock. MF Global shares have fallen 98 percent from their peak this year. The week before it filed for bankruptcy on Oct. 31, the New York-based company’s shares fell 67 percent to $1.20. They have since dropped to 14 cents.

“I started to buy the stock as it went down,” Peterffy, chairman and chief executive officer of Greenwich, Connecticut- based Interactive Brokers, said today in a phone interview. He was worth $1.5 billion in 2009, according to Forbes, and he has the power to elect all board members at Interactive Brokers. “You win a few, you lose a few,” he said.

The firm, which Peterffy founded, said in its quarterly filing today that it owned MF Global shares valued at $16.7 million as of Sept. 30. Following the bankruptcy filing, Interactive Brokers reduced the value of those shares plus subsequent investments in the stock to zero, recognizing a $28.8 million loss, today’s filing with the Securities and Exchange Commission shows.

‘Huge Tragedy’

Customers of MF Global, the holding company for the broker- dealer that was run by ex-Goldman Sachs Group Inc. co-chairman Jon Corzine, have been able to transfer only a portion of their accounts to new brokers. The broker-dealer unit, MF Global Inc., faces liquidation. The lack of access to customer cash at MF Global is a “huge tragedy,” Peterffy said.

“It’s a horrible black spot on the futures industry,” he said. “The next time something like this happens, the positions should be immediately liquidated and the money distributed.”

Peterffy said an investment banker at Evercore Partners Inc. called him before MF Global collapsed to find out if he was interested in taking over any of the firm’s customer accounts. He said in the interview that he couldn’t talk about discussions he had with MF Global from the morning of Oct. 28 until the morning of Oct. 31 because he signed a non-disclosure agreement.

Interactive Brokers is no longer interested in taking over any of MF Global’s accounts, Peterffy said.

‘Not Infected’

“We would like to be a broker that is not infected by any of this event,” he said.

The Interactive Brokers executive had courted a business arrangement with MF Global for years, starting when the company’s customer assets were still part of Refco Inc. Refco went bankrupt two months after its August 2005 initial public offering that raised $670 million. CEO Phillip Bennett was later convicted of hiding hundreds of millions of dollars in bad debt. Man Group Plc outbid Interactive Brokers and bought Refco for $323 million. MF Global became a public company when it was spun off of Man Group in 2007.

An agreement between MF Global and Interactive Brokers would have given the owner of the futures broker use of Interactive Broker’s trading and risk-management systems, while Peterffy’s company would have used MF Global’s sales force.

“They were strong in sales and they had no technology,” Peterffy said. “Interactive Brokers is weak in sales and has the best technology.”

Technology Talks

Peterffy said he held discussions with CEOs Kevin Davis and Bernard Dan and global head of retail operations J. Randy MacDonald about MF Global using his company’s technology. The firms were close to finalizing a deal before Dan left MF Global and again in October, he said. The agreement would have led to MF Global running its equities and foreign exchange business on Interactive Brokers’ technology platform, with futures added later, Peterffy said.

“It’s been a many-years-long project for me that never came to fruition,” he said.

Corzine, 64, increased risk-taking at MF Global as part of his strategy to re-make the owner of the futures broker into an investment bank. The company suffered a ratings downgrade and loss of customers’ trust in late October related to its largest- ever quarterly loss and $6.3 billion in investments in European sovereign debt.

Discrepancies over missing customer funds used to back futures trades doomed a potential acquisition by Interactive Brokers, said Hans Stoll, an Interactive Brokers director and a professor of finance at Vanderbilt University in Nashville, Tennessee. The deal could have averted the bankruptcy filing.

‘Lots of Uncertainties’

“The board certainly considered that purchase and stepped away from it at a point where it became clear there were lots of uncertainties about the accounts and segregated funds,” Stoll said in a Nov. 1 interview.

Customers of MF Global whose money is trapped at the broker say the safeguards meant to protect them failed. The company filed for bankruptcy on Oct. 31, listing debt of $39.7 billion and assets of $41 billion after failing to find a buyer in the days leading to its collapse.

“It’s a huge tragedy,” Peterffy said. “I simply can’t understand why it is being dealt with the way it is. I agree that some of the money should be given to the clients as soon as possible.”

CME Group Inc., which has audit power over MF Global as part of its self-regulatory authorization, and James Giddens, the trustee overseeing the liquidation of MF Global, are working to locate money that is missing from client accounts. The U.S. Commodity Futures Trading Commission is investigating a $593 million-shortfall in those accounts, a person with knowledge of the regulatory probes said on Nov. 4.

“Never bend the rules,” Peterffy said about what he learned from the MF Global implosion. “You bend the rules a little bit and then it’s a slippery slope.”

To contact the reporters on this story: Matthew Leising in New York at mleising@bloomberg.net; Nina Mehta in New York at nmehta24@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net