As most traders know, brokers have to tape phone calls. So perhaps the most interesting aspect of the Commodity Futures Trading Commission’s (CFTC) enforcement action against Jon Corzine, Edith O’Brien and MF Global are the internal phone calls and e-mails between staff when the firm was going down. On June 27, Corzine was charged by the CFTC that MF Global unlawfully used nearly one billion dollars of customer segregated funds to support its own proprietary operations and the operations of its affiliates…. Corzine bears responsibility for MF Global’s unlawful acts. He held and exercised direct or indirect control over MF Global and Holdings and either did not act in good faith or knowingly induced these violations, the CFTC stated in its complaint. Likewise, Edith O’Brien, assistant treasurer of MF Global and head of liquidity management, approved and/or caused numerous illegal transfers of customer segregated funds to the Firm’s proprietary accounts, and otherwise aided and abetted MF Global’s customer segregated fund liquidity.
The CFTC complaint is against MF Global Inc., MF Global Holdings, Jon Corzine and Edith O’Brien. MF Global receivers have signed off on the settlement and now it’s up to the U.S. bankruptcy court to approve.
After the complaint was announced, word spread through a New York Post story quoting an anonymous source that the Department of Justice(DOJ) had dropped any criminal investigations against Corzine, although the DOJ’s only on-the-record comment was “no comment.” One source told us that historically government agencies will wait to press civil charges until after any DOJ criminal actions; in this case that didn’t happen, inferring but not confirming criminal charges won’t be filed. But this isn’t always true, especially when customer funds are on hold, noted one attorney. On another front, Rep. Michael Grimm (R-NY) is calling on the DOJ for criminal charges against Corzine, citing that based on the taped calls by Corzine, he perjured himself during congressional hearings. Update: on Aug. 1, a letter from several Republican lawmakers was sent to the DOJ requesting an investigation of Corzine, comments he was taped as saying and his testimony in front of Congress.
How did they get there?
By now, even the least interested person knows about the failure of MF Global, and that Corzine hoped to turn MF Global into an investment bank and invested funds into what became bad investments, especially sovereign debt. But the illiquidity of the firm had been ongoing…and then came Oct. 6, 2011. From the CFTC complaint:
…on Thursday, October 6, 2011, members of senior management were concerned about the Firm’s liquidity and ultimate viability. O’Brien, her supervisor, Holdings’ Global Treasurer, and others discussed on a recorded telephone line that the Firm expected to have to make a margin payment of $50 million to $75 million the next day for MF Global’s RTMs [repurchase to maturity trade]. They agreed that this margin obligation would have to be paid from FCM Excess Cash because the Firm had no other readily available source of cash that could cover that amount. At the time, the FCM Excess Cash balance was approximately $80 to $100 million. Holdings’ Global Treasurer expressed concern that even without the stress of this margin call, the Firm was facing the loss of liquidity and that it was “skating on the edge” without “much ice left.”
On that same day, Global Treasurer Vinay Mahajan spoke to Holdings CFO Henri Steenkamp and said that he had told Corzine that the Firm’s liquidity “situation” was “not sustainable” and that “the situation is grave.” Later during this conversation, the global treasurer stated that “we have to tell Jon that enough is enough. We need to take the keys away from him.” Corzine disparagingly nicknamed the Global Treasurer “the Gravedigger.
The evening of Oct. 6, Corzine received an email from Holdings’ CFO that detailed the financial stresses on the Firm. In the email, Holdings’ CFO told Corzine that “[o]f most concern, is the sustained levels of stress and the lack of signs that this will reduce soon.”
Holdings’ CFO identified MF Global’s three sources of liquidity: (1) cash from its subsidiary, MF Global Finance USA, Inc. (“Finco”); (2) FCM Excess Cash; and (3) MF Global’s broker dealer division. Holdings’ CFO warned Corzine that the Firm was becoming overly reliant on the cash in the FCM customer accounts because the other two sources of liquidity were insufficient: “the situation of our broker-dealer [is] that [it] is currently unable to fund itself, and more worrying continues to need more cash than we have in finco [sic], thereby having us dip into FCM excess every day.”
However, it seems that Corzine was “determined to squeeze MF Global’s customer segregated accounts and customer secured accounts for cash. In a recorded conversation with another MF Global employee (“Employee #2”), Corzine pronounced: “We need to go through what that real number is at the FCM. You know, what’s the drop dead amount. . . You know, I’m sure there is a buffer in her thinking. We’ve got to find out what that is so that we have some ability to think about pulling it if we have to. Obviously, keep me posted.”
