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MF Again

posted by Stephen Lubben
The MF Global trustee filed his lawsuit against Jon S. Corzine and other former MF Global executives.

But the complaint itself, while quite well done, makes for rather strange reading upon further reflection.

First, note that this is a breach of fiduciary duty action against officers quo officers, whereas the more typical Delaware fiduciary duty action is against the board.  Indeed, one can almost forget that MF Global had a board when reading the complaint.

For example, we are told that “Defendant Corzine was ultimately responsible for the Company’s administrative, back office and technology functions, including the adequacy of the Company’s risk management and internal controls.”

Sure, but where was the board? Certainly they had some responsibility here too, no?

The move to sue Corzine as an officer (he could have also been sued as a director) may be an attempt to sidestep Delaware corporate law that largely insulates directors from duty of care claims. I have to hedge a bit on this point, however, since there is some confusion as to what type of business entity MF Global actually was:  the complaint refers to the holding company as a limited liability company, whereas the last 10-K suggests it was a Delaware corporation.

But in any case, it becomes clear that the complaint is mostly about colossally poor management at MF Global. The complaint makes a somewhat feeble attempt at making these facts into a duty of loyalty claim, but really loyalty claims are about conflicts of interest or self-dealing, and the facts alleged instead involve sloppiness and recklessness.

And ultimately Delaware law makes it particularly difficult to sue managers for subpar management.

By and large, Delaware would prefer to leave issues of managerial quality to the markets and shareholder voting. The Delaware courts, the key enforcers of fiduciary duties, don’t see themselves as good evaluators of managers, and worry about the risks that come from doing such an evaluation with the benefit of hindsight.

The risk of hindsight basis are particularly strong when poor management seems to have run a company into the ground, as happened here, but to some degree it's a risk that shareholders and long-term creditors always take.

The challenge for the court will be to see if this case involves something more. Only that “something more” can really be the subject of recoveries against officers.

The complaint does not paint a flattering portrait, and will likely have an influence on these managers’ future ventures.

But I’m not sure the complaint will provide too much additional recovery to the understandably frustrated creditors.


Stealing money from segregated customer accounts to meet MF Global's own margin calls doesn't qualify as "something else"?

And we now know that such stealing was not a one-off fluke that occurred only in MF Global's final days. Instead it was done repeatedly over several moths and repeatedly discussed at length at the the highest levels in meetings that included Corzine.

I mean, for goodness sake, can anyone honestly say that the executives of a small broker that engaged in such conduct would not immediately be thrown in jail and appear in the next episode of American Greed?

The ridiculous complaint soft pedals the foregoing in order to provide cover for the lack of criminal prosecution. In its omissions and bland allegations, it is an attempt to change the "narrative" of what occurred, deflect attention from the truly criminal acts, and generally act as justification for the lack of criminal action.

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