Jonathan Ernst/ReutersJon S. Corzine, MF Global’s former chief executive, listens to a question during his appearance at a House hearing on his firm’s demise.Whether criminal charges will be filed over transfers of customer funds in the final days before MF Global collapsed in October 2011 may hinge on what was said by executives at the firm trying to keep it alive.
Like many white-collar crime investigations, this one has uncovered a trail of e-mails that gives a framework, but the recollections of the participants will be crucial to determining whether prosecutors can build a criminal case.
A memorandum released by the House Financial Services Committee in advance of a hearing this week quotes an e-mail sent by Edith O’Brien, an assistant treasurer, stating that an important $175 million transfer to JPMorgan Chase from an MF Global account was made “per JC’s direct instructions,” referring to the firm’s chief executive, Jon S. Corzine.
DealBook has reported that another e-mail to Mr. Corzine at the same time indicated the funds were drawn from a “nonseg” account, meaning they did not include any customer money.
A crucial question is what “instructions” were provided to Ms. O’Brien. They do not appear to have been communicated by e-mail, so most likely they were transmitted verbally. This may well set up a classic “he said, she said” situation.
A spokesman for Mr. Corzine asserted that he “never directed Ms. O’Brien or anyone else regarding which account should be used to cure the overdrafts, and he never directed that customer funds should be used for that purpose. Nor was he informed that customer funds had been used for that purpose.”
Ms. O’Brien has been subpoenaed to testify at the subcommittee hearing, and she has indicated she will assert her Fifth Amendment right against self-incrimination and refuse to answer questions. She has also declined to provide information to criminal and civil investigators looking into MF Global’s collapse, requesting a grant of immunity from prosecution before discussing the matter.
While the e-mails from Ms. O’Brien clearly show Mr. Corzine was involved in the transfer, they also do not indicate whether he was aware customer funds were being used.
Still, it should not come as a surprise that there is no “smoking gun” out there showing that criminal conduct occurred.
White-collar cases are frequently built on circumstantial evidence like e-mails and brief conversations that may be subject to conflicting interpretations about what was actually meant. Meaning is derived not only from the particular words used, but also the tone of the communication, which may well direct a person to take action without regard to the consequences. Rarely is there a document in which a person reveals an intent to commit a crime.
It should be noted that neither Ms. O’Brien, Mr. Corzine nor anyone else at MF Global has been accused of wrongdoing.
A statute that is likely to play an important role in any potential criminal case is a provision of the Commodity Exchange Act, 7 USC § 13(a)(1). The statute makes it a crime to “to embezzle, steal, purloin, or with criminal intent convert to such person’s use or to the use of another, any money, securities, or property having a value in excess of $100” from a customer of a futures or commodities broker. A violation is punishable by up to 10 years in prison and a $1 million fine.
The term “criminal intent” can be interpreted to require prosecutors to prove at least that a defendant acted with knowledge that a transaction would take — “convert” — client funds for an improper purpose, which could include covering a firm’s own financial obligations. One potential avenue for proving intent would be through “willful blindness,” which means a defendant was on notice of potential problems and purposely chose to remain ignorant of the likely violation.
The House Financial Services Committee memorandum highlights the liquidity crisis MF Global faced as a result of rating downgrades prompted by its investment in European sovereign debt securities. The $175 million transfer took place while the firm faced repeated calls for additional capital, which can be viewed as a red flag regarding all of its financial transactions.
Moreover, JPMorgan questioned the source of the funds transferred, asking MF Global for written assurances that customer funds had not been used. The level of concern expressed by a counterparty to a transaction indicates that there were questions being raised about whether customer money was properly segregated, another red flag that could be used as evidence to establish willful blindness if charges were pursued against any individuals.
What is missing at this point is the “she said” side of the equation, because Ms. O’Brien is unlikely to say exactly what “instructions” she received without some protection from future prosecution. The question is whether prosecutors or Congress are willing to grant her immunity before they know what testimony she can provide and whether she is credible.
Prosecutors are hesitant to grant immunity or enter into a cooperation agreement with a witness until they have some indication what the person will say — they are averse to buying the proverbial “pig in a poke.” If it turns out immunity was given to the person primarily responsible for a violation, then prosecutors lose the opportunity to punish that person and instead have to rely on the most culpable participant to build a case against others.
The usual means to deal with this problem is to have a potential witness’s attorney make a “proffer,” which is a description of the information that can be provided but is not a statement that could later be used against the witness. At this point, however, it does not appear there has been a proffer about what Ms. O’Brien might say regarding her conversations with Mr. Corzine or others at MF Global related to account transfers.
Congress is also permitted to seek an order of immunity from a federal district court to compel a witness to testify under 18 U.S.C. § 6005. The problem is that granting immunity means it would be very difficult to ever prosecute the witness in the future.
Under the federal immunity statute, 18 U.S.C. § 6002, prosecutors are prohibited from introducing a person’s statement in a subsequent case and from using “any information directly or indirectly derived from such testimony or other information” — the so-called “fruits” of the statement.
Congress learned a lesson about granting immunity to witnesses in the prosecutions of Oliver North and John Poindexter for their testimony in the Congressional investigation of the Iran-Contra affair. The United States Court of Appeals for the District of Columbia Circuit reversed their convictions because the Justice Department could not show that their immunized testimony provided in Capitol Hill hearings had not effected the evidence used against them at trial.
So it is unlikely the House will seek immunity for Ms. O’Brien at this point, and will leave the ultimate decision to prosecutors. She may be castigated at an upcoming Congressional hearing for asserting her Fifth Amendment right against self-incrimination, but that will not shed any new light on the MF Global transfers.