Regulator’s clear message to brokerage CEOs – you are ultimately responsible for customer funds.

The CFTC, in one of its strongest worded statements we’ve seen, has brought a civil action against former MF Global CEO Jon Corzine, as well as former Assistant Treasurer Edith O’Brien for the $1 billion in client funds which were missing when MF Global went bankrupt in October 2011. Before becoming MF Global CEO in 2010, Corzine served as both Governor and US Senator of New Jersey, as well as being a former CEO of Wall Street powerhouse Goldman Sachs.

The CFTC did not come out and say that Corzine knew what was being (wrongly) done with client funds. It did state however that “Turning a profit is not the only job of the [CEO]… the CEO must do what’s necessary to prevent unlawful uses of customer money…”

Although the CFTC was very specific in its description (see below) of what it believes Corzine did and knew (and what he also should have known), it remained very vague as to what exactly it wants from him. Often the CFTC states a specific number it is suing for. Here, the CFTC just stated that it seeks “full restitution and penalties against [MF Global], Corzine, and O’Brien, in addition to trading and registration bans and injunctions against Corzine and O’Brien”. The “full restitution” apparently means 100% repayment of the approximately $1 billion lost by MF Global customers — meaning that, if successful, the CFTC’s suit could in theory force Corzine to give up most if not all of his personal fortune, if the client monies aren’t found elsewhere.

It should be noted that this is NOT a criminal charge against Corzine. It is basically a civil action. It is unclear if some US federal or state agency will try to tack on criminal charges at some stage.

So what does the CFTC claim about Corzine? Some quotes include:

• … as MF Global’s need for cash was rising and its sources of cash were diminishing, Corzine knew that the firm was relying more and more on proprietary funds that it held alongside customer funds… Corzine did not enhance MF Global’s deficient systems and controls sufficiently… ultimately, these failures contributed to the massive customer losses.
• Corzine was warned about the firm’s liquidity stresses, and he knew that the firm violated its own policy that had been designed to protect customer funds.
• Corzine is alleged to have been aware of the firm’s true low cash balance, even as he directed the firm to continue paying large obligations without inquiring how the firm could come up with the money to do so…. [he] did not act in good faith and is also charged with violating his legal obligations to diligently supervise.

For the complete CFTC press release on Jon Corzine click here.

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