Managed Futures Education Center

Note: This document was updated with new information 2/3/2012.  This document and information related to it is being used in a Congressional investigation.  

Why was release of critical disclosure apparently delayed?  Why were time stamps suspiciously altered? 

Critical documents related to MF Global’s financial condition appear to have been delayed for release by the Securities and Exchange Commission (SEC) at an important time just before a MF Global floated $300 million bond offering to professional investors on August 2, 2011.

While possibly a coincidence, approximately the same time the documents in question were finally made public, MF Global professional account holders were beginning to flee the company, leading to an eventual liquidity crisis and the firm’s bankruptcy.

The document in question is MF Global’s Annual Audited Report on Form X-17-A-5. What is critical about this report is that it contained information regarding of MF Global’s risky sovereign debt trades, including information that disclosed MF Global was over-leveraged and in need of a margin call.  Had professional investors had this information weeks after the May 31, 2011, the date MF Global initially filed the documents, instead of September 2, 2011, when the SEC initially claimed to receive the documents, investors might have avoided purchasing what ultimately became worthless MF Global bonds.

Information on sovereign debt is contained in the firm’s 10-Q filing, available on the SEC and MF Global web site.  However,  such information is incomplete and clear as the Annual Audited Report.  For instance, the 10-K and 10-Q filed by MF Global Holdings did contain sufficient detail to ascertain the size of the Euro trades and the fact they were off balance sheet.   Also at issue is the method in which significant material disclosure occurred, hidden in a footnote of the 10-Q report.  Providing disclosure of significant material information was critical, as S&P was in the middle of downgrading US sovereign debt at the time.  For such information to be disclosed in a footnote is interesting.

In regard to the Annual Audit document, which clearly disclosed all relevant information, here is the critical timeline:

• May 31, 2011: The date the SEC acknowledged receiving MF Global’s 2011 Annual Audit.

• August 2, 2011: MF Global sold $300 million of bonds to professional investors.

• MF Global’s 2011 Annual Audit document was initially file stamped by the SEC as received on September 2, 2011 (see figure 1). When the document was made public later weeks later, clearly disclosing critical details of MF Global’s risky Sovereign debt position, professional traders were beginning to flee the firm. This fleeing ultimately caused a crescendo of MF Global account holder liquidations.

• December 14, 2011: SEC removes the MF Global Annual Report

Figure 1 (Above): Initial financial disclosure file stamped September 2, 2011 – well after the May 31, 2011 acknowledged filing date. MF Global floated an unsecured bond offering in August of 2011.

• January 3, 2012: SEC uploads a new copy of the Annual Report with a different file stamp date.

• Curious written notations that appeared in the replacement Annual Audit may indicate SEC interest in MF Global’s sovereign debt exposure–the very exposure FINRA was said to be negotiating with the firm over during the summer of 2011. (Figure 3)

While the SEC is said to have no definitive timeline for publishing Annual Audit documents, compliance consultant Bob English notes these documents are typically scanned and uploaded within two to four weeks from receipt. “The process is the documents are typically indexed and file stamped in the first week, then two weeks later they are scanned and uploaded to the public server,” he said. MF Global Inc.’s 2011 filing, due to the SEC on May 31, 2011, would have been anxiously anticipated by astute investors. Rumors had been swirling throughout the futures industry MF Global was in trouble, and industry participants could have used the information in the report for signs of trouble at the firm. When the May 31 filing did not appear it may have raised questions, according to Mr. English.  These assertions regarding the delayed filing and document alterations are documented in a Forbes article by Francine McKenna.  The key point is to connect all the dots and recognize the significance of the documents in question.  There was a bond offering that appears to have been held under questionable circumstances.  That is serious fraud if true.  There is significant “too big to fail” special privilege afforded to the president of a Futures Commission Merchant (FCM).  The New York Fed would have never considered an FCM to walk up to the discount window, and yet Mr. Corzine once again received special treatment, as he has through this entire investigation.  The double standard is appalling.

