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MF Global Bondholders Feel Duped, With Good Reason

Much has been written about the $1.2 billion that remains missing from the accounts of MF Global Holdings Ltd. (MFGLQ)’s customers, one of the most egregious violations of trust on Wall Street at a time when confidence in the behavior of financial executives is extremely low.

Less discussed -- but equally outrageous -- are the losses suffered by bondholders who feel they were duped by MF Global executives during the summer of 2011 into investing $650 million. MF Global executives told these investors that everything at the company was just fine when, in fact, capital and liquidity were in devastatingly short supply.

On July 28 and again on Aug. 3, MF Global raised $325 million by selling bonds -- the first a 3.375 percent convertible-note offering, due 2018; the other a 6.25 percent senior note offering, due 2016. Thanks to the company’s collapse and subsequent bankruptcy filing on Oct. 31, these two bond offerings now trade at around 35 cents on the dollar. What in August 2011 was worth $650 million is now valued at about $227 million, a staggering loss of around $423 million in a matter of months.

It’s true that in the annals of Wall Street, creditors have suffered bigger losses -- Lehman Brothers, anyone? Yet, for sheer speed and chutzpah, the actions of MF Global’s management may stand alone.

Misleading Statements

Not surprisingly, in addition to all the other lawsuits that MF Global executives and board of directors are facing, one brought by the buyers of these notes is wending its way through federal court in the Southern District of New York. The plaintiffs make a compelling argument that they were duped by the public statements of Jon Corzine, MF Global’s former chief executive officer, and the company’s Securities and Exchange Commission filings.

The class-action complaint claims that MF Global’s collapse was caused by management’s “wholesale disregard for its purported risk management and internal controls as MF Global sought to transform itself from broker-dealer to a full service investment bank at all costs.”

The plaintiffs feel that Corzine’s ambition led him to make the reckless bet of at least $6.4 billion on the sovereign debt of several economically struggling European countries. “This strategy utterly failed,” the complaint states, and the company’s management and board “sought to bail out MF Global by raising desperately needed capital through the materially false and misleading” bond-offering documents.

Among other examples, the plaintiffs cite the statements MF Global made in its 2011 Form 10-K about its abundant liquidity as evidence that the company was intentionally misleading investors.

“Our policy requires us to have sufficient liquidity to satisfy all of our expected cash needs for at least one year without access to the capital markets,” reads the form. “To manage our liquidity risk, we have established a liquidity policy designed to ensure that we maintain access to sufficient, readily available liquid assets and committed liquidity facilities.”

The plaintiffs argue these statements were false. “MF Global was suffering from severe liquidity pressures” -- as quickly became evident -- “based on its exposure to the European debt crisis through its enormous holdings of European sovereign debt,” according to the complaint. “MF Global was materially undercapitalized.”

Risky European Bets

Further, the plaintiffs claim, whereas the offering documents for the bonds claimed that the use of proceeds would be partly for “general corporate purposes” -- a typical catch- all -- MF Global management knew that large chunks of the $650 million were “desperately needed to provide required liquidity and working capital given the then-deterioration in value of MF Global’s $6.4 billion holdings of European sovereign debt.”

In almost every bankruptcy filing, bondholders take it on the chin. That is to be expected. And few tears should be shed for sophisticated investors who miscalculate the risks of owning securities in companies that are highly leveraged and have new management intent on changing business plans. (By last summer, it was certainly no secret that Corzine intended to change the way MF Global conducted its business by making big bets with other people’s money. He said as much publicly on several occasions.)

Still, the level of deception by MF Global’s executives and board members demands that they be held personally accountable for the losses suffered by these bondholders -- just as they should be held personally liable for the losses suffered by MF’s customers. It seems to me, demanding this level of accountability -- which, of course, their lawyers will say is unjustified -- is the only way Wall Street executives will begin to take seriously their fiduciary duties to their customers, counterparties and creditors.

At the moment, though, that is just a columnist’s fantasy. No MF Global executives have been held accountable for their actions, more than six months after the firm’s collapse and billions of dollars of other people’s money have been lost. Come to think of it, no one else on Wall Street has been held accountable for blowing up our economy, either. How can this still be the case?

(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)

Read more opinion online from Bloomberg View.

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To contact the writer of this article: William D. Cohan at wdcohan@yahoo.com.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.

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