Mirabile Dictu! Someone (Bankruptcy Trustee Freeh) Finally Sues Jon Corzine Over MF Global

The great unwashed public might get to enjoy a bit of theater. MF Global bankruptcy trustee Louis Freeh filed suit against Jon Corzine and two other MF Global executives, Brad Abelow and Henri Steenkamp, for running the firm into the ground for breach of fiduciary duty of care, breach of fiduciary duty of loyalty, and breach of fiduciary duty of oversight. That’s legalese for doing a recklessly bad job of being in charge.

The suit does not include the issue that has many members of the investing public outraged: the appropriation of customer funds. But even though the specific failings are familiar to anyone who has been following this sorry affair closely, reading them together is a reminder of just how astonishingly irresponsible Corzine was as an executive. One of the basic requirements of a trading operation is you need to have solid controls and reporting. Yet Corzine instead entered into a outsided trading strategy that produced accounting earnings but drained liquidity. It’s frustrating that the suit misses this element, that the trade actually had a two day funding gap on top its other defects, including the fatal one, the risk of increased haircuts on a levered trade. That meant it drained cash even when it was showing accounting profits.As Michael Crimmins wrote:

The repo to maturity trade that enabled MFG to disappear the position was an INTERCOMPANY trade between MFGI and MFGUK. The ACTUAL repo with the street (MFGUK to LCH) was repo to (maturity-2 days).

The external auditors and the regulators waved it through anyway.

Since the entire business model rested on this fiction, the customers were doomed at the point this was approved.

The resulting catastophe was inevitable and all the issues about chaos in the final moments and feuds between Treasury and Accounting and antiquated systems is noise.

The regulators could have shut him down on day one. Using intercompany accounting to game the regs is compliance 101 stuff, so the regulators can’t claim they were bamboozled by the slickest guy in town. They were idiots, genuinely or conveniently, you decide.

At least Lehman had the decency to pay its counterparties to rent their balance sheet to pull off their scam. Fuld must surely envy Corzine.

Of course, the fact that complaint auditors and “see no evil” regulators permitted this bogus treatment is the reason Freeh and his lawyers chose to omit this issue. Corzine et al. could simply take the position that who was he to second guess the experts? But the failure to put the focus on the central problem means complicit regulators escape the opprobrium they deserve.

And there was more than enough dereliction of duty to make for a juicy filing. Corzine knowingly relied on faulty reports, such as a “liquidity dashboard,” gave incomplete reports to his board, and ignored warnings of his Internal Audit department. And that’s only some of the high points.

Freeh v. Corzine et al., April 23, 2013

The fact that the suit was filed suggests that Corzine and his former partners in gross mismanagement were unable to reach a settlement. And as readers no doubt know, roughly 95% of all lawsuits are settled. But here, Freeh has already done a huge investigation prior to filing the suit, so the usual motivation to escape discovery costs isn’t a big driver; there’s not much additional work to be done to prepare for trial. Corzine has a big enough ego, an established appetite for risky courses of action, and deep enough pockets so as to be far less deterred by courtroom costs and process than most defendants. So the odds are way higher than normal that this filing will lead to trial than most cases.

Unfortunately, some embarrassing cross examinations and a diminution of Corzine’s net worth falls far short of what Corzine deserves, which is jail time. But this suit may pave the wave for other litigation. If we are lucky, Corzine will be tortured in court for years.

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  1. Jessica

    Are we seeing the first stirrings of an attempt within the elite to seem to do at least a little something about the most flagrant insults to trust, law, and the fabric of society? Some dawning sense within the elite that things have gone so far that maybe relying completely on the propaganda-entertainment apparatus and SWAT teams and pepper spray is not so wise?
    Also, is there any part of the elite that is not corrupt or not completely corrupt that might try to rein in those parts that are 110% corrupt?

    1. Mark P.

      [1] “Are we seeing the first stirrings of an attempt within the elite to seem to do at least a little something about the most flagrant insults to trust, law, and the fabric of society?”


      [2] “Also, is there any part of the elite that is not corrupt or not completely corrupt that might try to rein in those parts that are 110% corrupt?”


    2. RepubAnon

      No, we’re seeing the perils of acting recklessly with the money of another member of the 1% club. Has Mr. Corzine been looting the 99%, hey, ripping the eyes out of muppets is who they are – it’s what they do.

