Question

• in your own words please write an essay on a real case of actual fraud affecting a company that has occurred between 2010 and 2020 where you should mention The name and location of the company that was the victim of the fraud must be clearly identified and A clear explanation of what the fraud was and how it affected the company and The financial cost or estimated financial cost to the company of the fraud And lastly what actions the company took in response to the fraud

Answer 1

MF Global, formerly known as Man Financial, was a major global financial derivatives broker, or commodities brokerage firm that went bankrupt in 2011. MF Global provided exchange-traded derivatives, such as futures and options as well as over-the-counter products such as contracts for difference (CFDs), foreign exchange and spread betting. MF Global Inc., its broker-dealer subsidiary, was a primary dealer in United States Treasury securities. A series of perceived liquidity problems and large fines and penalties dogged MF Global starting in 2008, and led to its bankruptcy in 2011.

Beginnings

Spun out of Man Financial Group in 2007, in a less than remarkable initial public offering (IPO), at a time when upsets in the global financial markets were beginning to be felt, MF Global was a commodities brokerage house (futures commission merchant, FCM) offering clearing and executions services. It had ambitions to become a financial services firm on the order of a Goldman Sachs or J.P. Morgan. Blighted with a bent for aggressive, even excessive risk taking, it would seem only fitting that Jon Corzine would come to head the firm.

Downfall

The firm's undoing resulted from what many are calling a repurchase to maturity trade (RTM), whereby the firm finances its balance sheet by posting collateral to a counterparty that extends the firm credit, and then repaying the counterparty when the collateral - in this case, euro denominated sovereign debt - matures. Some, however, disagree with this interpretation of the strategy, calling the firm's transaction a total return swap, which is a form of credit risk management. In this scenario, MF Global sold protection to buyers long the underlying assets - eurozone sovereign credits - receiving both yield and capital gains from them. MF Global sold insurance and purchased price and credit default risk of what were increasingly shaky assets.

As the seller who received the total return on the reference asset, MF Global did not actually own the reference assets, but was subject to price and default risk in an off balance sheet transaction, being synthetically long the assets and their attendant risks. A drawback of the total return swap is that the underlying assets must be easily tradable, that is, liquid. Clearly, European sovereigns failed to meet this criterion. Who wanted to conduct business with a firm subject to increasing default and liquidity risk?

These circumstances ultimately scuppered the firm's salvation by Interactive Brokers in the 11th hour. The rash of credit downgrades would not exactly enhance the firm's standing. While no eurozone country has yet defaulted, the perception became the reality, as lenders to the firm issued margin calls, fearing for their own safety.

In an effort to meet its obligations, MF Global admitted to accessing what should have been separate client funds. This latter action would appear to constitute fraud, though no one has been charged, as yet, with any criminal wrongdoing.

The Bottom Line

MF Global's collapse affected not large financial institutions, but smaller clients, such as individual investors and small business clients (farmers, ranchers, financial advisors) who used commodities to diversify portfolios and hedge risk. James Giddens, the trustee, is seeking to recover all of the clients' misappropriated funds, approximately two thirds of which have been returned to date. Unlike bank deposits or brokerage accounts, futures accounts carry no backstop akin to FDIC insurance or SIPC coverage. For this reason, account segregation is deemed sacrosanct.

Finally, by the fact that there has appeared to be no systemic ripple effect, MF Global would not seem to have been too big to fail. The implications for other firms of a similar nature are not insignificant, though. There has been some talk of design of an insurance system for futures brokers along the lines of a SIPC or FDIC, as existing regulation appeared less than up to the task of protecting clients. The boondoggle visited upon MF Global casts yet another pall on the financial services profession and its trustworthiness.

Corzine's testimony before Congress

Corzine himself told Congressional investigators during his testimony in December 2011 that "I never intended anyone at MF Global to misuse customer funds and I don't believe that anything I said could reasonably have been interpreted as an instruction to misuse customer funds."

A Bloomberg story reported that "Lawyers said it was no surprise that he repeatedly focused on intent in his testimony," because proving intent is part of the burden of prosecutors in criminal fraud cases. The case has attracted scrutiny from a number of criminal enforcement and regulatory bodies, including the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission, the Federal Bureau of Investigation, Congressional investigators, and possibly the Department of Justice (DOJ).

Creditors' claims in the billionsEdit

The largest creditor listed in the filing was JPMorgan Chase, with a claim of $1.2 billion. As administrative agent, JPMorgan structured a revolving credit facility. JPMorgan syndicated all but $80 million to other investors. Therefore, its own true exposure was $80 million. The second largest creditor was Deutsche Bank (on behalf of bondholders), with a claim of $325 million.

Board of directors; criticism of Corzine, boardEdit

At the time of its bankruptcy filing, MF's board of directors included:

• Jon S. Corzine, chairman and chief executive officer

• David P. Bolger, independent member, formerly with Chicago 2016 and Aon Corporation

• Eileen S. Fusco, attorney and CPA, formerly with Deloitte & Touche

• David Gelber, independent member, formerly with ICAP PLC, Citibank NA, Chemical Bank and HSBC

• Martin J.G. Glynn, independent member, former CEO of HSBC

• Edward L. Goldberg, founder of Longview Investments, formerly with Merrill Lynch

• David I. Schamis, managing director at J.C. Flowers & Co., and

• Robert S. Sloan, founder and managing partner of S3 Partners New York, formerly with Credit Suisse and Lehman Brothers

In the immediate wake of the bankruptcy, Corzine and the board were criticized in the financial press for their apparent non-awareness of the company's condition in the immediate lead-up to the event and their apparent inabilities to manage the risk the company had assumed.