Corzine’s disgrace

By Felix Salmon
June 27, 2013
The CFTC complaint we were waiting for has now arrived: MF Global, Jon Corzine, and MF's former assistant treasurer, Edith O'Brien, have all been charged with misusing -- stealing, effectively -- almost $1 billion in customer funds.

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The CFTC complaint we were waiting for has now arrived: MF Global, Jon Corzine, and MF’s former assistant treasurer, Edith O’Brien, have all been charged with misusing — stealing, effectively — almost $1 billion in customer funds. They took the money out of customer accounts knowing that they weren’t allowed to do so, and they failed to repay it, and they also failed, naturally, to tell the CFTC what they were doing.

Corzine, as the CEO of a highly-regulated financial institution, was responsible for ensuring that his company didn’t break the law, but he didn’t seem to care nearly as much about those responsibilities as he did about his own trading account. And while other investment-bank CEOs at least pay lip service to the idea of being client-focused, Corzine seemed to care about clients mainly as a source of funds he could use to meet margin calls.

During the summer of 2011, Corzine directed Holdings’ CFO to explore all potential sources of funds and assets that could be used to meet the liquidity needs of MF Global’s proprietary trading activities. This included the use of customer funds to satisfy, in part, MF Global’s need to increase its capital by hundreds of millions of dollars to meet its obligations…

On October 6, 2011, in response to the Firm’s liquidity stresses, Corzine told an MF Global Treasury Department employee that they were going to do all the things they could do to not draw on the revolver the next day, even if that meant “go[ing] negative” in the FCM customer accounts.

“Going negative”, here, means exactly what you think it does: that the amount of money in segregated client accounts was lower than the amount of money those clients were being told that they had.* And Corzine was saying this as early as October 6, when he still had a $1.2 billion credit line to play with, and well over three weeks before Halloween, when MF Global eventually ended up filing for bankruptcy.

The complaint tells a clear tale: by October 17, MF Global was violating its own policies with regard to customer accounts, and raiding them for cash. By October 26, it found itself unable to repay that cash by the end of the day, and had “a deficiency by the close of business of over $298 million in its customer segregated accounts”, in the wake of a transfer of more than half a billion dollars out of MF Global’s customer segregated accounts and into its proprietary accounts. That deficiency rose to $413 million the following day, October 27, when the following conversation took place on a recorded phone line:

Corzine: We have a money management account at Chase, if my memory serves me.

Employee #1: Yeah, it’s the JP Morgan Trust account, but that’s cash seg for clients — it has nothing to do with greasing our wheels for Chase to move.

Corzine: I understand but you put it in a tri-party, and then once the securities have started moving, then you move it back to the, um — this is the same thing we did last night, they left it in the tri-party, the seg money.

“Seg”, here is short for “segregated”, as in “this money is put aside for clients and we can’t touch it”. Except Corzine clearly does want to touch it: he essentially wants to borrow against it, and then send the proceeds to Chase as MF Global money.

Certainly there was a lot of chaos at MF Global at the time — but that’s no excuse for committing a $165 million “bookkeeping error”. And in any case, of course, the chaos was ultimately Corzine’s fault: he was the person who fired risk managers and spent no time worrying about risk controls, preferring instead to put all of his effort into trading. Even at the end, Corzine seemed much less worried about customer funds than JP Morgan was. JP Morgan asked for a signed letter attesting to the fact that the money it was receiving had not come from customer accounts; Corzine just forwarded the email on to get signed (it never was signed), and never asked anybody to find out whether customer accounts had, in fact, been raided. (Probably because he knew the answer.) States the complaint: “Corzine failed to implement any controls or take any steps to ensure that customer segregated funds were not and would not be unlawfully used.” (My emphasis.)

Even heading into the final weekend, when Corzine was explicitly told that MF Global had raided customer funds* and had not managed to repay them, he did nothing to inform regulators of that fact.

It’s impossible to know how this lawsuit is going to play out, but Corzine’s own lawyer seems flustered:

Andy Levander, counsel for Corzine, said: “This is an unprecedented lawsuit based on meritless allegations that Mr Corzine failed to supervise an experienced back-office professional who was located in a different city and who did not report to Mr Corzine or even to anyone who reported to Mr Corzine.