Playing a shell game
On Oct. 18, despite a decision that FCM cash would no longer be used as a liquidity source, the firm used approximately $55 million more than what was available of FCM excess cash, the complaint states, adding it was the third day in a row that Corzine received information that the Firm violated its policy.
On Oct. 26, MF Global became under-segregated to the tune of $298 million in customer seg accounts… the firm did not immediately notify the CFTC or CME Group, its designated self regulatory organization. According to the complaint, O’Brien and her staff in MF Global’s Treasury Department directed, approved, and/or caused funds to be transferred from customer segregated accounts at the request of MF Global’s broker-dealer staff. O’Brien understood that any use of customer segregated funds was unlawful, even if these customer funds were later returned to the segregated accounts. At approximately 6:00 p.m. ET, O’Brien told broker-dealer staff in an email that she needed them to return funds from MF Global proprietary accounts at the Bank of New York Mellon (“BONY”) to customer segregated accounts “ASAP,” and that they could not afford a “SEG issue.” BONY was one of MF Global’s primary banks, housing customer segregated accounts as well as MF Global proprietary accounts, among other Firm accounts.
Just prior to 6:30 p.m. ET, O’Brien told Employee #2 on a recorded telephone line that the Firm would not be in compliance with customer segregation rules because funds were not being returned to customer segregated accounts:
O’BRIEN: It is a total clusterfuck . . . . They have to move half a billion dollars out of BONY to pay me back . . . . Tell me how much money is coming in and I will make sure it gets posted. But if you don’t tell me, then tomorrow morning I am going to have a seg problem . . . . I need the money back from the broker-dealer I already gave them. I can’t afford a seg problem.
But she got one as BONY transferred $325 million to a customer seg account, but it wasn’t enough. The complaint continues: O’Brien sent an e-mail to one MF Global employee titled “Heads up my projection,” which stated: “Due to large B/D client wires we could be negative seg tomorrow AM.”
On Oct. 27, with credit from BONY or JPMorgan (JPM) not coming due to MF Global’s precarious position, Corzine spoke to one employee, says the complaint, to strategize how they could use customer segregated funds to induce JPM to clear MF Global’s trades more quickly:
CORZINE: We have a money management account at Chase, if my memory serves me.
Employee #1: Yeah, it’s the JPMorgan 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.
At the close of Oct. 26, MF Global’s customer segregated accounts were under-segregated by more than $298 million. That same day, states the complaint, despite knowing accounts were under-segregated, O’Brien and her staff transferred at least $525 million of seg funds, including $325 million transfer from a customer seg account at BONY, to the Firm’s proprietary accounts. But before BONY allowed the transfer, it asked if it would comply with CFTC regulations. The complaint states:
O’Brien replied to BONY by email that the $325 million were “not required to be segregated intra-day under CFTC or SEC rules.” She deliberately did not copy other MF Global Treasury Department employees on her email response to BONY because, as she explained to one of her colleagues in the Treasury Department on a recorded telephone line: “I don’t want to take anyone down with me.
The complaint states that knowing seg funds were underfunded, At approximately 8:45 p.m. ET, Employee #2 told Corzine on a recorded telephone line that some of the funds O’Brien had transferred from the FCM to help satisfy MF Global’s proprietary obligations had not been returned. Corzine asked if she had received back “enough to be in compliance,” and the employee responded, “no, she[’s] indicating she’s net short $106 million.” Corzine thereafter instructed the employee to “raise hell” with (JPMorgan) to obtain funds from the secured revolver to “cover up” the gap left by transfers of funds that were not returned. Corzine did not receive assurances that the funds were returned.
Although that night the firm filed a seg report to the CFTC stating it had more than $116 million in excess funds, it actually was underfunded by more than $298 million.
Early Friday morning, Oct. 28, Corzine learned the U.K. affiliate was overdrawn in its JPMorgan accounts by $134 million. At 9:00 a.m, according to the complaint, he instructed O’Brien to transfer funds to pay for the overdrafts, saying it was “the most important thing she can get done that day.” O’Brien complied, sending $175 million to the U.K. affiliate. In a phone call the next day, she told a colleague “the only place I had the $175 million, ok, was in seg.” O’Brien also commented during this conversation that she “move[s] money all the time . . . from seg over to house and house over to the BD [broker-dealer]. O.K., that’s what we do all the time because we don’t have enough capital…” When told she might not get the money back right away, she responded that “leaves us with a problem – a big problem.”
When JPMorgan inquired about this transfer, Corzine followed up with O’Brien, who noted that it was transferred from a MF proprietary account, leaving out that originally it was from the customer seg funds account.
On Friday, O’Brien’s team asserted that seg funds account be readjusted to show an increase of $540 million, which was wrong but unquestioned.
