Corzine trial means more scrutiny for top executives

Last week’s decision by US District Court Judge Victor Marrero to allow the US Commodity Futures Trade Commission (CFTC) lawsuit against former MF Global CEO Jon Corzine to move forward is another reminder that regulators will be more aggressive at going after individuals for fraud and misconduct violations in 2014.

Judge Marrero’s decision gives the CFTC the chance to prove that Corzine should be held liable under the seldom used ‘control person’ provision of the Commodities Exchange Act, which says that the person in control of a business can be held personally liable for misconduct of employees of that business if that person acted in bad faith or induced the wrongful conduct. What senior executives will want to watch as this case moves forward is how the court will interpret what constitutes ‘acting in bad faith’ and ‘inducing wrongful conduct.’ Experts say current case law hasn’t established accepted standards for those issues, so no one is sure how the court will rule as the CFTC makes its case.

With Corzine as CEO, MF Global filed for Chapter 11 bankruptcy protection in October 2011 after getting margin calls on several losing investments in European sovereign debt. Last November the company’s brokerage unit was fined $100 million in connection with customer losses in the failure, but CFTC is pursuing additional legal action.

‘The CFTC’s exercise of the Commodity Exchange Act's ‘control person’ liability provision against a corporate CEO, like Corzine, in these circumstances raises the stakes and creates an uncertainty as to when senior managers may be charged personally for employee misconduct that they may not have even known about,’ says David Yeres, senior counsel at Clifford Chance law firm in New York. ‘This decision does nothing to constrain the broad prosecutorial discretion of the regulators who may feel public pressure to pursue senior executives for corporate wrongdoing.’

An experienced attorney who focuses on derivative legal matters, Yeres explains that the decision to allow the case to go forward sends a message to senior management to ‘spend time and resources in putting into place systems and controls that are tailored to their trading related operations and compliance risks, as well as to be personally responsive to red flags of wrongdoing.’

Additionally, Yeres says the main takeaways for companies and compliance officers are:

• Make sure that your corporate documents provide adequately for indemnifying officers for legal expenses, ‘because they could be sued just for being at the head of the organization.’ Most Delaware corporations do this already.
• There is likely no need to seek special D&O insurance coverage, but it may be a good time to check your policy and coverage limits.
• ‘For good corporate governance and for purposes of self defense, senior managers would be well advised to make sure there is an established a system of controls and supervision that is well suited to the nature and level of their participation in Commodity Exchange Act regulated markets,’ he emphasizes. ‘They could also, depending on their role, require proper training for themselves and their staff.’
• Finally, companies should create an environment where material compliance issues are reported up to the appropriate level of management and then followed up on.  ‘Turning a blind eye to a problem certainly could result in control person liability,’ Yeres says.