MARKETSDECEMBER 6, 2011
Corzine Rebuffed Internal Warnings on Risks
By AARON LUCCHETTI and JULIE STEINBERG, Wall Street Journal
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MF Global

MF Global Holdings Ltd.'s executive in charge of controlling risks raised serious concerns several times last year to directors at the securities firm about the growing bet on European bonds by his boss, Jon S. Corzine, people familiar with the matter said.

The board allowed the company's exposure to troubled European sovereign debt to swell from about $1.5 billion in late 2010 to $6.3 billion shortly before MF Global tumbled into bankruptcy Oct. 31, these people said. The executive who challenged Mr. Corzine resigned in March.

The disagreement shows that concerns about the big bet grew inside the company months before the trade rattled regulators, investors and customers. The executive, Michael Roseman, whose title was chief risk officer, also expressed concerns directly to Mr. Corzine in meetings of just the two men and with other people present, people familiar with the situation said.

Mr. Roseman contended MF Global didn't have enough spare cash to withstand the risks of its position in bonds of Italy, Spain, Portugal, Ireland and Belgium. He also presented gloomy hypothetical scenarios of what could happen if MF Global's credit rating was downgraded because of the exposure.

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Mr. Corzine, who started betting on the bonds shortly after arriving as chief executive in March 2010, responded to Mr. Roseman's concerns that some of the scenarios were too extreme and likely impossible, people familiar with the matter said. The former New Jersey governor and Goldman Sachs Group Inc. chairman said MF Global's exposure was limited, adding that the likely profit was worth the risks, these people said.

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The CEO suggested to board members earlier this year that he might leave the company if they didn't trust his judgment about the bet, according to people familiar with the matter.

Boardroom disagreements in which the CEO's decisions are questioned by a lieutenant are rare. The situation at MF Global is even more unusual because it came just six months after directors hired Mr. Corzine to turn around the struggling brokerage firm. He replaced hundreds of sales officials and other employees with former traders from bigger Wall Street firms more accustomed to taking risks.

Mr. Corzine, 64 years old, has had no comment on MF Global since he resigned as chairman and CEO last month. His spokesman declined to comment on Monday.

The House Agriculture Committee has subpoenaed Mr. Corzine to testify at a hearing Thursday where lawmakers will probe the company's collapse and press for answers about an estimated $1.2 billion in missing customer money. Mr. Corzine is expected to attend the hearing.

Raising a Red Flag

Sept. 2, 2008 Michael Roseman joins MF Global as chief risk officer.

March 23, 2010 Jon Corzine joins MF Global as chairman and CEO. MF Global's European bond trade is at zero.

September 2010 Mr. Roseman expresses concern to Mr. Corzine and MF Global's board that the bet was getting too big. European bond trade now stands at about $1.5 billion.

Jan. 31, 2011 MF Global informs Mr. Roseman that he would be replaced as chief risk officer.

March 31, 2011 Mr. Roseman leaves company. European bond trade is now at $6.3 billion

June 2011 Securities regulators start looking at whether an MF Global unit held enough capital for its European trade. European bond trade at the firm is at $6.4 billion as of June 30, 2011.

September 2011 Concerns about Italy and other European sovereigns grow. European bond trade at $6.3 billion as of Sept. 30.

October 2011 MF Global bonds are downgraded Oct. 24, partially due to the European bet. As customers flee, the company begins reducing its European bond position. MF Global files for bankruptcy Oct. 31. European bond trade at about $5 billion as of the bankruptcy filing.

November 2011 The U.K. bankruptcy administrator sells the bulk of the remaining European sovereign bonds in MF Global's positions by Nov. 9. European bond trade at or near zero.

Sources: MF Global filings, WSJ reporting

A spokesman for law firm Davis Polk & Wardwell LLP, which represents the company's former directors, declined to comment. The directors resigned last week. Before the bankruptcy filing, the board's audit and risk committee was led by Eileen Fusco, a former Deloitte LLP partner. Ms. Fusco couldn't be reached for comment.

Mr. Roseman, 50 years old, joined MF Global in 2008 to improve risk-management culture after a rogue-trading incident cost the firm $140 million. In his first year, he helped install risk-management systems designed to prevent future blowups.

"Mike had a very good nose for the issues," said Thomas A. Kloet, CEO of Canadian exchange operator TMX Group and a former executive at brokerage firm Fimat, where Mr. Roseman was hired in 2004. "If he identified a risk, I listened to him." Mr. Roseman began his financial career in the early 1990s after a decade in aerospace and engineering. He traded interest-rate products at a Japanese bank before moving into risk management.

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At Fimat, Mr. Roseman warned the company not to take too much risk on any one client, said a person familiar with the matter. At Bank of Montreal, where he worked in the early 2000s, he raised concerns about an energy transaction, according to other people.

"He would stand in people's face," one person said. A Wall Street executive who worked with Mr. Roseman added: "He got nervous when he saw concentrated risk positions."

Some MF Global executives felt even before Mr. Corzine, a former bond trader, took over as CEO that Mr. Roseman was too risk-averse, according to people familiar with the matter.

These people contend that his background was a much better fit for the firm's traditional business of trading futures on exchanges for clients, rather than its aspirations under Mr. Corzine to become a full-service investment bank that could nimbly trade various financial instruments.

Mr. Corzine started making his bets on European bonds in the summer of 2010. As reported by The Wall Street Journal in November, he didn't rely heavily on the risk-management department at MF Global, reporting only to the company's board of directors.

Mr. Roseman was cautious about Mr. Corzine's bet on European bonds almost from the start, even though the CEO expressed confidence that euro-zone leaders wouldn't let the countries default. They haven't yet, though the bonds' prices have been volatile.

