Jon S. Corzine, MF Global Holding Ltd. (MFGLQ)’s chief executive officer, gave “direct instructions” to transfer $200 million from a customer fund account to meet an overdraft in a brokerage account with JPMorgan Chase & Co. (JPM), according to a memo written by congressional investigators.
Edith O’Brien, a treasurer for the firm, said in an e-mail quoted in the memo that the transfer was “Per JC’s direct instructions,” according to a copy of the memo obtained by Bloomberg News. The e-mail, dated Oct. 28, was sent three days before the company collapsed, the memo says. The memo does not indicate whether that phrase was the full text of the e-mail or an excerpt.The account could have contained both client and company funds, the memo notes. Whether the transferred funds were those of the company, its clients or both is not known.
“If client funds were transferred at his direction, it raises new questions,” Seth Berenzweig, managing partner at Berenzweig Leonard LLP, a law firm in McLean, Virginia, said in an interview with Bloomberg Television. “This is a new storm cloud that is now headed for Jon Corzine and it raises a lot of issues.”
O’Brien’s internal e-mail was sent as the New York-based broker found intraday credit lines limited by JPMorgan, the firm’s clearing bank as well as one of its custodian banks for segregated customer funds, according to the memo, which was prepared for a March 28 House Financial Services subcommittee hearing on the firm’s collapse. O’Brien is scheduled to testify at the hearing after being subpoenaed.
‘Funds Were Safe’
“Over the course of that week, MF Global (MFGLQ)’s financial position deteriorated, but the firm represented to its regulators and self-regulatory organizations that its customers’ segregated funds were safe,” said the memo, written by Financial Services Committee staff and sent to lawmakers.
Steven Goldberg, a spokesman for Corzine, said in a statement that Corzine “never gave any instruction to misuse customer funds and never intended anyone at MF Global to misuse customer funds.”
Vinay Mahajan, global treasurer of MF Global Holdings, wrote an e-mail on Oct. 28 that JPMorgan was “holding up vital business in the U.S. as a result” of the overdrawn account in London, which had to be “fully funded ASAP,” according to the memo.
$200 Million Transfer
“On the afternoon of Friday, October 28, MF Global transferred $200 million from a segregated customer account at JPMC to cover a $175 million overdraft in one of MF Global’s JPMC accounts in London,” the memo says. “Ms. O’Brien wrote in an e-mail that the transfer was ‘Per JC’s [Jon Corzine’s] direct instructions’.”
Barry Zubrow, JPMorgan’s chief risk officer, called Corzine to seek assurances that the funds belonged to MF Global and not customers. JPMorgan drafted a letter to be signed by O’Brien to ensure that MF Global was complying with rules requiring customers’ collateral to be segregated. The letter was not returned to JPMorgan, the memo said.
Corzine, 65, in testimony in front of the House panel in December, said he did not order any improper transfer of customer funds. Corzine also testified that he never intended a misuse of customer funds at MF Global, and that he doesn’t know where client funds went.
“I never gave any instruction to misuse customer funds, I never intended anyone at MF Global to misuse customer funds and I don’t believe that anything I said could reasonably have been interpreted as an instruction to misuse customer funds,” Corzine told lawmakers in December.
In his statement, Goldberg said Corzine did not specify which funds should be used to replenish the JPMorgan account.
“He never directed Ms. O’Brien or anyone else regarding which account should be used to cure the overdrafts, and he never directed that customer funds should be used for that purpose,” Goldberg said. “Nor was he informed that customer funds had been used for that purpose.”
The bankruptcy trustee overseeing the liquidation of the company’s brokerage subsidiary has estimated a $1.6 billion shortfall between customer claims and assets available.
Lawmakers and investigators from the Commodity Futures Trading Commission, Securities and Exchange Commission and Department of Justice have been reviewing events leading up to MF Global’s bankruptcy filing. Executives including Corzine, a Democrat who served in the Senate from 2001 to 2006 and as governor of New Jersey from 2006 to 2010, gave testimony on the collapse at three congressional hearings last year. Corzine was co-chairman of Goldman Sachs Group Inc. (GS) before entering politics.
Representative Randy Neugebauer, a Texas Republican and chairman of the Financial Services oversight and investigations subcommittee, is preparing a final report on his investigation into the firm’s failure.
“One of the goals of our investigation is not only to find out where the money went but to identify what went wrong in order to prevent this from happening again,” Neugebauer said in a statement.
O’Brien is scheduled to appear before lawmakers with Christine Serwinski and Laurie Ferber, two other MF Global executives named by Corzine as being involved in the transaction, according to the memo. Henri Steenkamp , the firm’s chief financial officer, is also scheduled to testify, as is a representative from JPMorgan who has not yet been identified.
MF Global and its brokerage sought Chapter 11 bankruptcy after a $6.3 billion bet on the bonds of some of Europe’s most indebted nations prompted regulator concerns and a credit rating downgrade. Corzine quit MF Global Nov. 4.
During his testimony, Corzine identified O’Brien as someone with knowledge of a transfer of funds from customer accounts before the firm sought bankruptcy protection Oct. 31.
Reid H. Weingarten, O’Brien’s lawyer, did not respond to a phone call and e-mail seeking comment.
The memo’s account of the e-mail exchanges aligns with what Terrence Duffy, the executive chairman at CME Group Inc. (CME), told lawmakers during a December congressional hearing. Auditors at CME, which had authority to oversee MF Global, learned from an employee of the brokerage that Corzine knew about the loans involving a European affiliate, Duffy told committee members.