    3. nonclassical

      …statute of limitations running out-likely reason for hush-up on Wall $treet “criminogenic accounting fraud”, as William K Black defines…

    4. RBHoughton

      I feel you are right Jessica.

      Investment intermediaries like Corzine have wives, and children and friends. Can they stand the looks they get? Can they keep shame and remorse at bay? Its the same with all the bank directors and stock-brokers. They carry on because they have an argument that says they are right to do so.

      Others have identified this ideological basis to “profit regardless of ethics” as Utilitarianism. I agree. It is only necessary to confront them and lead them to recognise their view is indefensible. That leaves greed as their sole justification and I expect, unless they can keep it secret, that it will not be enough.

  2. David

    Of course the real reason Corzine was never criminally charged was because he raised so much money for Obummer’s political campaigns.

    1. The Sandman

      The elements of proving a crime, and the burden of proof and jury dynamics, are so much different than proving civil liability, that they offer a more likely explanation for no criminal prosecution than rank cronyism. Can’t rule out politics, for sure, but can’t default to it as an explanation every time either.

      1. Synopticist

        Yeah, difficult to prove, yada yada.

        That doesn’t explain why he was never even questioned in a criminal context, despite billions of missing dollars when fraud was a pretty likely explanation. Or why his chief honchos weren’t pressurised to give up their boss like they would had it been almost anyone else.

        But it wasn’t just that he was a big Obama fundraiser, and Governor. He was Wall Street aristocracy, former Goldman head, and the walking, talking stealing and dealing epitome of the new untouchable elite caste.

      2. andy synonymous

        I agree politics should not be the default explanation in every case, and in fact I don’t think it’s the whole explanation for the failure of the DOJ and state prosecutors to go after Jon Corzine.

        It seems to me that in this case the prosecution would have a good chance of making enough of a showing on the elements to survive a motion for a directed verdict. And jury dynamics here are bad for the defendants. The disappearance of money which investors had been assured was segregated from the firm’s proprietary accounts is something a jury can understand. Mr Corzine’s ego would make him a terrible witness. And there is the possibility of the prosecution tempting one of the defendants with a sweet plea offer in return for testifying against the others. Of course, there would be some chance that even if the jury convicts the verdict might be set aside by the trial court or overturned on appeal.

        But the larger point is that the fact that criminal prosecutions are difficult doesn’t justify the failure to prosecute Mr Corzine and others. Prosecutors, even if they know they may not get a conviction, have a duty, when it is warranted, to at least try to protect the public and to be seen to be doing so, even when it is not easy and may not be successful. I’m not saying a prosecutor should drag a defendant’s name through the mud when he or she knows the case won’t stand up in court. But giving up without a fight on a case that could go either way just because the odds are against you is not what we pay prosecutors for.

        Cronyism doesn’t explain the moral failure of prosecutors to make the financial nobility answer for their crimes. I put it down to cowardice.

        1. tawal

          As much as I agree with your analysis above, I don’t think it is cowardice. It’s the revolving door, ego and public relations. They only try the cases that don’t hurt their future employment, and that they have a 95% chance of winning, so they can brag.

      3. Strangely Enough

        How then to explain the disparity between the treatment of Corzine, HSBC, and Wall Street generally, with the prosecution of Aaron Swartz?

      4. OMF

        The elements of proving a crime, and the burden of proof and jury dynamics, are so much different than proving civil liability, that they offer a more likely explanation for no criminal prosecution than rank cronyism. Can’t rule out politics, for sure, but can’t default to it as an explanation every time either.

        Breuer, is that you?

        1. Ms G

          Seconding the question and asking, in follow up, “or is that the Spin Handler in Covington & Burling’s “Media Relations Office”?”

    2. McMike

      I am more inclined to believe that Corzine was left alone because JP Morgan was his “fence” for the stolen customer money. Or more accurately, because they re-stole what he stole.

      (Christ, that reads like a Tarantino script).

      1. NotTimothyGeithner

        I think at an early stage Obama made a decision to protect the banks at all costs with the belief, a childish one, that 2008 was a hiccup. Do you remember the woman at the town hall who said, “I’m exhausted of defending you?” Like the Romney tape, it was everything else besides what was repeated ad nauseum that was most telling. Obama’s response included telling her that the economy was great in 2007 back when the country’s number one concern was the economy and jobs. I agree with Maya Angelou and think Obama revealed he’s a shallow, idiot who doesn’t grasp bubbles or prosperity as long his friends are okay. I think he believed everything would go back to “normal” (as if it exists) once the adults (anyone who the DFHs hate) were in charge and free of partisan bickering.

