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MF Global Trustee Freeh Sues Corzine

Two earlier reports last year reached similar conclusions.

Following his appointment as chief executive, Corzine "initiated a new and aggressive trading strategy, investing heavily in European sovereign debt, which was financed through repurchase to maturity transactions," Freeh said in the 174-page report.

Under the strategy, broker-dealer unit MF Global Inc. would purchase the securities, and MF Global U.K. Ltd. acted as agent for the purchase. The transactions involved financing the company's purchase of European sovereign debt issued by countries such as Ireland, Italy, Portugal and Spain and were meant to "capitalize on volatility and unrest in the European markets," the report said.

"Because of the way these trades were structured, the company immediately recognized the income while simultaneously removing the transactions from the company's balance sheet. These transactions were meant to serve as a profit 'bridge' until the company began to produce earnings from other, new lines of business," Freeh said in the report.

"When combined with other factors, strategic decisions and management lapses surrounding the company's business, the [trades] ultimately sowed the seeds of the company's destruction," the trustee said. "Although the trades generated the expected up-front 'income,' these trades also jeopardized the company's available liquidity and left the company highly leveraged as a result of these off-balance-sheet transactions. When the European economy deteriorated during the summer of 2011, clearinghouses and other counterparties began making escalating margin demands, draining the company's liquidity and drawing the attention of regulators and credit rating agencies."

Freeh stated that between September 2010 and June 2011, MF Global Holdings' board approved a number of requests from Corzine to increase risk limits for investing in European sovereign debt.

The trustee pointed out that against the advice of chief risk officer Michael Stockman -- who in the summer of 2011 suggested the company cease investing in the sovereign trades, also known as European RTMs -- management looked for additional sources of liquidity to support the new trading strategy.

"As these events unfolded, Corzine and his management team failed to strengthen the company's weak control environment, making it almost impossible to properly monitor the liquidity drains on the company caused by Corzine's proprietary trading strategy," Freeh said. "Among other significant gaps, the company lacked an integrated global treasury system, preventing management from obtaining an accurate real-time picture of the company's liquidity. The inadequate controls also prevented the company from knowing, during the last week of its existence, that customer segregated funds at the [futures commission merchant] were being used to meet the [broker-dealer's] liquidity needs and satisfy an obligation of [MF Global U.K.]. These glaring deficiencies were long known to Corzine and management, yet they failed to implement sufficient corrective measures promptly."
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