Out the Kleptocracy: Congress Damns Corzine but Lets Him Off the Hook

Blog post by William D. Cohan, Nov 25, 2012

Perhaps we should no longer be surprised by the arrogance of Wall Street executives. Still, the level of hubris and bullying displayed by Jon Corzine during his 19-month tenure as chairman and chief executive officer of MF Global Holdings Ltd. (MFGLQ) -- as described in a recent congressional report about the company’s 2011 collapse -- stands out for sheer offensiveness.

The 97-page report prepared by the staff for Republicans on the House Financial Services Committee panel on oversight and investigation pulls no punches when it comes to blaming Corzine for the MF Global disaster, which wiped out thousands of jobs and billions of dollars of customers’ and creditors’ money. “Jon Corzine caused MF Global’s bankruptcy and put customer funds at risk,” the report concludes flatly.

And the gory details strewn throughout the elegantly written report -- some revealed for the first time -- show the full extent to which Corzine was out of control. In May 2010, two months after he was hired, Corzine, the former senior partner of Goldman Sachs Group Inc. (GS) and former governor and U.S. senator from New Jersey, began his pattern of deception.

“The goal here is not to be a prop trader,” the report claims Corzine said. “I don’t think that we will be in a risk taking position, substantial enough to have it be the kind of thing that the rating agencies would say ‘holy cow, these guys got a different business strategy’ than what we told them we had.”

New Division

A month later, though, Corzine had set up a new division at MF Global, the Principal Strategies Group, to make big wagers with the firm’s capital, the very thing he said MF Global would not do. He fired a bunch of the firm’s traders who he thought were not capable of swinging for the fences and brought in a slew of new hires, many from Goldman Sachs, to get the job done. He also had his very own proprietary-trading account at MF Global, even though company policy required that a more senior executive always sign off on personal trading -- an impossibility in his case because he was the most senior executive. (Corzine got around that requirement by creating a subcommittee of the board of directors to oversee his personal trades.)

By late summer, the proprietary traders and Corzine had identified a potentially lucrative trade in the sovereign debt of European nations -- among them, Ireland, Italy, Portugal and Spain -- that was trading at a discount and that Corzine thought would eventually trade at par once it matured in a year or two. He was betting that the European Financial Stability Facility, created by the euro area following decisions taken by the European Union in May 2010, would make sure the sovereign debt didn’t default.

As the size of Corzine’s bet reached about $2 billion in September 2010, Michael Roseman, the company’s chief risk officer, began to raise questions. (At the time, Roseman reported to the board of directors, not to the CEO.) Roseman told Corzine of his growing concern, and Corzine suggested they bring up the matter at the next board meeting. But Corzine soon stuffed Roseman, and at that meeting he persuaded the board to let him increase the bet to $4 billion.

“The same month, Corzine retained a search firm to find a new chief risk officer for the company,” according to the House report.

By October, as the size of the trade reached the new $4 billion limit, Roseman repeated his concern to Corzine. Again, Corzine appealed to the board -- at its November meeting -- to allow him to increase the bet. The board complied, boosting the limit to $4.75 billion. That same month, Corzine told Roseman he would no longer report to the board, but to Brad Abelow, MF Global’s chief operating officer and a longtime Corzine crony. In January 2011, Corzine fired Roseman.

Corzine’s Bet

Corzine made sure the new chief risk officer, Michael Stockman, would also report to Abelow, not the board. At the end of February 2011, Stockman met with board member Martin Glynn, a former executive at HSBC Holdings Plc, who warned Stockman he would face “tremendous pressure” to approve higher risk limits “in non core areas to support earnings weaknesses elsewhere.” By March, with Stockman’s support, the board increased Corzine’s bet limit to $5.8 billion.

Yet Corzine was still not content. In early June, he asked the board to increase the transaction limit to $8.4 billion. When the board asked him to leave the room, the offended Corzine told Stockman that if the board didn’t think he was “the right guy,” it should find someone else to be CEO. The board raised Corzine’s limit to $8.5 billion. But Stockman was now getting increasingly concerned about the size of the position.

By August 2011, Corzine had bet $7.4 billion on European sovereign debt. At an Aug. 11 board meeting, Stockman told the board the company “could need” an additional $246 million to $930 million to meet margin calls if the value of the underlying European sovereign debt continued to fall. At the meeting, Corzine and the board rejected as “too costly” the idea of hedging MF Global’s exposure to Corzine’s bet. The board also asked Stockman to create a “break the glass” contingency plan in case the ratings companies downgraded MF Global as the size of the bet became known.

In the survival plan, Stockman predicted MF Global would have sufficient liquidity to survive “one month under a severe stress event.” On Oct. 24, Moody’s Investors Service downgraded MF Global and cited -- for the first time -- the company’s outsized “exposure to European sovereign debt.” But Stockman was wrong: Despite some last-minute juggling with $1 billion of supposedly segregated customer money to pay off creditors, MF Global filed for bankruptcy a week later and was liquidated.

