SEC Said to Review Possible MF Insider Trading

By Joshua Gallu and Shannon D. Harrington - Nov 4, 2011 6:22 AM GMT+0700

The U.S. Securities and Exchange Commission is reviewing trades in MF Global Holdings Ltd. (MF) convertible bonds to determine whether some investors sold the debt based on confidential information before the firm’s demise, according to two people with direct knowledge of the matter.

Investigators are in part focusing on trades that were made ahead of announcements that the firm’s credit rating had been downgraded, the people said, speaking on condition of anonymity because the matter isn’t public.

MF Global, the holding company for the futures broker run by former New Jersey Governor and ex-Goldman Sachs Group Inc. (GS) Co-Chairman Jon Corzine, filed for bankruptcy Oct. 31 after concerns that it may lose money on its holdings of European sovereign debt prompted demands from regulators to boost capital, as well as credit downgrades and margin calls.

Regulators are reviewing whether some investors learned in advance and traded on news that pushed the company closer to bankruptcy, the people said.

In one instance, MF Global’s $287.5 million of 1.875 percent convertible notes due in 2016 fell as much as 1.1 cent to 68.7 cents on the dollar on Oct. 24, one hour before Moody’s Investors Service announced that it cut the company’s credit ratings to the lowest investment-grade rating and was considering cutting it to junk, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority.

Last Two Hours

About 32 percent, or $6.5 million, of the total $20 million of bonds traded on Oct. 24 were executed in the two hours preceding the downgrade, Trace data showed. Convertibles allow investors to exchange bonds for stock when shares of the issuers reach preset levels.

Trading in MF Global’s common shares didn’t follow the same pattern. The stock rose as much as 2.2 percent in the hours leading up to Moody’s announcement. After the downgrade, the stock fell as much as 5.4 percent to $3.49.

John Nester, an SEC spokesman, declined to comment. MF Global spokeswoman Diana DeSocia said it’s the company’s policy not to comment on price movements in its shares and bonds.

MF Global announced in September that Finra required the firm to boost capital in its U.S. unit because of the holding it had amassed in European countries’ bonds as concerns about their ability to repay mounted. On Oct. 25, the day after Moody’s announced the downgrade, the company reported its largest-ever quarterly loss of $191.6 million, and Corzine disclosed $6.3 billion of exposure to bonds from countries including Italy, Spain, Belgium, Portugal and Ireland.

Missing Money

In papers filed this week in U.S. Bankruptcy Court in Manhattan, MF Global listed debt of $39.7 billion and assets of $41 billion. The company is being investigated by regulators for money that may be missing from client accounts, according to two people with knowledge of the matter.

U.S. regulators have subpoenaed MF Global’s auditor, PricewaterhouseCoopers LLP, for information on the segregation of assets belonging to clients trading on U.S. commodity exchanges, according to a person briefed on the matter.

The Commodity Futures Trading Commission sent the subpoena seeking information about $633 million missing from customer accounts, said the person, who spoke on condition of anonymity because the matter isn’t public.

In the auditor’s most recent formal action on behalf of its client, it gave MF Global a clean audit opinion in its May 20 annual report.

Chris Atkins, a spokesman for PricewaterhouseCoopers, declined to comment on the subpoena. Steve Adamske, a CFTC spokesman, declined to comment.

To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net.

To contact the editors responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net