Suit Accuses Corzine of a Failure at the Helm

8:53 p.m. | Updated

Jon S. Corzine, no stranger to bare-knuckle brawls after spending nearly 40 years on Wall Street and in New Jersey politics, now faces the biggest fight of his career: a showdown with the United States government.

On Thursday, federal regulators sued Mr. Corzine in connection with the collapse of the brokerage firm MF Global and apparent misuse of customer money during its final days. Mr. Corzine, a former United States senator and New Jersey governor, ran the firm until its bankruptcy in October 2011.

The Commodity Futures Trading Commission, the federal agency that regulated MF Global, argued in the lawsuit that Mr. Corzine had failed to prevent a lower-level employee from transferring customer money to banks and clearinghouses. The agency also sued that employee, Edith O’Brien, assistant treasurer, who oversaw the transfer of customer money from the firm’s Chicago office.

While the agency did not accuse Mr. Corzine of authorizing the breach of more than $1 billion in customer money, or even knowing that the wrongdoing had happened, it claimed that he had failed to “diligently supervise” the firm as it jeopardized the client accounts. The suit also outlined a more ambitious claim that Mr. Corzine was subject to so-called control person liability, a legal provision that allows for the punishment of executives for the bad acts of lower-level employees.

“Turning a profit is not the only job of the person at the top of a C.F.T.C.-regulated firm,” said David Meister, the agency’s enforcement director. “Particularly in times of crisis, the person in control, like the C.E.O. here, must do what’s necessary to prevent unlawful uses of customer money, so that customers’ money is still there if and when the music stops.”

The lawsuit, filed in United States District Court in Manhattan, provides the most complete account to date of MF Global’s collapse and its violation of customer protections. Citing dozens of e-mails and capturing previously unreleased phone calls that laid bare the firm’s chaotic final days, the government painted the first real-time synopsis of a Wall Street blowup using executives’ own haunting words.

In a call recorded by the firm in October 2011, for example, the firm’s global treasurer acknowledged to a colleague that MF Global was “skating on the edge,” without “much ice left.”

In another call that month, the global treasurer indicated that the firm’s liquidity “situation” was “not sustainable” and that “we have to tell Jon that enough is enough. We need to take the keys away from him.” Mr. Corzine, who inherited a firm in 2010 that lost money in each of the previous three years, nicknamed this person “the Gravedigger.”

If found liable, Mr. Corzine and Ms. O’Brien could face fines and possibly a ban from trading commodities. Such a ban would deliver a blow to Mr. Corzine, 66, a onetime titan of Wall Street and Washington.

But Mr. Corzine, who no longer appears to be drawing scrutiny from criminal authorities, has indicated that he will fight the civil charges. Andrew J. Levander, Mr. Corzine’s lawyer, denounced what he called “an unprecedented lawsuit based on meritless allegations that Mr. Corzine failed to supervise an experienced back office professional who was located in a different city and who did not report to Mr. Corzine or even to anyone who reported to Mr. Corzine.”

Mr. Levander added that Mr. Corzine “did nothing wrong, and we look forward to vindicating him in court.”

Steven Goldberg, a spokesman for Mr. Corzine, said the trading commission’s lawsuit “is not surprising considering the political pressure to hold someone liable for the failure of MF Global,” the largest Wall Street bankruptcy since the 2008 financial crisis.

In suing Mr. Corzine, the agency took an unusually hard line against a Wall Street executive, setting up a legal battle that could drag on for years. Unlike other regulatory agencies, which often settle with defendants without extracting an admission of guilt, the agency also obtained an acknowledgment of wrongdoing from MF Global’s estate. As part of the announcements on Thursday, which thrust the once-obscure trading commission onto its biggest stage, the commission imposed a $100 million fine on the estate.

“This is a bellwether case for the commission following an exhaustive investigation,” said Bart Chilton, a commissioner at the agency who has railed against the breach of customer accounts.

As MF Global teetered on the brink of collapse, employees in Chicago transferred customer money to plug holes in the firm’s own accounts, causing a shortfall for clients like hedge funds and farmers, whose money vanished into banks and clearinghouses.

But now, the trading commission’s settlement deal with MF Global is expected to spell relief for MF Global customers, who have already recovered about 89 percent of their money. In a statement on Thursday, a spokesman for the brokerage firm’s trustee said he would seek court approval “to bring customer distributions up to 100 percent.”

Despite the recovery of money, the trading commission took aim at Ms. O’Brien, accusing her of “aiding and abetting the firm’s misuse of customer funds.” The trading commission, citing Ms. O’Brien’s e-mails and recordings of her frantic late-night phone calls, claimed she had known that certain transfers were improper.

When Ms. O’Brien, for example, sought to transfer $325 million from customer funds to an MF Global account at the Bank of New York Mellon, the bank sought assurances that she was complying with federal regulations. Ms. O’Brien explained that the transfer was technically legal, though the trading commission said that she “deliberately” had not copied other employees on her e-mail because, as she later told a colleague, “I don’t want to take anyone down with me.”

In another call cited by the commission, Ms. O’Brien told two employees that at least $530 million had been transferred from customer accounts and that it would be “game over” unless some was returned. “From a regulatory perspective?” one employee asked. “Yep. Yep, it could be,” she replied.

Mr. Corzine faces a lighter charge than Ms. O’Brien. He was accused of failing to supervise the firm, stemming from a breakdown in the firm’s controls.

The trading commission, for example, blamed Mr. Corzine for allowing the firm to violate its own internal policies for protecting customer money. On Oct. 6, 2011, according to the agency, Mr. Corzine told an employee that the firm should temporarily avoid drawing on a credit line from its bank, even if that meant going “negative” in the customer accounts, a plan that was technically legal but violated firm policy.

The trading commission also plans to level a second charge that could be more difficult to prove. In claiming “control person liability,” the agency must show that Mr. Corzine “did not act in good faith.” While that poses a steep challenge given the lack of a smoking gun, the agency cited a number of e-mails and calls that raise questions about Mr. Corzine’s control of the firm.

On the evening of Oct. 27, an employee warned Mr. Corzine that Ms. O’Brien was still waiting for banks to return some wire transfers. In reply, Mr. Corzine asked if she had received “enough to be in compliance,” and the employee responded “no.” It is unclear whether “compliance” referred to firm policy or federal regulations.

That same evening, Mr. Corzine was informed that while MF Global had plenty of available assets, only $82 million was in cash. The next morning, he was informed that a clearinghouse was demanding twice that amount and that JPMorgan Chase was seeking $134 million to patch an overdrawn account.

Minutes later, he told Ms. O’Brien to meet JPMorgan’s demands, telling her that it was “the most important thing” she could get “done that day.”

The trading commission blamed Mr. Corzine for not telling her to ensure the protection of customers, given that the firm had the paltry $82 million in cash to fix much larger demands.

Other e-mails, however, point to a potential defense for Mr. Corzine. He was informed, for example, that the firm had about $600 million worth of securities and other assets that it could use to meet the demands of the clearinghouse and JPMorgan, an argument Mr. Corzine previously made when testifying before Congress. And in another e-mail, Ms. O’Brien explicitly stated to Mr. Corzine that the transfer to JPMorgan was a “house wire,” meaning it came from the firm’s accounts, not from customers.