Valuable Lessons Learned (New Business Development Best Practices): MF Global Trustee Sues former CEO and other Senior Executives

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Published Date : April 22, 2013

On April 23, 2013, Louis J. Freeh, the Trustee of MF Global Holdings Ltd. filed a lawsuit against John Corzine, former CEO of MFG and two other former senior executives, Chief Operating Officer Bradley L. Abelow and Chief Financial Officer Henri J Steenkamp, related to the collapse of MFG in October 2011. Among other things, the lawsuit charges each of the individuals with breaches of various fiduciary duties to MFG. This follows the Trustee's release on April 4, 2013, of a comprehensive report related to his investigation of the causes of MFG's demise.

According to Freeh in the Report, when John Corzine, the CEO and Chairman of MFG, with Board approval, embarked on a plan to enhance the profitability of MFG during Spring 2010 by adding proprietary trading to its mix of businesses, "management ignored operational and risk deficiencies in the Company's controls that could not sustain this transformation." When market volatility increased dramatically during Fall 2011, these deficiencies ultimately caused the collapse of the Company. According to Freeh,

"[t]he decision to expand MF Global's proprietary trading may have appeared sound in a vacuum, but in the reality of the business Corzine and his management team inherited with its known controls and resource deficiencies, this strategy was disastrous." According to the Complaint, at no time did MFG maintain, among other measures, an adequate risk policy or adequate risk practices, or adequately monitor its liquidity needs and availability. It was management's decision to proceed with MFG's implementation of proprietary trading, particularly its engagement of repurchase to maturity financings involving certain European sovereign debt instruments, in light of these deficiencies that constituted their breach of their fiduciary duty.

Freeh's Complaint and the Report of MFG provides a chilling reminder of how important it is for management of FCMs carefully to consider evaluation of and augmentations to existing operation, risk and compliance systems as necessary prior to undertaking new businesses. It also emphasizes how important it is for executives timely to address deficiency items identified by firms' internal audit or other control departments as many of the allegations against the defendants appear to derive at least in part from their knowledge imputed from reports written by a firm's Internal Audit department.

Valuable Lessons Learned:

  1. Proposed new businesses must be formally evaluated in advance, including identifying potential regulatory requirements, potential risks and systems needs. Deficiencies in controls and systems necessary to support such new businesses must be corrected prior to implementation. This does not mean that perfect controls and systems must be implemented in the first instance; however, adequate systems and controls sufficient to address relevant risks should be in place prior rolling out a new business. As the business evolves so should the quality of the systems and controls.
  2. Internal audit and other control recommendations must be promptly addressed. This is not a suggestion to encourage control departments to lessen the severity of their recommendations. However, control departments must ensure that their recommendations are based on proper understanding of relevant facts, and management must ensure that recommendations are addressed fully and timely. This does not mean that all recommendations must be implemented 100%; but where not, management must indicate why not, including what other mitigating factors justify management's action.

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The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of April 22, 2013, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.

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