This day in history: May 6, 2009: Demise of MF Global starts as firm ordered to pay £20 million in damages

In the fifth part of a new series on FinanceFeeds, we take a look back at “This day in history” within the world of FX. Every Friday morning, we take a look back through the various groundbreaking developments that continue to take place in our fascinating industry.

May 6, 2009 was most certainly no ordinary day, as a ruling by a British judge against MF Global, one of America’s highest profile electronic trading companies which became the subject of one of America’s highest profile corporate demises, set the scene for what became a ground-up regulatory overhaul and change in operational structure of the entire FX and OTC derivatives industry.

On this day 7 years ago, litigation PR company Bell Yard represented independent trader Rajesh Gill in a case brought against MF Global’s UK division, which was based in London, a subsidiary of the main firm which at the time was led by notorious former Goldman Sachs executive Jon Corzine in New York.

In his case which cited MF Global UK for Fraudulent Misrepresentation, Mr. Gill, who filed the suit in the name of his company (Parabola Investments Ltd vs MF Global UK Ltd), a High Court judge in London ruled that MF Global UK Ltd was vicariously liable to pay damages and claimants’ costs to Parabola Investments Limited, amounting to a not inconsiderable £20 million in damages.

The entire OTC FX industry was very different indeed in the first decade of this Millenium.

One reason for this is that it was in its absolute infancy, and there were far less firms in existence apart from the long-established companies in Britain’s square mile that have 30 years under their belt, providing spread betting and CFD trading to an established audience since the mid 1980s.

There were no MetaTrader 4 brokerages and white label brands in those days, therefore there was very little competition, and the retail industry was relatively small.

Another reason for today’s FX industry when compared to that of the late 2000s being as different as thermonuclear fission from cheese is that incidents such as this and the subsequent demise of very large firms caused the regulators – starting with the authorities in the United States – to completely change the way retail OTC brokerages operate their business.

How did the claim against MF Global come about?

After an extremely prosperous start to his trading career, Mr Gill transferred his high-volume account to Union Cal (later acquired by MF Global), managed by an individual broker, Matthew Bomford.

Unbeknown to Mr. Gill, his account immediately began losing significant funds, allegedly as a result of a repeated and deliberate series of failings and dishonesty at the hands of Mr Bomford.

At that point, litigation PR firm Bell Yard was instructed to protect Mr Gill’s reputation in the face of aggressive denials as to MF Global’s their liability and unfound assertions by MF Global as to Mr Gill’s competency.

Some 10 years ago, back in 2006, Mr. Gill originally prepared his lawsuit, which came about 4 years after he had investigated the cause of the rapidly declining balance in his trading account.

When Mr. Gill discovered the losses in 2002, he embarked on a one-man litigation campaign against MF Global’s UK division and absolutely would not let go.

Just 5 weeks after the trial commenced at the High Court in London, MF Global UK made a decision to settle before a verdict was reached, admitting vicarious liability for fraudulent misrepresentation and deceit.

As a result of the pre-verdict decision to settle, the senior management of MF Global were not required to appear in court to give evidence under oath.

Mr. Gill’s victory against MF Global represented a landmark ruling for a lost profits case, and marked out lawyers Peter Atkinson of Gordon Dadds Solicitors and Neil Kitchener QC (Queen’s Counsel) of One Essex Court Chambers as having set a precedent.

Two years later, MF Global went bankrupt.

In 2011, MF Global faced major difficulties with its liquidity over the course of several months.

Some analysts and financial commentators at the time indicated that MF Global probably experienced a number of trading days in 2011 during which the firm’s bets on sovereign debt would have required the use of customer funds to meet capital requirements, thereby maintaining operating funds and possibly overall solvency.

A large part of these pressures on MF Global were a result of the firm’s involvement in a significant number of repurchase agreements.

Many of these repo agreements were conducted from their balance sheet. Also, MF Global made a $6.3 billion investment on its own behalf in bonds of some of Europe’s most indebted nations.

Failure of those, and other, repo positions contributed to the massive liquidity crisis at the firm. MF Global experienced a meltdown of its financial condition, caused by improper transfers of over $891 million from customer accounts to a MF broker-dealer account to cover losses created by trading losses.

On October 31, 2011, MF Global executives admitted that transfer of $700 million from customer accounts to the broker-dealer and a loan of $175 million in customer funds to MF Global’s U.K. subsidiary to cover (or mask) liquidity shortfalls at the company occurred on October 28, 2011. MF could not repay these monies with its own funds.

Improper co-mingling, or mixing, of company and client funds took place for days before the illicit transfer and loans – and perhaps many other days earlier in the year.

According the New York Times, “MF Global dipped again and again into customer funds to meet the demands”, perhaps beginning as early as August 2011.

The high profile demise of MF Global was a turning point in regulatory and legal criteria for the FX industry.

Part of the capital adequacy requirement ruling which requires all US Forex dealers to maintain a minimum of $20 million and the inforcement of rulings for all firms worldwide to maintain segregated client accounts, as well as to report to central depositories and central counterparties arose from the consequences of the demise of MF Global.

Infrastructure directives such as MiFID and the those included in the Dodd-Frank Wall Street Reform Act were brought with MF Global and PFGBest having been used as case studies for what could potentially go wrong if a complete overhaul did not take place.

Mr. Corzine, a former Governor of the State of New Jersey, denied the use of customer funds to prop up the company, and actually, along with former MF Global managers including Bradley Abelow and Henri Steenkamp, appealed a court ruling calling for 100 percent repayment to customers of the bankrupt brokerage.

The ruling was made on November 5, 2013, by U.S. Bankruptcy Judge Martin Glenn and would allow all missing customer funds to be returned by the end of the year.