While we wait for an army of MF Global’s regulators to figure out how and who transferred trading clients’ money into the firm’s house accounts there is another issue that needs equal scrutiny.
How did international brokerage house Jefferies convince institutional investors to buy over $600 million of secured and unsecured MF Global corporate debt this summer?
Five days after the Corzine led firm filed bankruptcy I posed this question to a Senior Vice President of debt securities at Jefferies. We’d been introduced through a social friend at a popular New Canaan watering hole and, me being the enterprising reporter took the opportunity to look him in the eye and ask my most pressing question:
What in heck possessed you guys to sells hundreds of millions of MF Global secured bonds in August?
Without hesitation he looked right back at me and said, “MF Global lied to us”.
A little taken back I gave him a slight smile and said, “Really? About what? The health of the balance sheet?”
“Mr. Jefferies” shot right back with a slightly frustrated face, “Yes they lied.”
As we watch traders go on CNBC today casting doubt on the legitimacy of Corzine’s congressional testimony – He claims to not know where his clients $1.2 billion is – I’m wondering what else this CEO is possibly misleading people about. And does my ‘Mr. Jefferies’ accusations have any meat to them.
We know Jefferies had to do a certain level of due diligence. Their job was to dress up $325 million of 6.25% notes due 2016. How could Corzine or his underlings lie to the lead underwriter and ultimate salesman of these bonds? Did MF Global’s auditor PricewaterhouseCoopers not disclose specific information to Jefferies when they issued an audit opinion on the bonds?
I don’t know this answer yet but Francine McKenna, a sharp columnist at American Banker and former auditor pointed out this simple fact: The financials and audit opinion PwC authorized for inclusion in the bond offering were from MF Global’s March 31st audited year-end numbers. The dual bond offerings were issued in August and September so unaudited, but auditor reviewed financial from the 1st quarter (April-June) would have been available.
This is important because as we later learned it was in this 1st quarter report that Team Corzine admitted they needed to respond to FINRA about their pesky question of 40-1 leverage as a result of the $6bnish Euro debt trade. On top of that this is when the firm starts to admit that while the trade is off-balance sheet they’re required to raise more regulatory capital.
Hummm sound like PwC and Corzine were walking a fine line on disclosures. But it also reads like Jefferies didn’t push the firm’s auditor to disclose a more timely view of the health of MF Global.
I don’t know how desperate Jefferies corporate bond traders were to make their sales number that quarter. Maybe they got sloppy on due dilly or maybe they were actually lied to, but it’s worth a regulator checking out.
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!
So right 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.
It’s also worth noting that another bank – one that knew MF Global pretty well – JP Morgan made a hasty exit on another MF Global corporate bond offering in December 2009. ZeroHedge noted the sudden offer pull on a $250 million 10 year bond offering with JP Morgan giving the excuse ‘market conditions’ were the reason to back out of the bond sale. But maybe JP Morgan, MF Global’s biggest creditor in the bankruptcy, knew back then how sloppy MF Global’s clearing business and accounting was and didn’t want to put their silver-plated good name on a brass-plated bond deal.
Either way if you are an investor who is sitting on some of these MF Global corporate bonds and question now how Jefferies marketed the bonds, I’d love to hear from you.
Editors Note: A special thanks to Bob English, contributing editor at www.EconomicPolicyJournal.com, for his research ideas on the history of Jefferies and MF Global.