Oct. 31 (Bloomberg) -- MF Global Holdings Ltd., the
holding company for the broker-dealer run by ex-Goldman Sachs Group
Inc. 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 today 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.
“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 today 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.”
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.
Fifth-Largest
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 today said they
advised bankruptcy as the “safest” course of action.
“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.”
The company's regulated U.S. broker-dealer unit, MF
Global Inc., which didn't file for bankruptcy, was sued today 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 today 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.
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 today 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 today 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.
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, 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.
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, 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.,
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.”