Arguably no scandal in the history of the futures industry has done as much damage as the MF Global debacle in the fall of 2011. The reason is that it challenged one of the core underpinnings of the futures industry—that customer segregated funds would remain segregated from the rest of the capital in a futures commission merchant (FCM) so that it would not be at risk even if the FCM itself failed.
That principle held through the credit crisis of 2008 when U.S. futures customers of Lehman Brothers did not lose a dime out of their Lehman accounts due to the firm’s failure. Because of this, when Congress created the Dodd-Frank Wall Street Reform and Consumer Protection Act in the wake of the credit crisis, it adopted the futures industry model of central counterparty clearing.
One of the heartbreaking elements we discussed covering the MF Global debacle was the number of folks who, in the midst of MF Global’s troubles, left their accounts alone, secure in the fact that their money was safe, even if the firm failed. It was an anecdote many introducing brokers (IB) shared with me as they contemplated the likelihood of MF Global’s collapse: “Don’t worry, even if the broker fails, your funds are safely segregated,” they told their customers. And why wouldn’t MF Global customers — including farmers, feedlot operators, investors with commodity trading advisors and IBs — believe it? It was what the exchanges, FCMs, IBs and Futures magazine told them.
One man turned us all into liars. That man was MF Global Chairman and CEO Jon Corzine, and he did it because he saw MF Global not as a futures brokerage business he needed to maintain where he had a fiduciary responsibility to uphold, but a cash cow he could use to fulfill his goal of creating the next Goldman Sachs. MF Global illegally dipped into customer segregated accounts to cover margin required for Corzine’s proprietary positons in foreign sovereign debt. Corzine pushed out risk managers who warned MF Global’s board of the risk in the positions, which grew to $6.2 billion.
After a long, nearly six-year process, the MF Global debacle came to a conclusion earlier this year. Corzine settled the last lawsuit, agreeing to a $5 million civil fine from the Commodity Futures Trading Commission (CFTC), which also barred Corzine from ever working for an FCM or registering with the CFTC.
The settlement provides some closure, but not justice to the industry victims who would have preferred to see a criminal prosecution.
There have been multiple settlements as well as a bankruptcy process, which eventually returned the $1.6 billion shortfall in customer segregated funds to its rightful owners, though not in time to save multiple businesses from their own demise.
While many may have viewed the CFTC settlement as the closing chapter on MF Global and Corzine’s business career, in May the New York Times Deal Book webpage touted a potential comeback for the former head of Goldman Sachs and Governor of New Jersey.
The story, written by Ben Protess, continues on a theme from that site and other major business outlets that dismissed the seriousness of the crimes committed at MF Global. It talks about Corzine’s plan to launch a hedge fund seeking to trade volatility related to the Trump Administration. He has already received commitments.
This same site posted multiple stories in the midst of the MF Global case, citing unnamed sources, suggesting that criminal charges would not be filed against Corzine, and also discussing Corrzine’s plans to eventually launch a hedge fund. At the time we described this as journalistic malpractice. While a criminal prosecution was being contemplated and the bankruptcy administrator was on record saying fraud was likely committed, DealBook was suggesting that this would all simply go away, and Corzine would be free to move on as if nothing happened. In the recent story, they downplayed the damage done in the collapse by noting “about $1 billion of customer money temporarily went missing,” as if it was misfiled. It wasn’t, it was illegally transferred from customer segregated accounts to cover Corzine’s over-leveraged proprietary positions. It took more than two years for customers to get their money—which by law should have been safely segregated from MF Global assets — back.
MF Global collapsed for one reason: irresponsible trading and money management by Corzine, who should never be in a position of managing other people’s money again.