The Case Against Corzine

Submitted by James L. Koutoulas, Esq.
President, Commodity Customer Coalition [13], CEO, Typhon Capital Management [14]

The Case Against Corzine

As the one year anniversary of the MF Global Bankruptcy is upon us, the WSJ has now joined [15] the NY Times [16] in writing a ‘woe is me’ piece on behalf of Jon Corzine. The WSJ continues bemoaning the pitiable situation of “restlessness and frustration” of the former CEO of Goldman Sachs, former Governor of New Jersey, and former Senator from New Jersey who apparently isn’t content with being “confident about the likelihood that he will avoid any criminal charges related to MF Global.” Corzine is still estimated to be worth several hundred million dollars despite presiding over the failure of the largest non-bank commodity broker where $1.6 billion in customer money was stolen. I cry for him, I really do.

Trying to portray Corzine as being focused on mundane things like finding a job rather than worried about doing jail time for his obvious crimes appears to be another prong of Corzine’s attorneys’ use of the Chewbacca Defense [17], along with saying that the fraud charges “Make No Sense,” [18] because the money “Vaporized” [19] and he had no motive since he had a de minimis portion of his net worth invested in MF Global stock. However, proving Corzine committed fraud and perjury would be relatively simple for any motivated prosecutor. Since the Department of Justice clearly is not motivated to prosecute Corzine after he bundled $500,000+ in campaign contributions to their boss [20], I provide this quick and easy guide for any ambitious state prosecutor to bring charges themselves:

Corzine’s motive was not making money in the ‘buy a private jet’ sense. It was showing others that he was a great trader to validate his narcissism. In spite of his assertions before Congress that he “Simply does not know where the money went,” Jon Corzine created a totalitarian corporate culture where only yes men were tolerated.
MF Global was under liquidity stress well before the bankruptcy and its executives knowingly used customer funds to meet internal liquidity needs well before its ‘chaotic’ final days.
The customer money did not ‘vaporize,’ and it was not lost via a Rule 1.25 investment- it was knowingly transferred to meet margin calls at JP Morgan, and MF Global executives knowingly falsified segregation reports to provide plausible deniability for the illegal transfers, and made them against CME Group’s express instructions to the contrary.

And, with the details:

Corzine’s motive was not making money in the ‘buy a private jet’ sense. It was showing others that he was a great trader to validate his narcissism. In spite of his assertions before Congress that he “Simply does not know where the money went,” Jon Corzine created a totalitarian corporate culture where he exercised control over every aspect of the business, and only yes men were tolerated.

Corzine was an obsessive narcissist who traded on his BlackBerry in meetings and made the firm break out his personal trades as a separate line item so he could prove he was the most profitable trader in the firm [21].

MF Global was under liquidity stress well before the bankruptcy and its executives knowingly used customer funds to meet internal liquidity needs well before its ‘chaotic’ final days.

MF Global staff was playing a “shell game” and shuffling cash between entities. From the MF Global, Inc. Trustee’s Investigation Report [25], page 83 of PDF:

In July 2011, the firm’s CFOs openly proposed using customer funds to meet liquidity needs on an overnight basis. From the MF Global, Inc. Trustee’s Investigation Report [25], page 83:

The firm’s other CFO, Christine Serwinksi, evaluated Steenkamp’s proposal to use customer funds to meet liquidity needs, and told management, in writing, that it would put client assets at risk. From the MF Global, Inc. Trustee’s Investigation Report [25], page 84:

Steenkamp walked Corzine through the risks of the plan, but Corzine knowingly ignored that risk and willfully put customer money at risk. From the MF Global, Inc. Trustee’s Investigation Report [25], page 85:

Using customer funds to meet firm obligations became routine months before the “chaos” of the bankruptcy, and MF Global ran deficits in their regulatory obligations well before the ultimate implosion. From the MF Global, Inc. Trustee’s Investigation Report [25], page 85:

Corzine knew about the liquidity stress, and that customer cash was being tapped routinely. From the MF Global, Inc. Trustee’s Investigation Report [25], pages 88-9:

The customer money did not ‘Vaporize,’ and it was not lost via a Rule 1.25 investment- it was knowingly transferred to meet margin calls at JP Morgan, and MF Global executives knowingly falsified segregation reports to provide plausible deniability for the illegal transfers, and made them against CME Group’s express instructions to the contrary.

