MF Global trustee tags Corzine, senior officers in breach of duty suit

By Caroline Salls

Pittsburgh, April 23 - MF Global Holding's Ltd. Chapter 11 trustee Louis J. Freeh filed a lawsuit Monday against Jon S. Corzine, Bradley I. Abelow and Henri J. Steenkamp "for acts and omissions that culminated in the business collapse of the company and the bankruptcies of the debtors," according to a filing with the U.S. Bankruptcy Court for the Southern District of New York.

Specifically, the trustee said the defendants, in their capacities as officers, "breached their fiduciary duties of care, loyalty and oversight over the company and failed to act in good faith."

As Freeh said in his trustee's report filed earlier this month, Monday's lawsuit alleges that the defendants dramatically changed MF Global's business plan without addressing existing systemic weaknesses that ultimately caused the plan to fail.

As part of the new business plan, and in violation of his fiduciary duties as chief executive officer, the trustee said Corzine engaged in risky trading strategies that strained the company's liquidity and could not be properly monitored by its inadequate controls and procedures.

Meanwhile, Freeh said Abelow and Steenkamp, "Corzine's hand-picked deputies and the company's most senior officers," breached their fiduciary duties by failing to ensure that MF Global's procedures and controls were adequate and could accommodate the new business plan.

"Throughout their tenures, defendants were repeatedly warned - in reports, meetings, e-mails and in-person exchanges - of the failures and need for improvements in the company's procedures and controls," Freeh said in the lawsuit.

"Yet, instead of taking necessary steps to fix those problems, defendants - in violation of their fiduciary duties to the debtors and the company - pursued an even riskier business plan, thereby straining inadequate controls and risk monitoring systems beyond their capabilities."

Because defendants failed to implement proper controls and procedures, Freeh said they also had difficulty properly monitoring the company's liquidity drain caused by its unprecedented high volume of proprietary trading and a repurchase-to-maturity (Euro RTM) strategy.

The trustee said the defendants also never informed MF Global's board about the company's liquidity challenges in its final months,or about any deficiencies in the company's ability to track liquidity.

In addition, Freeh said the defendants' breaches caused a potential buyer to withdraw from negotiations; the beginning of the Securities Investor Protection Act liquidation of MF Global Inc., the Chapter 11 bankruptcy filing, the cessation of MF Global's business operations and the destruction of MF Global's value as a going concern.

As a result, Freeh said MF Global lost well in excess of a billion dollars in value, not including any shortfalls in customer funds.

Plan changes

In addition to the lawsuit, the proponents of MF Global's confirmed plan of liquidation requested court approval to modify the plan to allow establishment of a five-year litigation trust.

The company said the trust will be established to liquidate litigation trust claims and transfer available cash for the benefit of holders of allowed claims and interests.

In addition to the complaint filed Monday, MF Global said more claims may arise from the circumstances alleged in that lawsuit or in the trustee's report.

A hearing on the proposed plan changes is scheduled for May 1.

MF Global Holdings, a New York-based commodity and derivatives broker, filed for bankruptcy on Oct. 31, 2011. Its Chapter 11 case number is 11-15059.

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