To further highlight special treatment, Mr. English points out that the document was held by the SEC concurrent with negotiations that FINRA and the SEC were having with MF Global over foreign sovereign debt exposure, which has now been widely reported after the fact. “It appears as though someone at the SEC may have been holding the document while negotiating with Mr. Corzine over his sovereign debt exposure,” Mr. English speculated, noting that between the May filing date and September release date FINRA and SEC negotiated with MF Global.  The day before the MF Global bond offering FINRA, in what might be considered its version of a soft margin call, finally demanded an increase of capitalization to support Corzine’s sovereign debt trade.

Curious handling of the MF Global documents has been noted.  The documents in question were de-indexed from the SEC database and then re-posted.  This is highly  activity given that a sampling of smaller brokerage firms found no instances of missing or amended audits.  “Astute industry participants may have been watching for the Annual Audited report of the broker unit,” noted Mr. English. “That report did not surface until September at the earliest. This is clearly out of the norm with respect to how the SEC usually scans and publicly posts these reports.”

After reviewing the charges, SEC spokesperson John Nester said: “Generally, broker-dealers that carry customer accounts publish audited balance sheet reports on their own websites at the same time they are filed on paper with the SEC and available for public inspection. The reports are also scanned for posting to the SEC’s EDGAR database, but there is no deadline that establishes when they must appear on EDGAR. After it was posted in September, the MF Global report on EDGAR was amended to correctly reflect that it was filed May 31, 2011.”

As Mr. English notes in a survey of 20 mid-sized brokerage firms, there were no instances of pulling down documentation after the fact and changing of information.

Critical MF Global Documents Receive Unusual Treatment

Figure 2 (Above): Altered time stamp – taken off the SEC database in December of 2011 and replaced with a new time stamp indicating a May 31, 2011 filing date.

Interesting are handwritten SEC notations in the January 4, 2012 replacement filing near MF Global’s sovereign debt exposure, indicating a discussion may have taken place regarding the issue, according to Mr. English (Figure 3). Other telling items indicating the critical MF Global Annual Audit received special treatment includes the fact the square time stamp from the registrations unit as opposed to the more common diamond-shaped time stamp (figure 4), highlighting one of many points at which the MF Global filing received unusual handling.

The next step in this story is to connect the key dots between unusual document release dates with the non-transparent sale of MF Global’s toxic debt instruments and Mr. Corzine’s closed door negotiations with FINRA. Of further interest is the larger picture, how this type of manipulation of documents fits a larger pattern of hiding facts from regulators and investors.

Lack of Transparency Hurts All Investors

What must be considered in the story is the importance of missing the May 31 filing date. This is critical because in August, 2011 MF Global floated a $300 million unsecured bond offering, with a triple B- S&P rating, which was primarily sold to professional investors. This angle has yet to be discussed, and it is the critical missing link.

This critical information should have been made transparent to investors but was rather held under wraps until after the now worthless bonds were sold to professional investors. However, the apparent withholding of information not only impacted bond holders, but also clients of MF Global and their segregated accounts.

Figure 3 (Above): Unusual notations appear on the second version of the Annual Audit, uploaded January 4, indicating the SEC had noticed the toxic Sovereign debt exposure. Mr. Corzine was said to be given formal warnings from the CFTC in 2011 regarding

Déjà vu All Over Again?

Let’s consider the concept of operating financial services in a non-transparent, asking the important question: does this fit a larger pattern of behavior?

Note that it was Goldman Sachs, under Mr. Corzine’s reign in the late 1990s, who pioneered packaging and selling toxic and non-transparent mortgage debt instruments to professional investors. Surely Mr. Corzine and Goldman Sachs were aware of the toxic contents of what they were packaging and selling to professional investors. The CFTC was aware of these deceptive investment products, and a former CFTC chairperson, Brooksley Born, lost her job over simply trying to bring transparency to these products. Of course, these mortgage derivatives ultimately blew up in 2008.

