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If the Federal Bureau of Investigation turns up evidence that MF Global Holdings Ltd improperly mixed customer accounts and its own funds, it would still be difficult to prosecute the firm’s CEO, Jon Corzine, on criminal charges, legal experts said.
After MF Global filed for Chapter 11 bankruptcy on Monday, regulators said a large amount of customer funds were unaccounted for. Reuters also has reported that the FBI is showing preliminary interest in regulatory probes looking into the missing funds.
Neither MF Global nor Corzine have been charged with any wrongdoing.
But if customer funds have disappeared, it could be grounds for criminal charges against individual officers of the firm under the mail and wire fraud statutes, according to Jeff Ifrah, a white-collar criminal defense lawyer in Washington, D.C.
One potential theory the government could pursue would be that MF Global induced investors to open accounts with the firm under the false premise that their accounts would be kept separate from the firm’s operating accounts. To charge Corzine himself on that theory, the government would have to prove that he acted with some knowledge of the alleged scheme and intended to defraud investors.
Executives at Corzine’s level are not often charged in such schemes, according to defense attorneys.
“It’s rare that a person in his position is charged, unless they were the ones making off with the money,” said Jonathan Uretsky, a New York-based securities lawyer who also represents defendants in white-collar cases.
Criminal charges are not the only possible liability. He could face civil charges from regulators such as the U.S. Securities and Exchange Commission or the U.S. Commodities Futures Trading Commission, according to legal experts.
From the CFTC, the most likely charge against Corzine would be that he violated a rule requiring diligent supervision of commodity accounts, said Jerry Markham, a professor at Florida International University. If a regulatory rule is violated, the CFTC could issue a fine.
“The head of the firm can delegate supervision authority but there is a residual obligation that he make sure that what’s being delegated is carried out,” said Markham.
In past cases involving mingling of funds at brokerage firms, the SEC has also brought charges under various securities laws, said Thomas Gorman, a partner at Dorsey & Whitney. But he said there was no precedent for a case of alleged mingling of funds at such a large institution.
“Usually you see this allegation as part of a Ponzi scheme or a variation of it,” said Gorman. “I find it a surprising allegation for a major brokerage house to commingle the money like that.”
Finally, Corzine could face private lawsuits by investors in MF Global securities and investors who held accounts at the firm. Reed Kathrein, a partner at the law firm Hagens Berman, said he has already been in contact with potential plaintiffs.
Kathrein said that if lawsuits against Corzine are filed, they will likely come from investors in MF Global’s shares and bonds who claim they were misled by the firm’s various disclosures about its internal controls. He also said that account holders whose funds have gone missing could make claims against Corzine under a variety of state laws, such as breach of fiduciary duty and breach of contract.