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The CFTC’s litigation continues against MF Global Holdings Ltd., Jon S. Corzine, and Edith O’Brien, with restitution proceeding for customers who collectively sustained $1 billion in losses
The long, drawn-out saga of defunct FX company MF Global may be put to an end today, as the US Commodity Futures Trading Commission (CFTC) has announced that the company’s former customers whom sustained losses at the time of the demise of the global financial derivatives broker are to start receiving final restitution payments.
In an announcement by the trustees of MF Global today which was publicized by the CFTC, the company will now begin making final distributions to its customers to satisfy its obligation of full restitution for $1.212 billion in losses sustained by customers of MF Global when the company failed three years ago in 2011.
The demise of MF Global, which was once a prominent derivatives firm and well known publicly listed company in North America was a very high profile affair, especially when considering that it occurred just one year after the Dodd-Frank Wall Street Reform act was sworn into US government policy by President Obama as a direct result of concerns over consumer protection subsequent to the financial crisis in 2009, which left a great many retail consumers severely endebted.
The circumstances which surrounded the company’s insolvency were not purely a matter of accidental bad fortune, but rather a result of the allegations that MF Global had likely experienced a number of trading days in 2011 during which the firm’s bets on sovereign debt would have required the use of customer funds to meet capital requirements, thereby maintaining operating funds and possibly overall solvency – a practice which is strictly illegal in the United States.
In late October 2011, MF Global experienced a catastrophic ruin of its financial condition, directly caused by improper transfers of over $891 million from customer accounts to a MF broker-dealer account to cover losses created by trading losses.
On October 31, 2011, MF Global executives admitted that transfer of $700 million from customer accounts to the broker-dealer and a loan of $175 million in customer funds to MF Global’s U.K. subsidiary to cover (or mask) liquidity shortfalls at the company occurred on October 28, 2011. MF could not repay these monies with its own funds.
Given this situation, the company’s incumbent CEO Jon Corzine became the subject of litigation, the outcome of which has still not been decided by the CFTC, and whose son Jeffrey Corzine committed suicide just three weeks ago in Mexico City following what spokesman Steven Goldberg detailed to Reuters at the time as a “severe case of depression” from which Mr. Corzine Jr had been suffering for several years and had “been receiving treatment for what is a very painful and debilitating physical and mental ailment.”
Jon Corzine had formerly held senior governmental positions, most notable of which having been Governor of New Jersey from 2006 to 2010, subsequent to which he assumed the leadership position at MF Global.
Just one year into his tenure, the company’s woes began, which finally may be put to rest today.
The arrival at the trustees’ ability to bring about full restitution was initiated originally by Judge Victor Marrero of the U.S. District Court for the Southern District of New York, who entered a consent order on November 8, 2013 requiring MF Global to begin making final restitution payments after obtaining permission from the bankruptcy court to remedy any shortfall with funds of the MF Global general estate. Following an unsuccessful appeal by parties to related litigation, the bankruptcy court’s order allocating estate funds to satisfy customer claims has now become effective.
In addition to full restitution, the consent Order imposed a $100 million civil monetary penalty on MF Global, to be paid after MF Global has fully paid customers and certain other creditors entitled to priority under bankruptcy law.
Gretchen Lowe, Acting Director of the CFTC’s Division of Enforcement, today publicly stated that “Throughout the Division’s investigation and ongoing litigation, ensuring full restitution to customers has been a primary focus. I am pleased that the terms of the consent Order are now being fulfilled and that these final restitution payments will satisfy the remaining shortfall. The CFTC will continue to ensure that those who violate U.S. commodity laws and regulations designed to protect customer funds will be held accountable.”
The consent Order arose out of the CFTC’s complaint, filed on June 27, 2013, charging MF Global and the other Defendants with unlawful use of customer funds. In the consent Order, MF Global admitted to the allegations pertaining to its liability based on the acts and omissions of its employees as set forth in the consent Order and the Complaint.
The CFTC’s Complaint charged MF Global, a registered Futures Commission Merchant (FCM), with violating provisions of the Commodity Exchange Act and CFTC Regulations intended to protect FCM customer funds and requiring diligent supervision by registrants. Specifically, the Complaint charged that during the last week of October 2011, MF Global unlawfully used customer segregated funds to support its own proprietary operations and the operations of its affiliates.
In addition to the misuse of customer funds, the Complaint alleged that MF Global unlawfully failed to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts, made false statements in reports it filed with the CFTC that failed to show the deficits in the customer accounts, used customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid in violation of CFTC regulations, and failed to diligently supervise the handling of commodity interest accounts carried by MF Global and the activities of its partners, officers, employees, and agents.
Whilst Mr. Corzine continues to face charges, and MF. Global remains liable for the $100 million fiscal penalty levied against it despite its bankrupt status, the fact that restitution will materialize will come as very good news to the former investors who can now put this entire episode behind them.