GOTCHA! @CFTC Files Suit Against #Corzine et al: CUSTOMERS TO RECEIVE 100% RECOVERY

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Former New Jersey Senator and Governor Jon Corzine, CEO of defunct MF Global.
Former New Jersey Senator and Governor Jon Corzine, CEO of defunct MF Global.
Caught at last? Former New Jersey Senator and Governor Jon Corzine, CEO of defunct MF Global.

Calling the segregation rules a "cornerstone  of customer protection" laws, the CFTC filed a strongly-worded four count complaint alleging violations of the Commodity Exchange Act in connection with the collapse of MF Global by its CEO Jon Corzine and its Treasurer Edith O'Brien, as well as the firm's holding company and brokerage subsidiary.  More importantly for victims of MF Global's collapse,  the CFTC also filed a proposed order settling the charges with the brokerage subsidiary, MF Global, Inc. ("MFGI"), in which customers would be entitled to a 100% recovery of their property.  The order is subject to the approval of the judge overseeing MFGI's SIPA liquidation.  If all goes according to plan, customers could start receiving final payments as early as late September 2013.

The CFTC expanded on facts uncovered in the SIPA Trustee's Investigation Report, detailing new evidence garnered from company phone calls recorded in the normal course of business.   These calls add a new dimension to the extent to which Mr. Corzine is alleged to have participated in the misuse of customer funds.  Many of the statements he made on these calls appear to directly contradict Mr. Corzine's sworn testimony to Congress.  Congressman Michael Grimm (R-NY) renewed his call today for Attorney General Holder to bring perjury charges against Mr. Corzine.  For O'Brien, who invoked the 5th amendment and refused to testify at a Congressional hearing, the calls paint a damning portrait who someone who knew what she was doing was illegal and did it anyway.

The CFTC seeks 'equitable relief' from findings of liability on the defendants, which include a ban on trading commodity futures and swaps for Corzine and O'Brien, restitution to be paid to customers and more.  Since the CFTC has only civil enforcement powers, no criminal charges are forthcoming at this time.  However, some of the violations Mr. Corzine is charged with in the CFTC's civil complaint--unlawful transfer/conversion of funds, willful violations of the CEA--are felonies which may be publishable by up to 10 years in prison (see 7 USC § 13).  Whether or not criminal charges are filed will depend on the Department of Justice's willingness to make a case before a five year statute of limitations expires.


The order, which lays out a settlement agreement between the SIPA Trustee and the CFTC, specifically states:

MF Global shall make restitution for the amount of $1,212,000,000 (one-billion two-hundred twelve million dollars), or such amount necessary to ensure that all 4d and 30.7 Allowed Customer Net Equity Claims are paid in full.  (Proposed Order, pg 5)

The order lays out a proposed schedule for transfers of customer funds:

  • Within 5 business days of receipt of MFGUK settlement ($290M), expected September 15, 2013, the SIPA Trustee must file 'Final Customer Allocation Order'.  The order would authorize general estate funds to be used as necessary to pay customers;
  • Within 5 business days of the 'Final Customer Allocation Order', final distribution shall commence to 4d and 30.7 customers;
  • If the Trustee must use general estate funds to pay customers, general creditors are subrogated to the claims of customers against third parties pursuing recoveries from the shortfall;
  • MFGI will pay a $100,000,000 civil monetary penalty (subordinated to customers and creditors).

The order is posted below and can be downloaded here.


MF Global's Chapter 11 case is presently the 8th largest bankruptcy in US history by filing.
MF Global's Chapter 11 case is presently the 8th largest bankruptcy in US history by filing.

