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MF Global Was Bad

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The thing is that when you run a brokerage company and it goes and loses $1bn of customer money, the CFTC really ought to charge you with "fail[ing] to supervise diligently the activities of [your] officers, employees, and agents," no? At least? There are various views of Jon Corzine's role in MF Global's efforts to misplace a billion dollars - did he intentionally misuse customer funds? was he aggressive but above-board? just confused? - but no one is going around saying "oh, yeah, Corzine was really on the ball there protecting customer money." You're just irreducibly not supposed to lose a billion dollars in customer money, and if you do, "failure to supervise diligently" is pretty much the kindest possible description.

Anyway here is the CFTC press release and complaint against Corzine and Edith O'Brien, the MF Global assistant treasurer and general fall guy. There have been approximately eight thousand lengthy blow-by-blows of the MF Global implosion by now, and I would understand if you didn't want to read this one; I sure didn't. Unlike the others, though, the CFTC complaint is enlivened by recorded telephone conversations. In which Edith O'Brien does not come off well:

O’Brien and her staff in MF Global’s Treasury Department directed, approved, and/or caused funds to be transferred from customer segregated accounts at the request of MF Global’s broker-dealer staff. O’Brien understood that any use of customer segregated funds was unlawful, even if these customer funds were later returned to the segregated accounts. ... O’Brien told Employee #2 on a recorded telephone line that the Firm would not be in compliance with customer segregation rules because funds were not being returned to customer segregated accounts:

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.

Later she ... lost those scruples. This is bad:

On Thursday [October 27, 2011], despite knowing that MF Global’s customer segregated accounts were already under-segregated or would become under-segregated as a result of the transfer, O’Brien directed, approved, and/or caused improper transfers from customer segregated accounts totaling hundreds of millions of dollars.

O’Brien and her staff directed, approved, and/or caused the transfer of at least $525 million from customer segregated accounts to the Firm’s proprietary accounts. For example, these transfers included a $325 million transfer from a customer segregated account at BONY to a proprietary account and an additional $200 million transfer from a customer segregated account at JPM to a proprietary account.

Before BONY permitted the $325 million transfer, it inquired of MF Global broker-dealer staff by email whether the transfer would comply with CFTC Regulations if the $325 were moved to a Firm account. O’Brien replied to BONY by email that the $325 million were “not required to be segregated intra-day under CFTC or SEC rules.” She deliberately did not copy other MF Global Treasury Department employees on her email response to BONY because, as she explained to one of her colleagues in the Treasury Department on a recorded telephone line: “I don’t want to take anyone down with me.”

Oh gosh. I mean, obviously, that's a bad thing to do. But: you gotta admire the sword-falling-on there; I certainly would have cc'ed everyone at the damn firm to spread the blame around. But, also: you can't hop on a recorded telephone line to talk about the bad shit you didn't want to put in an email! That's not how it works! Come on!

Corzine, meanwhile, comes off a bit better, mainly because he never seems to have been recorded saying "let's do some crimes." (Well, maybe once?1) His bad conversations came in two flavors. Late in MF Global's liquidity crunch they were of the form:

  • underling tells him "we are probably doing crimes";
  • Corzine shouts "well that's unacceptable!!! FIX IT!!! RAAARRRRHHHH!!!!";
  • Corzine gives no further guidance; Corzine hangs up; underling doesn't fix it; Corzine never follows up.


At approximately 8:45 p.m. ET, Employee #2 told Corzine on a recorded telephone line that some of the funds O’Brien had transferred from the FCM to help satisfy MF Global’s proprietary obligations had not been returned. Corzine asked if she had received back “enough to be in compliance,” and the employee responded, “no, she[’s] indicating she’s net short $106 million.” Corzine thereafter instructed the employee to “raise hell” with JPM to obtain funds from the secured revolver to “cover up” the gap left by transfers of funds that were not returned. Corzine did not receive assurances that the funds were returned.

That is what we in the biz call "failure to supervise."2

Earlier on, Corzine's role was different. Rather than expressing ineffectual dismay about the illegal things that MF Global was doing, he basically went around asking everyone "can we do things that are closer to being illegal, without actually being illegal?" For instance, the CFTC regulations at the time allowed MF Global to use customer funds for its own purposes, as long as those funds were for foreign trading.3 MF Global had a policy against doing that, because doing that would be asinine.4 At some point Corzine decided to be asinine:

On October 6, 2011, in response to the Firm’s liquidity stresses, Corzine told an MF Global Treasury Department employee that they were going to do all the things they could do to not draw on the revolver the next day, even if that meant “go[ing] negative” in the FCM customer accounts. Corzine knew that “going negative” in the FCM customer accounts would be a violation of Firm policy.

But not a violation of the law! The law was all "go ahead, use those customer funds!"

The next day, October 7, 2011, Corzine remained determined to squeeze the MF Global’s customer segregated accounts and customer secured accounts for cash. In a recorded conversation with another MF Global employee (“Employee #2”), Corzine pronounced: “We need to go through what that real number is at the FCM. You know, what’s the drop dead amount. . . . You know, I’m sure there is a buffer in her thinking. We’ve got to find out what that is so that we have some ability to think about pulling it if we have to. Obviously, keep me posted.”

