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Trustee Freeh Sues Corzine, Deputies, Alleging They Led MF Global Into Ruin

Monday, April 29, 2013
ByRichard Hill

Louis Freeh, the Chapter 11 trustee for MF Global Holdings Ltd., parent of bankrupt futures commission merchant MF Global Inc., sued former MFG chief executive officer Jon Corzine and two other former MFG senior executives April 22 in the U.S. Bankruptcy Court for the Southern District of New York, alleging their “acts and omissions” led to the FCM's collapse in 2011 (In re MF Global Holdings Inc., Bankr. S.D.N.Y., No. 11-15059, 4/22/13).

In a report earlier this month, Freeh said Corzine and co-defendants Bradley Abelow, MFG Holding's chief operating officer and president, and MFG Holding's chief financial officer Henri Steenkamp, were “key members” of MFG management whose conduct contributed to losses of between $1.5 billion and $2.1 billion at the firm (25 BBLR 483, 4/11/13). MF Global filed for bankruptcy protection in October 2011 after it failed to find a buyer (23 BBLR 1365, 11/3/11).

Freeh told the court in the April 22 complaint that Corzine “engaged in risky trading strategies that strained the company's liquidity and could not be monitored by the company's inadequate controls and procedures.”

Abelow and Steenkamp, MFG Holding's most senior officers after Corzine and his “hand-picked deputies,” allegedly breached their fiduciary duties “by failing to ensure that the company's procedures and controls were adequate.” This occurred at a time when Corzine was instituting a new business plan that was a radical departure from the firm's traditional emphasis on being an intermediary for futures customer orders, Freeh contended.

Freeh is seeking damages, attorneys' fees, and costs in amounts to be determined by the court.

A spokesman for Corzine did not return a call for comment, and counsel for Abelow and Steenkamp could not be identified immediately.

Historically Deficient Controls

According to Freeh, MFG Inc.'s controls were deficient by the time the defendants came on board in 2010. During their tenure, however, Corzine, Abelow, and Steenkamp “failed to adequately improve” the procedures and controls, Freeh asserted. He added that Corzine knew the procedures and controls were “weak,” but nonetheless reshaped the firm into a full-service broker-dealer and investment bank that included a proprietary trading operation.

The defendants “failed to improve [MFG Inc.'s] already deficient systems to accommodate the new and additional risks of this new and larger business,” Freeh told the court.

Corzine led the proprietary trading operation, which, according to Freeh, “severely strained the company's liquidity” and exceeded trading limits created by the board of directors. Corzine's business strategy, which drained the firm's capital reserves through repeated margin calls, “ultimately contributed to [MFG Inc.'s] downfall,” Freeh said. “Despite their awareness of these risks, defendants failed to prepare” for the margin calls and other, related demands on the firm's capital.

Corzine, Abelow, and Steenkamp “were warned repeatedly” by others at the firm of the dangers presented by their business strategy and deficient controls, Freeh said, but violated their fiduciary duties to the firm's debtors by doubling down on their strategy. They also allegedly failed to keep the board apprised of the firm's financial stress.

$1.6 Billion in Missing Customer Funds

At the time of its bankruptcy filing, MFG Inc. told regulators it could not account for at least several hundred million dollars in futures customer deposits--a number later revised to up to $1.6 billion by the trustee representing the customers. According to Freeh, the firm's deficient controls led it to lose track of the customer funds, which actually were being used improperly to meet capital obligations on the broker-dealer side of the business.

Freeh said Corzine pushed for the use of “surplus” customer segregated funds to help prop up the firm. In summer 2011, Freeh said, Corzine and Steenkamp, over the objections of other senior MFG Inc. officials, “continued to promote the potential use of customer funds to meet the company's growing liquidity pressures. … Notwithstanding the company's statutory obligation to segregate customer funds, [Corzine] nonetheless directed the Finance and Treasury Departments, through Defendant Steenkamp, to 'maximize' the use of any daily surplus of customer segregated funds.”

In another alleged instance, in September 2011, Steenkamp approved the stealthy inclusion of $300 million in futures customers' assets when reporting capital and liquidity figures to regulators in the United Kingdom.

In January, the bankruptcy court approved a settlement between three trustees in the case, including Freeh, that will result in U.S. customers of the firm recouping a significant percentage of their deposits (25 BBLR 179, 2/7/13).

Freeh was represented by Adam Hoffinger, Daniel Nathan, and Brett Miller, Morrison & Foerster LLP, Washington and New York.

ByRichard Hill

The complaint in the case can be seen at /uploadedFiles/Content/News/Legal_and_Business/Bloomberg_Law/Legal_Reports/mf22(1).pdf.

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