MF Global: gross negligence or intent
By Matthew Goldstein
There was plenty of theatrics Thursday when Jon Corzine returned to his old stomping ground–Capitol Hill–to offer an apology and a mild defense for the events that led to the collapse of MF Global. But in the end little light was shed on just what happened during those final days of October, as Corzine’s firm spiraled towards bankruptcy and hundreds of millions dollars of supposedly protected customer money went missing.
Corzine said many times he didn’t know what happened to the money and was shocked as anyone to find out the money was gone. But there is one thing Corzine said that will prove to be the most critical part of his testimony and that’s his assertion that he never intended to do anything wrong. Or more precisely, he never intended to have customer money maintained in segregated accounts transferred to the firm’s own bank accounts.
As anyone who has been following the MF Global saga now knows, the one inviolate rule of the futures industry is that a firm cannot commingle its money with its customers, or take customer money in a segregated account to pay the firm’s bills or debts.
Yet it increasingly looks like customer money was moved and commingled with the firm’s own money. But the challenge for investigators from the FBI to determine is whether the commingling was an accident–the result of gross negligence by harried and frantic employees of MF Global. Or was the money moved in a deliberate and desperate attempt to the keep the ship afloat.
It’s an important distinction because gross negligence–no matter how bad that might be–would likely only expose those at MF Global to potential civil liability. That’s bad and could results in stiff fines and bans from the futures business for individuals, but probably no jail time.
On the other hand if someone at MF Global gave an order to begin wiring money hand-over-fist out of customer accounts to meet some margin call, then a crime might very well have been committed. The key thing is whether anyone at MF Global had the intent to break the law and move customer money. It’s why Corzine kept to the “I didn’t intend” construction in answering questions during the hearing.
Now it’s well possible he didn’t intend to violate the rule against misusing customer money. And it’s possible that no one else at MF Global did either. The movement of money could have been simply the result of poor record keeping and extreme carelessness. Even though the FBI has been investigating for a month, no one has been arrested or even implicated in breaking the law.
Now sources say investigators are acting under the assumption that this isn’t just a case of gross negligence and someone knew customer money was being improperly transferred. That’s not surprising–investigators by nature expect the worse and hope to find it. FBI agents are trained to have a nose for crime. But good investigators also won’t pursue a case without the evidence to back it up and that could still take weeks or months. And even then the evidence just might not be there.
It’s nearly four years since the collapse of Bear Stearns and still no one of significance has gone to jail over the financial crisis. It’s often said being stupid or dumb is not a crime.
Still, all you need to know is that the only thing that really matters in the MF Global investigation is whether the line between gross negligence and intent was crossed within the firm.
Everything else about this mess–including the issue of whether Corzine operated MF Global with too much leverage, the risky bets he made on European debt and the level of regulatory disclosure–is just noise.