The U.S. Commodity Futures Trading Commission Thursday filed an enforcement action in a New York District Court against MF Global Holdings Ltd., MF Global and its former CEO Jon Corzine, as well as Edith O'Brien, its former assistant treasurer.
The suit is based on MF Global's unlawful use of customer funds that the CFTC says "harmed thousands of customers and violated fundamental customer protection laws on an unprecedented scale."
MF Global has agreed to settle all charges against it on terms set forth in a proposed order that is subject to court approval and includes 100% restitution of the approximately $1 billion lost by all commodity customers when the firm failed on October 31, 2011.
The order also includes the imposition of a $100 million penalty, which can be paid to the extent MF Global has not fully exhausted all available funds and assets paying customers and then other creditors entitled to priority under bankruptcy law. The CFTC also seeks trading and registration bans and injunctions against Corzine and O’Brien.
"I am pleased that the MF Global Trustee has agreed to settle the charges against the company," noted CFTC Commissioner Jill Sommers in a press statement. "There is nothing more important than doing everything possible to make full restitution to all commodity customers."
CFTC Commissioner Bart Chilton called the MF Global debacle a "collassal catastrophe" and said he hoped the customers who lost money will gain some satisfaction from the commission's actions and have their faith restored in the futures markets.
"People need to know that their segregated funds are sacrosanct and should never have to fear waking up in the morning to learn they have evaporated," he said.
Events leading to the MF Global demise
According to the Complaint, Corzine joined MF Global as CEO in March 2010. In the summer and fall of 2011, 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 in Futures Commission Merchant customer accounts.
During this time, CFTC says Corzine did not enhance MF Global's deficient systems and controls sufficiently to ensure that the firm's increasing reliance on FCM cash did not result in unlawful uses of customer money. Ultimately, these failures contributed to the massive customer losses, CFTC alleges.
During October 2011, MF Global was on the brink of failure and in need of cash to survive. 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, the CFTC says.
In the last week of October 2011, with virtually no other sources of immediate cash to turn to, the firm repeatedly and unlawfully used customer funds for firm needs, ultimately leaving it nearly $1 billion short of customer funds, the CFTC says.
In that last week, CFTC alleges Corzine was 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.
Corzine is charged for the firm's violations as an MF Global "control person" who, among other things, did not act in good faith and is also charged with violating his legal obligations to diligently supervise.
CFTC alleges O'Brien knowingly approved improper transfers
O'Brien, MF Global's Assistant Treasurer, is charged with aiding and abetting the firm's misuse of customer funds.
According to the Complaint, she directed, approved, and/or caused improper transfers of hundreds of millions of dollars from customer accounts to help meet the firm's needs during the final days of October 2011, while knowing that MF Global did not have sufficient proprietary funds available in those customer accounts for those transfers.
With respect to the company defendants, in addition to the misuse of customer funds, the Complaint charges that MF Global: unlawfully failed to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts; filed false reports with the CFTC that failed to show the deficits in the customer accounts; and used customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid in violation of CFTC regulation.
Additionally, it alleges that MF Global Holdings controlled the operations of MF Global and is therefore liable as a principal for MF Global's violations of the Commodity Exchange Act and CFTC regulations.
More MF Global:
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MF Global Settlement Reached
Trustee Releases Report on MF Global
Investigation Reveals MF Global's Corzine At Fault For Bankruptcy
House Holds Hearing on MF Global Bankruptcy