Jon S. Corzine, MF Global Holding Ltd.’s former chief executive officer, may face potential legal liability if investigators show he knew customer money might be used when he ordered $200 million transferred to a U.K. account as his brokerage neared collapse, former prosecutors said.
The ex-Goldman Sachs Group Inc. co-chairman gave “direct instructions” to move money from a U.S. account to meet an overdraft with JPMorgan Chase & Co. just days before MF Global’s bankruptcy, according to a memo by congressional investigators. Such accounts may have contained assets belonging to both customers and MF Global.
The U.S. Department of Justice and federal regulators are investigating the firm’s Oct. 31 collapse. Corzine, a Democrat from New Jersey who served in the U.S. Senate and as governor, told Congress last year he never directed customer funds be used improperly. Though showing he deliberately used customer money would be the key to a criminal case, former prosecutors said Corzine, who hasn’t been charged with any wrongdoing, could be deemed liable in civil cases for misuse of customer money simply for ordering the hole in JPMorgan’s account plugged, if it turns out customer funds were used.
“It’s not whether he specified,” John Moscow, a former chief prosecutor in the office of Manhattan District Attorney Robert Morgenthau, said yesterday in an interview. “The economics of the situation were he was out of money. The bottom line is, he was taking a risk with somebody else’s money.”
In a casino, said Moscow, now with Baker Hostetler LLP in New York, “if I put your money on the table, I’ve committed larceny as soon as I expose it to risk.”
Hearing This Week
Andrew Levander, a lawyer for Corzine, didn’t return a call or e-mail after normal business hours seeking comment on the probe. A congressional hearing on the issue is set for this week.
MF Global and its brokerage sought Chapter 11 bankruptcy protection in New York after a $6.3 billion bet on the bonds of some of Europe’s most indebted nations prompted regulator concerns and a credit-rating downgrade. Corzine, 65, quit MF Global Nov. 4. The bankruptcy trustee overseeing the liquidation of the company’s brokerage subsidiary has estimated a $1.6 billion shortfall between customer claims and assets available.
Edith O’Brien, a treasurer for New York-based MF Global, said in an e-mail quoted in the Congressional memo that the $200 million transfer was “Per JC’s direct instructions,” according to a copy of the memo obtained by Bloomberg News.
The e-mail, dated Oct. 28, was sent three days before the company collapsed, according to the document. The account may have contained both client and company funds, the memo states.
O’Brien’s internal e-mail was sent as MF Global found intraday credit lines limited by New York-based JPMorgan, the firm’s clearing bank as well as one of its custodian banks for segregated customer funds, according to the memo.
Barry Zubrow, JPMorgan’s chief risk officer, called Corzine to seek assurances that the funds belonged to MF Global and not customers. JPMorgan drafted a letter to be signed by O’Brien to ensure that MF Global was complying with rules requiring customers’ collateral to be segregated. The letter wasn’t returned to JPMorgan, according to the memo. JPMorgan was given verbal assurance that the transfer followed the rules, according to a person familiar with the transaction.
The assurance was given by O’Brien or someone in her office, said the person, who declined to be identified because the communications were private. Reid Weingarten, O’Brien’s lawyer, didn’t respond to calls or an e-mail seeking comment after normal business hours.
The congressional memo was prepared for a March 28 House Financial Services subcommittee hearing on the firm’s collapse. O’Brien is scheduled to testify, having been subpoenaed.
Steven Goldberg, a spokesman for Corzine, said in a statement yesterday it was Corzine's ``understanding that on the evening of Oct. 27, MF Global had substantial hundreds of millions of dollars in cash and free collateral available.''
Goldberg said last week that the former MF Global chief “never gave any instruction to misuse customer funds and never intended anyone at MF Global to misuse customer funds.”
The Congressional memo’s account of the e-mail exchanges involving O’Brien aligns with what Terrence Duffy, executive chairman at CME Group Inc., told lawmakers during a December hearing. Auditors at CME, which had authority to oversee MF Global, learned from an employee of the brokerage that Corzine knew about the loans involving a European affiliate, Duffy told committee members.
Michael Clark, a former federal prosecutor who has handled financial fraud cases, said the government may be able to show “that Corzine and the staffers knew at that time the request was made that it necessarily meant they’d have to pull funds without authorization from other customer accounts.”
Vulnerable to Litigation
Clark, now with the law firm Duane Morris LLP in Houston, said the actions of Corzine’s employees may make him vulnerable to litigation.
“The law recognizes that a principal can be liable for the actions of his agents under such circumstances,” he said.