Corzine was in love with his ‘brilliant’ European Sovereign debt trade that he thought would prove just how smart he was to all those who pushed him out of high offices at Goldman Sachs and the State of New Jersey. He refused to reduce his $6.4B position and only did so after the downgrade. From the MF Global, Inc. Trustee’s Investigation Report [25], pages 154-5:

MF Global’s DSRO, CME Group, stated on October 27, 2011 that “any equity withdrawals must be approved in writing by CME Group’s Audit Department.” [26] (Page 12).
Also, on October 27^th, MF Global’s debt was downgraded to junk, and MF Global reported that it had $116,164,132 in excess firm cash held in the customer segregated account. [26] (Page 11). By this point, the run on the ‘bank’ was in full swing, and was common sense to all that the excess cash would only decrease from that point as customers rushed to withdraw funds. ‘All,’ of course, included MF Global’s primary lender, clearing firm for proprietary trades, and a custodian of the customer funds, JP Morgan Chase. From the MF Global, Inc. Trustee’s Investigation Report [25], page 138:

On October 28^th, MF Global UK had an overdraft of $175M in its JPM account. Three JPM Risk Officers called Corzine, and advised him that JPM would not permit MF Global to liquidate further assets until MF Global met that margin call. See MF Global, Inc. Trustee’s Investigation Report [25], page 139.
At this point, Corzine had the choice between admitting failure at his fourth consecutive job, or stealing customer money to try to keep his beloved sovereign debt trades on. He chose to steal.
That morning, MF Global staff prepared a falsified segregation report that they submitted to CME Group that included a $540M manual adjustment with no support for the adjustment, whatsoever. This adjustment allowed them to show a falsified balance of firm excess of $200,178,912 in 4d funds despite deficits calculated by in-house employees of -$341M and -$167M. Obviously, no industry professional would believe that the firm excess could increase during a run on the ‘bank,’ nor would they believe a projection that was so wildly favorable and based on an unsubstantiated adjustment over those that were internally prepared through legitimate data. The only purpose of that adjustment was to provide plausible deniability for senior management to transfer customer money due to an ‘error.’ See MF Global, Inc. Trustee’s Investigation Report [25], pages 111-13.
Then, Corzine explicitly broke the law:

Please note that nowhere in the Trustee’s report does it say that either of these transfers were approved by CME Group, despite orders “any equity withdrawals must be approved in writing by CME Group’s Audit Department.” [26] (Page 12). That is because CME Group issued no such approvals.
Once JPM had the money on back on their books, they shifted into C-Y-A mode and tried to protect itself under the Safe Harbors of the bankruptcy code which would have allowed them to keep the customer money if they could also show plausible deniability as to the origin of the transferred funds. Since they were monitoring the segregated funds closely, they knew that MF Global was undercapitalized, so they deviated from their standard business practices and asked for a ‘comfort letter” whereby MF Global would represent that the funds were not customer funds. MF Global would not sign any three continuously diluted letters because they knew customer money was transferred, just as JPM did. Corzine was directly told by JPM risk officers that they had “regulatory concerns” with the transfers and JPM would be sending MF Global a letter to sign off that the transfers did not contain customer money. See MF Global, Inc. Trustee’s Investigation Report [25], pages 132-136.
Thus, even if one were to buy his plausible deniability based on the falsified segregated funds report, he was still informed of the concerns by JPM three days before MF Global’s bankruptcy. This is in direct contradiction of his Senate Ag Committee testimony where he said he had not learned about the missing customer money until the late evening of October 30^th. See Confusion Follows Claim That Corzine Knew of Funds Transfer [27]
CME Group Executive Chairman Terrence Duffy followed Corzine’s Senate testimony on December 13^th, and, after meeting with David Rosen and myself, pledged to us, “I am going to do the right thing and stand up for customers.” He then deviated from his written testimony and confirmed that Corzine knew of the transfer out of customer segregation. [28] Instead of the Senate arresting Corzine on the spot for perjury or obstruction of justice, the CME, despite being MF Global’s DSRO, was asked to suspend its own investigation shortly thereafter in favor of DoJ and the FBI.
Back to the events of October 28^th -while MF Global was wiring customer funds out the door per Jon Corzine’s instructions to keep its sovereign debt trades on, it made an intentional change in business practices to redirect customer withdrawal requests from wire transfers to checks, essentially engaging in check kiting. John L. Roe [29], the VP of the Commodity Customer Coalition [13]— the non-profit organization he and I co-founded in the wake of the MF Global fraud—wrote a detailed memo describing this behavior [30].
MF Global continued to make additional transfers of customer money to JPM and BONY- See MF Global, Inc. Trustee’s Investigation Report [25], pages 136-142.

