By Douwe Miedema
WASHINGTON (Reuters) - A top U.S. regulator charged former MF Global chief Jon Corzine over the collapse of the futures brokerage, blaming the former Goldman Sachs co-chief executive with being a key actor in one of the country's 10 biggest bankruptcies.
The Commodity Futures Trading Commission said on Thursday it will seek in a civil case to ban Corzine and former Assistant Treasurer Edith O'Brien from the industry, and also seek penalties against the two.
"Mr. Corzine is charged with being more than a passive actor in the downfall of MF Global," CFTC enforcement head David Meister said on a call with journalists. "He lacked good faith and ... violated his supervision obligations."
The CFTC also settled with MF Global Inc, which agreed to pay a $100 million penalty and funds still owed to customers, but will continue to pursue MF Global Holdings Ltd.
The futures brokerage collapsed in October 2011 under the weight of aggressive bets on European sovereign debt, after Corzine - a former New Jersey governor and U.S. senator - sought to transform the brokerage into a global investment bank.
But investors quickly lost confidence in the company's health when the European economy weakened in the middle of 2011, asking MF Global to put up more money to secure the trades, and causing its remaining cash to rapidly vanish.
Customers were left reeling after it was discovered that about $1.6 billion was missing from their accounts and that the company had used the money to stop gaps in its business, which unlawful and caused a political fire storm.
"This is an unprecedented lawsuit based on meritless allegations," said Andrew Levander, a lawyer for Corzine. "Mr. Corzine did nothing wrong, and we look forward to vindicating him in court," he said.
O'Brien's lawyer had no immediate comment.
In its investigations, the CFTC found that MF Global's company treasurer was describing the liquidity situation as "skating on the edge" and recommended to "take the keys away" from Corzine, which did not happen.
Corzine has often struck a defiant tone when testifying in late 2011 before lawmakers about the debacle, pointing the finger at back-office dealings he had no insight in, and denying knowledge of any instructions to misuse customer funds.
And O'Brien invoked her constitutional right against self-incriminated and refused to answer questions when called to testify. But the CFTC's complaint places the two firmly at the heart of the $41 billion bankruptcy.
In the last week the company existed, Corzine was aware of its true low cash balance, but he continued to pay large obligations, the CFTC said in its complaint.
"Our investigation also recovered an audio recording of (O'Brien) saying to a colleague that it could be 'game over' from a regulatory perspective if the customer funds weren't returned," Meister said on the call.
"Given what (the CFTC) must have perceived to be the challenges of the facts I think they've crafted a complaint that lays out a good theory," said Gary DeWaal, who formerly worked as a senior trial attorney for the agency. "From a drafting perspective, the complaint tells a complete story," he said.
But another lawyer, asking to speak anonymously, said there was little in the complaint that pointed to fraud, reducing chances of any criminal charges.
But U.S. Representative Michael Grimm, a New York Republican, urged prosecutors to bring criminal charges against Corzine, saying there was growing proof that he had committed perjury in his testimony before lawmakers.
The CFTC also sought an order for Corzine and O'Brien to disgorge any salaries or bonuses, or trading profits, that they had received from any unlawful actions.
Louis Freeh, the trustee liquidating MF Global, has said in the past he believed customers would get all their money back when the company in April won court approval to liquidate its assets, and end its $40 billion bankruptcy.
Most customers have already been reimbursed for about 93 percent of the value of their accounts.
There was praise from across the political spectrum for the CFTC's action. Senator Debbie Stabenow, a Michigan Democrat, and Texas Republican Congressman Randy Neugebauer cited the importance of futures markets for farmers, who use them to protect against wild swings in commodity prices.
But not everybody was happy.
"I don't think the penalty is high enough," said Dean Tofteland, a Minnesota farmer, who is still missing about $20,000 he had at MF Global when it collapsed.
"Apparently there's still this mindset out there that people can get away with stuff like this if you're well connected like Jon Corzine is," he said.
(Additional reporting by Emily Stephenson and Sarah N. Lynch in Washington, Karen Freifeld, Emily Flitter and Nick Brown in New York and Tom Polansek in Chicago, Editing by Karey Van Hall, Gerald E. McCormick and Steve Orlofsky)