Eric Holder vs. MF Global is the Case Everyone Should Be Talking About

"This task force's mission is not just to hold accountable those who helped bring about the last financial meltdown, but to prevent another meltdown from happening."

— Attorney General Eric H. Holder Jr., 2009

On June 27, the Commodity Futures Trading Commission filed a complaint against the officers of MF Global, detailing an investigation into the bankruptcy of the company that should capture the interest of anyone worried about the integrity of the financial markets. In this case, we had a complete meltdown of integrity, and no one is going to jail. No one will even stand trial. We didn't have a lot of accountability on Wall Street prior to this case, and now we have zero.

The CFTC complaint is a civil action, not a criminal one. The CFTC has the authority to levy fines and bar people from working in the securities industry. The Department Of Justice ("DOJ") pursues criminal investigations. The DOJ investigation into MF Global failed to find sufficient evidence to pursue a criminal charge, leading one to ask what crimes if any the DOJ would pursue.

The crimes in the case of MF Global are completely different from those that arose during the financial crisis of 2008. The losses in that crisis largely stemmed from customers making decisions based on bad information. In this case, the customer was neither asked nor informed. MF Global breached customer accounts for money needed in its own bets. 

The facts of the case of MF Global are depressingly familiar. A mix of greed and stupidity resulted in the eighth largest bankruptcy in the history of the country, leaving thousands unemployed and unsecured creditors with maybe $0.34 on the dollar. When the company filed for bankruptcy protection, its capital was leveraged 80 to 1, more than double the level of leverage in Bear Stearns or Lehman Brothers. When MF Global ran out of its own money, MF Global used its clients' money for the firm's benefit. The only reason that the firm did not trigger a new financial crisis is that few institutions had followed them in a narrow sector bet of such magnitude.

The CFTC investigation of MF Global uncovered compelling evidence that senior management of the firm authorized the misuse of customer funds. These officers knew that the funds had been misused, and subsequently made misstatements of fact not only to Congress but the bankruptcy court as well. The danger in this case is that Washington is setting an even lower standard of accountability of those entrusted with our financial system.

"Misused funds" means that MF Global loaned customer money to itself to cover the company's bets on the European bond market while the company was working on the details of its own bankruptcy filing. It knowingly invested client money in an investment which benefited itself, and which the company knew was probably worthless. As the CFTC said in its complaint, MF Global "used customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid in violation of CFTC regulation." That sounds like a long-winded way to say it stole.

At this point, it is unclear how much of the money customers will get back. While the government claims that customers will get 100% restitution, it is pending approval of the bankruptcy court. Even so, this promise does not mean that customers will be compensated for the losses caused by the bankruptcy. The bankruptcy order which froze the firm's accounts meant many clients were unable close their option positions, creating a potential massive loss. These clients aren't getting their money back.

It is also unclear why this transaction is not illegal. Reuters explains that in the MF Global case there was a "lack of bad motives or an intent to steal or deceive." A writer at The Wall Street Journal speculated that workers could claim that poor record keeping led to confusion.  Others have speculated that investing in a company that is working on a bankruptcy filing is nothing more than poor judgement. These journalists make a very forgiving jury.  

The problems of MF Global stem from Jon Corzine, who wanted to transform the company from a commodities broker to an investment bank. He didn't have a business plan. He had a very heavily leveraged bet on the politics of the European Central Bank ("ECB"). Corzine thought that the ECB would intervene in a segment of the bond market lifting the price on discounted bonds. This was not an investment. It was a bet on politics that unraveled in a financial domino effect.

The debt situation in Europe continued to worsen, causing bond prices to drop. As prices dropped, lenders put margin calls on MF Global requiring more money. The margin calls created financial losses, which in turn led to a downgrade of the company's credit rating. The lower credit rating set off more margin calls.  Through out the process, MF Global was little more than a drunk at the craps table, doubling up every loss.

The CFTC's complaint against the former officers lists pages of events leading up to the collapse of the company.  The complaint includes a near-daily recounting of violations of corporate policy and government regulations. One attempt to deceive the Bank Of New York ended with the assistant treasurer saying on a recorded line that she hadn't copied people within MF Global on an email to BONY, because "I don’t want to take anyone down with me."

For his role in this collapse, Corzine continues to face a civil complaint from the CFTC. He faces possible perjury changes for his testimony before Congress in 2011. But today no one faces jail time including the assistant treasury who authorized the money movement. The Justice Department has five years to file criminal charges, so this may change. But nothing will change until Washington does.