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Is Corzine a Fraudster or just Incompetent?

Corzine Feigns Ignorance in Questioning about MF Global

Is Jon S. Corzine, the former U.S. Senator, New Jersey governor, and Goldman Sachs CEO, a fraudster who is trying to absolve himself of any responsibility for the meltdown at MF Global by feigning ignorance, OR is he the most incompetent CEO ever to come out of the C-Suite? You make the call.

MF Global filed for bankruptcy protection on October 31 after a disastrous bet on European government debt. In just a week, stock investors lost about $585 million. More than $600 million in clients' money is still missing. Regulators say MF Global moved the money out of client accounts within days as the firm's cash dried up.

MF Global didn't list the European debt on its balance sheet for all to see. Instead, those holdings were shifted to the company's "off-balance sheet," deep in its financial statements. Some separate filings with regulators excluded the European debt entirely.

Under a 2002 anti-corporate fraud law (Sarbanes-Oxley Act) — which Corzine co-wrote as a U.S. senator — CEOs of public companies must personally certify the accuracy of their company's financial statements. If client money was used by the firm for its own purposes, Corzine could be held responsible, according to Thomas Ajamie, an attorney who specializes in financial fraud cases. "That would be the house gambling with customers' money," Ajamie said.

The direct costs of the failure include $1.2 billion in supposedly segregated retail investor accounts that have not been identified and 2,900 people lost their jobs. The real costs go way beyond and include a further rupturing of the trust in the securities industry on the part of the American public and concerns about whether our regulatory systems are capable of monitoring banks and securities firms to identify problem firms while the fraud is occurring and take action against such firms after the fact.

Corzine appeared before Congress last Thursday having been subpoenaed to testify about his role as the former CEO of MF Global. Here are some of Corzine’s explanations and responses to questions from the Congressional panel. It’s worth noting that Lawmakers had previously heard from farmers, ranchers and small-business owners who are missing money deposited with the firm. Agricultural businesses use brokerage firms to help reduce their risks in an industry vulnerable to swings in oil, corn and other commodity prices.

  • In his prepared testimony submitted before the hearing, Corzine said he could not explain what happened to “many hundreds of millions of dollars” that the firm was holding for customers. "I simply do not know where the money is, or why the accounts have not been reconciled to date," he told the House Agriculture Committee, adding that he was "stunned" when he heard of the missing funds.
  • Under pointed questioning by members of the House Committee, Corzine said he “would not rule out the possibility that someone at the firm misinterpreted him as suggesting that the struggling firm tap into investors’ funds.”
  • Asked why there was a shortfall in customer funds, Corzine said that “many transactions… occurred in those last chaotic days.” He said he was not aware of all of those transactions and that “as a consequence it would be very hard for me to speculate why or where that shortfall took place.”
  • Asked if he authorized a transfer of customer funds, Corzine responded, “I never intended to break any rules, whether it dealt with the segregation rules or any of the other rules that are applicable.”
  • When asked if he was aware of any transfers, authorized or unauthorized, out of customer accounts, Corzine said, “I’m not in a position, given the number of transactions, to know anything specifically about the movement of any specific funds.”

Janet Tavakoli, an expert on the transactions MF Global specialized in, said Corzine's remarks seemed to divert attention from the firm's fundamental flaw under his leadership: It lacked the cash to cover its bets after investors started to fear that a major European nation would default.

Rep. David Scott, D-Ga., said it was the "height of disbelief" to think that Corzine knew nothing about the $1.2 billion. "We've got to get better answers from you because you [were] the CEO," he said. Rep. Tim Johnson, R-Ill., said that "people who live in the real world" have "suffered dramatically" from MF Global's downfall, and he asked Corzine whether he'd be willing to pay back those people with his own personal fortune. Corzine dodged the question, saying he was confident the money would be found. Seriously?

In his testimony to the House Agriculture Committee, Corzine sought to deflect blame for the company's collapse, arguing that he inherited a firm already doomed by his predecessors' bad financial decisions. Let me get this straight. Here is a former Senator, Governor, and CEO of Goldman Sachs taking a position as CEO of a failing company. Why would he do that? It doesn’t pass the smell test unless he saw it as a vehicle to stoke the burning fire that is his ego. Perhaps Corzine saw it as a way to personally enrich himself and he didn’t consider the possible consequences of his actions. That seems to be a recurring theme in the business frauds and financial meltdown that has plagued our country since the late 1990s.

Blog posted by Steven Mintz, aka Ethics Sage, on December 12, 2011