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Corzine Faces Trading Ban as CFTC Sues Over MF Global

A U.S. regulator’s lawsuit against Jon Corzine could make him the first former leader of Goldman Sachs Group Inc. to be banned from trading, the industry he returned to after serving as a New Jersey senator and governor.

The complaint filed yesterday by the Commodity Futures Trading Commission seeks to punish Corzine for failing to supervise employees at MF Global Holdings Ltd., which transferred client funds to pay debts in a failed effort to save the firm. Less than a year after the October 2011 bankruptcy, Corzine considered starting a hedge fund, the New York Times reported in August, citing people with knowledge of his plans.

If the CFTC prevails against Corzine, “he’ll face a very serious challenge if he ever wants to be involved in the money-management business again,” said Gregory Bruch, a law partner at Bruch Hanna LLP in Washington and former assistant enforcement director at the Securities and Exchange Commission. “They’re trying to bar him from the business, and that’s going to be a huge fight.”

Corzine, 66, who replaced Stephen Friedman as Goldman Sachs’s leader in 1994, handed off to Henry Paulson in 1999 and became MF Global’s chief executive officer in March 2010 after losing his bid for a second term as New Jersey governor to Republican Chris Christie, 50. The move to MF Global was a step down from Goldman Sachs, once Wall Street’s most profitable securities firm.

Photographer: Andrew Harrer/Bloomberg

Former Chairman and Chief Executive Officer of MF Global Holdings Ltd. Jon Corzine. Close

Former Chairman and Chief Executive Officer of MF Global Holdings Ltd. Jon Corzine.

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Photographer: Andrew Harrer/Bloomberg

Former Chairman and Chief Executive Officer of MF Global Holdings Ltd. Jon Corzine.

Paulson, 67, later became U.S. Treasury secretary and Friedman, 75, served as director of the National Economic Council and chairman of the Federal Reserve Bank of New York. Senior government roles are so common for former Goldman Sachs leaders that current CEO Lloyd C. Blankfein, 58, said last year that he could stay “forever” if he doesn’t land such a job.

Restitution, Penalty

The CFTC also sued former Assistant Treasurer Edith O’Brien and reached a settlement with the company’s brokerage unit, MF Global Inc., which agreed to pay about $1 billion in restitution to clients and a $100 million penalty. The settlement is subject to court approval.

“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,” his lawyer, Andrew Levander, said in a statement, referring to O’Brien, who was based in Chicago. “No evidence has been found that contradicts Mr. Corzine’s sworn testimony before Congress.”

Evan T. Barr, a lawyer for O’Brien, wasn’t available for comment.

Unlawful Acts

Corzine bears responsibility for MF Global’s unlawful acts, the CFTC said yesterday in its complaint. The suit, which requests a jury trial, also seeks monetary penalties and disgorgement of all benefits received, including salaries and bonuses, from the defendants.

“He held and exercised direct or indirect control over MF Global and Holdings and either did not act in good faith or knowingly induced these violations,” the agency said in the complaint, referring to the brokerage unit and the parent company.

Corzine failed to supervise the company’s officers, employees and agents, the regulator said.

“If the CFTC can prove that Mr. Corzine had a sense that the firewall between firm and customer money was at risk, control-person liability would become a viable weapon of the CFTC,” said Seth Taube, a partner at Baker Botts LLP in New York. “Where companies cause great damage, the law recognizes that the man at the top should bear some responsibility, absent evidence of strong internal controls.”

Recorded Conversations

The complaint cites recorded phone conversations between MF Global employees in the firm’s final weeks.

In one conversation on Oct. 6, 2011, about three weeks before the firm’s bankruptcy, the global treasurer said, “We have to tell Jon that enough is enough,” according to the complaint. “We need to take the keys away from him.”

Corzine sought to turn the brokerage firm into a global investment bank that reaped revenue from proprietary trading, according to the complaint. His plans included making larger and riskier investments from MF Global’s funds, the CFTC said.

To achieve that goal, Corzine caused the firm to make significant investments in instruments such as the sovereign debt of European countries, the CFTC said. The plan faltered by late 2011, placing “significant strains on the firm’s capital and liquidity,” the CFTC said.

Risks Mounted

As the risks associated with Corzine’s strategy mounted, he repeatedly was permitted by the holding company’s board to increase the size of the investments, the regulator said.

The CFTC, led by Chairman Gary Gensler, has itself been blamed for contributing to MF Global’s downfall. Gensler, 55, who was a colleague of Corzine’s at New York-based Goldman Sachs and recused himself from the agency’s investigation of the case, failed to coordinate with the SEC, according to a November report by U.S. House Republicans.

It’s hard to bring cases against CEOs like Corzine, “largely because they are so well-lawyered, so well-protected,” said Arthur Levitt, a former SEC chairman who’s an adviser to Goldman Sachs and on the board of Bloomberg News parent Bloomberg LP. “The CFTC under Gary Gensler has been much more aggressive than any of its predecessors.”

MF Global’s collapse on Oct. 31, 2011, was the eighth-biggest bankruptcy in U.S. history. A $6.3 billion wager on the bonds of some of Europe’s most-indebted nations helped destroy the firm and its brokerage unit, which listed assets of $41 billion and debt of $39.7 billion in its Chapter 11 filing.

Liquidity Crunch

Corzine was warned about MF Global’s liquidity crunch and “knew the firm violated its own policy that had been designed to protect customer funds,” the CFTC said in a statement.

Kent Jarrell, a spokesman for James W. Giddens, the trustee for the liquidation of the brokerage unit, said in an e-mailed statement that the agreement with the CFTC, which is subject to court approval, is “appropriate.”

Corzine has also been sued along with senior executives Bradley Abelow and Henri Steenkamp in U.S. Bankruptcy Court by Louis J. Freeh, a trustee winding down the brokerage. Freeh alleged that they failed to act in good faith and implemented strategies that caused the company to fail.

The CFTC “will have to prove there were red flags” that Corzine ignored, said Bruch, the former SEC attorney. “The complaint doesn’t say he was corrupt or lied to regulators.”

The case is U.S. Commodity Futures Trading Commission v. MF Global Inc., 13-04463, U.S. District Court for the Southern District of New York (Manhattan).

To contact the reporters on this story: Keri Geiger in New York at kgeiger4@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net; Tiffany Kary in New York at tkary@bloomberg.net

To contact the editors responsible for this story: Christine Harper at charper@bloomberg.net; John Pickering at jpickering@bloomberg.net; Maura Reynolds at mreynolds34@bloomberg.net

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