The "buffer in her thinking" is the fact that the CFO wanted to keep safe more money than was technically required by law. This was a good idea: you don't want to get close to the line when your computer systems, etc., are terrible at figuring out where the line is. Which was true of MF Global.5

So staying away from the line was MF Global's policy. Until, y'know, they needed the money. Some people preferred to stick with the policy but Corzine's attitude toward them was what you'd expect:

In another recorded conversation on October 6, the Global Treasurer relayed to Holdings’ CFO and another MF Global employee (“Employee #1”) that he had told Corzine that the Firm’s liquidity “situation” was “not sustainable” and that “the situation is grave.” Later during this conversation, the Global Treasurer stated that “we have to tell Jon that enough is enough. We need to take the keys away from him.” Corzine disparagingly nicknamed the Global Treasurer “the Gravedigger.”

I hope to his face? I actually feel like "The Gravedigger" would be a pretty fun trading-floor nickname?

I digress. The CFTC charged MF Global with various badness, but since MF Global is basically a smoking corpse it settled the charges for approximately nothing but an assurance that it'll give customers their money back.6 Corzine and O'Brien are charged with failure to segregate and misuse of customer funds, and Corzine with failure to supervise; the CFTC is seeking fines, etc., and a lifetime ban from the commodities-brokering business. Which is possibly a bit of overkill: could you imagine hiring Jon Corzine to run your commodities brokerage now?

CFTC Charges MF Global Inc., MF Global Holdings Ltd., Former CEO Jon S. Corzine, and Former Employee Edith O’Brien for MF Global’s Unlawful Misuse of Nearly One Billion Dollars of Customer Funds and Related Violations [CFTC]
CFTC v. MF Global Inc. [CFTC]

1.I think this is pretty messed up:

On the afternoon of October 27, Corzine spoke to Employee #1 on a recorded telephone line to strategize how they could use customer segregated funds to induce JPM to clear MF Global’s trades more quickly:

Corzine: We have a money management account at Chase, if my memory serves me.

Employee #1: Yeah, it’s the JP Morgan Trust account, but that’s cash seg for clients -- it has nothing to do with greasing our wheels for Chase to move.

Corzine: I understand but you put it in a tri-party, and then once the securities have started moving, then you move it back to the, um -- this is the same thing we did last night, they left it in the tri-party, the seg money.

That sure sounds like "use customer money to fund our prop positions" but maybe it's ambiguous; he seems not to think it's illegal anyway.

2.Or there's the time that MF Global transfers customer money to JPMorgan, its clearing bank, to cover an overdraft, and JPMorgan figures it out:

Shortly before 2:00 p.m. ET on Friday, October 28, 2011, JPM’s Chief Risk Officer told Corzine that JPM wanted written assurances (the “JPM letter”) that the transfers, among others, complied with CFTC Regulations. JPM’s Chief Risk Officer told Corzine in substance, among other things, that JPM was seeking assurances because the payment had been accomplished through two transfers, one of which had come from a customer segregated account.

The letter got hot-potatoed around MF Global and no one ever signed it. Corzine did some looking into it though:

At approximately 4:30 p.m. ET, Employee #2 told Corzine on a recorded telephone line that he spoke to personnel at MFGUK regarding whether MFGUK would be able to return the $175 million that had been used to pay for the overdrafts. The employee told Corzine, “I don’t think that situation is going to be resolved, I think [MFGUK is] going to have a fail there.” Corzine responded, “we really, really can’t have that.”

HELPFUL. "Notwithstanding the request from JPM, Corzine did not direct Holdings’ GC or anyone else to determine whether customer segregated funds had been used to cover the overdrafts."

3.Here's the CFTC's explanation in the complaint:

An FCM is also required at all times to have a certain minimum amount of funds held in separate accounts to satisfy a portion of the FCM’s financial obligations to its “foreign futures customers,” who entrust the FCM with funds for purposes of trading on foreign boards of trade or exchanges (“secured customer funds”). Pursuant to the regulations in effect during the period relevant to this Complaint, an FCM was permitted to use a certain amount of secured customer funds for the FCM’s own purposes and was permitted to keep in designated accounts for the benefit of foreign futures customers (“customer secured accounts”) an amount of funds that was less than the FCM’s total obligations to its customers trading on foreign boards of trade or exchanges. The methodology for calculating the required balance of secured customer funds that the FCM was required to maintain was known as the “alternative method” or the “alternative calculation.”

We've talked about the "alternative method" a little before. Unsurprisingly, after MF Global, the CFTC got rid of this rule, because it was kind of an absurd rule.

4.From the complaint again:

MF Global’s CFO was tasked with considering whether secured customer funds (intended for foreign trading) that exceeded the minimum balance determined by the alternative calculation (as described above in paragraph 24) could be used, along with excess segregated funds, for overnight funding of the Firm’s operations. Even though she concluded that the law at the time permitted such use of secured customer funds, MF Global’s CFO recommended a more conservative approach for purposes of protecting customer funds to avoid a situation where the Firm was unable to meet obligations to all of its foreign futures customers. The conservative approach, which the Firm adopted as its policy, required that the Firm not use the secured customer funds that exceeded the minimum balance determined by the alternative calculation for overnight funding of the Firm’s operations unless the Firm had on hand a sufficient balance of excess funds (i.e., proprietary funds) in customer segregated accounts to cover its use of such secured customers funds.

5.As the CFTC puts it, "despite his knowledge of the deficiencies in MF Global’s systems and controls, Corzine did not take sufficient steps to ensure that the Firm’s daily draws of cash from FCM customer accounts did not result in an unlawful use of customer funds."

6.From the press release:

If approved by the United States District Court and the United States Bankruptcy Court, the proposed settlement of all charges against MF Global will require 100% restitution of all remaining commodity customer claims. The proposed 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.

Safe to say those funds are exhausted.