By Joel Rosenblatt
JPMorgan Chase & Co. and Goldman Sachs Group Inc. units were sued by two pension funds over claims they made misleading statements about the exposure of MF Global Holdings Ltd. securities to European sovereign debt.
As a result of the misstatements, MF Global’s stock traded at “artificially inflated prices,” the funds said in the complaint filed yesterday in federal court in Manhattan. “While the extent of MF Global’s exposure to European sovereign debt was concealed, the defendants were able to raise some $900 million in the offerings.”
MF Global Holdings, which was run by former Goldman Sachs Group Inc. co-chief executive officer Jon Corzine, filed for bankruptcy Oct. 31 after making bets on sovereign debt and getting margin calls. The New York-based company listed debt of $39.7 billion and assets of $41 billion in Chapter 11 papers. The broker-dealer is being liquidated separately.
Other companies named as defendants in the complaint were Bank of America Corp.’s Merrill Lynch unit, Citigroup Global Markets Inc., Deutsche Bank Securities Inc., RBS Securities Inc. and Jefferies & Co. Corzine and MF Global officers were also named as defendants.
The complaint was filed by IBEW Local 90 Pension Fund and the Plumbers & Pipefitters’ Local #562 Pension Fund. The funds seek to represent other shareholders in a class-action, or group suit.
David Wells, a spokesman for New York-based Goldman Sachs, declined to comment. Shirley Norton, a spokeswoman for Charlotte, North Carolina-based Bank of America, and Joseph Evangelisti, a spokesman for New York-based JPMorgan, didn’t immediately return calls after regular business hours seeking comment on the lawsuit.
Separate Liquidation
The broker-dealer unit of MF Global Holdings is being liquidated separately. The trustee liquidating MF Global Inc. said yesterday distributions of collateral in customers’ accounts are “dependent upon assets available and there is no assurance of a 100 percent return.”
The trustee, James Giddens, got court permission Nov. 17 to transfer $520 million in assets to about 23,300 accounts. While planning a third transfer to include a “few hundred” accounts that haven’t had distributions so far, Giddens said the assets available for segregated commodities accounts are “substantially less” than his estimate of claims that will be allowed.
Shortfall, Remedy
“Efforts are ongoing to analyze the cause of the shortfall and to seek to remedy it in coordination with multiple regulators and law enforcement officials,” he said in a statement yesterday.
The broker-dealer’s bankrupt parent moved hundreds of millions of dollars from its futures client accounts to other accounts before its bankruptcy filing, according to a person familiar with the audit of the company, who declined to be identified because the discussions are private.
MF Global Holdings was required to segregate funds posted as collateral by futures clients. The company filed the eighth- largest U.S. bankruptcy after making a $6.3 billion bet on Eurobonds and getting margin calls.
Giddens, whose first transfer of assets was almost $1.6 billion, said the third payment might be a bulk transfer to bring the value of collateral to 60 percent of the net equity in the accounts of all claimants, including those who have received nothing yet. A bulk transfer depends on finding futures brokers to receive the assets, he said.
Multiple Probes
The Commodity Futures Trading Commission, Securities and Exchange Commission and Federal Bureau of Investigation are investigating cash movements at the firm before the bankruptcy filing. The CFTC has been probing about $600 million in futures client funds that disappeared as the firm prepared for bankruptcy. Regulators said they haven’t located the money.
In a separate matter, a federal judge yesterday said he will approve a $90 million settlement of investor claims stemming from a 2008 wheat-trading loss incurred at MF Global’s commodity brokerage.
U.S. District Judge Victor Marrero in Manhattan also said he would approve attorney fees of $16.2 million. A class of investors, led by four public pension funds, claimed losses of $1.1 billion on MF Global shares after the firm disclosed that a broker in its Memphis, Tennessee, office lost $141 million in a few hours in unauthorized trades.
Defendants in that case include MF Global; Man Group, its former owner; underwriters of MF Global’s initial public offering in July 2007; and some former and current officers and directors. The suit claimed MF Global deceived investors by misrepresenting its risk management measures.
Settlement Share
MF Global’s $2.5 million contribution to the settlement will be fully reimbursed, the company said in a court filing earlier this month.
The case is IBEW Local 90 Pension Fund v. Corzine, 11-8401, U.S. District Court, Southern District of New York. The bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-cv-7750, and the wheat-trading case is Rubin v. MF Global, 08-cv-02233, U.S. District Court, Southern District of New York (Manhattan).
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