MF Global row drags in banks

TWO American pension funds have launched legal action against seven banks, claiming they concealed problems over MF Global’s $6.3bn (£3.99bn) exposure to European sovereign debt.

Royal Bank of Scotland, Goldman Sachs and JP Morgan Chase, as well as former MF Global boss Jon Corzine, are among those named in the suit.

The registration statements and prospectuses for $900m of MF Global note offerings failed to show how the company was using high leverage, was investing heavily in risky European sovereign debt and not properly segregating client assets from its own, claim the IBEW Local 90 Pension Fund in Connecticut, and the Plumbers’ and Pipefitters’ Local #562 Pension Fund

The filing said the banks helped draft the offering documents and sell the notes, pocketing $21.2m of fees, and that the quality of their due diligence investigation was a “substantial factor” in the collapse of the futures brokerage.

It is one of the first attempts to recover cash from the futures brokerage, which collapsed on 31 October. The other lenders named in the writ are Bank of America, Citigroup, Deutsche Bank and Jefferies Group. Deutsche Bank could not be reached last night and all the other banks declined to comment.

Separately JP Morgan is lining up a bid for MF Global’s 4.7 per cent stake in the London Metals Exchange. A source said: “There are multiple parties involved. It’ll be done in the short term.”

JP Morgan already has a 6.2 per cent stake and Goldman is also a major shareholder in the LME, which has made itself open to a £1bn takeover. The exchange was founded in 1877 and still operates an open outcry ring.

The Chicago Mercantile Exchange and the IntercontinentalExchange have also been named as likely bidders but MF Global administrator KPMG could not be contacted last night.

Meanwhile the location of about $600m of MF Global customer funds is still unclear although KPMG has said clients will get back some money before all positions are finally settled.