Trustee sues Corzine over MF Global collapse

Just weeks after entering settlement talks, the bankruptcy trustee for MF Global sued former CEO Jon Corzine for actions leading to the collapse of the brokerage.

Here’s the story from the New York Times:

A bankruptcy trustee has sued Jon S. Corzine and other former MF Global executives, claiming they were “grossly negligent” in the lead-up to the brokerage firm’s collapse.

The action by the trustee, Louis J. Freeh, comes just weeks after he agreed to postpone the lawsuit and enter mediation with Mr. Corzine. Now, by filing litigation that appeared to catch the MF Global executives off-guard, Mr. Freeh may have jeopardized those talks.

A spokesman for Mr. Corzine, Steven Goldberg, disputed the accusations and questioned why Mr. Freeh was even bringing the case. “We question why the trustee chose to file this lawsuit, which is filled with seriously flawed allegations, while he is participating in court-ordered mediation of these very claims.”

Mr. Freeh, who represents hedge funds and other creditors of MF Global, said on Tuesday that “the mediation process is ongoing,” and that it was “in the best interests of the Chapter 11 estates to file the complaint.”

Details of the allegations seem to come from a previously released report by Freeh, according to the Wall Street Journal story:

In the lawsuit, Mr. Freeh highlighted the alleged “acts and omissions” of the executives that he says “culminated in the business collapse of the company and the bankruptcies of the debtors.”

When the men were running MF Global, Mr. Freeh said they “dramatically changed” the company’s business plan without addressing “systemic weaknesses.”

Mr. Corzine, the suit alleges, engaged in “risky trading strategies” that strained MF Global’s liquidity. Mr. Freeh says the firm’s “inadequate” controls and procedures failed to properly monitor those strategies.

The lawsuit seeks to hold Mr. Abelow and Mr. Steenkamp, whom the suit calls Mr. Corzine’s “hand-picked deputies,” responsible for those controls and procedures.

“Between defendant Corzine’s arrival at the company and the commencement of the bankruptcies of the debtors, MF Global lost well in excess of a billion dollars in value, not including any shortfalls in customer funds,” the lawsuit alleges.

The lawsuit seeks damages from the men in an amount to be determined at trial. Any recoveries would go to the holding company’s creditors, not customers of its brokerage. MF Global has about $200 million in insurance coverage available to pay legal judgments.

The complaint appears to be drawn from a report into the origins of MF Global’s bankruptcy that Mr. Freeh released earlier this month. The document attributed much of the blame for the brokerage’s failure to Mr. Corzine.

Marketwatch.com had a thoughtful analysis of what the charges could mean to other Wall Street executives. Given the high profile nature of the CEO and the charges, I’m sure this will be closely watched in C-suites across the country. Here’s an excerpt:

The main issue, and the one that will be of the greatest import to Wall Street, is where risk-taking ends and negligence begins. MF Global bet $6.3 billion on European sovereign debt in the midst of a worsening credit crisis. Those sour bets led to the firm’s implosion in October 2011.

Was it bone-headed? Yes. Was is negligence and/or malfeasance? That is less clear.

The case may ultimately hinge on what managers knew and when they knew it. In the court filing, Freeh suggests management knew of faulty controls as early as a year before the firm’s collapse.

The Freeh lawsuit isn’t the only criticism of Corzine’s role in reshaping and, perhaps, destabilizing MF Global. Should it succeed, however, it would represent a seismic legal shift.

Wall Street CEOs just don’t get pinned for the fortunes of their firms and the fates of customers. They may lose a job, some reputation and suffer embarrassment, but they are not, in general, held responsible in a legal sense.

I’m sure there are more than a few CEOs watching the case who are nervous that Corzine entered talks only to have charges filed a few weeks later. The case could set precedence for other bankruptcies and holding executives responsible for actions. At the least, it’s a public setback for a well-known CEO.