Jon Corzine Sees No Problem In How He Ran MF Global (Into Bankruptcy)

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
Read More.
a | A

One reason that it's hard for regulators to bring cases against the heads of big broken financial institutions is that chief executive officers tend not to actually, like, do all the illegal stuff themselves. They have people for that, and those people are the perfect shape and size to fit under buses, so the CEOs can always claim that whatever bad things went on were done by their underlings without their knowledge or approval.

To deal with this problem regulators have recently been a bit more aggressive in bringing cases against executives for "failure to supervise" those underlings, which makes sense. If you're the boss, your job probably does include keeping an eye on people and warning them away from, like, rampant criminal activity and/or making your company not exist any more. And "failure to supervise" charges, as the name implies, require regulators to prove that you didn't pay sufficient attention to the bad things that went on, so you can't really use the defense of "well I never knew about those bad things."

But that doesn't mean you won't try! Steven A. Cohen, head of SAC Capital Management, charmed the world this summer by arguing that he never read the e-mails that his traders sent him about all their insider trading, and therefore couldn't possibly be guilty of failing to supervise them.*

On Monday Jon Corzine filed a motion to dismiss his own failure-to-supervise case, and he seems to have learned from Cohen's experience because he doesn't lead with "I knew nothing about all this stuff but I'm sure I supervised it great." Corzine, you'll recall, used to run a futures broker-slash-investment bank called MF Global, which in rapid succession in 2011:

  • bought a lot of European sovereign bonds on Corzine's say-so;
  • lost a billion dollars of customer money; and
  • went bankrupt.

And in 2013 the Commodity Futures Trading Commission sued Corzine for failing to supervise the employees who lost all that customer money.

The motion to dismiss is actually pretty compelling. The main thesis is that Corzine was the CEO: he couldn't directly keep an eye on everyone at the firm, and had to delegate responsibilities to people who knew more about different bits of the business than he did:

The Complaint is vague in the extreme as to the identity of the person or persons that Mr. Corzine supposedly failed to supervise. As CEO of a global financial services firm, with "almost fifty separate direct or indirect subsidiaries," Mr. Corzine could not possibly have been required to supervise every aspect of the business, or every employee of the firm. Instead, he reasonably and appropriately delegated supervisory responsibility to others. With respect to Ms. O'Brien, an Assistant Treasurer at MFGI, the Complaint specifically alleges that she was supervised by MFGH's Global Treasurer. The Global Treasurer, in turn, reported to MFGH's CFO, who reported to Mr. Corzine.

Edith O'Brien is the assistant treasurer who seems to have actually lost the billion dollars; she does not come off well in the CFTC's case! But fair enough: Corzine didn't fail to supervise her because she was impossibly far away from him on the org chart and nobody could have expected him to even know who she was.

Corzine's lawyers also argue that he shouldn't be held responsible for the generally ramshackle state of MF Global's client-protection systems:

Although replete with conclusory assertions that Mr. Corzine was aware that MFGI's systems and controls were somehow inadequate, the Complaint fails to describe those systems and controls. Yet it is clear that they existed. ... The Complaint does not and cannot allege that (i) MFGI's controls and systems were disregarded or non-operational at any time, (ii) MFGI's controls and systems fell below industry standards, or (iii) Mr. Corzine failed to improve MFGI's controls and systems during his tenure.

"It is clear that they existed" is very close to the weakest imaginable defense of your systems and controls.** "Hey, how's your team's new quarterback?" "Well, he definitely exists!" High five.

Corzine's motion says that the CFTC "relies on irrelevant allegations calculated to sully Mr. Corzine's character, as well as rambling hindsight criticisms of complex management decisions, many of which were made during times of extreme stress," and that's probably a fair way of characterizing it. And, I mean: it worked. Those criticisms are well taken! Corzine ended up being a terrible CEO of MF Global but being a terrible CEO isn't illegal. Not catching illegal activity by someone three rungs below you on the corporate ladder also probably isn't illegal. And having bad but industry-standard (and improving!) customer protections probably isn't illegal, and as the motion quite correctly points out the industry-standard protections, in 2011, were pretty weak.***

Also, to be fair Corzine, was hired to be a terrible CEO of MF Global. MF Global was a boring futures commission merchant, hanging on to money for clients, and it hired Corzine to take it into the whiz-bang business of bond trading and investment banking and proprietary risk-taking. And boy did he do that! He may have improved MF Global's control systems, but at the same time his new trading created the liquidity risk that ultimately blew up MF Global, and that also blew past those control systems and ate all the customer money.

And then, when MF Global needed calm decisive expertise in actually hanging on to money for clients, Corzine was unsurprisingly unable to provide it. He was too busy trading bonds. My favorite anecdote from the MF Global story is that Corzine refused to meet a potential buyer for his big bond portfolio because he was too busy selling MF Global commercial paper. A halfway sensible financial institution CEO would have delegated both those jobs. Corzine wasn't much for delegation, when it came to things he cared about, and was perhaps too good at delegating the things he didn't care about. And the things he didn't care about turned out to be the important things.

* It made more sense than that, sort of. Still, charming.

** What is the weakest imaginable defense? "It is possible that they existed"? Can you do worse?

*** For instance it notes that CFTC rules actually allowed MF Global to use some customer money for its own purposes. MF Global had its own policy against this, because it was a very bad idea, but it played pretty loose with that policy by the end. But the industry standard, and the rules: pretty weak. (They're getting a little better post-MF Global.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at