Case 1:11-cv-07866-VM Document 330 Filed 08/20/12 Page 1 of 238 I UNITED STATES DISTRICT COURT ; COURT sov SOUTHERN DISTRICT OF NEW YORK ---------------------x Civil Action No. 1:11 -cv-07866-VM IN RE MF GLOBAL HOLDINGS LIMITED SECURITIES LITIGATION : CONSOLIDATED AMENDED SECURITIES CLASS ACTION COMPLAINT --------------------- x JURY TRIAL DEMANDED THIS DOCUMENT RELATES TO: : ECF CASE All Securities Actions (DeAngelis v. Corzine) ---------------------x Case 1:11-cv-07866-VM Document 330 Filed 08/20/12 Page 2 of 238 TABLE OF CONTENTS Page I. NATURE AND SUMMARY OF THE ACTION .............................................................. 2 II. JURISDICTION AND VENUE ......................................................................................... 7 III. PARTIES ............................................................................................................................ 8 A. Plaintiffs..................................................................................................................8 B. Individual Defendants ........................................................................................... 10 1. Officer Defendants .................................................................................... 10 2. Director Defendants .................................................................................. 11 C. Underwriter Defendants ........................................................................................ 14 IV. FACTUAL BACKGROUND ........................................................................................... 17 A. The Formation Of MF Global And Its Subsidiaries ............................................. 17 B. Corzine Spearheads A “Transformative Effort” Toward Profitability ................. 20 C. MF Global’s DTA Was Materially Overstated During The Class Period ............ 24 1. Background On MF Global’s DTA .......................................................... 24 2. GAAP Accounting For DTA .................................................................... 26 3. MF Global Violates GAAP By Failing To Record A Timely Valuation Allowance Against Its U.S. DTA ............................................. 30 (i) MF Global Did Not Have Evidence Of “Sufficient Quality And Quantity” That It Was “More Likely Than Not” To Realize A Benefit From Its U.S. DTA ............................................................35 (ii) Compensation Structure Changes Were Not Sufficient Positive Evidence To Offset MF Global’s U.S. DTA .................................37 (iii) Purported Tax Planning Strategies Were Neither “Prudent” Nor “Feasible”.......................................................................................41 D. MF Global Launches A Euro Sovereign Debt Trading Strategy Using Repo And RTM Transactions ............................................................................... 44 1. Background Regarding Repo And RTM Transactions ............................. 44 i Case 1:11-cv-07866-VM Document 330 Filed 08/20/12 Page 3 of 238 2. The Impetus For The Corzine Trade ......................................................... 46 3. The Mechanics Of The Corzine Trade ...................................................... 47 4. After The Corzine Trade Temporarily Boosts Profits, Substantial Undisclosed Liquidity Risks Trigger Massive Margin Calls .................... 49 E. MF Global’s Ineffective Risk Management And Internal Controls ..................... 57 1. The Board Dismisses Myriad Red Flags And Corzine Exponentially Increases Euro Sovereign Debt Trading Limits ................ 57 2. Dozens Of Gaps In Risk Management Are Presented To, But Ignored By, The MF Global Board .................................................... 67 F. Belated, Inadequate Disclosures About The Corzine Trade Prompt Regulatory Inquiries That Help Shut Down The Corzine Trade .......................... 71 1. The FINRA And FSA Investigations ........................................................ 72 2. The SEC Comment Letters ....................................................................... 79 G. MF Global’s Liquidity Crisis Is Masked By Intraday (And Overnight) Transfers, Including Unlawful Transfers From Customer Accounts .................... 82 1. Background On Segregated Customer Accounts And The Use Of Intraday Transfers At MF Global ............................................................. 82 2. MF Global’s Most Senior Executives Use Inter-Company Transfers To Meet Increasing Daily Liquidity Needs .............................. 86 3. Inter-Company Transfers Become A “Shell Game” ................................. 88 4. Liquidity Monitoring During The Class Period ........................................ 