The CFTC has officially charged Jon Corzine and MF Global employee Edith O'Brien with the "unlawful misuse" of almost $1 billion of customer funds, and the juiciest parts of the complaint are the phone calls between MF Global employees talking about their firm going into emergency mode.
You can read the full complaint on the CFTC website.
Corzine officially buried his firm in the fall of 2011, when bad bets on sovereign debt pushed the commodities brokerage into bankruptcy. According to the complaint, the former Goldman trader was trying to turn the firm into a Wall Street investment bank that generated revenue "from proprietary trading" and other businesses.
Corzine's laweyer, Andy Levander has released a statement calling these allegations "meritless."
In technical terms, MF Global was a 'futures commissions merchant' (FCM). That means that in the eyes of the law it had to have enough money in a separate account to satisfy "financial obligations" to all customers. That dollar amount is known as the "net liquidating value" (NLV). The firm is also obligated to keep money in a separate account for customers who ask MF Global to trade on foreign exchanges.
Now that that's covered, the sheer panic in these phone calls will make perfect sense.
On October 6th, 2011, O'Brien and other employees discussed that they would have to make a $50 to $75 million payment, and that it would have to come "from FCM Excess Cash because the Firm had no other readily available source of cash that could cover that amount. At the time, the FCM Excess Cash balance was approximately $80 to $100 million," says the complaint. Corzine had the option of using a $1.2 billion line of credit from JP Morgan but told an employee that he was OK with the FCM funds "going negative" to avoid using it and preserve the image that the firm was in good standing.
That day MF Global's Treasurer said of Corzine, "we need to take the keys away from him."
From the complaint:
On October 25th, after allegedly transferring hundreds of millions of dollars from customer accounts to proprietary accounts, Edith O'Brien frantically asked BNY Mellon, MF Global's custodial bank, to put money back in customer accounts.
She said it was "a total clusterf---" (from the complaint):
To be "under seg" or "under segregated" means lacking funds in a firm's mandated customer accounts.
Two days later, Corzine was getting desperate. He wanted JP Morgan to clear his trades more quickly. To do that, he had to use more customer funds held in a JPM account.
From the complaint:
JPM, for its part, did eventually ask Corzine for written assurances that any transfers he was requesting were within the law on October 28th. The bank had realized that the money might be from customer accounts. Corzine wrote a letter to JPM and the letter was forwarded around MF Global for the appropriate signatures (including O'Brien's), but it was never signed.
Later that day an employee told Corzine on a recorded call that MF Global's UK office may not be able to pay back $175 million that had been used to pay for overdrafts.
According to the complaint the employee said, "I don't think the situation is going to be resolved, I think [MFGUK] is going to have a fail there."
Corzine's response was simply, "we really, really can't have that."
But they did have that. In a phone call with two employees O'Brien said that the UK office "failed" her, and you can almost see her tallying up how much money the firm needs to survive on her hands as she frantically tries to put together $530 million.
From the complaint:
The complaint says that by the end of the day MF Global had just over $177 million in customer accounts.
But as we know, that didn't last.
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