Tepid Law

The report makes a number of tepid recommendations about how to prevent a recurrence of what Corzine wrought at MF Global. Among them is encouraging Congress to enact a law “to restore investor confidence in the futures markets” that imposes civil liability on the officers and directors who sign a company’s financial statements or “authorize specific transfers from customer segregated accounts for regulatory shortfalls of segregated customer funds.”

Unfortunately, civil penalties have done little to deter bad behavior on Wall Street. The report lamely sidesteps the issue of criminal liability in the MF Global debacle, and the New York Times reported that “federal investigators do not expect to file criminal charges against top executives.”

To anyone who has read the House report, this is a head- scratcher. It states that Corzine made several “fateful” decisions that led to MF Global’s bankruptcy and liquidation, causing billions of dollars in losses for customers, creditors and shareholders. In those “hectic final days,” the report notes, “the company repeatedly transferred funds into and out of segregated accounts, amplifying the risk that it would miscalculate account balances for regulatory purposes.” What’s more, “these risks were compounded by the atmosphere that Corzine created at MF Global, in which no one could challenge his decisions.”

A chronology of MF Global’s death throes prepared by CME Group Inc., the parent company of the Chicago Mercantile Exchange, states that at least one MF Global employee believed “Corzine knew about loans made from customer segregated accounts.”

I’m no prosecutor, but this reluctance to hold Corzine criminally responsible for what happened at MF Global seems like a crime in itself.

William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase.

Out the Kleptocracy: In the News: Lanny Breuer, Justice Department Criminal Division Chief, is stepping down

Photo by William Banzai7

The Crony Top Gun is named Breuer
The DOJ's fraud case pursuer
The Kleptocrat's guy
Just turned a blind eye
And Justice is now in the sewer

The Limerick King

by Danielle Douglas, The Washington Post, Jan 23, 2013

Lanny A. Breuer is leaving the Justice Department after leading the agency’s efforts to clamp down on public corruption and financial fraud at the nation’s largest banks, according to several people familiar with the matter.

As one of the longest-serving heads of the criminal division, Breuer has had a tenure filled with controversy and high-profile prosecutions. He was admonished for his role in the agency’s botched attempt to infiltrate weapons-smuggling rings in the operation dubbed “Fast and Furious.” And he has been accused of being soft on Wall Street for failing to throw senior bank executives behind bars for their role in the financial crisis.

Yet Breuer is widely credited with aggressively going after white-collar crime in the aftermath of the crisis. He also stepped up the division’s involvement in money-laundering cases, launching a series of criminal investigations that have resulted in multimillion-dollar settlements.

It is not clear when Breuer intends to leave his post, nor what he plans to do once he departs, but it is certain that the prosecutor’s days in office are winding down, according to people who were not authorized to speak publicly about the matter.

Officials at the Justice Department, including Breuer, declined to comment for this article.

When Breuer was confirmed as assistant attorney general for the criminal division in April 2009, the agency was tainted by allegations of political interference in prosecutions and unprofessional conduct during the George W. Bush administration. The department continues to be mired in controversy stemming from the Bush years.

During Senate hearings in 2011, Breuer conceded that he had failed to alert other Justice Department officials that federal agents had allowed guns to illegally flow into Mexico and onto U.S. streets between 2006 and 2007. The practice, known as “gun walking,” was also a key part of the Obama administration’s Phoenix gun-tracking operation, “Fast and Furious.”
The operation came under fire when many of the weapons later turned up at crime scenes in Mexico and the United States, including two where a Border Patrol agent was killed.

Several officials at the Justice Department resigned in connection with the operation, including Jason Weinstein, a deputy assistant attorney general in the criminal division. Breuer later apologized for his inaction when the tactics first came to his attention. Sen. Charles E. Grassley (R-Iowa) called for his resignation, but Attorney General Eric H. Holder Jr. stood behind Breuer.

A former prosecutor in the Manhattan district attorney’s office, Breuer came to the Justice Department well versed in white-collar crime. He has been a driving force behind the prosecution of banks involved in rigging the global interest rate known as Libor. His efforts helped produce a $1.5 billion settlement with UBS and led to criminal indictments against two of the bank’s former traders in December.

But Breuer and his team were blasted for not indicting the parent company and more of its executives given the broad scope of problems at UBS.

Critics have also decried Breuer’s routine use of deferred prosecution, which gives the agency the right to go after a company in the future if it fails to comply with the terms of the agreement. They say the use of such tactics amounts to a slap on the wrists of companies that have engaged in egregious behavior. Breuer, however, has argued that the agreements result in greater accountability for corporate wrongdoing.

Breuer made a name for himself as special counsel to President Bill Clinton, whom he represented in the 1998 impeachment hearings and the Whitewater investigation.

Before his appointment at the Justice Department, Breuer had worked at the Washington office of the Covington & Burling law firm, alongside Holder. While there, Breuer defended former Clinton national security adviser Samuel R. “Sandy” Berger, who was being investigated for tampering with presidential documents at the National Archives. He also represented baseball pitcher Roger Clemens in proceedings before the House Committee on Oversight and Government Reform about the use of steroids.

Americans Are Still Waiting for the "Perp Walks"

Ahhh-- soft-serve.

