Jon Corzine, the former head of MF Global Holdings Ltd., masterminded a scheme to inflate earnings that led to the eighth-biggest bankruptcy in U.S. history, according to an updated lawsuit filed by a trustee for the failed futures broker.
Corzine, a former Democratic governor and senator from New Jersey and once a co-chairman of Goldman Sachs Group Inc., implemented the trading scheme to prop up profits and get “in the money” on his stock options, according to an amended complaint filed in Manhattan bankruptcy court yesterday.
The new complaint intensifies the lawsuit brought in April by former trustee Louis J. Freeh against Corzine and senior executives Bradley Abelow and Henri Steenkamp. Freeh had said only that the executives dramatically changed MF Global’s business plan without addressing weaknesses. According to the new complaint, their actions rose to the level of a “scheme.”
“This is certainly throwing fuel on the fire,” said Michael Weinstein, chairman of Cole, Schotz, Meisel, Forman & Leonard PA’s white-collar practice in Hackensack, New Jersey. “You get into a whole new area,” possibly putting MF Global on par with financial frauds such as Enron Corp. and Adelphia Communications Corp., the former Justice Department trial attorney said in a phone interview.
The new allegations may allow the holding company’s current trustee, Nader Tavakoli, to try and recoup greater damages from the estate, potentially going after money Corzine made from his bonus or options, Weinstein said. Both lawsuits seek damages to be determined at trial.
The word “fraud” doesn’t appear in the complaint, Weinstein said. If it did, that might void Corzine’s directors’ and officers’ insurance policy, leaving less money to try and recoup through the lawsuit, he said.
Steven Goldberg, a spokesman for Corzine, didn’t immediately return a call and e-mail for comment on the suit. Corzine has said there is no basis for the claim that he breached his fiduciary duties or was negligent.
MF Global’s bankruptcy can be “traced to a scheme” that Corzine, Abelow and Steenkamp “designed and implemented to prop-up the company’s apparent profitability through highly leveraged transactions in foreign debt,” Tavakoli said.
Shortly after the three took control of the company, they put it on a high-risk path that devastated its liquidity, depleted customer funds and ultimately caused its failure, Tavakoli said.
The scheme involved making highly leveraged investments in European sovereign debt using repurchase-to-maturity financing transactions, Tavakoli said. These allowed the company to inflate earnings by immediately booking income even while it took on future liabilities from the instruments, according to the complaint.
Each such transaction put the company in further peril, and the executives increased the number of transactions near the end of financial quarters to inflate earnings and boost the company’s stock price, according to the complaint.
MF Global’s repurchase transactions rose from $400 million in September 2010 to close to $8.3 billion in August 2011. When the underlying European sovereign bonds were downgraded beginning in 2011, margin calls put more and more stress on the company.
“When the inevitable liquidity crises occurred as a result of these transactions, defendants, recklessly and with gross negligence, violated the law by using segregated customer funds to cover the company’s resulting liabilities,” Tavakoli said in the complaint. “Corzine was instrumental in misusing these customer funds.”
At one point, according to the complaint, Corzine told an employee of MF Global’s Treasury Department to take certain positions even if it meant going “negative” in customer accounts. Corzine also directed a subordinate to violate company policy and draw cash from the regulatory buffer established to ensure the safety of customer funds if cash was needed in October 2011, according to the complaint.
The parent company of brokerage MF Global Inc. filed for bankruptcy on Oct. 31, 2011, listing assets of $41 billion and debts of $39.7 billion. Customers, who saw billions of their funds go missing, have been repaid about 89 percent of what they are owed. A separate trustee for the wind-down of the brokerage unit seeks to repay them 100 percent.
The adversary case is 13-01333; the holding company’s Chapter 11 case, In re MF Global Holdings Ltd., 11-bk-15059; and the liquidation of the broker, In re MF Global Inc., 11- bk-02790, U.S. Bankruptcy Court, Southern District of New York (Manhattan).