Why Hasn’t NFA Barred Jon Corzine?
More than a year after MF Global’s demise, why hasn’t the National Futures Association taken action against Jon Corzine? For his malpractice Mr. Corzine should be permanently barred from NFA membership, associate membership and from acting as a principal of an NFA member. He should receive the maximum NFA fine as well.
Customers of MF Global have tied themselves into knots trying to convince authorities to pursue criminal charges against its CEO, Jon Corzine. The Commodity Customer Coalition has devoted considerable time to this effort as we believe prosecution of criminal wrongdoing at MF Global must occur in order to deter future offenses. We have all been told—perhaps rightly so—that Federal investigations take time. The burden of proof is high and this case is extremely complicated. In order to build an adequate case which can result in a conviction, the investigation must be given time to collect evidence and run all of the traps.
Yet in the meantime, Mr. Corzine has without question broken many NFA rules. Many of these infractions are serious enough to warrant a permanent bar from membership. NFA has the authority to conduct investigations into NFA members and associates for rule violations or even the suspicion that a violation may take place in the future. The NFA Business Conduct Committee has the authority to fine, suspend and expel members. While Mr. Corzine’s criminal fortunes will hinge on the difficult question of intent, NFA rules consider results over the state of mind of the perpetrator. The case for barring someone from the industry could be as simple as whether or not the Business Conduct Committee believes that person failed to “uphold high standards of commercial honor and just and equitable principles of trade.” For Jon Corzine, that case was made the day MF Global filed for bankruptcy with a shortfall in customer property.
And yet, the NFA has failed to bring an action against Mr. Corzine. His NFA violations are spelled out in great detail in the SIPA Trustee’s “Report of the Trustee’s Investigation and Recommendations.” How is it that Mr. Corzine has escaped a complaint by the NFA’s Business Conduct Committee?
It is true that Mr. Corzine has allowed his NFA membership to lapse. The NFA also did not pursue regulatory action against Peregrine’s fraudster CEO Russ Wassendorf. Mr. Wassendorf was pursued by the CFTC and he will certainly find it difficult to manage money from a Federal prison cell. But there have been numerous articles in credible national publications reporting Corzine’s desire to manage money again. If he does so through a hedge fund dealing in commodities or swaps, he might have to renew his NFA membership. It is unconscionable that the NFA would permit a man who was the sole NFA registrant at the first firm in 160 years which caused customers to lose funds held in segregation to once again manage customer funds.
The NFA owes it to commodity customers and its membership, especially those NFA members who remain incalculably damaged by Corzine’s infractions, to ban Jon Corzine from the commodities industry.
It is true that the NFA was not the Designated Self-Regulatory Organization for MF Global. That was the CME’s job. It is also true that the CME was asked to stand down in its investigation of MF Global by the FBI and Department of Justice. None of that precludes the NFA from pursuing its own case against Jon Corzine as an associate member of the NFA and an associated person of MF Global. The NFA Manual states that the “NFA has authority to discipline any Associate and any of its Members that are required to be registered with the CFTC.” Regardless of whether or not the NFA is the DSRO of the NFA Member firm in question, the NFA can bring an action against any associate member who breaks the rules. Mr. Corzine should be held accountable to NFA’s membership by NFA’s leadership.
In Congressional testimony before the House Committee on Agriculture, NFA president Dan Roth pointed out that “one way to prevent fraud is to deter fraud through vigorous prosecutions of the laws that are on the books now.” I do not expect the NFA to do the job of the Department of Justice. However, the NFA has an obligation to enforce its own rules on Mr. Corzine and it has failed to do so. The NFA’s 2011 Review echoes this, stating that “taking strong, decisive action against those NFA Member firms and individuals who violate the Association’s rules is a critical component of NFA’s success” (pg 6 under “Enforcement”: http://goo.gl/VoyMD).
That 2011 NFA review goes on to tout 41 complaints and 9 Member Responsibility Actions. Most of these cases involved misleading promotional material or sales practices that the NFA deemed fraudulent. To be sure, many of these cases were serious abuses of NFA rules and, in some cases, state and Federal law. Yet, MF Global represents the most serious threat to the sanctity of customer funds and the survival of the industry. For the first time in 160 years, customer money vanished from segregation. It wasn’t lost in approved investments; it did not disappear as the result of fellow customer risk. MF Global and Jon Corzine broke NFA rules and Federal law to move customer money out of segregation so they could prop up their failing firm–and the NFA has chosen to remain idle.
There are whispers in the wind that the CFTC will be filing a civil complaint early next year against Mr. Corzine. Perhaps the NFA is waiting for the CFTC to move first. Why? The NFA led the CFTC on reform efforts on segregation reporting and electronic bank access. Why lag the field on justice for MF Global victims?
