Federal law enforcement officials investigating the implosion of MF Global are concluding that sloppy bookkeeping rather than criminal activity is to blame for the firm’s demise that resulted in more than a $1 billion of customer funds that remains missing, FOX Business Network has learned.
Though officials haven’t totally ruled out bringing a criminal case against MF Global executives, including former chief executive Jon Corzine, the odds are long that a criminal case will be filed, according to people with direct knowledge of the matter. The evidence that law enforcement officials have gathered so far shows that the firm’s sloppy bookkeeping rather than direct criminal intent to commit fraud is at the heart of both the bankruptcy and the missing customer funds, which could total as much as $1.6 billion, these people tell FOX Business.
People close to the matter say regulators and prosecutors are investigating large transfers of money during MF Global's final days into various bank accounts, presumably to pay off creditors. At issue for criminal investigators: Proving that people inside the firm knew they were committing fraud when they were making those transfers.
Client accounts must be kept separate from a firm’s trading business, but firms can legally borrow from those accounts under certain circumstances. In his recent congressional testimony Corzine stated that he was given assurances that the use of customer funds during the firm’s final days was completely legal.
“So far what (criminal investigators) have seen is incredibly sloppy work, not knowing what the left and right hand is doing,” said one person with direct knowledge of the investigation. “We think it was a lot of bad judgment, not criminal judgment.”
The FOX Business Network reported on Nov. 7 that MF Global still hadn’t upgraded its compliance systems even as the firm was taking outsized risks in global bond markets, a new business model implemented by Corzine not long after he took over as chief executive in the Spring of 2010. Corzine, the former governor and US Senator from New Jersey, was also the CEO of Goldman Sachs (GS), where he was known as “fuzzy” because of his inattention to detail.
Corzine was ousted from Goldman in 1999 after the firm suffered massive losses in the bond market.
MF Global’s Oct. 31 bankruptcy filing has been the focus of several wide-ranging criminal and civil probes. On the criminal side, investigators from the US Attorney’s office in Chicago, the Federal Bureau of Investigation and the US Attorney for the Southern District of New York have all launched sweeping probes, interviewing dozens of firm employees and sifting through emails and other documents. The Securities and Exchange Commission, the Commodity Futures Trading Commission and the CME Group have all launched civil probes.
Regulators and law enforcement officials have spoken to numerous former employees of MF Global since the firm’s demise and continue to review the hundreds of documents before they make their final conclusion. But one employee who hasn’t been interviewed by the criminal investigators is Corzine. People close to the probe say they won’t likely depose him unless a criminal probe appears more likely.
Spokesmen for the Justice Department, the SEC, the CFTC and the CME declined to comment. An attorney for Corzine didn’t return a call for comment.
That doesn’t mean Corzine and senior officials at MF Global won’t face any charges of some kind. Officials in the CME Group -- the holding company of the Chicago Mercantile Exchange where MF Global was a member firm -- have said they believe the firm broke the law when it used the customer funds to pay off creditors or for other purposes, as now appears the case. Even though the CME has yet to officially conclude it probe, officials, including its executive chairman Terrence Duffy, have said any use of customer funds would be illegal.
But any case by the CME, the SEC or the CFTC would be civil in nature, meaning that the level of evidence to charge individuals with securities fraud is lower than the amount of evidence that must be produced by criminal authorities for them to bring charges.