The CCC has been arguing for over a year that, at a minimum, there is ample evidence that Mr. Corzine et al broke many provisions of the Commodity Exchange Act, Code of Federal Regulations and NFA rules (see Why Hasn't NFA Banned Corzine and The Case Against Corzine).  The CFTC's complaint follows a similar path, alleging illegal transfers of funds, the filing of false and misleading reports, a lack of internal controls and failure to supervise employees on the part of management.  The alphabet soup of agencies with enforcement authority over MF Global (CFTC, NFA, SEC, FINRA) have, until now, been unable to move ahead with civil cases pending an 'OK to proceed' from the Department of Justice.  Something has clearly changed, as the CFTC filed its complaint.  The complaint represents the fourth accusation of fault against Mr. Corzine by an investigative body, following the SIPA Trustee, the US Trustee and the O&I Subcommittee of House Financial Services.  Mr. Corzine is also being sued by the Chapter 11 Trustee and he is the subject of a consolidated class action lawsuit.

While a criminal case will hinge on the element of intent and carries a burden of proof beyond a reasonable doubt, the CFTC's civil case will be decided by the lower standard of a preponderance of the evidence and the element of intent is not as relevant.  Key points of the complaint:

  • 4 count complaint, 2 specifically against Corzine and O'Brien:
  • Relief Requested:
    • Full  restitution to all customers;
    • Civil monetary penalty of $140,000 for each violation of the Commodity Exchange Act;
    • Permanent ban from trading commodity futures and swaps, both for personal accounts and any accounts with indirect interest;
    • Permanent ban from registration or applying for exemption from registration;
    • Permanent ban from trading commodity futures and swaps for others;
    • Permanent ban from soliciting funds to trade commodity futures and swaps;
  • Seeks trial by jury.

Read the full complaint below or download it here.
Citations above are from the complaint and refer to the Commodity Exchange Act and Code of Federal Regulations.  CEA references are linked to the proper section in the US Code.  Click here for a conversion chart.

New Evidence

Among the revelations in the CFTC's complaint are details of inter-company telephone conversations recorded between Corzine, O'Brien and their colleagues regarding the treatment of customer funds at the height of the firm's liquidity crisis.  The calls provide a window into the final week at the firm.  Mr. Corzine testified in December 2011 at three Congressional hearings that he did not "generally involve" himself in "the movement of cash and collateral" at MF Global.  Corzine went on to testify that he was "stunned" when he was told that that "MF Global could not account for many hundreds of millions of dollars of client money" on October 31, 2011.  He famously plead to his former fellow Senators: "I simply do not know where the money is".  The new details revealed in the CFTC's complaint contradict these assertions, demonstrating how Corzine became very involved in cash movements in the firm's final weeks.  He had direct knowledge of the whereabouts of customer funds and he clearly had knowledge as to why there was a shortfall in MF Global's customer segregated accounts.

Chart from the SIPA Trustee's Investigation Report detailing MFGI's segregation deficits in its final week.

The CFTC lays out the case much in the same way as the SIPA Trustee.  Over the summer of 2011, Corzine directed the company to explore the use of customer funds to satisfy MF Global's liquidity issues.  Their cash crunch was a result of Corzine's levered repo bets on European sovereign debt.  At first, the use of customer funds was lawful though reckless.  Corzine used a now banned calculation to determine excess cash from customer accounts trading foreign futures.  This calculation, known as the 'alternative method', permitted the firm to not segregate unencumbered customer balances in accounts trading on foreign boards of trade.  So if you had $100,000 in such an account but you weren't trading anything today, using the 'alternative method' Corzine could use all of your cash for his own needs--legally.

His CFO developed a 'conservative policy' as to how those funds could be used.  Again, all of this is legal so far--though I doubt customers would have kept their money at MF had they known it was going on.  But as the liquidity stress increased, Corzine began violating this policy and soon thereafter allegedly began violating the law.

Corzine was acutely aware that the market was watching his liquidity position.  His internal repo bets were requiring more margin as the European banking crisis deepened.  Trading partners demanded more money on tighter terms.  News of Corizne's highly leveraged trades led customers to begin pulling out of MF. In late October, downgrades from ratings agencies left Corzine with few choices.  He knew that if he were to draw down on his $1.2 billion dollar credit revolver with JPMorgan, the sharks might smell blood in the water and sense MF Global's imperiled finances.  A run on the bank from customers and/or margin calls from creditors could sink the firm.  There was only one pool of cash that wouldn't raise any outside eyebrows:  customer segregated funds.

