MF Global Holdings Ltd.'s executive in charge of controlling risks raised serious concerns several times last year to directors at the securities firm about the growing bet on European bonds by his boss, Jon S. Corzine, people familiar with the matter said.
The board allowed the company's exposure to troubled European sovereign debt to swell from about $1.5 billion in late 2010 to $6.3 billion shortly before MF Global tumbled into bankruptcy Oct. 31, these people said. The executive who challenged Mr. Corzine resigned in March.
The disagreement shows that concerns about the big bet grew inside the company months before the trade rattled regulators, investors and customers. The executive, Michael Roseman, whose title was chief risk officer, also expressed concerns directly to Mr. Corzine in meetings of just the two men and with other people present, people familiar with the situation said.
Mr. Roseman contended MF Global didn't have enough spare cash to withstand the risks of its position in bonds of Italy, Spain, Portugal, Ireland and Belgium. He also presented gloomy hypothetical scenarios of what could happen if MF Global's credit rating was downgraded because of the exposure.
Mr. Corzine, who started betting on the bonds shortly after arriving as chief executive in March 2010, responded to Mr. Roseman's concerns that some of the scenarios were too extreme and likely impossible, people familiar with the matter said. The former New Jersey governor and Goldman Sachs Group Inc. chairman said MF Global's exposure was limited, adding that the likely profit was worth the risks, these people said.
The CEO suggested to board members earlier this year that he might leave the company if they didn't trust his judgment about the bet, according to people familiar with the matter.
Boardroom disagreements in which the CEO's decisions are questioned by a lieutenant are rare. The situation at MF Global is even more unusual because it came just six months after directors hired Mr. Corzine to turn around the struggling brokerage firm. He replaced hundreds of sales officials and other employees with former traders from bigger Wall Street firms more accustomed to taking risks.
Mr. Corzine, 64 years old, has had no comment on MF Global since he resigned as chairman and CEO last month. His spokesman declined to comment on Monday.
The House Agriculture Committee has subpoenaed Mr. Corzine to testify at a hearing Thursday where lawmakers will probe the company's collapse and press for answers about an estimated $1.2 billion in missing customer money. Mr. Corzine is expected to attend the hearing.
A spokesman for law firm Davis Polk & Wardwell LLP, which represents the company's former directors, declined to comment. The directors resigned last week. Before the bankruptcy filing, the board's audit and risk committee was led by Eileen Fusco, a former Deloitte LLP partner. Ms. Fusco couldn't be reached for comment.
Mr. Roseman, 50 years old, joined MF Global in 2008 to improve risk-management culture after a rogue-trading incident cost the firm $140 million. In his first year, he helped install risk-management systems designed to prevent future blowups.
"Mike had a very good nose for the issues," said Thomas A. Kloet, CEO of Canadian exchange operator TMX Group and a former executive at brokerage firm Fimat, where Mr. Roseman was hired in 2004. "If he identified a risk, I listened to him." Mr. Roseman began his financial career in the early 1990s after a decade in aerospace and engineering. He traded interest-rate products at a Japanese bank before moving into risk management.
At Fimat, Mr. Roseman warned the company not to take too much risk on any one client, said a person familiar with the matter. At Bank of Montreal, where he worked in the early 2000s, he raised concerns about an energy transaction, according to other people.
"He would stand in people's face," one person said. A Wall Street executive who worked with Mr. Roseman added: "He got nervous when he saw concentrated risk positions."
Some MF Global executives felt even before Mr. Corzine, a former bond trader, took over as CEO that Mr. Roseman was too risk-averse, according to people familiar with the matter.
These people contend that his background was a much better fit for the firm's traditional business of trading futures on exchanges for clients, rather than its aspirations under Mr. Corzine to become a full-service investment bank that could nimbly trade various financial instruments.
Mr. Corzine started making his bets on European bonds in the summer of 2010. As reported by The Wall Street Journal in November, he didn't rely heavily on the risk-management department at MF Global, reporting only to the company's board of directors.
Mr. Roseman was cautious about Mr. Corzine's bet on European bonds almost from the start, even though the CEO expressed confidence that euro-zone leaders wouldn't let the countries default. They haven't yet, though the bonds' prices have been volatile.
By September 2010, Mr. Roseman started voicing his concerns to board members, according to people familiar with the matter. Around the same time, the bet grew to about $1.5 billion, these people said. Mr. Roseman worried the trade might get bigger and even endanger MF Global if the financial turbulence in Europe got too rough.
People familiar with the situation said Mr. Corzine was annoyed by Mr. Roseman's dour attitude and persistence, though their face-to-face meetings about the trade were cordial. Some of their meetings included MF Global employees in risk management, treasury and finance.
As the bet ballooned, it flashed a warning sign on trading limits that Mr. Roseman had helped put in place before Mr. Corzine became his boss.
Even though Mr. Corzine answered only to the board, the directors had to approve any breaches of those trading limits. It was Mr. Roseman's job to seek permission from the board in those cases, even if he had concerns. A person familiar with the matter estimated that Mr. Roseman made at least three separate requests on behalf of the firm to increase the sovereign-debt exposure. Each time, directors asked Mr. Roseman about the risks of the trade.
He responded by outlining the risks that made him uncomfortable about the trade, people familiar with the situation said. Another person briefed on the matter said two directors don't recall hearing any protests by Mr. Roseman.
It isn't clear what Mr. Corzine said at the board meetings, but he was allowed to keep increasing the European bet gradually until June, when it hit $6.4 billion, someone familiar with the situation said.
In January, Mr. Roseman was notified by MF Global that he would be replaced by a new chief risk officer. He left in March after helping with the transition to his successor. Since leaving MF Global, Mr. Roseman has done some consulting work.
Earlier this year, some directors and executives also raised concerns about the size of Mr. Corzine's bet. On at least one occasion, Mr. Corzine wanted to boost the size of the trade by more than the board would let him, according to a person familiar with the matter.
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