O’Brien knew that the transfers from customer segregated accounts that day were unlawful. At about 6:00 p.m. ET in a recorded telephone call, O’Brien told Employees #1 and #2 that at least $530 million had been transferred from FCM customer segregated accounts and that it could be “game over” unless at least $355 million was returned:
O’BRIEN: Okay, so it’s 249.50 today, it’s 106 from, from Wednesday, actually, you guys, okay? Okay. 355. Okay. So, let’s just be delirious and think [the broker-dealer division] ha[s] more than 355. Okay? If they have it, I need it, and let me tell you why. Shh. London failed me on returning the 175 I pushed out to them this morning. Okay? That could be game over, you guys.
Employee #2: From a regulatory perspective?
O’BRIEN: Yep. Yep, it could be.
Employee #1: You need the 530 million bucks.
O’BRIEN: Yep. I don’t care where you get it, quite frankly. If you can get 530 million dollars, I’m putting it back in the seg pool. Okay? I can maybe get by with this 175, but I can’t get by without the whole 355, you guys.
According to the complaint: Among other things, Corzine also was aware, at the time when funds were transferred from the customer segregated accounts, that: (a) the Firm had inadequate controls and systems with regard to liquidity management and regulatory reporting; (b) MF Global was experiencing a liquidity crisis, which had worsened during the last week of October; (c) JPM sought written assurances that the transfer of hundreds of millions of dollars from MF Global’s customer segregated accounts was in compliance with CFTC Regulations; and (d)…MF Global had previously violated Firm policy by using more than what was available of FCM Excess Cash from the customer segregated and customer secured accounts to satisfy the Firm’s proprietary liquidity needs. Additionally, Corzine knew on Friday morning that MF Global had transferred $175 million to MFGUK even though he thought MF Global had immediate access to only $82 million in proprietary cash. He further learned from JPM shortly before 2:00 p.m. ET on Friday that the funds were used to pay the overdraft … and were in fact transferred from a customer segregated account.
Corzine knew that MF Global’s own policy regarding the use of FCM Excess Cash was repeatedly violated to meet the liquidity demands on the Firm. In October 2011 alone, MF Global had violated its policy on at least five business days. Yet, Corzine did not take sufficient steps in response to ensure that proper controls were established and implemented to prevent any further violation of a Firm policy that was designed to protect customer funds.
So now what?
With the court’s approval, the CFTC will settle with MF Global for full restitution to all customers who still await funds, as well as it imposes a $100 million fine to be paid after all clients are made whole. According to the MF Global Inc. Trustee’s office, $4.981 billion has been distributed, which is 89% of U.S. accounts and 18% of non-U.S. accounts. In a statement, MF Global Inc. trustee spokesperson said “the resolution with the CFTC concerning MF Global Inc. is appropriate because it is a cooperative plan, that with bankruptcy court approval, would allow the return of 100% of the claims made by the former customers who had accounts at the broker-dealer.”
The complaint pending against Corzine and O’Brien includes a monetary penalty as well as losing all industry/trading privileges.
Corzine’s attorney, Andrew Levander, had this statement: “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. 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.”
Perhaps, but Rep. Grimm alleges Corzine indeed perjured himself during congressional testimony, stating in a release:
“In 2011, Jon Corzine gave the following statements to Congress:
“I simply do not know where the money is.” — made in written and verbal testimony before House and Senate Agriculture Committees (Dec. 7, 2011; Dec. 13, 2011)
“I was stunned when I was told on Sunday, October 30, 2011, that MF Global could not account for many hundreds of millions of dollars of client money.” — written testimony to Senate Agriculture Committee (Dec 13, 2011)
“I did not, however, generally involve myself in the mechanics of the clearing and settlement of trades, or in the movement of cash and collateral.” — written testimony to Senate Agriculture Committee (Dec. 13, 2011).
Rep. Grimm shows as his evidence the conversation Corzine had on Oct. 27 with Employee #1 regarding the JPMorgan account when Corzine was asking about a money management account at Chase. The employee says it won’t help with Chase, and Corzine’s reponse is to put it in the tri-party account (see slide, left).
It might prove difficult to get Corzine on perjury, especially with this Congress, one source noted. However, Corzine’s testimony that he was “stunned” that they couldn’t account for missing client money on Oct. 30 after weeks of dipping into seg funds is disingenuous at best and a lie at worst when tape recordings show he was ordering money moved almost daily.
As for O’Brien, she isn’t saying anything, which is exactly what she did in front of Congress when she plead the 5th, and that just might be the smartest thing she did in this entire saga.