Courtesy The Wall Street Journal
Jon S. Corzine, the former New Jersey governor who revved up risky trading as chief executive at MF Global Holdings Ltd., deserves much of the blame for the firm's 2011 demise, according to a bankruptcy trustee's report released Thursday.
The report mentioned Mr. Corzine's name a total of 284 times—an average of more than once per page—and concluded that he and his management team engaged in "negligent conduct."
The 174-page document, filed shortly after midnight Thursday in a federal bankruptcy court by former Federal Bureau of Investigation chief Louis J. Freeh, represents the most thorough look into management's role in MF Global's failure—and the toughest yet on Mr. Corzine.
The findings in the report could help decide how much money Mr. Corzine and others potentially have to pay to settle private cases from MF Global customers and creditors in coming months. Those settlement talks are heating up, with a meeting scheduled with a court-approved mediator next week, according to people familiar with the plans.
Mr. Corzine, a former Goldman Sachs Group Inc. chairman who was brought in to rejuvenate MF Global in 2010, relied on his Wall Street background to transform the sleepy brokerage into a high-octane trading firm. But the company lacked the cash-management procedures, risk controls or manpower to properly oversee itself, Mr. Freeh said in the report.
Mr. Corzine's decision "to expand MF Global's proprietary trading may have appeared sound in a vacuum, but in the reality of the business Corzine and his management team inherited…this strategy was disastrous," the report noted.
After a series of risky bets on European sovereign bonds engineered by Mr. Corzine, the company failed in October 2011. Amid frantic transfers in an effort to save the firm, an estimated $1.6 billion in customer funds was lost, although no one has been charged civilly or criminally for those transfers. Since then, another trustee has recovered roughly 90 cents on the dollar—from trading partners and various accounts around the world—for many former MF Global customers.
In a statement Thursday afternoon, a spokesman for Mr. Corzine said: "Mr. Corzine worked tirelessly and in good faith to turn the business around." The statement called Mr. Freeh's report "a clear case of Monday-morning quarterbacking" and said "there simply is no basis for the suggestion that Mr. Corzine breached his fiduciary duties or was negligent."
Mr. Freeh was tapped in 2011 to examine the downfall of the New York company that was the parent of MF Global's brokerage operations. Thursday's report was the third and likely last major postmortem of the firm's rise and fall, and drew many of the same conclusions as the others.
Mr. Freeh's report also marks a new chapter in the case. He and James Giddens, the trustee overseeing the firm's brokerage unit, are largely turning over the reins to private lawyers, judges and a mediator, who are trying to put a final price tag on damages in the case.
A spokesman for Mr. Giddens said Thursday that distributions now under way will restore 89 cents on the dollar to former MF Global customers who did business on U.S. exchanges. Further distributions are expected in coming months that will boost the total to at least 93 cents on the dollar. Customers on foreign exchanges are expected to get back at least 75 cents on the dollar, up from the current 18 cents, the spokesman said. The increases need court approval.
Creditors have been hit much harder, with recent court documents suggesting that unsecured bondholders could recover just 12 to 42 cents on the dollar, though the rate may rise later. MF Global bonds have recently traded at 70 cents on the dollar, a sign that investors are betting more assets will be recovered for creditors, too.
In his report Thursday, Mr. Freeh noted that he had moved ahead with a plan to sue Mr. Corzine and other MF Global executives. But in recent days he halted that plan after being convinced by a mediator handling settlement talks in the case that he should join those talks instead, according to people familiar with the discussions.
Some major outside parties have paid money to end their exposure in the case. Now the reckoning turns to former MF Global executives including Mr. Corzine, who accumulated hundreds of millions of dollars of wealth in the 1990s running Goldman Sachs and therefore could be a target in civil suits.
"This makes it 3-for-3 for official reports that blame [Mr. Corzine] for the collapse," said James Koutoulas, a commodities investor and lawyer representing some of the firm's former customers.
Mr. Freeh in particular went after Mr. Corzine's healthy appetite for trading. A few months after starting at the firm, Mr. Corzine "started trading on his own" in company accounts that bore his initials, JSC, and became a topic of discussion among employees, the report said. It added that Mr. Corzine's trades "were only minimally supervised."
Meanwhile, Mr. Freeh's report said Mr. Corzine and his management team failed to improve faulty controls in MF Global's risk and treasury departments, even after being warned of their inadequacy. Those weaknesses prevented the company from knowing that some customer funds were being used to meet MF Global's needs when the company began to falter, the report said.
The Commodity Futures Trading Commission has been investigating the events at MF Global for more than a year, though no case has been filed yet. Criminal investigations haven't led to any indictments. The CFTC declined to comment Thursday.
In addition to Mr. Corzine, Mr. Freeh's report was critical of other executives including former chief financial officer Henri Steenkamp.
Mr. Steenkamp was "wrong" in asserting that many of the company's key systems "would survive…a run on the bank," the report noted.
Lee S. Richards III, a lawyer for Mr. Steenkamp, said his client "worked diligently and in absolute good faith to promote the best interests of the company. The suggestion that he in any way caused any of its losses is simply mistaken."
Mr. Corzine, who left the company days after its bankruptcy, has spent recent months trading for his own account, traveling and spending time with his family. His supporters point out that his doomed trade actually turned out to be a moneymaker. None of the European bonds he bet on defaulted through 2012.
But Mr. Corzine's next moves may be limited. Regulators could try to suspend him from the securities or futures industry, if the claims of negligence made by Mr. Freeh hold up.
John Coffee, a law professor at Columbia Law School, says that the lack of evidence of criminal fraud is a helpful sign for Mr. Corzine's future, but that he doesn't expect the financier to work on Wall Street again.
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