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Did brokerage firm's CEO purposely put customers at risk?

The CEO of a now-collapsed brokerage firm could face criminal charges as well as civil commercial litigation if investigators prove he knew customer funds might be included in a $200 million transfer of funds to an account in the U.K.

MF Global Holding Ltd. CEO John Corzine, also a former governor of New Jersey, gave "direct instructions" to transfer the money to cover an overdraft with JPMorgan Chase & Co. shortly before the brokerage filed for bankruptcy Oct. 31, investigators said. After the firm collapsed, there was an estimated $1.6 billion gap between customer claims and available assets.

To make a criminal case against him, the U.S. Department of Justice would have to prove he deliberately used customer funds to cover the shortfall. But for a civil lawsuit, investors would only have to show that customer funds were in fact used.

An email from the treasurer of the brokerage specified that the $200 million transfer was "Per JC's direct instructions." The chief risk officer for JP Morgan, which is the firm's clearing bank and one of its custodian banks for segregated customer funds, called Corzine to make sure the funds being transferred didn't belong to customers. The bank was given verbal but not written assurance, according to an inside source. Who gave that assurance isn't yet clear. But a spokesman for Corzine said the CEO believed the company had hundreds of millions of dollars available to transfer and that he never gave any instruction to misuse customer funds.

Even if he didn't deliberately put customers' money at risk, he may be legally liable for his employees' actions. If he's found to have directed the transfer of customer funds, he could be tried for fraud. That intent could be shown through direct evidence, such as memos to staffers or their own testimony. If the government can show through circumstantial evidence that Corzine should have known there wasn't enough company money to avoid dipping into customer accounts, the government still could have a strong case against him. In fact, the circumstantial evidence would make a stronger case because it wouldn't rely on employee testimony, which could be tainted by bias, memory problems or hidden motivations by workers.

At a time when more and more financial companies are being taken to task for their irresponsibility, it will be interesting to see whether this CEO is held liable both by the government and his customers, who are still out an estimated $1.6 billion.

Source: Blooberg, "MF Global's Corzine May be Liable if Customer Risk Known," Linda Sandler and Phil Mattingly, March 25, 2012

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Refco became a public company on August 11, 2005 with the sale of 26.5 million shares to the public at $22. It closed the day over 25% higher than that, valuing the entire company at about $3.5 billion. Investors had been attracted to Refco's history of profit growth—it had reported 33% average annual gains in earnings over the four years prior to its initial public offering.

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