MF Global Case Essay

Assignment Three

MF Global History:
MF Global was founded in the late 1700’s by James Man. It was a pure cash commodities firm that dealt mostly with the trade of sugar and molasses. ED&F Man, as it was known when it was founded up until the late 2000’s, mainly traded pure cash commodities until the late 1970’s. They then started to trade futures and other securities as futures market became more mechanized with the use of the internet. This made for a time of great growth and expansion and in 1994 they listed on the London stock exchange with a total of 650 employees. They acquired offices in Tokyo, Australia, the United States, and London. They remained this way as ED&F Man until 2007 when the company split into two firms.

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MF Global was the investment branch while a separate entity called the Man Group focused on asset management. MF Global began to be a problem in 2008 when they received fines from the SEC for unauthorized trading and insufficient risk management. There were other intermittent fines until 2010 when Jon Corzine took over MF Global. Then in 2011, Corzine started to put some serious money in debt trades. They were fine at first, but as the Euro zone started to collapse, so did MF Global. After a bad earning report and some defaulted European Debt, MF Global filed for bankruptcy. When the money was being returned to the investors they found that $1.2 billion dollars were missing. The money had just disappeared. 1. Who are the MF Global stakeholders?

According to the research I’ve made about MF Global and the scandal associated with the company, MF Global stakeholders are: Its shareholders: including the preferred stockholder private equity investor J. Christopher Flowers through his firm J.C. Flowers & Co. and all the commons stockholders with the biggest being Pyramis Global Advisors LLC, owning 8.44% common shares; Fine Capital Partners LP, 7.37%; Cadian Capital Management LLC, 6.17%; TIAA-CREF, 5.77%; Advisory Research Inc., 5.54%; Dimensional Fund Advisors LP, 5.41%; Rydex Security Global Investors LLC, 5.13%… Its unsecured creditors such as JP Morgan Chase; Deutsche Bank AG; Headstrong Services LL; and Comcast Corp. Its employees: including Jon Corzine himself, the CEO of the firm. The government

2. What are the ethical issues involved?

The actions of Jon Corzine can be looked at under four ethical theories. The utilitarian ethics requires maximizing the happiness of the greatest number. Jon Corzine did not maximize anyone’s happiness. His actions caused the company to close and that had a negative impact on all of the shareholders. Corzine himself no longer has a job, faced legal actions; the employees and their families were negatively impacted because they no longer have jobs; the investors were negatively impacted because they have lost a lot of money; and finally the government was negatively impacted because they lost the tax revenue of all the employees, the company, and the investors. Clearly Corzine’s actions made no one happy and he was acting unethically under the Utilitarian Ethical perspective. Under the individualistic ethical theory (or economic model of ethics) Jon Corzine’s actions were unethical. Individualistic ethics states that the main goal of a person or a company is to profit for the owner. The actions must be legal, but other than that everything is fair game. By losing all of the investors’ money and basically bankrupting MF Global, Jon Corzine did not maximize the profit of anyone. The Kantian ethical perspective states that in order to act ethically one must do three things: act rationally, be motivated by what is right, and that no one is exempt from the rules. Corzine acted as if he was above the rules.

He broke several of the companies own rules regarding risk management. He also did not act rationally; he invested over $6 billion dollars in European debt. While this investment may have been good, this astronomical amount was not. Finally he was not motivated by any of the right things; instead of being motivated by prosperity he was motivated by pride and greed. He wanted to prove that he still was a great trader, and that he had not made a colossal mistake. Finally, according to the virtue theory of ethics, Jon Corzine was being unethical by being dishonest and having no record of where the money was coming from and where it ended up going. He also did not show any self-control in investing such huge amounts of money and basically committed fraud. 3. Research, identify and discuss at least three reasons for the perception that the financial sector may be more unethical? The first reason for the perception that the financial sector may be more unethical is because of all the financial scandals the public has heard of since the late 1990’s.

The watershed event that brought the ethics of finance to prominence at the beginning of the twenty-first century was the collapse of Enron Corporation and its accounting firm Arthur Andersen. The many financial scandals relayed by the media brought into focus the necessity of changes in the corporate finances; however, it also brought the perception of an unethical financial sector. The financial sector is big and extremely profitable; Human nature does not trust financial advisors who work with large amount of money and perceive them as greedy and selfish. Another reason why the public might perceive the financial sector as more unethical than others is the many conflicts of interest faced by the “gatekeepers” in the business context. “Gatekeepers”—attorneys, auditors, accountants, and financial analysts— have the role to ensure that those who enter into the marketplace are playing by the rules and conforming to the very conditions that ensure the market functions as it is supposed to function. They provide a source for rules from which we can determine how professional ought to act.

These professions can also be understood as intermediaries, acting between the various parties in the market, and they are bound to ethical duties in this role as well. “Gatekeepers” are said to have fiduciary duties—a professional and ethical obligation—to their clients, duties that override their own personal interests. However, many of these professional intermediaries are paid by the businesses over which they keep watch, and are also employed by yet another business. Therefore, conflicts of interest arise. For example, as long as auditors are paid by the clients on whom they are supposed to report, there will always be an apparent conflict of interest between their duties as auditors and their personal financial interests. These conflicts are a good enough reason to make a change in how public accounting works, but it also gives the perception of unethical behavior to the public. Also, another reason why the financial sector might be perceived as unethical is the issue of inside trading that is becoming more and more heard of by the public (for example the prosecution of Martha Stewart).