Proving intent to abuse customer money “can be shown by direct evidence, such as documented instructions or staffers’ testimony, or by circumstantial evidence of intent showing he was willfully blind in that he chose to ignore what otherwise would have been obvious to him under the circumstances,” Clark said.
If Corzine asked employees to take funds temporarily from client accounts, the lawyer said, “the liability is more direct since that violates fiduciary and other legal duties owed to customers and the government.”
Transfer of Funds
Gerald Shargel, a criminal defense lawyer in New York, agreed with Clark, saying if Corzine is found to have directed the transfer of funds, a case for fraud could be brought based on a manager’s breach of fiduciary duty to clients.
Even if Corzine didn’t specify to O’Brien that she use client funds, but demanded that “needed” funds be transferred to JPMorgan while knowing there wasn’t enough company funds to make up the amount, the government may have a strong case, Shargel said.
If Corzine knew there wasn’t enough money to complete a transfer without dipping into client funds, there would be circumstantial evidence that could make a stronger case than testimony from O’Brien saying she was told specifically to take client funds, he said.
“When you have a web of circumstantial evidence, it’s stronger than a direct-evidence case: it doesn’t depend on memory, opportunity, bias, or hostility from an employee, who might be trying to get out from their own problems,’’ Shargel said.
There may also be liability if money was moved to another country to evade restrictions in the U.S. on such use of customer money, said Moscow.
In addition, securities laws may have been violated if Corzine failed to disclose to customers that the transfer abroad would affect their title to the funds, he said. That would apply even if the fine print in the customer contract specified that funds might be transferred to an affiliate, Moscow said.
In addition to federal probes, Corzine and other former MF Global executives face a group-investor lawsuit over whether they broke rules governing customer protection. The threshold for success in such civil litigation is far lower than the standard needed in a criminal prosecution.
The lawsuit, led by the Virginia Retirement System, alleged that Corzine made misleading statements that inflated the prices of MF Global securities. Separately, commodities customers are competing to lead another group lawsuit against Corzine.
Scheduled to Appear
At the hearing in Washington this week, O’Brien is scheduled to appear along with Christine Serwinski and Laurie Ferber, two other MF Global executives named by Corzine as being involved in the transaction, according to the Congressional memo.
Henri Steenkamp, the firm’s chief financial officer, is also scheduled to testify, as are representatives from JPMorgan and the Financial Accounting Standards Board who haven’t yet been identified.
Representative Spencer Bachus, the chairman of the Financial Services Committee, said last week in a statement that the investigations subcommittee will try “to learn whether the liquidity crunch at MF Global led someone to improperly use customer funds to meet the firm’s need for cash.’’
The five-page Congressional memo, which was drafted by committee staff and circulated to lawmakers on March 23, lays out a final week when the firm faced ratings downgrades, increasing margin calls and cuts to intraday credit lines.
Showed the Shortfall
By the evening of Oct. 30, O’Brien provided Serwinski, the chief financial officer for MF Global Inc., with a document that showed the shortfall in customer segregated funds was the result of three different transactions, according to the memo.
Those transactions -- intraday loans between MF Global’s futures commission merchant and its broker dealer, the funding of outgoing client funds and a $175 million transfer to MF Global’s London office -- totaled $909 million, according to the memo.
Corzine, in testimony before the House panel in December, said he didn’t order any improper transfer of customer funds. He also testified that he never intended a misuse of customer funds at MF Global, and that he doesn’t know where client funds went.
“I never gave any instruction to misuse customer funds, I never intended anyone at MF Global to misuse customer funds and I don’t believe that anything I said could reasonably have been interpreted as an instruction to misuse customer funds,” Corzine told lawmakers in December.
Yesterday, the New York Times reported Corzine was told during the brokerage firm's final day of business that a transfer of $175 million to JPMorgan came from the firm's own money, rather than from a customer account, according to an internal e-mail sent by an executive in MF Global's Chicago office. The transfer, the e-mail said, was a "House Wire," meaning that it came from the firm's own money, the newspaper reported. The Times said the transfer followed an earlier asset move that sent $200 million of customer money into the account, citing unidentified people familiar with the matter.
Goldberg, Corzine's spokesman, said the ex-CEO didn’t specify which funds should be used to replenish the JPMorgan account.
“He never directed Ms. O’Brien or anyone else regarding which account should be used to cure the overdrafts, and he never directed that customer funds should be used for that purpose,” Goldberg said. “Nor was he informed that customer funds had been used for that purpose.”
The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York; The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).