The Final Straw? Jefferies And Six Other Banks Sued For "Fraudulent" MF Global Bond Issuance

Tyler Durden's picture

Pick the odd one out of the following 7 banks, while in the process pointing out what they have in common: Bank of America Corp, Citigroup Inc, Deutsche Bank AG, Goldman Sachs Group Inc, Jefferies Group Inc, JPMorgan Chase & Co and Royal Bank of Scotland Group Plc. As it so happens 6 of the 7 are Bank Holding Companies, and have access to the Fed's various emergency facilities. The seventh, Jefferies, which a few years ago, boasted that it is now the largest remaining true investment bank after all its competitors had converted to BHC status, may soon regret it said that and did not join its peers. Why? For the same reason why on November 1, the day after MF Global filed for bankruptcy, we tweeted: "Here is why Jefferies is in deep doodoo: " The reference of course is to the now legendary prospectus for the MF Global 6.25% notes of 2016 that had the infamous Corzine key man event: "interest rate applicable to the notes will be subject to an increase of 1.00% upon the departure of Mr. Corzine as our full time chief executive officer due to his appointment to a federal position by the President of the United States and confirmation of that appointment by the United States Senate prior to July 1, 2013." At this point the only appointment Obama may give Corzine is that of a presidential pardon for a criminal felony offense (assuming of course Corzine brings a sleeping bag to Zuccotti square: the only offense for which he may ever be arrested). Alas, Jefferies, and the 6 other banks, do not have that luxury: as of late this afternoon, all six were sued by pension funds "who said the bonds' offering prospectuses concealed problems that led to the futures brokerage's collapse." Precisely as Zero Hedge expected. And unfortunately for Jefferies, this may well be the final nail in the coffin - because while the market had punished the bank for its Exposure, the biggest unknown in the past 2 weeks was whether and when it would be sued precisely for its MF Global liability. That time is now: next up - every single entity that was impaired in part or in whole as a result of the MF Global bankruptcy will follow suit and sue the same 7 banks... of which only Jefferies does not have the benefit of an infinite backstop. 

More from Reuters:

Other defendants include several officials associated with MF Global, including former Chief Executive Jon Corzine.

 

Friday's lawsuit may be one of the earliest efforts for investors to recover money from relatively deep-pocketed defendants that they believe may share in responsibility for MF Global's October 31 bankruptcy.

 

Bank of America spokeswoman Shirley Norton, Citigroup spokeswoman Danielle Romero-Apsilos and Jefferies spokesman Richard Khaleel declined to comment. The remaining banks did not immediately respond to requests for comment.

 

According to the complaint, the registration statements and prospectuses for about $900 million of MF Global note offerings this year omitted how the company was using high leverage, investing heavily in risky European sovereign debt, and not properly segregating client assets from its own.

 

It said the seven banks helped draft the offering documents and sell the notes, collecting $21.2 million of fees, but that their "failure to conduct an adequate due diligence investigation was a substantial factor" in MF Global's collapse, as well as in defaults on the notes.

 

The lawsuit was brought by the IBEW Local 90 Pension Fund in Connecticut, and the Plumbers' and Pipefitters' Local #562 Pension Fund in Missouri, and seeks class-action status. 

 

It seeks damages for investors between February 3, 2011 and October 31, 2011 in MF Global securities, including its 1.875 percent convertible senior notes maturing in 2016, its 3.375 percent convertible senior notes maturing in 2018, and its 6.25 percent senior notes maturing in 2016.

And to everyone who may have lost money or had their capital locked up indefinitely by the bankrupt firm, which we are 100% certain will see all of its valuable assets picked off by Goldman Sachs and JP Morgan, we suggest you familiarize yourself with lawsuit IBEW Local 90 Pension Fund et al v. Corzine et al, U.S. District Court, Southern District of New York, No. 11-08401 and enjoin it. Because one person who is getting very familiar with its contents right about now is Jefferies CEO, Dick Handler.

Incidentally, if Jefferies in big trouble, our other tweet from November 1 is also true: "And if Jefferies is in trouble, so is Fried Frank, underwriter counsel on the MF Global bond: http://t.co/L5vgjzqA"

So investment banks first; law firms next...Just how high will this debacle for the current administration reach we wonder?