New Insight into MF Global’s Frenzied Final Days

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Watch the Six Billion Dollar Bet, FRONTLINE’s investigation into the collapse of MF Global.

The Commodity Futures Trading Commission filed civil charges against Jon Corzine on Thursday, alleging that the former head of MF Global contributed to the “unlawful use” of more than $1 billion in customer funds before the firm filed for bankruptcy in October 2011.

The 47-page complaint does not accuse Corzine of authorizing the alleged breach of customer accounts, but claims the former senator and N.J. governor failed to “supervise diligently” the handling of those funds.

The lawsuit offers little new information on how customer money went missing at MF Global, but emails and phone transcripts cited in the complaint provide additional insight into the firm’s frenzied last days. Here are a few highlights:

Corzine Was Warned

In the fall of 2010,  MF Global’s chief risk officer (CRO) voiced concern about Corzine’s $6 billion bet on European debt — the bet that would ultimately doom the company.

According to the complaint, Corzine invested in sovereign debt through so-called “repurchase-to-maturity” (RTM) transactions. Under this strategy, MF Global would borrow money to pay for a bond while simultaneously pledging the bond as collateral on the loan. The firm was then obligated to repay its loan when the bond matured.

The upside was that the transactions allowed MF Global to record an immediate gain on its books. The downside was that if a European nation defaulted on its debt, MF Global would have a worthless bond, but still be responsible for paying back the loan.

According to the complaint, the chief risk officer:

Warned Corzine and Holdings’ Board of Directors about the potential pitfalls of the strategy, including that the RTM positions could result in margin calls and more demands for cash, would be difficult to unwind, and posed a liquidity risk to the Firm. The Former CRO recommended that the Firm place limits on the investments.

Corzine did not listen. Instead, he would go on to replace the risk officer, who left the company in March 2011.

“The Gravedigger”

In October 2011, MF Global had access to a $1.2 billion revolving line of credit with JPMorgan Chase. But despite the firm’s mounting liquidity trouble, the complaint alleges that “Corzine wanted to avoid using the revolver in part to avoid giving the appearance that the Firm needed to borrow money and therefore was in financial trouble.”

On Oct. 6, the firm’s global treasurer told the chief financial officer and a separate colleague that MF Global’s liquidity situation was not sustainable. “We have to tell Jon that enough is enough. We need to take the keys away from him,” he said. “Corzine disparingly nicknamed the Global Treasurer ‘the Gravedigger,'” according to the suit.

“A Total Clusterf***”

By Oct. 26, MF Global had allegedly transferred more than $500 million of customer money into the firm’s proprietary accounts.

Commodities law requires brokers like MF Global to have enough funds in its customer accounts to satisfy its obligations to those customers. If the balances in those accounts falls short, a firm is considered “under-segregated” or “under-seg.”

Assistant treasurer Edith O’Brien, who is also charged in the case, told staff that evening that the firm needed to return funds from proprietary accounts held at Bank of New York Mellon (BONY) to customer segregated accounts “ASAP.” Otherwise, she told a colleague later that night, MF Global would be in danger of running afoul of customer segregation rules:

It is a total clusterfuck … They have to move half a billion dollars out of BONY to pay me back … Tell me how much money is coming in and I will make sure it gets posted. But if you don’t tell me, then tomorrow morning I am going to have a seg problem … I need the money back from the broker-dealer I already gave them. I can’t afford a seg problem.

The “Moral Equivalent” of Cash

The next day, Corzine was preparing an update on the firm’s assets for the Federal Reserve Bank of New York and JPMorgan, both of whom were inquiring about the company’s financial condition. MF Global had $82 million in cash that could be used immediately at the time, according to the charges, and another $602 million in restricted assets that were unavailable for use. According to the complaint:

Acknowledging that these assets were restricted or not as liquid as cash, Corzine, in a recorded conversation, referred to them euphemistically as the ‘moral equivalent’ of cash.

Banks Were Suspicious

Three days before MF Global filed for bankruptcy, banks were suspicious that it may have been dipping into customer accounts.

Shortly before 2:00 p.m. on Oct. 28, JPMorgan Chase asked MF Global for written assurances that money it was paid to cover an overdraft complied with CFTC regulations.

The following day, O’Brien told the firm’s chief regulatory counsel that she did not want to sign the letter.

“No one has paid me back the money, I think we’re under-seg,” she told the counsel, according the suit.

No one from MF Global went on to sign the letter. Moreover, the complaint charges that:

Notwithstanding the request from JPM, Corzine did not direct Holdings’ [general counsel] or anyone else to determine whether customer segregated funds had been used to cover the overdrafts. Corzine also failed to halt multiple subsequent transfers of funds from customer segregated accounts that were made for proprietary purposes. Corzine failed to implement any controls or take any steps to ensure that customer segregated funds were not and would not be unlawfully used.

Former MF Global Holdings Ltd. Chairman and CEO Jon Corzine testifies on Capitol Hill in Washington, Tuesday, Dec. 13, 2011, before the Senate Agriculture Committee. (AP Photo/Susan Walsh)
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