NEW YORK MF Global Holdings LtdMF.N must face a class-action lawsuit accusing the brokerage of misleading investors about its risk management before a 2008 trading scandal, a federal appeals court said on Tuesday.
The U.S. Second Circuit Court of Appeals said a lower court judge erred in dismissing the lawsuit against MF Global, a futures and options specialist run since March by former New Jersey Governor and Goldman Sachs Group Inc Co-Chief Executive Officer Jon Corzine.
MF Global's market value fell about $1.1 billion, or 40 percent, on Feb. 28 and 29, 2008, following the revelation that a single trader that week lost about $141 million by speculating in wheat futures.
The investor lawsuit, led by a group of pension funds, accused MF Global of misleading them about its risk practices in a prospectus and registration statement issued when the New York-based company went public in July 2007.
Other defendants in the case include British hedge fund and onetime parent Man Group Plc, as well as various officers, directors and underwriters.
In a July 2009 ruling, U.S. District Judge Victor Marrero dismissed the case, pointing to cautionary statements in the prospectus about MF Global's risk management methods.
But a three-judge panel of the Second Circuit said this ruling was too broad.
"Characterizations of MF Global's risk-management system -- that the system was 'robust,' for example -- invite the inference that the system will reduce the firm's risk," Chief Judge Dennis Jacobs wrote for the appeals court. "Cautionary words about future risk cannot insulate from liability the failure to disclose that the risk has transpired."
The Second Circuit also reinstated a claim alleging that the prospectus did not disclose that traders had no limits when trading for clients. "At least as to phone orders, the firm's risk management controls did not reliably constrain brokers who executed trades on behalf of clients," Jacobs wrote.
Among the plaintiffs are pension funds in Illinois, Iowa and Massachusetts, as well as an institutional investor group.
Mark Rosen, a lawyer for the plaintiffs, declined immediate comment, saying he had yet to fully review the ruling. David Anders, a lawyer for MF Global, did not immediately return a call seeking comment.
MF Global shares were up 1.4 percent at $7.41 in midday trading on the New York Stock Exchange.
The case is Iowa Public Employees' Retirement System et al, v. MF Global Ltd, U.S. Second Circuit Court of Appeals, No. 09-3919.
(Reporting by Jonathan Stempel. Editing by Robert MacMillan and Lisa Von Ahn)