Insider Buying Major Fail: Jon Corzine and MF Global

I am a big fan of trading on insider buying (for example, see “The Market Is Ignoring These Insider Buys, But You Should Not“). So when I read that Jon Corzine had invested $3M of his own money in now bankrupt MF Global, shivers went up my spine. In “Why MF Global’s Collapse Matters“, Brett Arends provides a litany of reasons why every common citizen should care about the failure of MF Global. After noting that Corzine bought $450K in MF Global stock just this past summer, Arends concludes:

“…the people steering the ship haven’t got a clue.

Look at Jon Corzine, the chairman and CEO of MF Global. He has remarkable credentials. He’s the former head of Goldman Sachs, a former Senator, a former governor. And MF Global was his baby. He took over there last year, on a mission to build it into a global financial firm.”

The money Corzine invested represented a significant part of his compensation: last year including $2.75M in cash and a $1.25M bonus. In other words, Corzine did not make “symbolic” purchases just to dress up the MF Global story. He apparently really believed his own statements like this one from October 25:

“We remain confident that we have the resources and expertise to continue to successfully manage these exposures to what we believe will be a positive conclusion in December 2012….We were particularly pleased with the repositioning of our mortgage, credit and foreign exchange businesses; the performance of our commodities group; and the common alignment of our brand to strategy. These efforts reflect positively on our ability to execute and deliver competitive returns to shareholders in the quarters ahead.”

Or at least he hoped these words were true!

This whole incident reminds me that there is more to trading on insider buying than the who and how much. I still have to understand and appreciate the fundamental story of the company.

In related news, I was shocked to learn that one of my favorite market commentators, Bill Fleckenstein, likely lost a significant amount of money in MF Global. On Novemeber 11, Fleckenstein explained (emphasis mine):

“…even after being as careful as possible my entire life by having my cash in only Treasury bills or government debt, and keeping my assets in a custodial bank whenever I could, I have been caught in the nightmare of MF Global

…My account was 100% collateralized by T-bills, as I was led to believe that protected me in all cases, as the collateral was held in my name. But, it turns out if there is fraud — and fraud has been alleged in the MF Global case — T-bills do you no good. (In such cases, all assets and all accounts are equal, and share losses proportionate.) The only protection they offer is that they have no credit risk.

What’s more, Securities Investor Protection Corp. insurance does not apply to futures accounts, because cash is supposedly segregated and thus not at risk. So if there is fraud at a commodities firm, you have absolutely no protection for any of your money.”

This news sent triple shivers up and down my spine. Fleckenstein is a paragon of “money safety.” He has predicted, avoided, and sometimes profited from the major bubbles in tech stocks, housing, and credit. He has surfed the wave in gold and silver for many, many years. If even HE can get fooled like this, what hope is there for a commoner like myself?!?!

More than ever, be careful out there!

Full disclosure: long GLD, SLV

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