11-15059-mg Doc 1279 Filed 04/04/13 Entered 04/04/13 01:02 ...

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MORRISON & FOERSTER LLP 1290 Avenue of the Americas New York, New York 10104 Telephone: (212) 468-8000 Facsimile: (212) 468-7900 Brett H. Miller

2000 Pennsylvania Avenue, N.W. Washington, D.C. 20006 Telephone: (202) 887-1500 Facsimile: (202) 887-0763 Adam S. Hoffinger Daniel A. Nathan

Attorneys for the Chapter 11 Trustee

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

------------------------

In re

: Chapter 11

MF GLOBAL HOLDINGS LTD., et al., : Case No. 11-15059 (MG)

Debtors.

: (Jointly Administered)

:

-----------------------------

REPORT OF INVESTIGATION OF LOUIS J. FREEH, CHAPTER 11 TRUSTEE OF MF GLOBAL HOLDINGS LTD., et al.,

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TABLE OF CONTENTS

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I. EXECUTIVE SUMMARY ............................................................................................... 3 II. FACTUAL BACKGROUND ............................................................................................ 7

A. Transformation into MF Global............................................................................. 7 B. The Dooley Incident and MF Global's Risk Infrastructure ................................... 8

1. Immediate Impact of the Dooley Incident ................................................. 9 2. Creation of the CRO Position .................................................................. 10 3. Development of Written Policies Following the Dooley Incident........... 10

a. Escalation Policy.......................................................................... 10 b. Risk Policy ................................................................................... 11 4. Implementation Failures .......................................................................... 12 5. Promontory's Approval of Written Policies ............................................ 13 C. Corzine Joins MF Global as Chairman and CEO ................................................ 14 1. Corzine's Plan to Transform the Company ............................................. 16 2. The Launch of Proprietary Trading ......................................................... 17 3. The Hiring of Boston Consulting Group ................................................. 18 4. Expansion of the Company's Trading Capabilities and Establishment of the Principal Strategies Group ..................................... 21 5. Corzine's Trading Activities.................................................................... 23 D. RTM Structure and Accounting........................................................................... 24 1. RTM Structure ......................................................................................... 24 2. Role of a Clearinghouse........................................................................... 25 3. RTM Accounting ..................................................................................... 25 E. MF Global's Investment in European Sovereign Debt........................................ 26 1. MF Global's Execution of Euro RTMs ................................................... 26 2. Initial and Variation Margin .................................................................... 29 3. Revenues Generated by the Euro RTMs.................................................. 30 4. Corzine's Execution of Euro RTMs ........................................................ 32 5. Initial Increases to European Sovereign Risk Limits............................... 32 6. Corzine Asks the Board to Increase the Risk Limit to $4.5 Billion ........ 34 7. Corzine's Growing Bet ............................................................................ 34

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a. Corzine Seeks Risk Limit Increase to $4.75 Billion.................... 36 b. The Board Temporarily Halts European Sovereign Debt

Trading Between December 2010 and January 2011 .................. 37 c. Corzine Hires Stockman to Replace Roseman ............................ 39 d. Corzine Seeks Risk Limit Increase to $5 Billion......................... 40 e. Corzine Seeks Additional Risk Limit Increases in March

2011.............................................................................................. 43 f. Stockman Warns of Possible Increased Margin

Requirements ............................................................................... 44 g. Corzine Seeks Additional Risk Limit Increases in June

2011.............................................................................................. 46 h. Stockman Advocates Hedging and a Halt to Trading.................. 48 i. The Board Halts Trading ............................................................. 51 F. The "Break the Glass" Analysis .......................................................................... 53 G. FINRA Capital Charge ........................................................................................ 55 1. MF Global Faces Increased Regulatory Scrutiny as a Result of the Euro RTM Portfolio ................................................................................. 55 2. Debate with FINRA Regarding Capital Charge ...................................... 56 3. Consequences of Re-Filing the July 2011 FOCUS Report...................... 58 4. FSA's Reaction to the Capital Charge ..................................................... 59 5. The Press and the Credit Rating Agencies React to FINRA's Capital Charge Decision .......................................................................... 60 H. The Final Week of MF Global's Operations ....................................................... 60 1. Monday, October 24, 2011 ...................................................................... 60 2. Tuesday, October 25, 2011 ...................................................................... 61 3. Wednesday, October 26, 2011 ................................................................. 63 4. Thursday, October 27, 2011..................................................................... 65 5. Friday, October 28, 2011 ......................................................................... 68 6. Saturday, October 29, 2011 ..................................................................... 69 7. Sunday, October 30, 2011........................................................................ 70 8. Monday, October 31, 2011 ...................................................................... 71 I. Debtors' Funds at the Commencement of the Bankruptcy Cases........................ 71

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III. MANAGEMENT'S ROLE IN THE COMPANY'S COLLAPSE .................................. 74 A. MF Global's Control Failures .............................................................................. 76 1. Management Learned About Significant Gaps Between Risk Policies and Actual Practices Before Expanding MF Global's Proprietary Trading Activities ................................................................. 76 2. Specific Control Failures ......................................................................... 80 a. Lack of Liquidity Monitoring and Forecasting ? Liquidity Dashboards................................................................................... 81 b. MF Global Lacked Sufficient Controls Over Regulatory Reporting...................................................................................... 86 c. Gaps in Risk System Controls ..................................................... 88 d. Operations Department Control Failures ..................................... 91 (i) Use of Two Clearing Institutions ..................................... 91 (ii) Trade Settlement Systems................................................ 92 e. Collateral Management Control Failures..................................... 93 B. Management Was on Notice that the Company Could Not Adequately Meet its Liquidity Needs...................................................................................... 94 C. The Risks of the Company's Euro RTM Trading Strategy Materialize .............. 97 1. The Company's Excessive Euro RTM Exposure .................................... 97 2. The Revolving Credit Facilities ............................................................... 98 3. MF Global's Liquidity Could Not Support the Euro RTMs.................... 99 a. Impact of Initial and Variation Margin ........................................ 99 b. Growing Liquidity Pressure From the RTM Portfolio .............. 100 c. Increased Margin Demands ....................................................... 102 4. The Failure to Forecast or Effectively Challenge the Clearinghouses' Margin Calls................................................................ 104 5. Problems With MF Global's Hedging Strategy..................................... 105 6. Other Funding Pressures Affecting MF Global's Liquidity .................. 108 a. PSG Trading Desks.................................................................... 108 b. The HTM Portfolio .................................................................... 110 7. The B/D's Growing Reliance on the FCM for Funding ........................ 111 8. Methods Available for Calculating Segregated and Secured Funds...... 112

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9. Use of the Regulatory Excess ................................................................ 113 IV. CONCLUSION.............................................................................................................. 117

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