The "negligent conduct" of Jon Corzine and other officers of the MF Global Holdings Ltd brokerage contributed to the firm's dramatic collapse in 2011, according to a report by the bankruptcy trustee.
The report by former FBI director Louis Freeh said the failure of MF Global's officers contributed to losses of as much as $2.1 billion and adds to the growing number of reports and investigations pointing to their liability.
Freeh has prepared a lawsuit against former executives for breaches of fiduciary duty, but had not filed it pending the outcome of talks with a mediator appointed in a separate securities class action, according to the report.
Freeh's 124-page document blamed the collapse on "the risky business strategy engineered and executed by Corzine and other officers and their failure to improve the company's inadequate systems."
While the report was sharply critical of Corzine's conduct, it did not focus on one of the biggest mysteries of the MF Global collapse: the misappropriation of funds from customer trading accounts.
A spokesman for Corzine dismissed the report as "Monday morning quarterbacking" that ignores that Corzine took over a money-losing business and with board oversight began to improve its performance.
MF Global collapsed into bankruptcy in October 2011, less than two years after Corzine, a former New Jersey governor and Goldman Sachs chief, became CEO.
Corzine sought to transform the business into a global investment bank and pursued an aggressive strategy of betting on the sovereign debt of European countries such as Ireland and Portugal.
As Europe's economies weakened in the middle of 2011, MF Global was required to meet margin calls on its trades. Regulators have found that there was an unprecedented use of money in customer trading accounts to cover liquidity gaps as the company teetered on the brink.
Freeh's report found that reporting systems were lacking and failed to alert the company that customer money was being used.
"These glaring deficiencies were long known to Corzine and management, yet they failed to implement sufficient corrective measures promptly," Freeh wrote in the report.
Corzine's spokesman, Steven Goldberg, said in a statement the blame for MF Global's collapse rested with those outside the company.
He said the report "intentionally ignores the failure of counterparties to fulfill their commercially contracted obligations to MF Global and the profound impact this failure had on MF Global's customers and other stakeholders."
Freeh was appointed by the U.S. Bankruptcy Court in Manhattan to oversee the company's liquidation for the benefit of creditors.
His responsibilities include pinpointing possible legal liabilities of the management, and he singled out the "failures" of Corzine, former chief operating officer Bradley Abelow and former chief financial officer Henri Steenkamp.
The three "contributed to the losses suffered by Holdings Ltd and FinCo, which the trustee estimates to be between $1.5 billion and $2.1 billion."
Freeh's report follows several investigations by regulators as well as by a separate trustee appointed to recover funds for customer trading accounts. An attorney who is leading a class action on behalf of trading clients said Freeh's report did not reflect that it is unprecedented to have a shortfall in customer trading accounts in the failure of a brokerage.
"Negligence isn't strong enough to describe the conduct of Corzine and the other officers," said Merrill G. Davidoff, an attorney with Berger & Montague. "I think he is understating the scope of the problem."
Freeh's report does not use the word "criminal," although Edith O'Brien, an assistant treasurer at MF Global's brokerage business, invoked her Fifth Amendment right against self-incrimination when called to appear before lawmakers last year.
Freeh said in a footnote in the document that he believed the customer shortfall was as small as $6 million and that there might even be a $120 million surplus. Davidoff said the shortfall was in the "hundreds of millions dollars."
The trustee for the trading clients, James Giddens, has said he expects to recover at least 93 percent of their funds.
His spokesman said in a statement on Thursday that the remaining shortfall may be reduced by recovering money from former officers and directors of MF Global Holdings, the auditors and the Chicago Mercantile Exchange.
Many of the lawsuits over MF Global's collapse have been consolidated in federal court in Manhattan.
On Friday, U.S. Bankruptcy Judge Martin Glenn will be asked to approve MF Global's plan of liquidation. General unsecured creditors of the holding company are expected to collect between 14.7 cents and 34 cents on the dollar of what they are owed, according to court documents.
The case is MF Global Holdings Ltd, U.S. Bankruptcy Court, Southern District of New York, No. 11-15059
(Reporting by Tom Hals in Wilmington, Delaware; editing by Gerald E. McCormick and Matthew Lewis)