Why was disclosure of critical MF Global documents delayed?  Why were time stamps amended?

Critical documents related to MF Global’s financial condition appear to have been delayed for release by the Securities and Exchange Commission (SEC) at an important time just before a MF Global floated a bond offering to professional investors.  While possibly a coincidence, approximately the same time the documents in question were finally made public, MF Global professional account holders were beginning to flee the company, leading to an eventual liquidity crisis and the firm’s bankruptcy.

The document in question is MF Global’s Annual Audited Report on Form X-17-A-5.  What is critical about this report is that it contained information regarding of MF Global’s risky sovereign debt trades, including some subtle, yet important, details that were not available anywhere else.  Had professional investors had this information weeks after the May 31, 2011 initial filing date, as is said to be typically the case with such documents, they may have avoided purchasing what ultimately became near worthless MF Global bonds.   Here is the critical timeline:

• May 31, 2011: The date the SEC acknowledged receiving MF Global’s 2011 Annual Audit.

Figure 1 (Above): Initial financial disclosure file stamped September 2, 2011 – well after the May 31, 2011 acknowledged filing date. MF Global floated an unsecured bond offering in August of 2011.

• August 2, 2011: MF Global sold $300 million of now nearly worthless bonds to professional investors.

• MF Global’s 2011 Annual Audit document was initially file stamped by the SEC as received on September 2, 2011 (see figure 1).  When the document was made public later weeks later, disclosing critical details of MF Global’s risky Sovereign debt position, professional traders were beginning to flee the firm.  This fleeing ultimately caused a crescendo of MF Global account holder liquidations.

• December 14, 2011: SEC removes the MF Global Annual Report

• January 3, 2012: SEC uploads a new copy of the Annual Report with a different file stamp date. Curious written notations that appeared in the replacement Annual Audit may indicate SEC interest in MF Global’s sovereign debt exposure–the very exposure FINRA was said to be negotiating with the firm over during the summer of 2011. (Figure 3)

While the SEC is said to have no definitive timeline for publishing Annual Audit documents, compliance consultant Bob English notes these documents are typically scanned and uploaded within two to four weeks from receipt.  “The process is: the documents are typically indexed and file stamped in the first week, then two weeks later they are scanned and uploaded to the public server,” he said.  MF Global Inc.’s 2011

Figure 2 (Above): Altered time stamp – taken off the SEC database in December of 2011 and replaced with a new time stamp indicating a May 31, 2011 filing date.

filing, due to the SEC on May 31, would have been anxiously anticipated by astute investors.  Rumors had been swirling throughout the futures industry the firm was in trouble, and industry participants could have used the information in the report for signs of trouble at the firm.  When the May 31 filing did not appear it may have raised questions, according to Mr. English.  Mr. English’s assertions regarding the delayed filing and document alterations are documented  in a Forbes article by Francine McKenna.  The key is to connect the dots.  There was a bond offering that appears to have been held under questionable circumstances.  There is significant “too big to fail” special privilege afforded to the president of a Futures Commission Merchant (FCM).  The New York Fed would have never considered an FCM to walk up to the discount window, and yet Mr. Corzine once again received special treatment, as he is receiving special treatment in the investigation into MF Global. Mr. Corzine has yet to be questioned by authorities, something which legal sources say is unusual.

To further point out special treatment, Mr. English points out that the document was held by the SEC concurrent with negotiations that FINRA and the SEC were having with MF Global over foreign sovereign debt exposure, which has now been widely reported after the fact.  “It appears as though someone at the SEC may have been holding the document while negotiating with Mr. Corzine over his sovereign debt exposure,” Mr. English speculated, noting that between the May Filing date and September release date FINRA and SEC negotiated with MF Global and finally demanded an increase of capitalization to support Corzin’s sovereign debt trade. He notes that the documents were de-indexed from the SEC database and then reposted–unusual activity given that a sampling of smaller brokerage firms found no instances of missing or amended audits.  “Astute industry participants may have been watching for the Annual Audited report of the broker unit,” noted Mr. English.   “That report did not surface until September at the earliest.  This is clearly out of the norm with respect to how the SEC usually scans and publicly posts these reports.”

After reviewing the charges, SEC spokesperson John Nester said: “Generally, broker-dealers that carry customer accounts publish audited balance sheet reports on their own websites at the same time they are filed on paper with the SEC and available for public inspection. The reports are also scanned for posting to the SEC’s EDGAR database, but there is no deadline that establishes when they must appear on EDGAR.  After it was posted in September, the MF Global report on EDGAR was amended to correctly reflect that it was filed May 31, 2011.”

SEC guidelines are apparently written with large loopholes regarding disclosure dates.  While Mr. Nester’s comments point to the fact that while it might not be technically a rule violation, the special treatment provided Mr. Corzine should at least raise questions.  As Mr. English notes in a survey of 20 mid-sized brokerage firms, there were no instances of pulling down documentation after the fact and changing of information.

To read the full article, click here.

All contents Copyright © Mark H. Melin, 2012. For additional information visit www.Go2ManagedFutures.com

Mark Melin is author of the book High Performance Managed Futures and taught managed futures at Northwestern University.  He currently consults with professional investors regarding development of uncorrelated investment portfolios.

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