        Investigating Corzine opens a can of worms as other victims start to sue or disgruntled employees come forward which undermines “confidence” because people who don’t want to acknowledge reality would rather believe the housing market is about to explode as all those young people without jobs and hideous debt burdens are about to buy McMansions.

          1. NotTimothyGeithner

            I didn’t say naive. I said he was an idiot. There is a huge difference. He is a corporate whore and these banks will consume themselves, but I have never suggested he is naive. The man has no clue the economy had problems in 2007.

            He probably believes cutting Social Security benefits will lead to prosperity because the rich will have money to spread around to hire people because seniors can’t do that. He’s a moron and cruel, but I would never suggest he is naive. Children and do-gooders can be naive. Obama is neither.

            If Obama bothered to have a few sacrificial lambs, he would be overwhelmingly popular in light of the state of the current GOP. Even the Republicans understood, one has to “raise” spending on social program to keep people distracted from the real theft through low interest rates and corporate welfare. If Obama presented a Republican-style, the kind present when they are in office, it would pass with some horse trading and be all over with, and we would all go back to blaming Sarah Palin for all woes. He doesn’t do that because he isn’t that bright which is how Hillary would have done it.

            Even take his chained CPI proposals. He doesn’t even have a bullshit argument in place except to complain about radicals, the overwhelming majority of Americans. At least the GOP had b.s. about stock markets over time lined up.

          2. McMike

            Sorry, naive or idiot, I still put those in the same bucket.

            The point being, the two previaling explantions for Obama either emphasize that he is a calculating whore who knows exactly what he is doing, or it emphasizes that he is acting from a mistaken premise/understanding of some sort.

            Of course both can be true, yet most analysis seems to favor one side or the other on that question.

            The third explanation is that this hands are tied to prevent him from doing what he secretly really wants to do, but that’s just silly delusion.

        1. McMike

          Which is to say, I prefer the calculating whore emphasis.

          Sure, he may have convinced himself on delusions, and he is surrounded by people who may believe their own BS too.

          But at the end of the day, the lead motivation for his action is doing what his Wall Street backers tell him to do, no matter what that is.

          1. Synopticist

            I have him down as a centre-right, socially progressive politician. He does what the centre-right in America do, which is favour Wall Street interests above anything else in the economy. Or perhaps to nuance it, the centre-right favours Wall Street slightly less than the hard right, and a little more than the centre.

            Which would explain his (almost) complete capitulation to banking interests in general, and his lack of action on Corzine in particular.

        2. Ms G

          NTG — your theory about 2008 being an inflection point for Obama to suddenly start protecting banks does not square with the speech Obama gave at that Hamilton outfit in 2006. (Full video and perhaps transcript recently posted here at NC.) Obama has been a conscious and unrelenting soldier for the Neo-Liberal mafia (Rubin, Summers, Bill Clinton, Hilary Clinton, Geithner, et al.) and the Kleptocracy that they have installed. Obama is very much calculating that he will live very nicely ever after, as did Bill Clinton.

          1. NotTimothyGeithner

            My point was about his response to the crisis of 2008 which was to protect the banks was still based in stupidity because it requires massive QE injections which will result in inflation in real goods and inevitable collapse as consumers stop. It will be repeat of the Sub prime rates changing. To Obama, those same banks were healthy in 2007 because of the bubble. Without massive government intervention, those banks would be gone, but this is still a guy who thinks 2007 is normal and good economy. The idea of 2007 turning to 2008 probably doesn’t make any sense to him. Its the same as the people who still can’t get over the tech bubble bursting. Obama recently asked for banks to lower lending standards so lower income people can buy houses because of pressure, but 2007 was unsustainable period. His whole plan wasn’t just to save the banks, it was just to restore the temporary losses and hope things would be different. Its no different than his 2010 political efforts. They repeated the same Democratic strategy from non-Dean years and told dubious Congressman that Obama was way smarter and more talented than Bill Clinton. They were creamed, and Obama’s reelection was largely the result of long term demographic trends and race baiting in the GOP. Did you see Bill beaming on tv after Obama had asked him to campaign on the behalf of Democrats? Bill’s gloating couldn’t have been more obvious. I bet Bill and Hillary do Obama impressions.

