NEW YORK — (Mealey’s) The U.S. Commodities Futures Trading Commission (CFTC) on June 27 filed a civil complaint in the U.S. District Court for the Southern District of New York, alleging that Jon S. Corzine, as CEO of bankrupt MF Global Holdings Ltd. (MFGH), is legally responsible for MFGH’s misuse of $952 million in customer money that was invested with the firm. The complaint also names MFGH’s assistant treasurer Edith O’Brien as a defendant (U.S. Commodities Futures Trading Commission v. MF Global Inc., et al., No. 13-4463, S.D. N.Y.).
(Complaint available. Document #80-130703-019C.)
MFGH filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York in 2011. MF Global Inc. (MFGI), as an affiliate of MFGH, also filed for Chapter 11 bankruptcy at that time.
The CFTC complaint alleges that during the final week of MFGH’s operations before it filed for bankruptcy, Corzine oversaw practices that were violations of the Commodities Exchange Act (CEA), 7 U.S. Code Section 1. The commission also seeks a permanent injunction that would bar Corzine and O’Brien from working in the financial industry.
Specifically, Corzine unlawfully used money in customer segregated funds to support MFGH’s own proprietary operations and the operations of its affiliates, which resulted in a $952 million deficit in customer segregated accounts, the CFTC contends. Thousands of customers were directly and indirectly harmed by Corzine’s actions, the commission says.
The CFTC insists that Corzine “bears responsibility for MF Global’s unlawful acts.” Corzine held and exercised direct or indirect control over MFGH and MFGI and either did not act in good faith or knowingly violated the law, the CFTC argues.
The commission contends that O’Brien also directed, approved and/or caused numerous illegal transfers of customer funds to the firm’s proprietary accounts and aided the violations in question in her position as assistant treasurer of MFGH.
In addition to the violations that occurred in the final week before MFGH’s bankruptcy was filed, the CFTC argues that from January 2011 through May 2011, MFGH misused customer segregated funds by investing them in securities that were not considered readily marketable or highly liquid, in violation of CFTC regulations.
The CFTC maintains that when Corzine joined MFGH as CEO in 2010, MFGH was still principally a commodity brokerage firm that earned revenue primarily from interest income for servicing customers’ deposits and from commissions on customer transactions. Corzine planned to change the firm into a global investment bank that generated substantial revenues from proprietary trading activities that included making “increasingly larger and potentially riskier investments with MFGH’s proprietary funds,” the CFTC says.
One of Corzine’s risky plans, the CFTC argues, was the investment in the sovereign debt of certain European nations through repurchase-to-maturity transactions (RTMs) with counterparties trading on the London Clearing House.
While he was implementing his plan, Corzine was aware that MFGH had inadequate controls and systems with regard to regulatory reporting and liquidity management, but he failed to remedy those problems, the CFTC alleges.
The CFTC contends that MFGH’s chief risk officer (CRO) questioned Corzine’s RTM strategy in the fall of 2010, even notifying MFGH’s board of directors about the dangers of Corzine’s strategy. When the CRO suggested placing limits on the RTM investments, Corzine replaced the officer, who later left the firm in March 2011.
The CFTC maintains that as the liquidity stresses increased for MFGH through 2011, Corzine directed the firm’s chief financial officer to explore using customer funds to meet MFGH’s liquidity needs.
The CFTC alleges that Corzine, O’Brien, MFGI and MFGH violated the CEA and CFTC Regulations 1.20, 1.22, 1.23 and 1.25 for failure to segregate, and the misuse of, customer funds. The agency also contends the defendants violated CFTC Regulation 1.12(h) in failing to report what is called “under segregation,” the problem of customer segregated money that is missing from those accounts.
Permanent Injunction Sought
The CFTC says the defendants also filed false and misleading statements with the CFTC, and Corzine and O’Brien — specifically — failed to supervise MFGH’s employees.
The CFTC seeks penalties including a permanent injunction against Corzine and O’Brien that would prevent them from entering into any transactions involving commodities futures, options on commodities futures, commodity options, security futures products, swaps and/or foreign currency for their own personal accounts for any account in which they have a direct or indirect interest.
The CFTC is represented by Steven Ringer, chief trial attorney for the CFTC in New York.
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