"Risky business strategy."
These are some of the phrases you never want associated with your broker-dealer but these incendiary remarks - and more - can be found in Louis Freeh’s report on the collapse of MF Global and the behavior of its CEO Jon Corzine.
[Spurred by fear of losing bonuses, hedge fund traders feel pressure to break rules.]
MF Global bankruptcy trustee Freeh released his report this afternoon and the former judge and director of the Federal Bureau of Investigation did not mince words about Corzine's actions leading up to the fall of 2011 collapse of MF Global. Corzine undertook a "risky business strategy" of betting on European government debt while disregarding "glaring deficiencies" in controls. The losses eventually added up to nearly $1.2 billion, according to media reports.
Not only was the former New Jersey governor and Goldman Sachs CEO setting trading strategies, he was executing trades even in the middle of meetings.
According to The Financial Times:
As the European debt crisis worsened the company started to get margin calls, which threatened its liquidity, and it dipped into customer funds to help plug the hole.
"At one point, management even debated how aggressively the [broker-dealer], on an intraday basis, could borrow . . . customer funds [from its futures brokerage arm] required to be kept in secured and segregated accounts," the report found.
Mr Freeh found that the "actions and failures" of Mr Corzine, who was the governor of New Jersey before his ill-fated stint at MF Global, Bradley Abelow, chief operating officer, and Henri Steenkamp, chief financial officer contributed to losses estimated at $1.5bn-2.1bn, which brought down the firm.
In sobering news for technologists, Freeh reports that "inadequate controls also prevented the company from knowing, during the last week of its existence" that Corzine was using customer funds to meet the liquidity needs of the broker-dealer and satisfy debt obligations from its UK division.
That’s right: For a firm that had nearly $2 billion in funds to lose, they did not have adequate systems to warn them that they were operating both outside the law and beyond their risk parameters.
[Closing in on SAC Capital FBI arrests portfolio manager.]
But let's be honest, would a blinking red light really stop Corzine who it seems was desperately plugging the holes in his sinking ship? Afterall, this is a man who reportedly wants to start a new hedge fund for old times sake.
As for the MF Globalo saga, it's almost closing time. The Commodities Futures Trading Commission is wrapping up its investigation and a trustee for the former brokerage says that more than 93 percent of lost client finds is expected to be recovered.
Phil Albinus is the former editor of Advanced Trading and he currently edits the FierceFinanceIT newsletter. Follow him on Twitter at @philalbinus. Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining Advanced Trading, he served as editor of Waters, a monthly trade journal ... View Full Bio