Yesterday, the Commodity Futures Trading Commission (CFTC) took an action that regulators have rarely attempted since the 2008 financial crisis: trying to hold a CEO personally accountable for “failure to supervise.”
The agency’s civil action against former MF Global chief executive Jon S. Corzine raises a basic question about government enforcement efforts in the aftermath of the crisis: If regulators have had a hard time proving that top Wall Street executives engaged in fraud, why haven’t they instead charged more people—and more senior people—with failure to supervise?
“Failure to supervise diligently” was one of several civil charges the agency brought against Corzine, the former U.S. Senator and Governor of New Jersey who was at the helm of MF Global when the firm imploded and misplaced about $1 billion in customer funds.
The charge has been noticeably absent in many other enforcement actions.
In one of the other rare cases in which it was used, the CFTC ordered Goldman Sachs to pay a $1.5 million civil penalty for failing to diligently supervise its employees, but no individuals were charged. In a case related to the financial crisis, the Securities and Exchange Commission (SEC) brought a failure-to-supervise charge against TD Ameritrade and ordered the firm to repay customers $10 million, but it, too, did not charge any individual supervisors.
The SEC has used the enforcement tool against individuals in the more distant past. In 1992, it charged the CEO of Salomon Brothers and two other executives with failing to supervise a trader who submitted false bids in auctions of U.S. Treasury securities.
The new enforcement action against Corzine serves as a reminder that regulators may have the option of filing lesser charges against individual executives if they believe they would have a hard time proving fraud.
The CFTC alleged that Corzine was “aware of the firm’s true low cash balance, even as he directed the firm to continue paying large obligations without inquiring how the firm could come up with the money to do so.” He “knew that the firm violated its own policy that had been designed to protect customer funds,” the agency said.
The CFTC also charged Edith O’Brien, the former assistant treasurer of MF Global, with aiding and abetting the firm’s misuse of customer funds. The agency is seeking to impose a $100 million penalty against the company, and to ban Corzine and O’Brien from trading commodities in the future.
The CFTC’s complaint includes excerpts of previously unreleased phone calls with MF Global executives, which could help the agency makes its case against Corzine and O’Brien.
In one call, a company treasurer said the firm was “skating on the edge” without “much ice left.” He said the company needed to “take the keys away” from Corzine, who referred to the treasurer as “the Gravedigger.”
In another call, Corzine told an employee to “raise hell” to cover the missing funds, but he “did not receive assurances that the funds were returned,” according to the complaint.
At one point, Corzine resisted tapping a line of credit because he didn’t want to give the appearance that the firm was in financial trouble. He said the firm would avoid tapping into the credit even it meant “go[ing] negative” in the customer accounts, as The Wall Street Journal highlighted.
“Turning a profit is not the only job of the person at the top of a CFTC-regulated firm,” said David Meister, the agency’s enforcement chief. “Particularly in times of crisis, the person in control, like the CEO 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.”
Corzine’s lawyer called the CFTC’s action 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,” according to The New York Times.
A spokesperson for Corzine said the agency’s lawsuit is “not surprising considering the political pressure to hold someone liable,” the Times reported.