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US agency sues Corzine over failure of MF Global

Friday - 6/28/2013, 4:38pm  ET

FILE - In this Dec. 15, 2011 file photo, former MF Global Holdings Ltd. Chairman and Chief Executive Officer Jon Corzine testifies on Capitol Hill in Washington, before the House Financial Services Committee. Federal regulators announced Thursday, June 27, 2013, that they have accused former New Jersey Governor Jon Corzine of failing to properly manage MF Global, which misused customer funds before its 2011 collapse. (AP Photo/Susan Walsh, File)

MARCY GORDON
Associated Press

WASHINGTON (AP) -- Jon Corzine once saw a boutique brokerage called MF Global as his best hope to rescale the heights of Wall Street he'd once occupied as head of Goldman Sachs.

Now, MF Global is bankrupt. And Corzine faces a lifetime ban from the futures industry.

On Thursday, federal regulators sued Corzine, a onetime U.S. senator and governor of New Jersey. They allege that he was responsible for the misuse of customer money while CEO of MF Global, which collapsed in 2011.

A civil lawsuit filed in Manhattan by the Commodity Futures Trading Commission seeks to restrict Corzine's ability to trade investments and demands he pay unspecified penalties.

The suit charges that MF Global violated U.S. laws in the weeks before it collapsed by using customer funds to support its own trading operations. About $1.2 billion in customer money vanished when the firm collapsed.

Corzine bore responsibility for the unlawful acts by MF Global because he controlled the firm and its holdings and "either did not act in good faith or knowingly induced these violations," the lawsuit says.

In a conference call with reporters, CFTC Enforcement Director David Meister said Corzine failed to do enough to "prevent the firm from dipping into customers' funds to stay afloat."

MF Global has agreed to pay a $100 million penalty as part of a settlement announced Thursday. The money will come from bankruptcy proceedings.

Corzine has disputed the allegations by the CFTC, which regulated New York-based MF Global. He did so again Thursday through his lawyers.

"Mr. Corzine did nothing wrong, and we look forward to vindicating him in court," attorney Andy Levander said in a statement.

James Giddens, the court-appointed trustee overseeing MF Global's bankruptcy, called the settlement with the CFTC "appropriate." He said the $100 million penalty will be paid only after the firm's customers and creditors have received all their claims.

The CFTC also filed civil charges against Edith O'Brien, the firm's former assistant treasurer. Last year, O'Brien was summoned to a congressional hearing into what happened in MF Global's final days. She declined to answer questions, invoking her Fifth Amendment right against self-incrimination.

Attorneys for O'Brien didn't immediately return a call seeking comment Thursday.

The lawsuit seeks to bar Corzine and O'Brien from working for any firms that trade commodities or other investments regulated by the CFTC. Corzine and O'Brien would also be barred from trading any such investments on their own. They could still trade stocks and bonds.

Thursday's lawsuit is striking in that regulators have seldom charged individuals with financial crisis-era misdeeds. They have instead imposed fines and penalties against companies, often with no one having to admit blame.

Nearly 90 percent of the money belonging to the firm's U.S. customers has been recovered. Many farmers, ranchers and business owners used futures contracts through MF Global to hedge their risks against fluctuating crop prices. A futures contract allows someone to agree with someone else to buy or sell something -- corn, say, or gold -- at a set price at some point in the future.

The CFTC need not show in court that Corzine personally authorized the use of customer money, said Anthony Sabino of the New York law firm Sabino & Sabino, which specializes in white-collar crime. Top executives can be liable for "failure to maintain internal controls" or "failure to supervise," Sabino said.

Under a 2002 anti-corporate fraud law -- which Corzine co-wrote as a U.S. senator -- CEOs of public companies must personally certify the accuracy of their company's financial statements.

"When the Titanic went down, you didn't blame the cook; you didn't blame the guy in the engine room," Sabino said. "You blamed the captain. And Corzine is the captain of the ship called MF Global."

The CFTC has "a very substantial case" against Corzine and MF Global, Sabino said.

Robert Mintz, a former federal prosecutor, predicted that Corzine and the CFTC would eventually settle but not before a drawn-out battle.

That the CFTC filed suit against such a major defendant signals confidence that they have a strong case, he suggested.

"A defeat in a case like this, in such a high-profile setting, would come at some cost to the reputation of the agency," said Mintz, now at McCarter & English in New Jersey.

It isn't clear how much money Corzine is worth. He spent roughly $100 million of his fortune to win a U.S. Senate seat and the New Jersey governorship. In 2005, the last full year that he was a U.S. senator, he was estimated to be worth between $125 million and $175 million.

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