Perhaps FINRA should permanently bar Mr. Corzine from securities registration as well. I am not a member of FINRA, nor can I make that case. I am, however, a dues paying member of the NFA. I am both a customer and a creditor of MF Global. I can make the case for Mr. Corzine’s removal from the commodities industry. I will be submitting a letter to every NFA Compliance Director, every member of NFA’s Business Conduct Committee and Board of Directors requesting that Jon Corzine be permanently barred from NFA membership, associate membership and from acting as a principal of an NFA member. I will also request that he receive the maximum $250,000 fine and that this money be tendered to the SIPA Trustee so that it may be added to the fund of customer property for distribution to commodity customers.
There should be a price to pay for one’s active involvement, complacency or willful blindness in the perpetration of schemes to subvert NFA rules. As the SIPA Trustee noted in his investigation report of MF Global, ”had customer funds been properly protected, the customer property in Customer Accounts should have been largely if not completely unaffected by the liquidity crisis at MF Global” (pg 96 SIPA Trustee’s Investigation Report). Regardless of his intent, Mr. Corzine failed to protect customer funds. The NFA should hold him accountable.
To make things crystal clear, here is the case against Mr. Corzine’s license to do business in commodities.
The Case for Barring Jon Corzine – Summary of Potential Charges
The SIPA Trustee takes great pains in laying out the following case:
“Contrary to some public reports, the shortfall of customer property at MFGI was not caused by direct investment of customer funds in sovereign debt or even by losses on proprietary investments such as the sovereign debt. Rather, as detailed below, the actions of management and other employees, along with lack of sufficient monitoring and systems, resulted in FCM customer property being used during the liquidity crisis to fund the extraordinary liquidity drains elsewhere in the business, including margin calls on the European sovereign debt positions.
pg 15 SIPA Trustee’s Investigation Report.”
As a result, Mr. Corzine violated the following Financial Requirements of the NFA Manual:
- Section 4(a) Financial Requirements and Treatment of Customer Property
In his capacity as CEO of the FCM MF Global, Mr. Corzine violated the following CFTC regulations, which Section 4(a) of the NFA Manual deems to be violations of NFA Requirements:
- 17 CFR 1.12: Maintenance of minimum financial requirements by futures commission merchants and introducing brokers.
- 17 CFR 1.20: Customer funds to be segregated and separately accounted for.
Specifically, MF Global was out of regulatory compliance on customer funds from October 26th to October 31st and may have been out of compliance on other dates through 2011 (p 15 and 77 SIPA Trustee’s Investigation Report).SIPA Trustee’s chart of segregation violations for the last week of October 2011.
Segregation data for the month of October 2011 (click to enlarge).
- 17 CFR 1.22: Use of customer funds restricted.
MF Global used the funds of its commodity customers to secure for itself extension of credit and services of a number of counterparties, as well as to settle its own proprietary trades.
Mr. Corzine also violated the following Compliance Rules of the NFA Manual:
- Rule 2-2. Fraud and Related Matters.
Mr. Corzine and his subordinates knowingly converted funds they knew to belong to customers into available capital to fund the broker dealer and FCM operations of MF Global. Further, he disseminated misleading information regarding the status and treatment of customer property for the financial benefit of the firm.
- Rule 2-4. Just and Equitable Principals of Trade.
Mr. Corzine and his subordinates devised a scheme by which they would utilize segregated customer property to fund the broker-dealer and FCM operations of MF Global. They recklessly treated customer property as belonging to MF Global and used it to satisfy the financial obligations of the firm. Mr. Corzine may have directed his attorneys to mislead the Bankruptcy Court in order to avoid Chapter 7 liquidation proceedings for MF Global’s holding company. On November 1, 2012, Kenneth Ziman, an attorney for MF Global, told Bankruptcy Judge Martin Glenn that “to the best of knowledge of management, there is no shortfall.” The hearing was to determine if MF Global’s Holdings Voluntary Petition for Chapter 11 would be accepted. Had a shortfall in customer property at a subsidiary been revealed, especially one of $1 billon or more, the parent company would have been administratively insolvent. This would necessitate a Chapter 7 proceeding, which is much less advantageous to MF Global’s creditors. As the result of his own Congressional testimony, we know that Mr. Corzine knew of the shortfall as early as October 30.
- Rule 2-9. Supervision.
Mr. Corzine failed to adequately supervise his subordinates who had the task of transferring customer property between the company’s segregated customer accounts and third parties (pg 74 SIPA Trustee’s Investigation Report).
- Rule 2-10. Recordkeeping.
Mr. Corzine and his subordinates failed to keep adequate records of transfers of customer funds, even prior to the final month of the firm. Management was aware that their system was antiquated and did nothing to fix it.From the SIPA Trustee Investigation Report.
- Rule 2-29. Communications With the Public and Promotional Material.
This rule states that no member or associate shall make any communication with the public which operates as a fraud or deceit. The SIPA Trustee found that MF Global was advising clients during that time that it was holding all customer cash and collateral in CFTC Rule 1.25 and Rule 30.7 – Customer Segregation [accounts].” Not only did this imply that 30.7 accounts were subject to the same segregation requirements as 4d funds, it was patently false. MF Global was removing huge sums of money from customer segregation for proprietary use intraday and failed to return it overnight.