Jon Corzine’s Critics Want Him Banned From Futures Trading

Jon S. Corzine’s critics are making a renewed effort to halt the comeback attempt of the former head of MF Global Holdings more than a decade after the derivatives brokerage imploded and about $1 billion in customer money went missing.

(Bloomberg) — Jon S. Corzine’s critics are making a renewed effort to halt the comeback attempt of the former head of MF Global Holdings more than a decade after the derivatives brokerage imploded and about $1 billion in customer money went missing.

Three prominent executives in the futures industry are asking the US Commodity Futures Trading Commission to take another close look at Corzine and his young New York-based hedge fund, JDC-JSC. They claim the former New Jersey governor and US senator no longer qualifies for an exemption that allows him and the fund to trade a small amount of futures. His 2017 settlement with the regulator left him that room, but a subsequent rule change could eliminate it, they said.

Corzine, who once led Goldman Sachs Group Inc., wanted to make MF Global a Wall Street player. Instead, the brokerage fell into bankruptcy — one of the biggest in US history — setting off congressional and regulatory probes and prompting new restrictions on how brokers can invest customer funds. Critics say Corzine’s background makes him unwelcome in the industry.

“His continued ability to participate in our markets and our industry represents an indefensible failure of regulation,” Douglas Bry, president of Augur Trading Co., Ernest Jaffarian, CEO of Efficient Capital Management, and Martin Lueck, co-founder of Aspect Capital, wrote in a July 6 letter to the CFTC that was viewed by Bloomberg.  

The three men serve on the National Futures Association’s board of directors in the Commodity Pool Operators and Commodity Trading Advisors category. In the letter, they said they were speaking on their own behalf. They asked the CFTC to bring an enforcement action or pursue “whatever remedy is appropriate” to deny Corzine the exemption.

In a phone interview, Corzine said the hedge fund consulted with lawyers and has systems in place to ensure compliance with the rules of the exemption.

“We have strict rules,” he said. “We’ve programmed our computers to make sure all of that happens, and I don’t think there’s been any violation of any of those rules.”

The CFTC’s rule change has been reviewed with outside legal counsel, “and our outside legal counsel assured us that the firm still qualifies for the de minimis exemption,” said his spokesman, Steven Goldberg.

Corzine declined to comment on the letter, saying he wasn’t aware of it. A spokesman for the CFTC declined to comment.

Ultimately, Corzine paid $5 million to settle the CFTC’s case against him while neither admitting nor denying the allegations. The commission never directly tied him to the missing customer money, and Corzine has said that he never requested any misuse of customer funds.

The agreement’s careful wording allowed Corzine to navigate the intricacies of registration requirements. Though he was prohibited from registering with the agency or working as a futures commission merchant, he wasn’t explicitly barred from seeking an exemption from registration as a commodity pool operator, or CPO. Most large hedge funds have a CPO.

‘Legitimate Dispute’

In 2020, the CFTC tightened requirements. Under the rule change, firms and their principals seeking exemptions from CPO registration must not have “a statutory disqualification.” That includes registration bans or court orders that prevent someone from being involved in transactions or advice related to futures contracts, said David Slovick, a partner at Barnes & Thornburg and a former CFTC senior enforcement attorney. 

Nothing in the statute or in Corzine’s settlement clarifies whether he’s entitled to claim an exemption from registration as a CPO, said Slovick, who wasn’t involved in the CFTC case or any efforts by the letter’s authors.

“There’s a legitimate dispute here,” he said. “It is really up to the CFTC to decide whether they think what he’s doing is violating that provision.”

Two of the letter’s authors, Bry and Jaffarian, led an unsuccessful petition in 2019 to get the Securities and Exchange Commission to block Corzine’s registration as an investment adviser.

The SEC still placed restrictions on Corzine’s comeback by prohibiting him from trading his own capital separately from investor money. It also limited his hedge fund’s ability to invest in less-liquid assets.

JDC-JSC’s most recent regulatory filing discloses Corzine’s settlement. It also notes that he isn’t “restricted from acting as, or being affiliated with, an asset manager that is exempt from registration with the CFTC.”

JDC-JSC, which trades futures in areas such as interest rates and currencies, has claimed the exemption since 2018, according to regulatory filings. Corzine has listed three funds on Jan. 4 as exempt from registration, according to data from the National Futures Association. As of Dec. 31, 2022, his firm had about $510 million in regulatory assets under management, which can include leverage, according to an SEC filing in March. 

Fall From Grace

Corzine joined Goldman Sachs as a bond trader and rose to co-CEO before shifting to his political career. But it’s his time at the helm of MF Global that made him notorious. He joined the commodities and derivatives brokerage as CEO in 2010 with a vision of transforming it into a global investment bank focusing on proprietary trading. 

A series of risky bets in the European sovereign bond market — worth about $6 billion — led the firm to misuse customer accounts to cover a deepening hole in its own trading book as margin calls rolled in, the CFTC has said. The company went bankrupt in 2011.

In 2013, the CFTC sued MF Global and Corzine, alleging that the use of client cash to cover the company’s proprietary-trading obligations violated “fundamental customer protections on a scale never previously seen in the US futures markets.”

The regulator announced a settlement with MF Global in 2013, requiring the company to reimburse customers $1.2 billion and imposing a $100 million penalty. It took years for clients, including farmers, to recoup their funds through the bankruptcy process. 

(Updates starting in fifth paragraph on association board roles, SEC restrictions.)

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