To sum up, while Vice President Joe Biden’s “Smartest Guy I Know” [31] was smart enough to not explicitly say “Steal the Customer Money” in an email, there is enough circumstantial evidence, to conclusively prove fraud (and probably perjury) beyond a reasonable doubt.

Corzine was well aware of the risk involved with his European Sovereign Debt trades, and fired the risk manager who brought the risk to the board’s attention.
Corzine encouraged his yes man CFO Henri Steenkamp to risk deficits in customer segregated funds against the advice of his more experienced CFO, Christine Serwinski.
MF Global falsified a segregated funds report to show $200M in firm excess while internal calculations, external JP Morgan calculations, and common sense showed massive shortfalls.
That 200M coincidentally is the exact amount (less 170k and change) transferred from customer accounts to MF Global’s house account, with exactly 87.5% of it being transferred to JPM almost immediately following the initial transfer.
None of the transfers of customer money to JPM or BONY were approved by CME Group which, as MF Global’s DSRO, required MF Global to have all equity withdrawals pre-approved by them in writing.
JP Morgan risk officers notified Corzine personally of their concern that customer money may have been used as part of the initial transfer.
MF Global intentionally changed its business practices to favor its own liquidity needs over its customers by redirecting wire redemption requests to checks. This incidentally, would have zero effect on its liquidity position if it was not knowingly misusing customer funds, as unlike banks which may fractionally reserve lend, brokers must have a ratio of customer funds or permitted collateral greater than 1:1, as per CFTC Commissioner Jill Sommers, “EVERY SECOND OF EVERY DAY.” [32]

While no single bullet point proves fraud, taken together, any reasonable person will conclude that Corzine is guilty beyond a reasonable doubt.

Last December, when Rick Santelli asked me if customers would get their money back, I told him, “Damn right they will.” [33] The distressed debt markets agree, as buyers have now paid more than 98% of the face value of customer claims for US designated accounts, and over 93% for claims for 30.7, UK designated accounts. However, the futures industry remains severely damaged as shown by CME’s Q3 profit down 31% [34] as futures customers would rather take counterparty risk with a TBTF bank than trust uninsured clearing houses with ‘segregation’ protection that has proven to be nothing more than a paper tiger by Corzine’s theft.

If Corzine is allowed to walk, it sends the message to not just the futures industry, but the entire US financial complex, “You can steal customer money from not just commodities accounts, but savings accounts, checking accounts, 401ks, and IRAs so long as you pay Obama 500k in bundled protection money, err, campaign contributions.” And, while the current administration clearly doesn’t care about the integrity of markets, I do.

So today, for the 1 year anniversary of the day 38,000 farmers, ranchers, commercial hedgers, retirees, traders, and hedge funds were robbed, and 2,800 MF Global employees lost their jobs so an incredibly insecure multi-,multi-millionaire, Jon Corzine, could desperately try and show the world he is a great trader, after all, I renew my pledge to do all that I can to help put him behind bars [35]. I am working with multiple state Attorneys General to help them bring charges once the DoJ officially closes their ‘investigation.’ And, I have another little trick up my sleeve that I assure you that Corzine’s high-priced lawyers haven’t thought of, so stay tuned.

So, Jonny Boy, keep pretending how you did nothing wrong and you’re just bummed out that you haven’t gotten back to work being an awesome hedge fund manager. I hope your 500k bought a Presidential Pardon along with the DoJ’s silence, because the law is coming for you and you’re going to need it.

xoxo,

James L. Koutoulas, Esq.
President, Commodity Customer Coalition [13]
CEO, Typhon Capital Management [14]