Corzine Blames ‘Loss of Confidence’ for MF Global CrashBy and
MF Global seeks $3 billion from its former auditing firm
Accounting firm blames Corzine strategy for broker’s failure
With as much as $3 billion on the line, Jon Corzine is trying again to explain away a spectacular blot on his business legacy.
Corzine was summoned to the witness stand Thursday in MF Global Holdings Ltd.’s malpractice suit against the PricewaterhouseCoopers LLP accounting firm. It was a turn in market sentiment, and not his own flawed management, that led to the collapse of the trading firm he once ran, he told a Manhattan jury.
“There was a loss of confidence and trust in the organization after our earnings were announced and credit agencies downgraded us in the last week of October 2011,” Corzine said.
Corzine, 70, has served as governor of New Jersey, a U.S. senator and co-chairman of Goldman Sachs Group Inc., but it now falls to a New York jury to decide whether Corzine or PwC was responsible for MF Global’s failure. He took the helm at MF Global in March 2010 and ran it for just more than 1 1/2 years before it collapsed. The PwC trial may be the last word on who’s to blame for the meltdown.
Corzine hasn’t spoken publicly about the collapse since testifying before Congress in 2011. Dressed in a blue business suit, white shirt and gray tie, he told the jury of five men and five women about his rise from a boyhood spent on a farm in Illinois to the heights of American finance and politics. He spoke directly to them, at one point using his father’s corn crop to explain futures contracts.
MF Global’s administrator claims PwC gave the firm faulty advice about the how to treat a type of bond-repurchase agreement. MF Global booked them as sales, rather than as secured debt. MF Global claims the auditor also made the wrong call on a tax issue, leading to a write-off of more than $100 million in the weeks before the collapse. The administrator is seeking $3 billion.
Under friendly questioning by an MF Global attorney, Corzine told jurors of his plan to remake MF Global into a profitable company by modernizing its futures trading, building a full-service broker-dealer business, adding asset management and investment banking functions, and increasing the firm’s proprietary trading.
The trial is focused on a strategy Corzine pursued from the start of his time as MF Global’s chief executive officer. He had the firm bet on the sovereign debt of European countries, financed through a “repurchase-to-maturity,” or RTM, transaction. MF Global never lost money on the European bonds, issued by Italy, Spain, Portugal, Ireland and Belgium, he said. By September 2011, MF Global had a $6.3 billion portfolio of the Euro RTMs.
“We would have a hard time calling these risky securities,” Corzine testified.
The firm’s reckoning began in the summer of 2011, which was "clearly one of those times when markets were very, very stirred up" as the U.S. government was in crisis and in danger of shutting down, Corzine said. "It was a poor financial period not only for MF Global but for the whole financial services industry."
There was "a sense of distrust by some in the marketplace" about MF Global’s position in the European bonds, which helped contribute to the company’s collapse, he said. "If the marketplace had understood we had not lost money on these European sovereign bonds, we would be in a much more secure position."
Corzine testified about how the disclosure in late October 2011 of a $191.6 million quarterly loss tied to the tax issue on which PwC advised led in quick succession to credit downgrades, plunging shares and trade counterparties that held back cash in anticipation of a bankruptcy filing, which came on Oct. 31.
Corzine didn’t directly address the central claim of MF Global’s administrator -- that PwC failed as auditor. PwC says its accounting advice was correct and that it was Corzine’s decisions that led to the firm’s collapse. The firm in 2015 settled a lawsuit by MF Global investors for $65 million. Corzine will be cross-examined on Friday by PwC’s lawyers.
Corzine previously said he never directed the misuse of customer funds to help his firm stay afloat as it dealt with margin calls on bad bets in 2011. He testified to Congress that he asked that overdrafts with JPMorgan Chase & Co. be corrected. In 2013, MF Global’s brokerage unit was fined $100 million by the CFTC and admitted regulatory failures.
In a lawsuit against Corzine, the Commodity Futures Trading Commission claimed he failed to fix inadequate controls that led to $1 billion in missing customer funds and knew of the New York-based firm’s extreme cash shortage. The agency also said he didn’t ask questions about the origins of funds used to make transfers that he had ordered. In January, Corzine agreed to pay $5 million and consented to a lifetime ban from the futures industry as part of a settlement of the case. He is free to engage in futures trades that are exempt from CFTC registration and isn’t limited from trading in other markets.
On Thursday, Corzine testified he is now investing and giving to charities through his family office, while serving as a director on several boards and teaching at Fairleigh Dickinson University in Teaneck, New Jersey.
The case is CFTC v. MF Global Holdings, 11-cv-07866, U.S. District Court, Southern District of New York (Manhattan).