Federal regulators on Thursday filed civil charges against former MF Global Holdings Ltd. Chief Executive Jon S. Corzine and a top lieutenant for overseeing the misuse of almost $1 billion in customer funds, saying Mr. Corzine "bears responsibility" for the New York commodities brokerage's 2011 demise.
The Commodity Futures Trading Commission's complaint cited conversations not previously disclosed purportedly showing Mr. Corzine played a more active role in the firm's activities than he had suggested in the past.
The lawsuit, filed in U.S. District Court in Manhattan, comes as a new blow for Mr. Corzine, whose reputation-built on a career as a top executive at Goldman Sachs Group Inc., New Jersey governor and U.S. senator-has been tarnished in the past two years. Mr. Corzine, 66 years old, has been grilled by Congress in several high-profile hearings and is the focus of several civil lawsuits related to his oversight of the company.
The agency also charged a former executive at the firm, Edith O'Brien, with misusing customer funds, saying she aided and abetted the violations. The agency is seeking monetary penalties from Mr. Corzine and Ms. O'Brien and to ban the two from ever again trading commodities on Wall Street.
The CFTC's 47-page complaint depicts Mr. Corzine as instrumental in making decisions that put customer accounts at risk by allegedly moving money in violation of strict rules prohibiting such transfers.
In addition to the firm's misuse of customer funds, the CFTC also charged Mr. Corzine with "failure to supervise diligently," a violation of CFTC rules requiring top officials at regulated firms to maintain strong oversight of a firm's operations and employees.
"Mr. Corzine is being charged with being more than a passive actor in the downfall of MF Global," said CFTC enforcement chief David Meister in a Thursday conference call with reporters. Large trades pushed by Mr. Corzine "strained MF Global's liquidity and used up its cash," he said.
Andy Levander, a lawyer for Mr. Corzine, called the CFTC lawsuit "unprecedented" and "based on meritless allegations." He said, "Mr. Corzine did nothing wrong, and we look forward to vindicating him in court."
A lawyer for Ms. O'Brien, Christopher Barber, said in a statement that the CFTC case against his client was "meritless."
The CFTC also fined MF Global Inc., the parent company's broker-dealer that handled the funds, $100 million-the agency's largest fine ever against a futures merchant. MF Global agreed to settle the complaint and admitted to the CFTC's allegations. The company would pay the penalty after customers and creditors receive 100% of their claims, the trustee for MF Global Inc. said Thursday.
The complaint comes as the CFTC attempts to show a more muscular approach to policing customer funds amid criticism that it failed to spot red flags at MF Global and Peregrine Financial Group Inc., a futures broker whose founder stole millions in customer funds. It alleges about $1 billion in customer money was transferred from segregated accounts at MF Global to help prevent the company's financial collapse. The removal of customer funds was a blow to confidence in the banking industry just three years after the financial crisis required numerous banks to accept taxpayer money to stay afloat. The case also garnered attention since Mr. Corzine was viewed by some as a potential Treasury secretary.
Among the CFTC complaint's allegations is that Mr. Corzine ignored warnings from his global treasurer, Vinay Mahajan, that the firm's liquidity situation was "grave."
Mr. Corzine took steps to avoid tapping a line of credit that risked "giving the appearance that the firm needed to borrow money and therefore was in financial trouble," the complaint alleges. In October 2011, Mr. Corzine told the firm's treasury department they would "go negative" in customer accounts to avoid tapping that credit facility, in violation of firm policy, the complaint alleges.
Wall Street firms commonly record phone conversations for record-keeping reasons. In a recorded conversation that month, Mr. Mahajan told other employees, in reference to Mr. Corzine's trading and the company's use of dwindling funds, that "we have to tell Jon that enough is enough. We need to take the keys away from him." The CFTC complaint alleges that Mr. Corzine "disparagingly nicknamed the global treasurer 'the Gravedigger.' "
Mr. Mahajan wasn't charged with any wrongdoing. Gregory O'Connell, a lawyer for Mr. Mahajan, said his client "only worked for MF Global for 10 weeks and acted appropriately at all times."
The case relies on numerous recordings of conversations that CFTC officials allege show Mr. Corzine was more than a "passive" actor in the customer fund violations.
On Wednesday, Oct. 26, five days before MF Global's bankruptcy, Ms. O'Brien, the assistant treasurer for the firm's brokerage unit, told an employee on a recorded telephone line that the firm wouldn't be in compliance with customer-segregation rules because funds weren't being returned to customer accounts. Ms. O'Brien said it was "a total clusterf-. They have to move half a billion dollars out of [Bank of New York Mellon] to pay me back."
The following day, the employee told Mr. Corzine on a recorded telephone line that some of the funds Ms. O'Brien had transferred from the unit representing futures customers' accounts to help satisfy MF Global's proprietary obligations hadn't been returned.
According to the complaint, Mr. Corzine asked if she had received back enough money "to be in compliance," and the employee responded, "No, she['s] indicating she's net short $106 million."
Mr. Corzine told the employee to "raise hell" with J.P. Morgan Chase & Co., MF Global's banker, to obtain funds to "cover up" the gap left. The CFTC alleges Mr. Corzine didn't receive assurances that the funds were returned.
In congressional testimony, Mr. Corzine said he didn't know customer funds had been misused and that Ms. O'Brien assured him a separate transfer of customer money was proper.
Mr. Corzine took over MF Global in March 2010 and quickly pushed the firm to place large, leveraged bets on European debt. In the summer of 2011, amid widespread economic turmoil in Europe, those bets looked increasingly risky, prompting concerns among regulators and ratings firms about the firm's stability.
By October 2011, MF Global's finances had become increasingly stressed. In its final days, it dipped heavily into customer funds to help finance its trades, eventually using nearly $1 billion, regulators allege. In the process of moving cash, some customer funds were misplaced. Efforts to recover the funds have led customers with money in U.S. accounts to get about 89% of their money back, according to the MF Global Inc. trustee. They are expected to get more back in coming months, pending bankruptcy court approval.
Proving an executive failed to supervise the firm or its employees is easier than proving fraud, lawyers say. The CFTC will have to show Mr. Corzine was directly involved in overseeing those who committed the violations, according to lawyers. The existence of phone calls between Mr. Corzine and others could help the CFTC make that case.
Still, they cautioned the charges aren't a slam dunk. The case will hinge on Mr. Corzine's degree of involvement because he "can argue that he relied on others in overseeing the firm's operations," Peter Henning, a law professor at Wayne State University in Detroit, said in an email.