By September 2010, Mr. Roseman started voicing his concerns to board members, according to people familiar with the matter. Around the same time, the bet grew to about $1.5 billion, these people said. Mr. Roseman worried the trade might get bigger and even endanger MF Global if the financial turbulence in Europe got too rough.

People familiar with the situation said Mr. Corzine was annoyed by Mr. Roseman's dour attitude and persistence, though their face-to-face meetings about the trade were cordial. Some of their meetings included MF Global employees in risk management, treasury and finance.

As the bet ballooned, it flashed a warning sign on trading limits that Mr. Roseman had helped put in place before Mr. Corzine became his boss.

Even though Mr. Corzine answered only to the board, the directors had to approve any breaches of those trading limits. It was Mr. Roseman's job to seek permission from the board in those cases, even if he had concerns. A person familiar with the matter estimated that Mr. Roseman made at least three separate requests on behalf of the firm to increase the sovereign-debt exposure. Each time, directors asked Mr. Roseman about the risks of the trade.

He responded by outlining the risks that made him uncomfortable about the trade, people familiar with the situation said. Another person briefed on the matter said two directors don't recall hearing any protests by Mr. Roseman.

It isn't clear what Mr. Corzine said at the board meetings, but he was allowed to keep increasing the European bet gradually until June, when it hit $6.4 billion, someone familiar with the situation said.

In January, Mr. Roseman was notified by MF Global that he would be replaced by a new chief risk officer. He left in March after helping with the transition to his successor. Since leaving MF Global, Mr. Roseman has done some consulting work.

Earlier this year, some directors and executives also raised concerns about the size of Mr. Corzine's bet. On at least one occasion, Mr. Corzine wanted to boost the size of the trade by more than the board would let him, according to a person familiar with the matter.

—Julie Steinberg is a reporter at FINS.
Write to Aaron Lucchetti at aaron.lucchetti@wsj.com and Julie Steinberg at julie.steinberg@dowjones.com

MF Global Inc. fired 1,066 employees at the U.S. broker-dealer today, according to the trustee's office responsible for liquidating the unit.

The trustee's office responsible for liquidating MF Global Inc., the U.S. broker-dealer unit of MF Global Holdings Ltd., said between 150 and 200 former employees are being rehired to assist in the wind down of the business and processing of bankruptcy claims.

A source with direct knowledge of the matter said some of the people who are being fired have been assisting in the investigation of missing customer funds estimated to total about $600 million. The Department of Justice and the Commodity Futures Trading Commission are conducting an investigation into the missing money. The source said the trustee drew up the list of employees to be terminated without much consultation with MF Global's parent company. The spokesperson for the trustee's office declined to comment.

None of the laid-off employees will get severance pay or deferred compensation or bonuses, according to a spokesperson for the trustee's office. They'll receive health coverage through the end of November. Employees will get salaries through November 15 and the offices in New York City will be closed as soon as possible, the trustee's statement said. Smaller and less expensive office space will rented.

A source familiar with the matter also said the trustee initially had planned to send termination notices by email but then decided to hold town meetings so employees could be told verbally. The trustee's office declined to comment.

The broker-dealer unit includes brokers, traders, salespeople and operations staff who work in New York, Chicago, San Francisco, Houston, Kansas City, Boston and Washington, D.C.

Over the last two weeks, 165 layoffs in another MF Global entity have taken place in "piecemeal fashion" in both New York and Chicago, said sources close to the firm. Already-terminated employees have not received severance pay, deferred compensation or bonuses, nor are they assured of receiving health coverage beyond November, raising the potential that non-reimbursable medical expenses will be incurred, one of the sources said.

Related: MF Global Lays Off 165, More to Come

The 165 layoffs were spread across IT, finance, human resources and other back-office staff.

Jobs at the broker-dealer are being eliminated after the parent company, MF Global Holdings Ltd., declared bankruptcy Oct. 31 under Chapter 11 of the U.S. Bankruptcy Code. The broker-dealer arm of MF Global wasn't eligible to be reorganized and is being liquidated by trustee James W. Giddens, a lawyer with New York-based law firm Hughes Hubbard who is also liquidating Lehman Brothers Inc.

Employees who are terminated can file claims against the assets of the brokerage for severance, unused vacation days, benefits and other monies owed to them, according to bankruptcy attorneys. They will be paid a portion of their claims only after customers of the broker-dealer and those owed administrative fees get paid.

Related: The Next Steps for MF Global Employees

Employees can also file a WARN (Worker Adjustment and Retraining Notification) lawsuit. Under WARN, employers in New York must notify employees 90 days before laying off 33% or more of the workforce or 250 employees from a single employment site.

Employees can sue for eight weeks of pay and benefits to make up for the time they would have had to look for a new job, said Jack Raisner, an employment lawyer at New York-based law firm Outten & Golden LLP.

MF Global employees may be able to benefit from the fact that their terminations have occurred after the company declared bankruptcy. Their claims for WARN pay will be grouped with administrative expenses, so if the lawsuit is successful, they'll get paid at the same time as the lawyers handling the bankruptcy, Raisner said.

He said MF Global employees could experience a situation similar to that of former employees of Taylor Bean & Whitaker Mortgage Corporation, whom Raisner's law firm represents in a WARN lawsuit.

Taylor Bean filed under Chapter 11 in Florida in August 2009 and had terminated the employees a few weeks prior. In August 2011, the shell of the company and the employee's lawyers settled for $15 million, an agreement that was approved by the court last week and will need to be approved a final time in December. Once it gets approved the final time, the $15 million will be distributed to the employees (less the attorney fees), Raisner said.

Write to Julie Steinberg at Julie.Steinberg@dowjones.com