The definition of insider trading is trading by shareholders who hold private inside information that would materially impact the value of the stock and that allows them to benefit from buying or selling stock. Private information includes privileged information that has not yet been released to the public. Therefore, insider trading is considered patently unfair and unethical since it precludes fair pricing based on equal access to public information. The unfairness of this issue pushes towards the perception of unethical behaviors in the financial sector. The financial sector has no tangible product to sell; therefore treating clients fairly and building a reputation for fair dealing may be a finance professional’s greatest assets and the only way people are going to stop misperceiving the sector as unethical. 4. Research and discuss the ongoing ethical challenges facing the financial services sector and what can be done to overcome these challenges. As stated above, the financial services sectors is facing several ethical challenges that are trying to be overcome. The first challenge is the conflicts of interest and professional duties faced by the “gatekeepers” in the financial sector as stated above.

These conflicts could be stopped by some structural changes in how public accounting operates. Perhaps the Board of Directors rather than management ought to hire and work with auditors since the auditors are more likely reporting on the management activities rather than those of the Board. Or maybe public accounting could be paid by public fees. Or perhaps some legal sanctions could be created to penalize these conflicts of interest, like the Sarbanes-Oxley Act of 2002 is trying to do. Another challenge facing the financial service sector is the executive compensation that has become excessive in the past few years. Beyond issues of personal morality and economic fairness, excessive executive compensation practices also speak to significant ethical issues of corporate governance and finance. In theory, compensation packages serve corporate interest in two ways: incentive for performance, and rewards for accomplishment. However, the excessiveness of the amount of compensation has become out of hand. A solution to these would be to regulate the amount of compensation with maybe a ceiling that could not be over overpassed. Also, the challenge of inside trading might be one of the hardest to regulate. The Securities and Exchange Commission (SEC) has been trying to detect and prosecute insider trading violations but most of the time, these cases are treated after the fact. Besides the fear of legal actions would work better on preventing insider trading if the sentences faced would be higher. 5. What is the responsibility of the MF Global Board of Directors and were these responsibilities fulfilled? The law imposes three clear responsibilities to the Board of Directors: the duty of care, good faith, and loyalty. The duty of care involves the exercise of reasonable care by a board member to ensure that the corporate executives with whom she or he works carry out their management responsibilities and comply with the law in the best interests of the corporation. The duty of good faith is one of obedience, which requires board members to be faithful to the organization’s mission. And the duty of loyalty requires faithfulness—a board member must give undivided allegiance when making decisions affecting the organization. In the case of the MF Global Board of Directors, most of these responsibilities were not fulfilled. Under the duty of care, directors are permitted to rely on information and opinions only if they are prepared or presented professionals the director believes to be reliable and competent in the matters presented. In the MF Global case, Jon Corzine was a star bond trader at Goldman Sachs in the late 1980’s and early 1990’s.

His high appetite for risk proved to be beneficial, especially during times of economic expansion. And he had just taken a high risk in European Debt that returned $31 million. Therefore, one could think the responsibility of care had been fulfilled. However, the Board of Directors also has the duty to oversee risk management and the responsibility to put a stop to risky situations, which it failed to do with Jon Corzine and MF Global. Under the responsibility of good faith, the Board of Directors is not permitted to act in a way that is inconsistent with the central goals of the organization. Their decisions must always be in line with organizational purposes and direction, strive towards corporate objectives, and avoid taking the organization in any other direction. Once again, MF Global Board of Directors should have avoided the huge risk that Jon Corzine was taking by putting some serious money in the European debt trades and should have stopped him before the Euro zone collapsed, bringing MF Global down at the same time. Finally, the duty of loyalty means that conflicts of interest are always to be resolved in favor of the corporation. A board member may never use information obtained through her or his position as a board member for personal gain, but instead must act in the best interests of the organization.

The missing $1.2 billion obviously did not disappear and someone must have personally gained for this loss for the company. 6. Give a detailed argument on whether you believe an outside authority should provide oversight over companies vs. an internal mandate on ethical behavior (Sarbanes Oxley vs. COSO). Because reliance on corporate boards to police themselves did not seem to be working, Congress passed the Public Accounting Reform and Investor Protection Act of 2002, commonly known as the Sarbanes Oxley Act. The Act strives to respond to the financial scandals by regulating safeguards against unethical behavior. It is intended to provide protection where oversight did not previously exist, in terms of direct lines of accountability and responsibility. The Sarbanes Oxley is an external mechanism that seeks to ensure ethical corporate governance. On the other hand, another way to ensure appropriate controls within the organization is to utilize a framework advocated by the Committee of Sponsoring Organizations (COSO), which is an internal mechanism. It is a voluntary collaboration designed to improve financial reporting through a combination of controls and governance standards called the Internal Control. COSO describes “control” as including elements such as control environment (also called organization culture), risk assessment, control activities, information and communication, and ongoing monitoring. When it comes to control environment, it refers to issues such as operating styles, integrity, ethical values, philosophy, etc…

The culture of an organization is extremely difficult to change and depends only on the people within the culture. Therefore, I believe that this part could be hard to change. For example, if the culture within the firm is already borderline unethical, this would take a lot of time to change and therefore affect the control of the company and the ethical behavior. The same goes for every aspect of internal control; it is affected by people at every level of an organization. Internal control provides only reasonable assurance, not absolute assurance. I believe reasonable assurance might not be enough to assure ethical behavior. Therefore, I believe that an outside authority should provide oversight over companies. Of course, this outside authority should be neutral and not have any conflict of interests with the firm overseen. However, I also believe that all the controls one could implement have little value if there is no unified corporate culture to support it or mission to guide it.