But go back even further, perhaps Mr. Corzine’s first introduction to the managed futures industry. This is when he had a similar incident with Long Term Capital Management, where he essentially utilized confidential information provided to him by the New York Federal Reserve bank on LTCM’s trade positions and played the other side of those trades as they unwound.

Figure 4 (Above): The time stamp indicates unusual treatment of MF Global’s 2011 filing, according to compliance consultant Bob English.

And it was Corzine who personally promised to help the FED avert financial disaster with LTCM, but took advantage of the situation and made things worse by lying to LTCM and the FED to play both sides of the trade for personal enrichment. As Richard Lowenstein of the New York Times wrote about Corzine’s Goldman Sachs, “Brazenly playing both sides of the street [Corzine's ] Goldman represented investment banking at its ugliest.” The recent MF Global’s bond offering to professional investors appears to have been yet another example of Mr. Corzine knowingly packaging and selling toxic assets to professional investors without disclosing the toxic risk contents. The investors be damned.

Mr. Corzine had a similar issue with Jefferies, where he is accused of deception regarding the contents of an investment he was packaging and JP Morgan ultimately delayed the release of a bond offering. Remember those Jefferies rumors spreading around Wall Street after the MF Global scandal? Some are calling this payback against a firm that disclosed the truth.

When the Annual Audit Report in question was finally released weeks later, knowledgeable professional investors were said to start fleeing the FCM. Contrary to initial reports, this was not a “run on the bank” because these were futures accounts under the auspices of the Commodity Futures Trading Commission (CFTC). This widely assumed investor protection is critical because then the liquidation falls under the auspice of the Commodities Exchange Act (CEA), which assumes a “segregated account priority above all else” legal protection in the case of a bankruptcy through a liquidation process.

Special Privilege Provided Mr. Corzine

The document tampering raises serious questions about the relationship between the SEC and Mr. Corzine, painting a picture of special treatment the firm may have received, according to industry consultant, Elaine Knuth.

“This is really an important story because it goes beyond the SEC messy handling of filings. A filing delay before the bond offering, and during ongoing meetings between the SEC and MF Global, points to coziness, resulting in regulatory failure,” noted Ms. Knuth, who also contributes to the blog at www.MFGFacts.com. “It shows regulators favoring and protecting Wall Street investment bank interests over investor protections.”

Footnotes:

Forbes article that documents basic facts of changing filing Information after the fact:

http://www.forbes.com/sites/francinemckenna/2012/01/09/the-neverending-mf-global-story-regulators-block-the-truth-from-coming-out/

Key Facts regarding Jefferies:

http://www.teribuhl.com/2011/12/09/jefferies-bond-trader-claims-mf-global-lied-to-get-bonds-issued/

Key facts:

(1) MF Global allegedly lied to Jefferies, who was involved w/ syndication.

(2) JPM pulled a bond offering in Dec 2009 due to “market conditions”, but which may have been caused by knowledge years ago of MF’s poor books (speculates Buhl)

(3) There was also a stock purchaser lawsuit against MF that had to be funded over summer 2011:

“Hint to regulators — Jefferies isn’t exactly all-so-unaware of how MF Global operates its trading business. They were co-defendants in a class action lawsuit brought on by pension funds that sued over $MFG IPO disclosures. The pension fund scored a $90 million settlement this summer after alleging the defendants erroneously assured investors MF Global had real risk management controls that actually monitored trading risk ‘real time’. This stemmed from one of the firms commodity traders losing $141 million on wheat futures overnight and $MFG’s stock lost $1.1bn in market cap within two days. Ouch!

About the time, summer 2011, MF Global and Jefferies were getting ready to pony up millions to payout on the class action suit; Jefferies was able to earn back some nice fees in underwriting the corporate bond offering.”

Richard Lowenstein: When Genius Failed: The Rise and Fall of Long-Term Capital Management:

http://www.amazon.com/When-Genius-Failed-Long-Term-Management/dp/0375758259

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