Corzine Wants Case Dismissed, Gupta Seeks Leniency: This Week in Corporate Crime

by Aaron Task, Daily Ticker

Four years after Lehman's bankruptcy, most Americans are still waiting for the "perp walks."

Despite the populist (and partisan) appeal, former Goldman CEO and New Jersey Governor Jon Corzine seems likely to escape prosecution for the demise of MF Global, which collapsed nearly one year ago.

"After 10 months of stitching together evidence on the firm's demise, criminal investigators are concluding that chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear," The New York Times reported in August.

This week, Corzine's lawyers are seeking to have a civil case dismissed. A group of investors, including the Virginia Retirement System, claim Corzine, MF Global and its banks -- including Goldman, JPMorgan and Citigroup -- mislead investors about the risks MF Global was taking with its leveraged bets on European debt.

Corzine's lawyers claim the case "makes no sense" because Corzine bought 50,000 shares of MF Global two months before the collapse, The WSJ reports. Furthermore, Corzine's lawyers say the firm collapsed because of "unsuccessful business strategies," not fraud.

Meanwhile, former Goldman Sachs, Procter & Gamble and American Airlines board member Rajat Gupta is scheduled to be sentenced for insider trading today.

Gupta, who was found guilty of three counts of securities fraud and one count of conspiracy, faces a maximum sentence of 25 years, Reuters reports. Federal prosecutors are seeking 8 to 10 years but Gupta's powerful friends, including Bill Gates and Kofi Annan, are asking the judge to be lenient, citing his charitable work.

Of course, Bernie Madoff did a lot for charity too (before destroying several) and it's not hard to be charitable when you've amassed immense wealth. But Gupta was not Robin Hood and doing "good deeds" should in no way obscure the crimes committed.

Here's hoping U.S. District Judge Jed Rakoff - who has a history of being tough on white collar criminals and Wall Street generally - will do the "right" thing and reject the populist (and popular) notion that the law doesn't apply to the 1%.

Update: Gupta was sentenced to 24 months in prison and ordered to pay $5 million in fines.

What, Me Accountable?

Fraud -- What Fraud? Besides, There's Only $1.6 Billion Missing

There's seldom a criminal charge in sight for these runaway rogue traders, it seems.

I can feel a smirk spreading across my face.

By Jonathan Stempel

* Ex-MF Global CEO said had no motive to commit fraud

* US investigators also probe future brokerage's collapseNEW YORK, Oct 22 (Reuters) - Jon Corzine's lawyers say allegations that he fraudulently ran MF Global Holdings Ltd make "no sense" and that a lawsuit seeking to hold him and others responsible for the futures brokerage's bankruptcy must be thrown out.

Corzine, former colleagues and several banks, including JPMorgan Chase & Co and Goldman Sachs Group Inc, filed papers on Friday night to dismiss investor litigation over MF Global's collapse. The company's Oct. 31, 2011, bankruptcy was Wall Street's biggest meltdown since 2008.

Plaintiffs led by the Virginia Retirement System and the province of Alberta, Canada, have accused MF Global in the U.S. District Court in Manhattan of inflating its ability to manage risk, obscuring risks from a big bet on European sovereign debt and improperly accounting for deferred tax assets.But lawyers for Corzine, MF Global's former chairman and chief executive officer, said there was no securities fraud. They said the allegations merely suggested that Corzine mismanaged the company, was too optimistic, or failed to predict a liquidity squeeze prompted in part by credit rating downgrades.

Corzine's lawyers also said the former New Jersey governor's ownership of 441,960 MF Global shares, including some bought in August 2011 when the exposure to European sovereign debt had peaked, showed that he had no motive to commit securities fraud.

"Plaintiffs have not alleged any facts from which it could be inferred that Mr. Corzine knew prior to October 30, 2011 that MF Global would not be able to survive," Corzine's lawyers wrote. "Plaintiffs' theory that Mr. Corzine had fraudulent intent or participated in a fraud makes no sense."

The bank defendants, in a separate court filing, contended that MF Global's business strategy and risks were fully disclosed in public filings.

Salvatore Graziano and Jonathan Plasse, lawyers who represent the lead plaintiffs, did not immediately respond to requests for comment.

The Virginia Retirement System said it had managed about $53.1 billion of pension fund and other assets as of June 30. Alberta, through its Alberta Investment Management Corp unit, said it oversaw about C$70 billion (US$70.4 billion) of pension fund and government assets.

Their lawsuit, which seeks class-action status, covers investors in MF Global common stock, convertible bonds and senior notes between May 20, 2010, and Nov. 21, 2011.

Among the other defendants are former MF Global Chief Financial Officers J. Randy MacDonald and Henri Steenkamp, seven former independent directors, and units of Bank of America Corp , Citigroup Inc, Deutsche Bank AG and Royal Bank of Scotland Group Plc.

The U.S. Department of Justice and Commodity Futures Trading Commission are also investigating MF Global's collapse, which has left an estimated $1.6 billion of customer funds missing.
Criminal charges stemming from the collapse are unlikely, and civil cases are the more likely outcome, people familiar with the matter have said.

The case is DeAngelis et al v. Corzine et al, U.S. District Court, Southern District of New York, No. 11-07866.