Last week, a court approved a settlement deal among commodities firm MF Global’s bankruptcy trustees that will reimburse its customers for 93 percent of the value of their accounts, from which about $1.6 billion had disappeared during the firm’s bankruptcy. But even if they eventually see 100 percent of their funds returned, the firm’s misappropriation of customer funds under the leadership of Jon Corzine will remain a shocking example of financial malfeasance. It looks like Corzine could have gotten away with the crime of the century.
If you aren’t familiar with Jon Corzine, he is the man Vice President Joe Biden called first during the financial crisis because he considered Corzine “the smartest guy I know about the economy and finance.” Corzine spent much of his career at Goldman Sachs, becoming chairman in 1994. After Goldman Sachs went public, Corzine was forced out of the chairmanship, but he left with a $250–400 million payout. He quickly parlayed that money into a New Jersey U.S. Senate seat, and then the governorship of New Jersey in January 2006, before losing to Chris Christie in the next election.
Three short months later, he took over as chairman and CEO at MF Global, a commodities broker. Corzine planned to transform MF Global into an investment bank that some thought could become the next Goldman Sachs. That is where Corzine began to run into trouble.
Most investors have their accounts at either a bank or a traditional brokerage house. Banks have offered deposit insurance for the past 80 years, and brokerages have done so for the past 40. Since such institutions can dip into investors’ funds at any time, they pay fees to a government-operated insurance fund for protection in the case of bankruptcy.
But no such entity exists for commodities brokers such as MF Global, because they are not permitted to use clients’ funds in this way. The Commodities Exchange Act of 1936 says:
Customer funds to be segregated and separately accounted for
(a) All customer funds shall be separately accounted for and segregated as belonging to commodity or options customers. Such customer funds when deposited with any bank, trust company, clearing organization or another futures commission merchant shall be deposited under an account name which clearly identifies them as such and shows they are segregated as required by the Act.
In fact, the predecessor of MF Global had acquired its commodities accounts from the 2005 collapse of REFCO, which at the time was the largest independent firm in the futures industry. Despite huge losses and a large scandal, there was no invasion of REFCO’s accounts. Given that, how has no one been charged with a crime for the actions taken at MF Global in late October 2011? It is clear that funds from private commodity accounts were used illegally. Have Jon Corzine’s connections put him above the law?
Samuel Tenenbaum, clinical associate professor of law at Northwestern and a director of the Investor Protection Center, has followed this case since its inception. He believes that the two relevant agencies in this case, the Securities Exchange Commission (SEC) and the Commodities Future Trading Commission (CFTC), will not bring criminal charges, despite the fact that “clearly the law was broken.”
The Commodity Customer Coalition (CCC), which was formed in the aftermath of the MF Global bankruptcy and now has 10,000 members, agrees that the law was broken. The group’s cofounders, James Koutoulas and John Roe, authored a white paper on the MF Global matter. Their work examines the critical point in late October of 2011, when, they state, Mr. Corzine was informed that MF Global was overdrawn by $175 million with J. P. Morgan. According to the paper, Corzine personally ordered MF Global treasury official Edith O’Brien to transfer $200 million in customer funds from segregated accounts to MF Global in the U.K.; $175 million was then transferred to J. P. Morgan to clear the overdraft. When Corzine appeared in front of the House Subcommittee on Oversight and Investigations to explain the scandal, he was no longer the “smartest guy in the room.” Corzine admitted that he issued the order, but denied knowing it was customer money.
Stanley Haar, owner of Haar Capital Management and one of the people who has been pressing this matter legally, says that could not be true. Haar, an experienced commodities investor, and his clients had over $10 million in accounts with MF Global when the funds were taken (and, in fact, had had his accounts with REFCO before it was acquired by MF Global in bankruptcy). Corzine knew what was being done or “he was willingly blind,” Haar says, which still leaves Corzine legally responsible. MF Global had been scrambling for weeks to generate liquidity and had been placed under restriction by both J. P. Morgan and the Chicago Board of Trade (CME), Haar explains. Thus, according to him, “it would have been preposterous for Corzine to believe that hundreds of millions of dollars in company cash had suddenly been found.”
Haar’s conclusion is reinforced by the House subcommittee report, which found that J. P. Morgan’s chief risk officer, Barry Zubrow, personally called Corzine for assurance that the funds being transferred to clear the overdraft were not from customer accounts. Further, Zubrow sent a letter, to be signed by MF Global official Edie O’Brien on behalf of Corzine and MF Global, asserting that the transfers of funds complied with CFTC customer-protection rules. That letter was revised twice but never signed. At the time the CFTC, the SEC, and CME all had staff on the premises of MF Global offices in New York and Chicago, but MF Global went ahead with the illegal transaction anyway. The CME had ordered MF Global to get permission from the customers for any funds transferred from segregated accounts, but no such permission was sought.
Haar explains that the case is clear: Corzine and the firm, at minimum, “willfully neglected” their obligations when they ignored the signature request from J. P. Morgan and transferred the funds.