Rather than use his credit facilities, Corzine tapped customer accounts even if it meant "go[ing] negative" in those accounts--violating his policy on the use of those funds.   In response to this, his CFO, Global Treasurer and others told him that his course of action was not advisable or sustainable.  In fact, in a recorded conversation the Global Treasurer stated:

"...we have to tell Jon that enough is enough. We need to take the keys away from him."

They did attempt to take the keys away from him.  Despite these and other repeated warnings, Corzine sought to increase his use of customer funds.  In the first week of October 2011, Mr. Corzine had a conversation with an employee the CFTC calls "Employee #2" in which Corzine indicates that he wants to know the maximum amount he could squeeze out of customer accounts.

“We need to go through what that real number is at the FCM. You know, what’s the drop dead amount. . . . You know, I’m sure there is a buffer in her thinking. We’ve got to find out what that is so that we have some ability to think about pulling it if we have to."

Less than two weeks later, Corzine was violating company policy on the use of customer funds on a daily basis--and he was being informed of this violation everyday, through liquidity reports and conversations with top company executives.  After enough protesting from executives, on October 18, 2011 Corzine agreed to start using his $1.2 billion revolving credit facility in lieu of customer funds.  He acknowledged that using customer funds was dangerously close to illegal and could get them into trouble:

“yes . . . we have no buffer, no room for mistake . . . we already ended up getting close yesterday by using the FCM.”

 8 days later, the $1.2 billion in credit was gone and the firm began illegally transferring customer funds for its own uses.  The CFTC alleges Corzine not only knew about it, but directed it.

The 'Clusterf**k' Begins

According to the CFTC, on October 26 MF Global Treasurer Edith O'Brien knowingly transferred customer funds for firm proprietary needs.  She moved money from a customer account at Bank of New York Melon to a firm proprietary account.  It didn't come back at then end of the day and O'Brien knew she was in trouble.  For the first time, there was no legal rationale that permitted this.  She told Employee #2:

"It is a total clusterfuck . . . . They have to move half a billion dollars out of BONY to pay me back . . . . Tell me how much money is coming in and I will make sure it gets posted. But if you don’t tell me, then tomorrow morning I am going to have a seg problem . . . . I need the money back from the broker-dealer I already gave them. I can’t afford a seg problem."

The half billion didn't return, the firm was under-segregated and O'Brien knew it.  She knew that the firm was required by law to inform the CME and CFTC.  She didn't make any effort to do so.  How do we know Ms. O'Brien wasn't simply ignorant of the rules?  Well, MF Global considered her competent enough in the area of compliance to represent the firm at a CFTC hearing on customer collateral protection in October 2010.   It is more than a little ironic that at this hearing she defended the segregation infrastructure she would be in the process of destroying exactly one year later.

Ms. O'Brien did, however, inform others at the firm that they were likely to have a seg problem in the morning.  However, it isn't clear that she immediately informed Corzine.  On the surface, this gives some credence to the routine Corzine gave Congress.  'I simply do not know', it was Edith who made the transfers,etc.  While this does not clear Mr. Corzine of liability stemming from his fiduciary responsibility, it could clear him of criminal intent.  Perhaps on this day, Mr. Corzine did not explicitly know that he was out of compliance.  However, this excuse falls apart over the next three days.  Corzine would be told the following day in recorded phone conversations that they were out of compliance, under-segregated and using customer money.

Employee #2 told Corzine on a recorded telephone line that some of the funds O’Brien had transferred from the FCM to help satisfy MF Global’s proprietary obligations had not been returned. Corzine asked if she had received back “enough to be in compliance,” and the employee responded, “no, she[’s] indicating she’s net short $106 million.” Corzine thereafter instructed the employee to “raise hell” with JPM to obtain funds from the secured revolver to “cover up” the gap left by transfers of funds that were not returned. Corzine did not receive assurances that the funds were returned.

