Jon Corzine failed to address MF Global Holdings Ltd.’s growing liquidity needs as he tried to build the commodities broker into a global investment powerhouse, helping create the conditions that led to its downfall, a trustee in MF’s bankruptcy said on Monday.
In a blistering 275-page report, James Giddens, the trustee liquidating the company’s broker-dealer unit, said he might bring civil claims against former Chief Executive Corzine and other top MF Global executives for negligence and breach of duties to customers.
Giddens also said he was prepared to sue JPMorgan Chase & Co., one of MF Global’s main banks, if he and the bank could not settle within 60 days claims that the bank played a role in the disappearance of customer funds. To date, JPMorgan has returned $89 million of customer funds and $518 million of general MF Global assets, the report said.
Giddens has estimated that $1.6 billion disappeared from customer accounts when the company, which filed for bankruptcy on Oct. 31, 2011, improperly mixed client funds with its own money.
The report, based on interviews with more than 100 people and reviews of hundreds of thousands of documents, is the most comprehensive update on Giddens’ efforts to recover customer money.
MF Global collapsed after investors abandoned it following revelations of heavy bets it made on European debt. In the report, Giddens said those bets peaked at $7 billion last October.
Corzine, a former New Jersey governor and one-time CEO of Goldman Sachs Group Inc., resigned soon afterward, and he and other current and former MF officials have been sued by customer groups over their role in the collapse. Any legal action supported by Giddens could add weight to those claims.
Giddens had earlier said he was considering claims against certain executives but did not name them. Monday’s report identifies Corzine, as well as former Chief Financial Officer Henri Steenkamp and former Assistant Treasurer Edith O’Brien, as possible targets for civil claims.
A spokesman for Corzine said that there is no basis for a lawsuit against him.
“We note that the Trustee’s report is consistent with Mr. Corzine’s Congressional testimony that he did not direct or intend to direct the misuse of customer funds,” he said. “We simply do not agree with the Trustee’s suggestion that Mr. Corzine was negligent or there is any basis to sue him.”
Lawyers for Steenkamp and O’Brien were not immediately available.
Whether Giddens pursues MF executives may depend on their ability to pay any legal judgments and if they have insurance. Giddens said he was talking to insurers that may have issued such policies.
Executives are protected by around $375 million of various policies, lawyers for MF Global have said. Some customer groups have argued that insurance money should go directly to them, a position that is on appeal after being rejected by Bankruptcy Judge Martin Glenn.
Giddens said his report drew no conclusions about possible criminal liability. The Commodity Futures Trading Commission, the Securities and Exchange Commission, and the FBI are investigating the company’s downfall.
The report also offered recommendations on how to avoid a repeat of the chaos that followed the brokerage’s collapse.
In his report, Giddens painted MF Global as a company woefully unprepared for its own growth.
He said liquidity at the company had long been a concern but became an even greater issue when Corzine came on board in March 2010. Corzine’s vision of MF Global as a global investment bank required the company to maintain higher liquidity levels, Giddens wrote. But Corzine and his team vastly underestimated just how big an increase it would need, Giddens said.
MF Global management “failed to add to its Treasury Department and technology infrastructure, which was needed to meet the demands on global money management and liquidity,” Giddens said.
Giddens concluded that “management’s actions, along with the lack of sufficient monitoring and systems, resulted in customer property being used during the liquidity crisis to fund the extraordinary liquidity drains elsewhere in the business.”
The report described how MF Global employees were unable to adequately monitor liquidity levels in real time. When the company began to teeter last fall and counterparties unwound positions, the firm became overwhelmed by what one executive called a “liquidity asphyxiation,” according to the report.
Giddens chronicled one email exchange between then-Assistant Treasurer O’Brien and a fellow employee, in which O’Brien reacted with shock to a remark by CFO Steenkamp that the company had plenty of cash.
” wanted to say ‘Really, then why is it I need to spend hours every day shuffling cash and loans from entity to entity?’” O’Brien said, according to the report.
To make up for the drain on liquidity, MF Global used customer money that was supposed to be segregated from the company’s own funds. Dipping into customer accounts is not inherently prohibited, but brokers must ensure that customer pools have a surplus before using the funds for corporate transactions.
Disagreements and confusion mounted within MF over whether there was an available surplus in customer funds to plug the liquidity gap, the report said.
The report described how by close of business on Monday, Oct. 24, O’Brien approved $250 million of intraday transfers from customer accounts, even though the excess cushion in the customer account was less than $55 million.
Those funds were repaid the same day. But two days later, the report recounted, O’Brien authorized some $615 million of intraday transfers from her office in Chicago and then panicked as the New York office failed to return the funds.
She emailed several operations executives in New York that evening, the report said, wanting “to know how much is being return – from where to where.” She sent another email one minute later, stating, “I NEED TO KNOW NOW – TO PRE-ADVISE FUNDING AND AVOID A SEG ISSUE,” according to the report.
By close-of-business that Friday, the firm was missing some $952 million of the segregated funds.
TALKS HEAT UP
Giddens had earlier revealed he was in talks with JPMorgan on potential legal claims that centered on whether the bank could be holding customer money.
Monday’s report shed light on how JPMorgan at times responded to competing requests to transfer funds in ways that benefited the bank.
On Friday Oct. 28, for example, one MF Global employee asked the bank to repay an erroneous $165 million transfer from a customer segregated account by drawing on a line of credit, while another requested a $165 million wire to repay the credit line. JPMorgan canceled the former request but processed the latter, the trustee said.
A JPMorgan spokeswoman declined to comment.
The report also revealed that Giddens is investigating the actions of Bank of New York Mellon Corp in the week leading up to MF Global’s collapse. During that week, BNY Mellon added roadblocks to MF Global’s ability to get loans, the report said, a move that “further constrained” MF Global’s liquidity and its ability to clear transactions.
So far, the bank has cooperated with the investigation, Giddens said. A spokeswoman for BNY said the company had no comment.
Giddens also said he was in negotiations to recover $175 million controlled by CME Group Inc, MF Global’s primary regulator. That money consists of property posted by MF Global’s broker-dealer unit, against which some customers and other parties have asserted claims, according to the report.
MF Global owned memberships, or seats, to trade at CME and, like other clearing members at the exchange, put money into a guarantee fund as security for its financial obligations, CME spokeswoman Laurie Bischel said.
“We’re working with the trustee to finalize how those claims would be administered,” Bischel said.
$17 MLN IN FEES
Separately on Monday, Giddens filed a report with the bankruptcy court outlining about $17 million in fees racked up by his law firm in the first four months of MF Global’s bankruptcy.
Giddens’ legal team includes about 130 lawyers and another 28 paralegals. Giddens has personally billed 424 hours at a rate of about $894 per hour.
The bankruptcy is In re MF Global Holdings Ltd, U.S. Bankruptcy Court, Southern District of New York, No. 11-15059.
The brokerage liquidation is In re MF Global Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-2790.