Jon Corzine’s failure to address MF Global Holdings Ltd.’s growing liquidity needs as he tried to build the commodities broker into a global investment powerhouse helped create chaos that led to its downfall, according to a trustee’s report on Monday.
The blistering report from James Giddens, the trustee liquidating the company’s broker-dealer unit, said there could be civil claims against former chief executive officer Mr. Corzine and other top MF Global executives for breach of duties to customers.
Mr. Giddens also said he was prepared to sue JPMorgan Chase & Co., one of MF Global’s main banks, if the two sides cannot settle within 60 days claims over whether the bank played a role in the disappearance of customer funds. JPMorgan has already returned about $89-million in customer funds and $518-million in general MF Global assets, the report said.
A JPMorgan spokeswoman declined to comment.
Mr. Giddens has estimated that about $1.6-billion disappeared from customer accounts when the company, which filed for bankruptcy on Oct. 31, 2011, improperly mixed client funds with its own money.
The report, based on interviews with more than 100 people and reviews of hundreds of thousands of documents, is the most comprehensive status update on Mr. Giddens’ efforts to recover customer money.
The company collapsed after investors abandoned the firm following revelations of its heavy bets on European debt. Mr. Corzine, a former New Jersey governor and CEO of Goldman Sachs Group Inc., resigned soon afterward, and he and other current and former MF officials already have been sued by customer groups over their role in the collapse.
Any legal action supported by Mr. Giddens could add weight to those claims.
Mr. Giddens had earlier said he was mulling filing claims against certain executives, but did not name them. Monday’s report identifies Mr. Corzine, as well as former CEO Henri Steenkamp and former assistant treasurer Edith O’Brien, as possible targets for civil claims.
A spokesman for Mr. Corzine had no immediate comment. Lawyers for Mr. Steenkamp and Mr. O’Brien were not immediately available.
In his report, Mr. Giddens painted MF Global as a company woefully unprepared for its own growth.
He said liquidity at the firm had long been a concern, but it became an even greater issue with the hiring of Mr. Corzine in March, 2010. Mr. Corzine’s vision to convert MF Global into a global investment bank required the company to maintain higher liquidity levels, Mr. Giddens wrote, but Mr. Corzine and his team vastly underestimated just how big an increase it would need.
MF Global management “failed to add to its Treasury Department and technology infrastructure, which was needed to meet the demands on global money management and liquidity,” Mr. Giddens said.
He concluded that “management’s actions, along with the lack of sufficient monitoring and systems, resulted in customer property being used during the liquidity crisis to fund the extraordinary liquidity drains elsewhere in the business.”
Mr. Giddens said his report drew no conclusions about possible criminal liability. The Commodity Futures Trading Commission, the Securities and Exchange Commission, and the FBI have all launched probes into the company’s downfall.
The report also outlines key recommendations to avoid a repeat of the chaos following the major brokerage firm’s collapse.
The report described how MF Global employees were unable to aptly monitor the company’s liquidity levels in real time. As counterparties began to unwind their positions, the firm became overwhelmed by what one executive called a “liquidity asphyxiation,” Mr. Giddens’ report said.
To make up for the drain on liquidity, MF Global used assets from pools of money that were supposed to be segregated for customers. Disagreements and confusion mounted within the firm over whether there was an available surplus in customer funds to plug the liquidity gap, the report said.
Mr. Giddens also said he was in negotiations to recover $175-million controlled by CME Group Inc., MF Global’s primary regulator.
That money consists of property posted by MF Global’s broker-dealer unit, against which some customers and other parties have asserted claims, according to the report.
MF Global owned memberships, or seats, to trade at CME and, like other clearing members at the exchange, put money into a guarantee fund as security for its financial obligations, CME spokeswoman Laurie Bischel said.
“We’re working with the trustee to finalize how those claims would be administered,” Ms. Bischel said.
The report also revealed that Mr. Giddens is investigating the actions of Bank of New York Mellon Corp. in the week leading up to MF Global’s collapse.
During that final week BNY Mellon added arbitrary roadblocks to MF Global’s ability to get loans from the bank, the report said, a move that “further constrained” MF Global’s liquidity position and its ability to clear transactions.
So far, the bank has cooperated with the investigation, mr. Giddens said. A spokeswoman for BNY did not return a call seeking comment.
The trustee said he would probably not pursue legal claims against customers.
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