Even if he had received those assurances, he had an obligation to report the matter to the CME and CFTC.  In fact, above and beyond the normal reporting requirements, the CME had explicitly told Corzine and his staff that they were required to notify CME of any equity withdrawals from the firm (see page 4 of CME's Timeline presented to Congress).  In addition to ignoring the Code of Federal Regulations, Corzine et al ignored an order from their primary regulator.   That certainly appears to be a willful violation of several provisions of the Commodity Exchange Act.  It may not be a smoking gun, but it sure smells like gunpowder.

Again, the language used in the above quote gives Corzine some cover.  After all, he is talking about using cash from the "FCM", not specifically from a customer account--but that's the only place that the FCM had any cash to use and Corzine knew it.  He received liquidity reports daily.  He knew cialis 20mg where the money was and he was strategizing how it could help keep their creditors at bay.  Consider this exchange between Corzine and another employee.  They were trying to figure out how to quell the concerns of their clearing banks regarding their cash position.  Corzine postulated using customer funds inter-company tri-party repos, which was legal at the time (since banned) but only if it was excess segregated funds.

Corzine: We have a money management account at Chase, if my memory serves me.

Employee #1: Yeah, it’s the JP Morgan Trust account, but that’s cash seg for clients -- it has nothing to do with greasing our wheels for Chase to move.

Corzine: I understand but you put it in a tri-party, and then once the securities have started moving, then you move it back to the, um --this is the same thing we did last night, they left it in the tri-party, the seg money.

This is convoluted, complicated stuff if you get down into the weeds.  But it's important to keep the broad view and not get mesmerized by the details and the lingo.  Simply asked, was pulling customer money from a segregated account for use in a tri-party repo against the law?  To be absolutely clear, here is CFTC Commissioner Jill Sommers in her testimony to the House Agriculture Committee on how the customer segregated account is to be treated:

"While an FCM is permitted to invest customer funds, it is important to note that if an FCM does so, the value of the customer segregated account must remain intact at all times. In other words, when an FCM invests customer funds, that actual investment, or collateral equal in value to the investment, must remain in the customer segregated account at all times. If customer funds are transferred out of the segregated account to be invested by the FCM, the FCM must make a simultaneous transfer of assets into the segregated account. An FCM cannot take money out of a segregated account, invest it, and then return the money to the segregated account at some later time."

Corzine's play was a double dip on the capital, one he was counting on to provide liquidity for the firm.  He wanted to move customer money out of segregation, use it as collateral in a repo, have that collateral count both as margin for the repo and as collateral for the segregated account and then move it all back the following day.  That's not how it's supposed to work.

Meanwhile, errors for O'Brien began piling up.  A $165 million bookkeeping error--which would make Arthur Andersen blush-- was made by her team in the segregated account in addition to her BONY debacle.  This meant she was more out of compliance on October 26 than she thought.  When BONY questioned whether or not her transfers from customer accounts to firm accounts were legal, she told them they were "not required to be segregated intraday under CFTC or SEC rules".  That's simply not true.  As Commissioner Sommers points out above, "the customer segregated account must remain intact at all times".  Ms O'Brien did not copy her colleagues on this exchange with BONY for good reason.  As she later explained on a recorded line:

I don’t want to take anyone down with me.

Now that gun is smoking.  Yet O'Brien continued to meet proprietary needs with funds from customer segregated accounts.  Her goose appears to be cooked.

Game Over - The Final Friday and the Infamous Transfer to JPM

As we all have known for some time, on the morning of Friday October 28, 2011 JPMorgan informed Corzine that he was overdrawn on accounts in London to the tune of $175 million.  Corzine told Ms. O'Brien to send JPM money to cover it, that it was the most important thing she could do that day.  JPMorgan was concerned that customer money was being used in the transfer.  They sought a comfort letter, stating that no customer money was used in the transfer.  Corzine tried to get O'Brien to sign it, but she never did.  Until now, there was little information surrounding the circumstances of the comfort letter and what Corzine knew about the transfer to JPM he ordered.