“After 20 months of thorough investigations by the Department of Justice, two bankruptcy trustees, and the CFTC, no evidence has been found that contradicts Mr Corzine’s sworn testimony before Congress.

“Mr Corzine did nothing wrong, and we look forward to vindicating him in court.”

As Levander knows, there’s much more to this lawsuit than accusations that Corzine simply failed to supervise O’Brien — at the very least, it accuses Corzine of failing to supervise the entire bank. At some point, when you’re a fiduciary, incompetence becomes downright criminal, and if the CFTC wins this suit, I wouldn’t be at all surprised to see criminal charges follow. What’s more, the CFTC suit does not accuse Corzine of perjury, with respect to his Congressional testimony — so it’s fascinating that Levander picks that imaginary charge out in particular to deny it.

Of course, the CFTC complaint is only one side of the story — and in general expensively-represented financial professionals tend to have a pretty good track record at trials. But after reading this complaint, I doubt that even an acquittal would clear Corzine’s name. Someone like Bob Rubin might be deeply implicated in the financial crisis, but he still gets to trot around the globe being great and good. Corzine’s career, by contrast, is over. That’s not nearly sufficient punishment, but at least it’s a start.

Update: A Corzine spokesman calls to explain that when Corzine is quoted as knowing about “going negative” in the complaint, that does not mean he knew that customer funds were being raided. If you look at the account, there are the customer funds; and then there are the bank’s funds, which come in two different flavors. There’s the money which is freely accessible to the bank; and then there’s “excess seg” — the money which the bank needs to keep in the account but which doesn’t actually belong to customers.

Apparently, when Corzine was told that MF Global was “going negative” in the account, that meant that the bank would be left with less than the minimum required “excess seg”. It did not mean, necessarily, that the bank was raiding customer money. And so when Corzine was told on the Friday evening that O’Brien was “net short $106 million”, that might have meant only that the excess seg was short $106 million, but that the customer money was still untouched.


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Considering the charge of mis-using client money, and Corzine an Steenkamp’s requirements under the law as dictates by the Sarbanes Oxley law, it begs the question once again, “why no criminal charges”?

Posted by Sechel | Report as abusive

@Sechel Agree 110%. If the most hands on, call-the-shots CEO in the industry can so clearly and blatantly brush the black and white securities rules aside then there is no reason to even have any rules. String him up and take his money!

Posted by y2kurtus | Report as abusive

Honestly, he is an ex-Senator so nothing serious will happen to him. In a just world he would be dragged out into the street and shot like a rabid dog or some other destructive menace.

The idea that we have the death penalty for the relatively small stakes of killing an individual person, and even for slightly lesser crimes, but don’t have it for destroying billions of dollars through active malfeasance is a joke.

If ever there was a reason to bring back the gibbet or stockade this is it. Someone who had every advantage in life, and used that to make the world a much worse place and undermined trust in the financial sector permanently.

Posted by QCIC | Report as abusive

If he were a Republican, the Dems would be screaming for his head. But because he is a Democrat and closely associated with the unimpeachable Barack Obama, he escapes the moral and ethical outrage that should rightly fall upon him. Thanks Felix for keeping this story alive. Let’s hope justice is served.

Posted by Thistle21 | Report as abusive

Felix, Is your description in the update simply a paraphrase of what Corzine’s spokesguy told you, or is this your interpretation of his statements?

I hope it’s not the former, because it certainly sounds like you have reviewed some other evidence to come to a conclusion, rather than simply accepted an interested party’s view of some ambiguous evidence.

Posted by JesseD | Report as abusive

As a credit analyst who has seen more than his share of corporate failures, there is one common theme in all such debacles: when the money has run out and management’s back is up against the wall, there is nothing they won’t do to stay alive. Instead of facing the truth, they grasp at straws. Ig you dig deep enough into corporate failures, you will always find some sort of wrong-doing, especially accounting fraud. It’s human nature.

Posted by nixonfan | Report as abusive

Whoa…Corzine is the “smartest man in America when it comes to the economy” or so Joe Biden and Barack Obama said during the 2008 election. WHY isn’t this creep in jail with Robert Rubin and Jaime Dimon?

Posted by feudi | Report as abusive