Did Corzine knowingly order $200M to be moved out of segregated clients' accounts to cover bad eurozone bets? That is the key question. If he knowingly ordered such a transfer to cover bad bets, he committed fraud and will face stiff sanctions which might land him in jail next to Bernie (don't count on it, powerful politicians and former CEOs of Goldman Sachs never see the inside of a jail cell).
Meanwhile, Matt Egan of Fox Business News reports that Corzine may soon be back on Wall Street:
Jon Corzine's future job prospects on Wall Street may look bleak, but a newly proposed rule may ensure the former New Jersey governor won’t be forgotten anytime soon.
In an effort to prevent a repeat of futures brokerage MF Global's post-bankruptcy debacle, the so-called Corzine rule would require a principal like a CEO to sign off on large transfers of customer cash.
The proposed regulation aims to boost cratering confidence in the futures industry, which has been absolutely rocked by the revelation that, under Corzine, MF Global broke longstanding tenets by dipping into client cash that is still missing.
“This problem has really blown a hole in the futures industry,” said Michael Greenberger, former director of the Commodity Futures Trading Commission’s division of trading and markets. “Trading is down and people in the industry are very concerned about the industry’s future. Even hedging, which people think is a necessity, is being abandoned by commercial entities.”
Last fall MF Global collapsed under the weight of more than $6 billion in bullish eurozone bets that Corzine directed the New York-based company to make.
Investigators have said the firm used client cash, which is supposed to be ring-fenced, to help it meet margin calls and customer withdrawals as it faced a run on the bank. The MF Global bankruptcy trustee is still searching for some $1.6 billion in missing client money, leaving many futures traders and farmers in financial limbo.
“He lost his own money and that’s bad, but that can be ironed out in bankruptcy. But he lost his customers' money and that has really reaped a whirlwind in the industry,” said Greenberger, who is a law professor at the University of Maryland.
Holding Execs Responsible
At a recent industry conference, representatives from big investors like the California Public Employees' Retirement System, or CalPERS, and bond powerhouse Pimco made it “very clear if their money is not safe, they’re just going to stop doing these trades,” said Greenberger.
With that in mind, the futures industry is racing to safeguard client money and avoid a mass exodus. After all, what good is using futures contracts to hedge your bets if the money you use to hedge could vanish?
By forcing high-level executives to sign off on large transfers of client funds, CEOs wouldn’t be able to claim, like Corzine has, that they had no knowledge of what was going on. In theory, it would act as a deterrent to future firms facing a run.
“We just want to make that much less likely to ever happen," said Dan Roth, CEO of the NFA, which is an industry-funded watchdog that outlined the plan earlier this month.
Violators of the rule would be subject to sanctions, including potential expulsion from the NFA, which all futures commissions merchants are required to be a member of, Roth said.
Greenberger said the punishment should go further, putting executives in jeopardy of criminal charges and jail time, not just hefty fines.
“People want the CEO to spend some time in prison,” said Greenberger. “Often the fines are just the cost of doing business, but spending time in prison is very therapeutic in encouraging conduct that protects the investor.”
Roth said for this to be a criminal violation, Congress would have to approve changes to the Commodity Exchange Act. He said that while the NFA doesn't have a position on making it a criminal matter, "I don't know that we'd be opposed to that. We'd have to consider that."
Will Corzine Rule Take Effect?
However, some argue stringent requirements like Sarbanes-Oxley can backfire, creating a disincentive for companies to public or enter a certain industry. They say requirements like this can cause CEOs to have to micromanage the company.
“I’m not one for burdening CEOs with extraordinary and unreasonable auditing principles, but we can see the loss of this money has gone to the core of the viability of a multi-trillion dollar worldwide business,” said Greenberger.
Roth said the NFA has reviewed the proposed rule with its members and "so far no one has felt it was an unreasonable burden on NFA firms."
In a sign of the widespread fallout of the MF Global debacle, earlier this month the CME Group, which was MF Global’s front-line regulator, announced the resignation of CEO Craig Donohue.
Roth said the NFA may take up the Corzine rule in May. If approved, the rule would then have to be submitted to the CFTC for approval there.
It’s not clear if the proposed Corzine rule and other potential regulations will ultimately be enacted, but it is apparent there is the political will for some major changes.
Lawmakers on both sides of the aisle have been taking up the cause of individuals who have money missing in the MF Global aftermath.
“This is a bipartisan concern,” said Greenberger. “MF Global messed with the wrong people here. You not only have the powerful interests of the buy side of this market, but you’ve got farmers and ranchers up in arms.”
It should be a bipartisan concern. Caught up in this MF Global fiasco are many companies and plain old farmers who hedge their crops using futures market. It's a huge issue and I'm not sure the "Corzine-rule" will be enough to ensure clients' assets will be safeguarded from this type of fraud ever again.
Below, Bloomberg News reporter Phil Mattingly and Seth Berenzweig, managing partner at Berenzweig Leonard, talk about a Bloomberg News report that Jon S. Corzine, MF Global Holding Ltd.’s chief executive officer, gave “direct instructions” to transfer $200 million from a customer fund account to meet an overdraft in one of the brokerage’s JPMorgan Chase & Co. accounts in London, according to an e-mail sent by a firm executive. They speak with Trish Regan and Adam Johnson on Bloomberg Television's "Street Smart."