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).