US agency sues Corzine over failure of MF Global

PUBLISHED : Friday, 28 June, 2013, 10:49am
UPDATED : Friday, 28 June, 2013, 10:49am

Federal regulators have accused former New Jersey Governor Jon Corzine of misusing customer money while he was chief executive of MF Global, which collapsed in 2011.

A civil lawsuit filed Thursday in New York by the Commodity Futures Trading Commission seeks to ban Corzine from trading in the futures market and demands he pay unspecified penalties.

The lawsuit says Corzine bore responsibility for unlawful acts by MF Global because he controlled the company and its holdings and “either did not act in good faith or knowingly induced these violations.”

“He also failed to supervise diligently the activities of MF Global’s officers, employees and agents,” the lawsuit says.

MF Global has agreed to pay a US$100 million (HK$775.8 million) penalty as part of a settlement announced Thursday. The money will come from bankruptcy proceedings.

MF Global sought bankruptcy protection in 2011 after a disastrous bet on European countries’ debt. Under Corzine’s leadership, the firm bet US$6.3 billion (HK$48.9 billion) on bonds issued by Italy, Spain and other nations with deeply troubled financial systems.

The bonds plummeted in value in the weeks before MF Global’s failure as fears intensified that some European countries might default.

The firm’s US$41 billion (HK$318.1 billion) bankruptcy was the eighth-largest in US history.

When the Titanic went down, you didn’t blame the cook; you didn’t blame the guy in the engine room. You blamed the captain. And Corzine is the captain of the ship called MF Global
Anthony Sabino from the New York law firm Sabino & Sabino, which specializes in white-collar crime

Corzine has previously disputed the allegations by the CFTC, which regulated New York-based MF Global. Corzine and MF Global did not immediately respond publicly to Thursday’s lawsuit.

The CFTC also filed civil charges against Edith O’Brien, the firm’s former assistant treasurer.

The lawsuit is striking in that regulators have seldom charged individuals with financial crisis-era misdeeds. They have instead imposed fines and penalties against companies, often with no one having to admit blame.

The CFTC need not prove in court that Corzine personally authorised the use of customer money, said Anthony Sabino of the New York law firm Sabino & Sabino, which specializes in white-collar crime. Top executives can be liable for “failure to maintain internal controls” or “failure to supervise,” Sabino said.

“When the Titanic went down, you didn’t blame the cook; you didn’t blame the guy in the engine room,” Sabino said. “You blamed the captain. And Corzine is the captain of the ship called MF Global.”

About US$1.2 billion in customer money disappeared when MF Global collapsed. Nearly 90 per cent of the money belonging to the firm’s US customers has been recovered. Many farmers, ranchers and business owners used MF Global to hedge their risks against fluctuating crop prices.

The firm’s collapse was the first on Wall Street since the 2008 financial crisis ended. Critics have long complained that regulators have failed to aggressively pursue much bigger financial firms, whose high-risk bets nearly toppled the financial system.

Corzine, 66, had been a chief executive of Wall Street powerhouse Goldman Sachs before entering politics in 2000. He served as a Democratic US senator from New Jersey and later governor of the state.

Corzine has also been a major fundraiser for Democrats. He took the top job at MF Global in March 2010 after losing his 2009 bid for re-election as governor to Chris Christie, the current governor.

The CFTC’s lawsuit says that when Corzine joined MF Global, he aimed to convert it into a major Wall Street investment bank that generated revenue from aggressive trading strategies. It notes that he tried to boost revenue by making significant investments in the sovereign debt of some European countries.

The plan worked for a while even as the investments grew increasingly risky, the lawsuit said. In the second half of 2011, the risky investments and other factors put significant strains on the company’s cash flow and capital. By October 2011, the lawsuit says, sources of cash were drying up.

Corzine and other company employees communicated with one another, by email and sometimes on recorded telephone lines, about the firm’s “dire situation,” the lawsuit says.

It says a treasurer of the firm’s parent company, MF Global Holdings, told a chief financial officer and another employee in a recorded conversation on Oct. 6, 2011, that “we have to tell Jon that enough is enough. We need to take the keys away from him.”

Corzine “disparagingly nicknamed the Global treasurer ‘the Gravedigger,”‘ the lawsuit says

In the last week of October 2011, MF Global violated US commodity laws by using nearly US$1 billion of customer funds to support its own trading operations, directly harming thousands of customers, the lawsuit says.

Corzine stepped down as MF Global chief in November 2011, a few days after the firm filed for bankruptcy protection.