Federal regulators have accused former New Jersey Gov. Jon Corzine of misusing customer money while he was CEO of MF Global, which collapsed in 2011.
A civil lawsuit filed Thursday in New York by the Commodity Futures Trading Commission seeks to ban Corzine from trading in the futures market and demands he pay unspecified penalties.
The lawsuit says Corzine bore responsibility for unlawful acts by MF Global because he controlled the company and its holdings and "either did not act in good faith or knowingly induced these violations."
"He also failed to supervise diligently the activities of MF Global's officers, employees and agents," the lawsuit says.
MF Global has agreed to pay a $100 million penalty as part of a settlement announced Thursday. The money will come from bankruptcy proceedings.
Corzine has previously disputed the allegations by the CFTC, which regulated New York-based MF Global. Corzine and MF Global did not immediately respond publicly to Thursday's lawsuit.
The CFTC also filed civil charges against Edith O'Brien, the firm's former assistant treasurer. Last year, O'Brien was summoned to a congressional hearing into what happened in MF Global's final days. She declined to answer questions, invoking her Fifth Amendment right against self-incrimination.
Thursday's lawsuit is striking in that regulators have seldom charged individuals with financial crisis-era misdeeds. They have instead imposed fines and penalties against companies, often with no one having to admit blame.
The CFTC need not prove in court that Corzine personally authorized the use of customer money, said Anthony Sabino of the New York law firm Sabino & Sabino, which specializes in white-collar crime. Top executives can be liable for "failure to maintain internal controls" or "failure to supervise," Sabino said.
"When the Titanic went down, you didn't blame the cook; you didn't blame the guy in the engine room," Sabino said. "You blamed the captain. And Corzine is the captain of the ship called MF Global."
"He can't say, 'Johnny did this; Mary did that.' He's at the top of the pyramid. So he's responsible for everybody."
About $1.2 billion in customer money disappeared when MF Global collapsed. Nearly 90 percent of the money belonging to the firm's U.S. customers has been recovered. Many farmers, ranchers and business owners used MF Global to hedge their risks against fluctuating crop prices.
MF Global sought bankruptcy protection in 2011 after a disastrous bet on European countries' debt. Under Corzine's leadership, the firm bet $6.3 billion on bonds issued by Italy, Spain and other nations with deeply troubled financial systems.
Those bonds plummeted in value in the weeks before MF Global's failure as fears intensified that some European countries might default.
The firm's $41 billion bankruptcy was the eighth-largest in U.S. history. It was also the first collapse of a Wall Street firm since the 2008 financial crisis ended. Critics have long complained that regulators have failed to aggressively pursue much bigger financial firms, whose high-risk bets nearly toppled the financial system.
Corzine, 66, had been a CEO of Wall Street powerhouse Goldman Sachs before entering politics in 2000. He served as a Democratic U.S. senator from New Jersey and later governor of the state.
Corzine has also been a major fundraiser for Democrats. He took the top job at MF Global in March 2010 after losing his 2009 bid for re-election as governor to Chris Christie, the current governor.
MF Global was a small commodities broker in early 2010 when Corzine arrived. His vision was to transform the firm into a full-scale investment bank, similar to Goldman. The CFTC's lawsuit says he sought to do by generating revenue from aggressive trading strategies.
The plan worked for a while even as the investments grew increasingly risky, the lawsuit said. In the second half of 2011, the firm's investments and other factors put heavy strains on its cash flow and capital. By October 2011, the lawsuit says, sources of cash were drying up.
Corzine and other company employees communicated with one another, by email and sometimes on recorded telephone lines, about the firm's "dire situation," the lawsuit says.
It says a treasurer of the firm's parent company, MF Global Holdings Ltd., told a chief financial officer and another employee in a recorded conversation on Oct. 6, 2011, 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,'" the lawsuit says
In the last week of October 2011, MF Global violated U.S. commodity laws by using nearly $1 billion of customer funds to support its own trading operations, directly harming thousands of customers, the lawsuit says.
Corzine stepped down as MF Global chief in November 2011, a few days after the firm filed for bankruptcy protection.
Three reports on MF Global's collapse, by a House panel and two court-appointed trustees, placed most of the blame on Corzine. It said his risky strategies caused the failure.
Louis Freeh, the former FBI director who oversaw the liquidation of MF Global's parent, concluded in a report in April that a risky trading strategy and "negligent conduct" by Corzine and his top managers led to the collapse. A few weeks later, Freeh sued Corzine and the other executives.
Shareholders of MF Global also have sued Corzine and other top managers. The investors say they lost about $585 million in just a week as the firm foundered. They accuse MF Global and the executives of making false and misleading statements about the firm's financial strength.
The trustee overseeing the liquidation of MF Global's brokerage operations eventually recovered and returned to customers most of the missing money, having traced it to banks that held accounts for the firm and to other accounts. The trustee, James Giddens, also joined a lawsuit filed by MF Global customers against Corzine and the other top executives.
Corzine testified at three highly charged hearings of House and Senate committees in December 2011 after lawmakers summoned him by subpoena. It was a rare occurrence in Washington: A former member of Congress being called by former colleagues to testify publicly about potential violations of law.
Corzine's testimony offered little to satisfy lawmakers or MF Global customers who lost money. Yet his explanations would be hard to disprove, legal experts said.
He told the congressional panels that he never intended to "misuse" client money or to order anyone else to do so. Corzine also rebuffed an assertion that he knew about customer money that might have been transferred to a European affiliate just before MF Global collapsed.
O'Brien, the former assistant treasurer, was subpoenaed to testify at a hearing last year about an email she sent that appeared to contradict testimony from Corzine. The email said Corzine ordered a transfer of customer money to cover an overdraft in the firm's bank account in London.
"On the advice of counsel," O'Brien said at the hearing, "I respectfully decline to answer based on my constitutional right."
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