Why Isn't Jon Corzine in Custody?

On Oct. 28, MF Global transferred $200 million of client funds to cover a $175 million shortfall in accounts held by JPMorgan Chase (NYS: JPM) in London. Then-CEO and former New Jersey Gov. Jon S. Corzine authorized the transfer, Bloomberg reported on Friday. A memo describing the details of the circumstances of the order has since appeared on the document-sharing site Scribd.

Finally, the finger-pointing begins
We've been investigating MF Global's collapse for months now. In that time, we've seen the count of missing customer funds run from $600 million to $900 million to $1.2 billion to $1.6 billion as of this writing. No one will be surprised if the total continues rising.

What's changed is our knowledge of how the money got lost. Corzine apparently authorized the $175 million transfer to Chase, which CME Group (NYS: CME) chairman Terry Duffy hinted at in testimony before Congress in December.

The memo fills in details that Duffy either didn't know at the time or left out. In response to an email from Treasurer Vinay Mahajan on Oct. 28, the memo says Edith O'Brien, MF Global's assistant treasurer, wrote that the transfer to Chase was authorized, "per JC's direct instructions," with "JC" referring to Corzine.

Read the entire memo for a greater sense of the apparent panic that had gripped the firm. O'Brien's email is merely the so-called 'smoking gun.' It isn't much of one, though. Here's the most troubling section of the memo:

[Chase] sought to validate the appropriateness of the transfer. ... Chief Risk Officer Barry Zubrow called Mr. Corzine directly to seek assurances that the funds transferred to cover the overdraft were excess funds that belonged to MF Global and not customer funds. [Chase] then sent Mr. Corzine a draft letter to be signed by Ms. O'Brien, seeking broad assurances that all transfers -- past, present, and future -- from MF Global's [Chase] segregated customer accounts complied with the [Commodity Futures Trading Commission's] segregation rules. Laurie Ferber, General Counsel for MF Global Holdings, reviewed the letter, but thought it was too broad and sought to restrict the letter's scope to the October transfer.

Unwinding what went where and why has proved to be so byzantine a task that trustee Louis Freeh, a professional investigator who once served as director of the FBI, is seeking to pay bonuses to insiders who stay on to help find and recover the missing $1.6 billion. Things are looking up, though; in fact, we may well be reaching a turning point in the investigation.

What Corzine might have known, and why it matters
In a critical piece of reporting, The New York Times is writing today that an executive in MF Global's Chicago office informed Corzine by email that the Chase transfer had been completed as a "house wire," indicating that the funds were being transferred from an MF Global house account rather than from a customer account.

While this was technically true, the $200 million in question had already been moved to the house account by the time of the transfer. Thus, if we presume there was a crime, it occurred before Chase saw a dime, which makes O'Brien's claim the money was sent "per JC's direct instructions" mostly irrelevant.

What's more, according to his testimony before Congress, Corzine sought -- and received -- assurances directly from O'Brien that the wired funds did not belong to customers. Neither O'Brien's email nor the memo produced by House investigators offers evidence contradicting this claim.

Where the heck is the FBI?
The combination of O'Brien's email and the information unearthed by the Times adds to a mounting body of evidence that criminal misconduct occurred during MF Global's final days. Trouble is, we don't know who orchestrated the crime, when, and for what purpose.

Corzine has yet to be questioned by the FBI or prosecutors. Meanwhile, O'Brien has refused to cooperate and will be invoking her Fifth Amendment right against self-incrimination at this week's House Financial Services Committee hearing.

Calling for the orange jumpsuit at this point, before all the evidence is in, would be a mistake. Yet while the guns may no longer be smoking, they're undoubtedly warm. Warm enough, we think, to elevate this case from the vapid posturing of the People's House to the threat of time in the Big House.

We need to know what Corzine knew and when he knew it. We need the same from O'Brien. In fact, we need on-the-record statements from every MF Global employee who's testified before Congress. In short: We need to see regulators treating this like the criminal case it appears to be. But that's going to happen only if the FBI starts treating Corzine, O'Brien, and their former co-workers like witnesses.

What do you think? Should Corzine and O'Brien be called in for criminal questioning? Left alone barring further evidence of fraud at MF Global? Weigh in using the comments box below.

At the time thisarticle was published Fool contributorsTim BeyersandAlex Dumortierare members of the Motley Fool team investigating the collapse of MF Global. Tim is also a member of theMotley Fool Rule Breakersstock-picking team. Neither Tim nor Alex owned shares in any of the companies mentioned at the time of publication.The Motley Fool owns shares of CME Group and JPMorgan Chase. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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