O'Brien pushed out the $175 million from customer accounts in the hopes of getting it back later that day.  This was illegal, but at least she could cover it up if she got the money back.  She didn't.  Late on Friday afternoon, O'Brien walked her colleagues through just how bad the situation was.  As bad is it was, her math was off--it was actually much worse.  The numbers she uses below are denominated in millions.

Edith O'Brien swears in before a hearing of the Oversight and Investigations Subcommittee of the House Financial Services Committee in 2012.

O’Brien: Okay, so it’s 249.5 today, it’s 106 from, from Wednesday, actually, you guys, okay? Okay. 355. Okay. So, let’s just be delirious and think [the broker-dealer division] ha[s] more than 355. Okay? If they have it, I need it, and let me tell you why. Shh. London failed to me on returning the 175 I pushed out to them this morning. Okay? That could be game over, you guys.

Employee #2: From a regulatory perspective?

O’BRIEN: Yep. Yep, it could be.

Employee #1: You need the 530 million bucks.

O’BRIEN: Yep. I don’t care where you get it, quite frankly. If you can get 530 million dollars, I’m putting it back in the seg pool. Okay? I can maybe get by with this 175, but I can’t get by without the whole 355, you guys. u. As of the close of business on Friday, only $177.5 million was returned to customer segregated accounts.

Ms. O'Brien had been carrying a deficit in customer accounts for two days.  She knew it was illegal.  She failed to report it to the CFTC and CME.  She was, however, reporting it to her colleagues.  Employee#2 dutifully reported the bad news to Corzine.

The employee told Corzine, “I don’t think that situation is going to be resolved, I think [MFGUK is] going to have a fail there.” Corzine responded, “we really, really can’t have that.”

Now JPMorgan was concerned that the funds came from customer accounts.  They wanted that comfort letter.  And O'Brien told MF Global's Assistant General Counsel that she didn't sign the comfort letter for good reason:

O’Brien stated on a recorded telephone line that she told the AGC on Friday that she did not want to sign the JPM 32 letter. She also told the AGC during this conversation, among other things, that “no one has paid me back the money, I think we’re underseg.”

Game over.  Corzine knew the money he ordered Ms. O'Brien to send to JPM was customer money.  He knew it didn't come back to customer accounts on Friday.  He knew that meant that they were under-segregated.  Even though he tried to get O'Brien to sign JPM's comfort letter, he never bothered to check to see if customer funds were actually used in the transfer.  That's because he knew the answer.  Furthermore, he knew gaps existed in those customer accounts earlier in the week and he tried to borrow money to cover them.  He was using customer funds in repos and trying to double count the collateral.  I suppose he's the sauce for Ms. O'Brien's goose.

Now we await the Department of Justice to do its job.  It isn't enough to simply get out of the CFTC's way.  We're waiting.......


The CCC would like to thank the CFTC for their hard work in filing this complaint.  Moreover, we would like to thank the CFTC for putting commodity customers first by negotiating the proposed order to ensure a 100% return of customer funds.  We wish you the best of luck in seeing this process through to a successful conclusion.

News Roundup

CFTC v MFGI/MGFH/Corzine/O'Brien

Download (PDF, 170KB)

CFTC/SIPA Settlement/Proposed Order Granting Customers 100% Return

Download (PDF, 33KB)

#MFGlobal Customers

Are you a customer of MF Global? The CCC formally represents more than 200 clients in the bankruptcy process of MF Global on a pro bono basis, and informally represents thousands more in the public domain.

Get the latest news on #MFGlboal.

About John Roe 86 Articles
Co-Founder of the CCC and head of BTR Trading and Roe Capital Management.

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