The Commodity Futures Trading Commission (CFTC) sued former MF Global Holdings Ltd. Chief Executive Officer Jon Corzine for failing to properly oversee the company as it spiraled toward bankruptcy in 2011. The regulator also sued MF Global’s former assistant treasurer Edith O’Brien and said it reached a settlement with subsidiary MF Global Inc. to pay all funds due to customers and impose a $100 million penalty. That settlement is subject to court approval.
“Turning a profit is not the only job of the person at the top of a CFTC-regulated firm,” CFTC Enforcement Director David Meister said in a statement on the regulator’s website. “Particularly in times of crisis, the person in control, like the CEO here, must do what’s necessary to prevent unlawful uses of customer money, so that customers’ money is still there if and when the music stops.”
MF Global’s collapse led to billions of dollars in missing client funds at the broker dealer and the eighth-biggest bankruptcy in U.S. history.
Corzine, who served as a senator and governor from New Jersey and was once a co-chairman of Goldman Sachs Group Inc., presided over MF Global before it filed for bankruptcy on Oct. 31, 2011. Wrong-way $6.3 billion trades on bonds of some of Europe’s most-indebted nations helped destroy the company and its brokerage unit, MF Global Inc., which listed assets of $41 billion and debt of $39.7 billion in its Chapter 11 filing.
Corzine, 66, has been faulted by Congressional lawmakers, former customers who have named him in a class-action lawsuit, and the trustees overseeing the wind-down of MF Global. The Federal Bureau of Investigation also started a probe of the events leading to the bankruptcy, when as much as $1.6 billion in client funds went missing. No charges have been filed in the case.
“I think Corzine clearly has to decide whether to fight to the end or make a quick exit and resolve the matter,” said Michael Weinstein, a former trial attorney with the U.S. Department of Justice. Weinstein, speaking before the lawsuit was filed, said Corzine’s defense may include an argument that the regulator is suing for political reasons rather than trying to resolve a dispute.
Corzine wasn’t informed that customer funds were at risk or were being used improperly, and there is no evidence that he failed to work with management to try and turn around a failing company, Corzine spokesman Steve Goldberg said in a statement before the complaint was filed.
“Although the intense emotion and anger expressed by individuals who were affected by the collapse of MF Global is compelling and not to be understated, justice would not be served if Mr. Corzine were to be blamed for alleged mistakes that were made without his knowledge and that he did not cause or direct,” Goldberg said.
He cited CFTC comments from as early as November 2011 that blamed Corzine as evidence that the agency is bowing to “political pressure to hold someone liable for the failure of MF Global.”
The CFTC has itself been blamed at times for contributing to MF Global’s downfall. The regulator, chaired by Corzine’s ex-Goldman Sachs colleague Gary Gensler at the time of MF Global’s collapse, failed to coordinate with the Securities and Exchange Commission (SEC), according to a 101-page report last November by U.S. House Republicans.
The report faulted Corzine’s leadership at MF Global and said the CFTC also didn’t inform the SEC that the broker was using an alternative method for calculating customer funds.
The SEC didn’t include the CFTC in several meetings in 2011 about the brokerage’s capital and business strategy that would have been helpful for oversight, according to the report.
The current lawsuit shows the CFTC is flexing its enforcement muscle, which it has been doing more often since former federal prosecutor David Meister joined the agency in 2010, said Weinstein, of chairman of Cole Schotz’s white collar practice in Hackensack, New Jersey.
“This is a watershed moment for them, in how they want to be perceived in the marketplace,” he said of the regulator.
Corzine has also been sued along with senior executives Bradley Abelow and Henri Steenkamp in U.S. Bankruptcy Court by Louis J. Freeh, a trustee winding down the brokerage. Freeh alleged in the complaint that they failed to act in good faith and implemented strategies that caused the company to fail. It seeks unspecified damages to be determined at trial, as well as legal fees.
Freeh blamed Corzine and his management team for bungling an expansion of the company’s traditional business model while ignoring deficiencies in its risk controls. Corzine hired Chief Operating Officer Abelow, who was once his chief of staff as governor, and favored Steenkamp over then-CFO Randy McDonald, the lawsuit said.
Corzine, a Democrat, has testified before Congress that he never gave any instruction to misuse customer funds. He also said he didn’t believe anything he said could reasonably have been interpreted as an instruction to misuse customer funds.
Corzine joined MF Global in March 2010, when it was already suffering as it depended on interest rates for revenues at a time when rates were declining. As Corzine moved to convert it into a full-service broker dealer and investment bank, setting up a proprietary trading desk, he didn’t improve already deficient controls, according to Freeh’s complaint against Corzine.
Under his leadership, MF Global’s position in European investments increased from $400 million in mid-September 2010 to $8.3 billion at the end of August 2011. The company’s struggles were exacerbated by MF Global’s method of accounting for such trades, according to Freeh’s report.
Before joining MF Global, Corzine spent 24 years at New York-based Goldman Sachs, becoming co-head of the firm with Henry Paulson, who later became the U.S. Treasury secretary. He also spent five years in Washington, and served as New Jersey’s governor from 2006 to 2009.
Whether he can return to Wall Street after MF Global may come down to whether he faces a trading ban as a result of the CFTC’s action, Weinstein said.
“People reinvent themselves on Wall Street all the time,” Weinstein said. “It’s about whether you can make money.”