On Thursday, a firm called Brower Piven filed a Manhattan federal court securities-fraud class action against Jon Corzine and three other officials of the bankrupt brokerage MF Global. The complaint, as Jon Stempel reported for Reuters, claims that beginning in May, the MF execs deliberately misled shareholders about the brokerage’s leverage and risk-management controls. It’s really a placeholder: the plaintiff is one individual investor, and the suit asserts a single count of securities fraud based only on public MF Global regulatory filings, press releases, “and other information readily obtainable on the Internet.”
But meanwhile, behind the scenes, the big players in securities litigation are busily analyzing potential claims for MF shareholders and, perhaps more importantly, MF bondholders. They’re drafting memos and talking to the clients who usually lead major securities class actions — institutional investors such as public and union pension or health-care funds. There hasn’t been a lot of juicy securities fraud litigation of late, one plaintiffs’ lawyer told me, so firms are trying to figure out how to position themselves to lead this case. “It’s going to be a bloodbath,” another lawyer said. “Everyone is looking at this.” (Almost everyone I talked to declined to be named because they haven’t firmed up their plans for the MF litigation.)
So let’s take a look at how the shareholder and bondholder cases may shape up, and what pitfalls MF investors may face.
The biggest problem for investors, of course, is MF’s bankruptcy. It’s pointless to sue the company because of the automatic stay on litigation under Chapter 11. That’s why the shareholder suit filed Thursday names only officers of the company, not the company itself. Suing MF execs and directors is the only route for shareholders, no matter how egregious MF’s alleged behavior turns out to be: shareholder class actions, remember, are brought on behalf of investors who bought stock in a particular time frame, not investors who held the stock. And since MF didn’t issue stock in the period of time when its supposed deception took place, there are no deep-pocketed underwriters for shareholders to go after. (Interestingly, that fact distinguishes MF from Refco, the onetime rival of MF’s former parent Man Financial; Refco shareholders, who acquired their stock in an initial public offering not long before the company collapsed, were able to sue the underwriters.)
Deep-pocketed underwriters are the main reason that an MF bondholder class action may turn out to be a more lucrative undertaking than any shareholder litigation. The brokerage issued a series of bonds in the months leading up to its implosion. Those bond prospectuses made representations about the firm’s risk exposure that, in retrospect, look misleading. And under provisions of the Securities Act of 1933, underwriters are on the hook for disclosure failures. Unlike shareholders with securities-fraud claims under the Exchange Act of 1934, bondholders alleging violations of the Securities Act don’t have to show that the MF executives and underwriters who approved the offerings’ disclosure materials intended to deceive investors, but only that the documents were deficient. It’s an easier standard than shareholders face.