90 H. The Truth Begins To Emerge In MF Global’s Frenetic Final Days ..................... 94 1. October 17, 2011-October 27, 2011 ......................................................... 94 2. October 28, 2011-November 21, 2011 ..................................................... 99 V. MATERIAL MISSTATEMENTS AND OMISSIONS.................................................. 104 A. The Fourth Fiscal Quarter Of 2010 And Full Fiscal 2010 Year ......................... 104 1. Net Income And DTA ............................................................................. 104 2. Risk Appetite, Internal Controls And Liquidity Management ................ 108 ii Case 1:11-cv-07866-VM Document 330 Filed 08/20/12 Page 4 of 238 B. The First Fiscal Quarter Of 2011 ........................................................................ 112 1. Net Income And DTA ............................................................................. 112 2. Risk Appetite, Internal Controls And Liquidity Management ................ 114 C. The Second Fiscal Quarter Of 2011 .................................................................... 118 1. Net Income And DTA ............................................................................. 118 2. Risk Appetite, Internal Controls And Liquidity Management ................ 119 D. The Third Fiscal Quarter Of 2011 ...................................................................... 124 1. Net Income And DTA ............................................................................. 124 2. Risk Appetite, Internal Controls And Liquidity Management ................ 125 E. The Fourth Fiscal Quarter Of 2011 And Full Fiscal 2011 Year ......................... 130 1. Net Income And DTA ............................................................................. 130 2. Risk Appetite, Internal Controls And Liquidity Management ................ 132 F. The First Fiscal Quarter Of 2012 ........................................................................ 140 1. Net Income And DTA ............................................................................. 140 2. Risk Appetite, Internal Controls And Liquidity Management ................ 143 G. The Second Fiscal Quarter of 2012 .................................................................... 149 1. Risk Appetite, Internal Controls And Liquidity Management ................ 149 VI. THE OFFICER DEFENDANTS ACTED WITH SCIENTER ...................................... 154 A. The Officer Defendants Closely Monitored Core Operations ............................ 155 B. The Officer Defendants Were Aware Of, Or Recklessly Disregarded, The Abandonment Of Risk Management Practices ............................................ 156 C. The Officer Defendants Were Aware Of, Or Recklessly Disregarded, GAAP Violations And Reporting Of False Financial Statements ...................... 159 VII. LOSS CAUSATION ....................................................................................................... 161 VIII. CLASS ACTION ALLEGATIONS ............................................................................... 171 IX. THE INAPPLICABILITY OF THE STATUTORY SAFE HARBOR .......................... 174 iii Case 1:11-cv-07866-VM Document 330 Filed 08/20/12 Page 5 of 238 X. THE PRESUMPTION OF RELIANCE WITH RESPECT TO EXCHANGE ACT CLAIMS ................................................................................... 175 XI. CLAIMS FOR RELIEF UNDER THE EXCHANGE ACT........................................... 177 XII. ADDITIONAL ALLEGATIONS RELATING TO SECURITIES ACT CLAIMS ....... 180 A. The Secondary Offering ...................................................................................... 181 B. The 2016 Notes Offering .................................................................................... 182 C. The 2018 Notes Offering .................................................................................... 183 D. The 6.25% Senior Notes Offering ...................................................................... 184 E. The Defendants’ Failure To Exercise Reasonable Care Or To Conduct A Reasonable Investigation In Connection With The Offerings ........................ 185 XIII. CLAIMS FOR RELIEF UNDER THE SECURITIES ACT .......................................... 188 XIV. JURY DEMAND ............................................................................................................ 216 XV. PRAYER FOR RELIEF ................................................................................................. 216 iv Case 1:11-cv-07866-VM Document 330 Filed 08/20/12 Page 6 of 238 1. This action is brought by securities class action Lead Plaintiffs The Virginia Retirement System and Her Majesty The Queen In Right Of Alberta and additional named plaintiffs identified below (collectively,