If it walks like a duck, quacks like a duck, and poops like a duck, it’s a duck.
Unless, of course, the duck is Jon Corzine, a man who knows how to duck being a duck.
As you may well remember, J.C. (not Jesus Christ, though there was a time…) took the helm of global financial derivatives broker MF Global in 2010 and oversaw the roasting and bankruptcy of the firm in 2011.
It took a while, but the Commodity Futures Trading Commission (CFTC) just filed suit in U.S. District Court in Manhattan this past June, claiming about $1 billion in customer money was transferred from segregated accounts at MF Global to try to prevent the company’s financial collapse. The CFTC’s 47-page complaint calls out Corzine for making decisions that put customer accounts at risk in violation of rules prohibiting such transfers.
Using customer money to essentially meet margin calls on your huge European sovereign debt bets is a regulatory no-no.
Unless you know just how to duck the charges…
On Tuesday, Jon Corzine, “The Duck of Death” (that’s how Gene Hackman reads the cover of a book being written about gunslinger Richard Harris in the Clint Eastwood film “Unforgiven”) had his lawyers spit back at the Commodity Futures Trading Commission’s charges.
The Duck’s lawyers said the charges should be dismissed because “there is no evidence demonstrating that Mr. Corzine knowingly directed unlawful conduct or acted without good faith.”
In their 30-page motion, Corzine’s lawyers said, “even if the facts alleged were established at trial, they still would not support liability on either count” and added the agency’s complaint is based on “irrelevant allegations calculated to sully Mr. Corzine’s character.”
The Duck is trying to duck the charges by saying he didn’t make the transfers, and didn’t make anyone make the transfers, and if the transfers were made, well, good luck finding his fingerprints on any keystrokes or notes to employees he wasn’t directly responsible for, on account of the fact that it was a big firm, you know.
The CFTC also charged MF Global’s Assistant Treasurer, Edith O’Brien, saying she aided and abetted the violations. She also requested on Tuesday that the court dismiss similar charges against her.
Her lawyers say the CFTC’s “theory” that O’Brien was complicit is “doomed” because it implies she couldn’t have “knowingly and intentionally” moved customer money.
It seems that on account of there not being any J.C. fingerprints anywhere on the transfers, the CFTC wants the Court to believe that O’Brien made the transfers based on instructions, directly or implied, or on account of knowing her boss’ bad bets were drawing unwanted attention and creditors were calling in loans, kind of like a margin call.
According to the Wall Street Journal, “The CFTC’s complaint detailed the chaos of the firm’s final days in October 2011 as executives scrambled to keep the firm afloat. Ms. O’Brien’s lawyers said the chaotic situation that the CFTC described proves she couldn’t have known she was moving customer money.”
Here’s what the lawyers said in the filing to dismiss the charges: “If MF Global’s employees could not distinguish customer funds from proprietary funds in real time, then it was impossible for them to know whether any particular withdrawal from the customer segregated accounts in fact dipped into forbidden customer funds, much less intend to do so.”
Now, in case you missed that, there’s the “duck.” O’Brien’s lawyers said she couldn’t have known, when she was transferring money to creditors, whether that money was the firm’s money or customers’ money, because all Hell had broken loose.
Money had to be transferred precisely because, according to a November 2012 House Financial Services Subcommittee on Oversight and Investigations, funds were taken after MF Global employees “identified excess company funds held in customer accounts.” Because they did not have an accurate tally for the amount of customer funds the firm held, employees “withdrew customer funds as well as company funds.”
The CFTC is accusing Corzine of overseeing the misuse of customer funds and with “failure to supervise diligently.” But the whole “failure to supervise” thing misses the point that Corzine’s risk-taking paved the way for the firm’s collapse.
Here’s what gets me…
As the New York Times says, “The commission did not accuse Mr. Corzine of authorizing the breach of the customer money, or even knowing that the wrongdoing had happened. Instead, the suit hinges on his supposed failure to ‘diligently supervise’ the firm as it raided the client accounts. The suit also argues that Mr. Corzine was subject to so-called control person liability, a legal provision that allows for the punishment of executives for the acts of lower-level employees like Ms. O’Brien.”
Corzine’s lawyers answered that he “did not direct anyone to determine whether” MF Global was raiding customer accounts, but stopped short of claiming that Corzine had “any reason to believe” that the money was in jeopardy.
Why would The Duck of Death have any reason to want customer monies transferred? Maybe it could possibly, allegedly, have had something to do with the giant off-balance sheet bets he was making on European sovereign debt that were going against him, and had gotten found out and were causing creditors to call in loans.
Not that this matters, but this wouldn’t be the first time J.C. had made some large bets that went against him…
Corzine reached the pinnacle of Wall Street success when he became co-CEO of Goldman Sachs in 1994, in spite of the fact that the trading he supervised had huge losses from shorting the British pound, at almost the same time he was appointed to succeed departing chairman Stephen Friedman. Those risky trades reportedly lost Goldman almost $2 billion.
The trading bets that went south back at Goldman in the mid-1990s failed to derail his rise. But those that he tried to oversee nearly two decades later proved his undoing.
According to the House subcommittee report, “Corzine kept these trades off the firm’s books, hiding the full extent of the risk it was taking on while maintaining an ‘authoritarian atmosphere’ that prevented subordinates from questioning his decisions.”
The firm’s big European positions were publicly disclosed in May of 2011 in public filings. But in October, regulators asked the firm to hold additional capital because of the trades, bringing them to public attention and panicking the market. A Moody’s downgrade a few days accelerated the firm’s downfall.
As the company faced a liquidity crisis in its final days, the House report says, Corzine’s failure to implement “the systems and controls necessary to protect customer funds” led to transfers from these accounts and the eventual shortfall in customer funds.
When the firm folded, some 38,000 customers were left in the lurch. Customers who traded on U.S. exchanges have since received roughly 80% of their money back, but customers trading on foreign exchanges have recovered just 5%, according to the court-appointed trustee tasked with recovering the funds.
Some $1.6 billion of customer funds went missing, and hundreds of jobs were lost.
But it wasn’t Jon Corzine’s fault. If it was, or if there was any real proof it was his fault, surely there would be criminal charges filed somewhere.
Alas, there are only the CFTC civil charges. And even those are being threatened by legions of lawyers defending the poor wee Duck who got squashed trying to cross the road remaking his new firm into another ego-inflating Goldman Sachs wannabe contender.
Maybe I’m wrong. But if it looks like a duck and you-know-whats on everybody, I say it’s a DUCK!