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Salmon: Corzine's Disgrace

NEW YORK ( Reuters Blogs) -- The CFTC complaint we were waiting for has now arrived: MF Global, Jon Corzine, and MF's former assistant treasurer, Edith O'Brien, have all been charged with misusing -- stealing, effectively -- almost $1 billion in customer funds. They took the money out of customer accounts knowing that they weren't allowed to do so, and they failed to repay it, and they also failed, naturally, to tell the CFTC what they were doing.

Corzine, as the CEO of a highly-regulated financial institution, was responsible for ensuring that his company didn't break the law, but he didn't seem to care nearly as much about those responsibilities as he did about his own trading account. And while other investment-bank CEOs at least pay lip service to the idea of being client-focused, Corzine seemed to care about clients mainly as a source of funds he could use to meet margin calls.
During the summer of 2011, Corzine directed Holdings' CFO to explore all potential sources of funds and assets that could be used to meet the liquidity needs of MF Global's proprietary trading activities. This included the use of customer funds to satisfy, in part, MF Global's need to increase its capital by hundreds of millions of dollars to meet its obligations...

On October 6, 2011, in response to the Firm's liquidity stresses, Corzine told an MF Global Treasury Department employee that they were going to do all the things they could do to not draw on the revolver the next day, even if that meant "go[ing] negative" in the FCM customer accounts.

Corzine was saying this as early as Oct. 6, when he still had a $1.2 billion credit line to play with, and well over three weeks before Halloween, when MF Global eventually ended up filingfor bankruptcy. But there's a question over what exactly "Going negative" means, here. On its face, it means that the amount of money in segregated client accounts was lower than the amount of money those clients were being told that they had.

But Corzine's spokesman tells me that when Corzine is quoted as knowing about "going negative" in the complaint, that did not mean he knew that customer funds were being raided. In the account, there are the customer funds; and then there are the bank's funds, which come in two different flavors. There's the money which is freely accessible to the bank; and then there's "excess seg" -- the money which the bank needs to keep in the account but which doesn't actually belong to customers.

Apparently, when Corzine was told that MF Global was "going negative" in the account, that meant that the bank would be left with less than the minimum required "excess seg." It did not mean, necessarily, that the bank was raiding customer money.

The complaint tells a clear tale: By Oct. 17, MF Global was violating its own policies with regard to customer accounts, and raiding them for cash. By Oct. 26, it found itself unable to repay that cash by the end of the day, and had "a deficiency by the close of business of over $298 million in its customer segregated accounts," in the wake of a transfer of more than half a billion dollars out of MF Global's customer segregated accounts and into its proprietary accounts. That deficiency rose to $413 million the following day, Oct. 27, when the following conversation took place on a recorded phone line:
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.

"Seg" here is short for "segregated," as in "this money is put aside for clients and we can't touch it." Except Corzine clearly does want to touch it: He essentially wants to borrow against it, and then send the proceeds to Chase as MF Global money.

Certainly there was a lot of chaos at MF Global at the time -- but that's no excuse for committing a $165 million "bookkeeping error." In any case, of course, the chaos was ultimately Corzine's fault: He was the person who fired risk managers and spent no time worrying about risk controls, preferring instead to put all of his effort into trading. Even at the end, Corzine seemed much less worried about customer funds than JP Morgan was. JP Morgan asked for a signed letter attesting to the fact that the money it was receiving had not come from customer accounts; Corzine just forwarded the email on to get signed (it never was signed), and never asked anybody to find out whether customer accounts had, in fact, been raided. (Probably because he knew the answer.) States the complaint: "Corzine failed to implement any controls or take any steps to ensure that customer segregated funds were not and would not be unlawfully used." (My emphasis.)

Even heading into the final weekend, when Corzine was explicitly told that MF Global had "gone negative" to the tune of $106 million, whatever that means, he did nothing to inform regulators of that fact.

It's impossible to know how this lawsuit is going to play out, but Corzine's own lawyer seems flustered:
Andy Levander, counsel for Corzine, said: "This is an unprecedented lawsuit based on meritless allegations that Mr Corzine failed to supervise an experienced back-office professional who was located in a different city and who did not report to Mr Corzine or even to anyone who reported to Mr Corzine.

"After 20 months of thorough investigations by the Department of Justice, two bankruptcy trustees, and the CFTC, no evidence has been found that contradicts Mr Corzine's sworn testimony before Congress.

"Mr Corzine did nothing wrong, and we look forward to vindicating him in court."

As Levander knows, there's much more to this lawsuit than accusations that Corzine simply failed to supervise O'Brien -- at the very least, it accuses Corzine of failing to supervise the entire bank. At some point, when you're a fiduciary, incompetence becomes downright criminal, and if the CFTC wins this suit, I wouldn't be at all surprised to see criminal charges follow. What's more, the CFTC suit does not accuse Corzine of perjury, with respect to his Congressional testimony -- so it's fascinating that Levander picks that imaginary charge out in particular to deny it.

Of course, the CFTC complaint is only one side of the story -- and in general expensively represented financial professionals tend to have a pretty good track record at trials. But after reading this complaint, I doubt that even an acquittal would clear Corzine's name. Someone like Bob Rubin might be deeply implicated in the financial crisis, but he still gets to trot around the globe being great and good. Corzine's career, by contrast, is over. That's not nearly sufficient punishment, but at least it's a start.

-- Written by Felix Salmon in New York.

Read more of Felix's blogs at Reuters.

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