But this is Jon Corzine, former governor, former U. S. senator, buddy to the rich and famous — and a leading bundler for President Obama’s reelection campaign. By the first quarter of 2012, he had raised over $500,000 for the campaign. On May 14, 2012, Representative Michael Grimm (R., N.Y.) sent a letter co-signed by 63 other House members asking for a special counsel to be appointed because of the administration’s obvious conflict of interest. After review of the matter, Attorney General Eric Holder could not find anything to pursue with regard to criminal charges, and the administration never acted on the request for a special counsel.
The members of the Commodity Consumer Coalition whose money was missing had to rely on the subcommittee report, which, though it detailed illegal acts, did not call for pursuing criminal charges. When asked why the subcommittee conclusions did not call for charges, the spokesperson for the subcommittee, Heather Vaughan, insisted that that was not the mission of the committee, as it lacks the power to bring charges. When it was pointed out that Congress has oversight on the relevant agencies and could pressure them to pursue criminal charges, Vaughan said that the subcommittee was not doing that, either. The group recommended changing the laws so that indictments would be brought against parties who behave this way in the future, but their work let Corzine, O’Brien, et al. off the hook.
The cheated customers now have to go about getting their money back through a complicated legal process. The CFTC would normally handle a situation such as this, but it has never managed the recovery of misallocated money before, and its chairman had to recuse himself because he once worked for Corzine at Goldman Sachs. Instead, the bankruptcy court appointed two trustees: former FBI director Louis Freeh to represent MF Global, and James Giddens for the Securities Investors Protection Corporation (SIPC) to represent the customers. Giddens, an experienced bankruptcy attorney with Hughes, Hubbard and Reed, has no experience with commodities trading. At the time of the bankruptcy, MF Global had 100 securities accounts worth about $100 million in total and 38,000 commodities accounts worth $6.4 billion — yet the customers’ trustee has no experience in the field.
CCC and other observers also questioned the court’s decision to allow the company to be split into two separate entities, one of them a holding company that is allowed to continue operating under Chapter 11 bankruptcy. Regulators, led by the CFTC, should have insisted on seizure and liquidation of the firm by a receiver, which would have given priority to the commodity customers over the other claimants. CCC also highlights the customers’ lack of representation at the bankruptcy hearings: No one from the CFTC was there.
For now, the two trustees are battling it out over whatever funds are available. Giddenss’s spokesman tells me that “the trustee takes seriously his duty to treat commodities customers, securities customers, and general creditors equitably.” Yet what is equitable in this matter is certainly open to debate — the commodities-account holders contend they have the highest priority for any funds, since their accounts should never have been touched to begin with and the other claimants should be repaid after they receive full payment.
Then there is the cost of administering this entire mess. There was a negative reaction when Giddens announced in June 2012 that he had already racked up $17 million in fees. Then he claimed the money would not come from customer funds — but I could not obtain a straight answer from Gidden’s spokesman as to where the funds are coming from. They are coming from, in his words, the “general estate.” In plain English that means someone who had an account at MF Global will foot the rather sizable bills from Giddens and Freeh.
If you think this is just a fight between a bunch of wealthy folks, think again. Big hedge funds had accounts at MF Global, in addition to billionaire Carl Icahn and large corporations such as Coca-Cola. But there were 38,000 accounts in total, 25,000 of whose holders have made bankruptcy claims.
In fact, over 87,000 farmers were affected by the bankruptcy. Many of them were invested in accounts for farm co-ops, using commodities futures to hedge the risk of their crops’ going bad in a given year. The farmers who long have protected themselves with these commodities accounts now have a significant distrust of the system, and many were short of funds for the next planting season.
It seems likely that MF Global’s perfidy chilled the commodities market. Trading on the futures market was down 8.9 percent in the first six months of 2012 compared with the first six months of 2011. Options trading was down 11.5 percent for the same period. The Chicago Board of Trade’s net income declined 17 percent in the same period. Professor Tenenbaum attributes the drop to a “lack of trust” that has developed in the wake of the scandal.
Hopes of pursuing criminal charges hinge on the case against Edie O’Brien, MF Global’s assistant treasurer under Corzine. Her attorney, Reid Weingarten, is one of Eric Holder’s closest friends and represented the now–attorney general in the hearing held to review the pardon of Marc Rich. Further, Holder and Weingarten co-founded a D.C. nonprofit, and Weingarten’s son was hired by the Department of Justice after Holder became attorney general. O’Brien invoked the Fifth Amendment in March and has insisted on immunity from prosecution if she is to provide any information on what happened in October 2011.
So where does the situation stand today? Commodities customers have gotten back 80 to 85 percent of their funds with a commitment to bring that to 93 percent in the near future. Corzine has stated his intention to start a hedge fund, where at least if he loses such money again, his investors will have authorized him to do so. Tenenbaum says that “this is not over from an illegality point of view.” But one can surmise that Corzine feels pretty safe as the little guys still struggle to get back the money they never dreamed would be touched.
Right now, smart investors would bet on Corzine’s never being charged with a crime.
— Bruce Bialosky, a former presidential appointee and weekly columnist, is a CPA in active practice.