In many of the past frauds I’ve studied, it seems managers fail to learn from history. Even when they are forewarned, managers sometimes can’t see the emerging problems that must be addressed if they are to be successful.
At MF Global, there was past history, forewarnings and still managers brought down a firm that had roots going back to the 1700s.
In February 2008, an MF Global trader, Evan Dooley, took a risky position in wheat futures and lost the firm $141 million.
In response to this matter, MF Global agreed it needed to improve its risk management, supervision and compliance programs. In August of 2008, MF Global established a Chief Risk Officer position to develop and implement risk policies.
In the spring of 2010, the Risk Department identified emerging risk areas and notified the Board of Directors. A follow-up report in October 2010 continued to alert the Board of gaps in MF Global’s risk policies.
As identified in the Report of the Trustee’s Investigation and Recommendations:
Similar concerns surfaced in internal audit reviews. A Corporate Governance internal audit issued in May 2010 identified MF Global’s risk policies as not congruent with the changes to its broker-dealer business. Among the specific gaps identified by Internal Audit was liquidity risk reporting. Similarly, an Internal Audit report on Market and Credit Risk Management in October 2010 identified “High Risk” areas arising from the lack of controls over risk reporting. The report also reiterated that market risk policies had not been updated to reflect the current operating environment. The report attributed the failures to remediate gaps to staffing and budget constraints. Thereafter, during 2011, Internal Audit expressed concern that the absence of reliable liquidity reporting tools and dependence on Ms. O’Brien’s [an assistant treasurer] comprehensive knowledge of liquidity issues might represent a “key man risk,” because the processes supporting the composition of the liquidity forecast were not documented and were mainly based on Ms. O’Brien’s expertise and experience.
Despite the Risk Department and the Internal Audit Department raising the red flags that should have caused management to stop and listen, managers continued to pursue a flawed strategy.
The result is a shortfall in segregated property available to return to customers. It currently amounts to $900 million in domestic accounts and $700 million related to trading by customers on foreign exchanges – or $1.6 billion according to the Trustee in the liquidation of MF Global!
The Trustee believes that claims for breach of fiduciary duty and negligence, may be asserted against Jon Corzine [CEO], Henri Steenkamp [CFO], and Edith O’Brien [Assistant Treasurer].
Getting managers to listen is a challenge – not listening though may result in future prison terms for some managers if subsequent investigations establish criminality.
