Attorney: MF Global's Underwriters Should Steel Themselves (Again) -peHUB

Attorney: MF Global’s Underwriters Should Steel Themselves (Again)

A whole lot of money is still missing from the futures trading business MF Global, and investors are likely to pursue the firm’s underwriters and auditors for some remuneration, says former SEC attorney Mark Fickes, now a San Francisco-based partner at BraunHagey & Borden.

While one lawsuit has already been filed against MF Global in Manhattan federal court and more are expected, Fickes says to expect “a lot of activity not only against the company but its officers, underwriters, and auditors, too.”

Already, PricewaterhouseCoopers has been issued a subpoena by the Commodity Futures Trading Commission (CFTC), the federal regulator tasked with finding $600 million in missing client assets from MF Global, monies that may have improperly commingled with those of the business itself. MF Global declared bankruptcy late last month after making a $6.3 billion bet gone bad on the short term notes of troubled countries that include Spain, Ireland, and Italy.

And though no one has been charged by regulators with wrongdoing at this point, the circle of culpability could be enormous once the ball gets rolling, says Fickes. He points to two cases as past precedents. The first centers on Refco, a commodities and futures business that declared bankruptcy just two months after raising $670 million in a 2005 IPO. (It was discovered that Refco’s chief executive, Phil Bennett, obscured hundreds of millions of dollars of losses inside the firm. Bennett was given a 16-year jail term in 2008.)

In the aftermath of Refco’s implosion, the Man Group, a British investment firm, bought its salvageable assets to create MF Global, which the Man Group took public in 2007. But first, Refco’s underwriters agreed to settle a consolidated shareholder lawsuit over Refco’s collapse. The cost to those 12 underwriters, including Bank of America, Credit Suisse, and Goldman Sachs: a cash payment of $49.5 million.

“Underwriters are a lucrative source of recovery for individual investors,” says Fickes. “If they aren’t adequately disclosing risks, they’re on the hook.”

Of course, timing matters, too. In August, plaintiffs in a second case involving MF Global were awarded a $90 million settlement against the firm, Man Group, and three dozen of its underwriters over a 2008 rogue trading loss. But they may never see the entire payout. As Bloomberg reported on Tuesday, all lawsuits against the firm came to an abrupt halt with MF Global’s bankruptcy filing. A bankruptcy court will decide next week whether to move forward with the settlement.