            As far as his corporate whoring, Obama’s vaunted 2004 DNC speech was a shot at John Edwards “Two Americas” campaign mantra which is still true despite whatever else one might think about Edwards. Obama opened up with wealth inequality doesn’t matter, is the concern of whiners, and all of our problems can be solved by clapping. Thats the message of his 2004 speech.

      2. Ms G

        McMike — That is a great insight about JPM as the “fence” that “re-stole” the customer accounts that Corzine stole from MFG.

        It squares very comfortably with the facts if you look at how Freeh and Holder orchestrated the (non) handling of JPM and Corzine.

  3. jyllyj

    I’d like to see some executives from the underwiting department at Jefferies get deposed in the MFG trial. Jefferies was lead underwriter on two bond deals in August before the collapse. I recall trading the bonds and thinking to myself, “Wow, we finally beat that Latin American toll road bond deal that collapsed in six months. We are racing towards the bottom!” I can’t remeber the name of the bond deal, but the gist of the story was this: it was a ‘private’ toll road built right along side a free road. The bond sold to investors at par and then went to junk status as the revenues did not come in less than six months. How is it Jefferies, a primary dealer, did 2 bond deals for MFG in August, (one was a convertible bond the other I believe a 30 yr bullet) and both deals collapsed in October? (a mere three months later.) I can’t see the bond guys not hiding smirks as they watched the two deals come to mkt. Whomever worked on those deals should be looked at for their due diligence.

    1. Susan the other

      Wasn’t he the head of the FBI in his former incarnation? As such he understands the litigation of crime v that of personal injury. And he knows exactly how to prevent evidence that would incriminate.

      1. Ms G

        Susan T.O. — yes, Freeh most certainly was head of the FBI. I think we’re well past the point where anyone (even Obot Media Lackeys and other Spokesobots) can argue that Freeh has served as nothing more than JPM’s hitman and fixer in this MF Global matter.

        Holder took care of letting Corzine walk a free man. Freeh took care of making sure JPM held on to the stolen customer account money for as long as possible (float, compound interest, etc.) and then returning as little of it as possible.

        Good tag team. For Corzine and JPM.

  4. Kelly Wheeler

    Your opening comment was great–“The great unwashed public might get to enjoy a bit of theater.” As Orlando Bankruptcy Attorneys we love to see big players get what is just. A story that happened here in Florida, while not as nationally important as the Corzine case, still is great to see. A married couple actually forclosed on a branch of the Bank of America. You can see the video here–http://www.youtube.com/watch?v=G3d1qqQJcdM

  5. hiram bilgewater

    Freeh is a fixer for the swine. Look at how he handled the Sandusky Penn State pedo ring and the Bandar Bush BAE FCPA scandal. Corzine will perform a controlled demolition or make all stakeholders pearly whitw. rise, repeat.

  6. Handgrip

    The Innocent Were Knowingly Imprisoned and Tortured So As Not to Embarrass the Powerful

    “Now, in a sworn declaration obtained exclusively by Truthout, Col. Lawrence Wilkerson, who was chief of staff to former Secretary of State Colin Powell during George W. Bush’s first term in office, said Bush, Cheney, and Rumsfeld knew the “vast majority” of prisoners captured in the so-called War on Terror were innocent and the administration refused to set them free once those facts were established because of the political repercussions that would have ensued…

    Truthout, Ex-Bush Official Willing to Testify Bush, Cheney Knew Gitmo Prisoners Innocent

    source: http://jessescrossroadscafe.blogspot.com/

  7. barrisj

    MF Global…choice, as I’m sure that’s how investors characterise the operation, along with MF Corzine.

  8. Conscience of a Conservative

    The real question considering the negigence issue raised and the discussion of lack of controls is why Corzine & Steenkampf have not been charged with violating Sarbanes Oxley. Clearly controls and procedures were not as represented when they signed off on Sarbanes compliance doc nor was the finanical picture painted accurate. Unfortunately conventional wisdom holds that Corzine’s role as Democratic rainmaker has given him imunity here.

  9. Ms G

    ” … is why Corzine & Steenkampf have not been charged with violating Sarbanes Oxley,” which Corzine himself drafted, adding an additional nasty twist to his non-prosecution by Obama’s man at the Department of Justice, Eric Placeholder.

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