WASHINGTON, DC - Jon Corzine (L) testifies during a hearing before the Oversight and Investigations... [+]
The Commodity Futures Trading Commission (CFTC) sued former
For an agency that has long operated as a junior financial regulator to the Securities and Exchange Commission (SEC) and has little experience in bringing high profile white collar cases, the civil lawsuit launches the CFTC into new territory.
Corzine, a former Governor and Senator from New Jersey who once served as the co-chairman of Goldman Sachs, is the type of highly-acclaimed Wall Street insider accused of wrong-doing that has historically been the target of the SEC and the Department of Justice. The departure from this trend makes this an interesting case, one that may begin to redefine the role played by the CFTC and other less well-known financial regulators.
The CFTC's allegations against Corzine are both straightforward and complex. In a lawsuit filed in a federal court in Manhattan, the agency blames Corzine for trying to transform the commodities broker into an investment banking heavyweight upon his arrival at the helm in 2010. The attempt, according to the CFTC, led to MF Global's downfall.
The alleged mismanagement, of course, is not a crime.
The agency then details MF Global's desperate efforts to stay afloat in 2011 as its investments in European government bonds went awry. With MF Global crumbling under a mountain of debt, it allegedly tapped $1 billion worth of customer accounts, which are supposed to remain separated from the firm's proprietary accounts, to meet its liquidity needs.
This is where it gets tricky. The CFTC doesn't accuse Corzine of ordering the firm's plunge into customer accounts. Instead, it accuses him of either not acting in good faith or knowingly inducing the violations and of failing to "supervise diligently the activities" of MF Global's employees.
At the end, the CFTC blames Corzine for the actions that went wrong under his watch. In the agency's eyes, he either caused the violation or should have been able to prevent it under the circumstances.
Provisions of the Commodity Exchange Act do hold supervisors responsible for the wrongdoing of their subordinates as long as they did not act in good faith or knowingly induced the violation. This kind of standard, where senior managers are held responsible for the misdeeds of those they oversee, has been an elusive one for regulators to apply since the 2008 financial crisis.
It will be interesting to see whether the CFTC can pull this off, especially against a high-profile opponent who will have the resources to fund a top-notch legal team.
As a civil lawsuit, the CFTC will not have to overcome a high burden of proof. It only needs to prove that its allegations are more likely than not to be true. This is a much lower hurdle than the "beyond a reasonable doubt" standard used in criminal prosecutions. But even in the civil setting, financial regulators have struggled to win cases: last year, the SEC lost a case against Bruce Bent involving money market funds.
The CFTC, which does not have a long track record in pursuing high-profile cases, is stepping into the unknown. A victory or significant settlement with a former Wall Street titan might push the obscure agency further into the limelight and invite other less-known regulators to lurch into the forefront. A defeat, however, might return the regulatory landscape back to its historic norm.
