Montana farmers trapped in the $41 billion collapse of brokerage giant MF Global are suing its officers and its business partners for trade violations.
The lawsuit filed Monday in U.S. District Court in Missoula targets not only MF Global CEO Jon Corzine, a former Democratic governor and U.S. senator, but also auditor Pricewaterhouse-Coopers and banker J.P. Morgan for enabling MF trading practices that last October led the nation's eighth largest bankruptcy.
Federal officials have been unable to find an estimated $1.2 billion in missing customer money. MF Global is accused of dipping into segregated customer accounts, which were supposed to be off-limits. Those customers, 38,000 of whom were farmers and ranchers engaged in commodity trades, were unaware that their accounts were being drawn down.
Investigators now believe that MF Global used client money to shore up bad investments in sovereign foreign debt.
“They bet the farm on European sovereign debt. I just didn’t realize it was my farm they were betting,” said Marty Klinker, a Fairfield farmer who had $600,000 frozen in the MF Global bankruptcy.
Klinker and other plaintiffs contend that auditor PricewaterhouseCoopers kept giving MF Global clean bills of financial health, even as customer accounts were raided. Had the auditor reported the activity, regulators for the Chicago Mercantile Exchange and the U.S. Commodities Futures Trade Commission might have been alerted.
A spokeswoman for PricewaterhouseCoopers said Monday that the company doesn’t comment on litigation.
Representing the farmers, attorney Matt Edling said PricewaterhouseCoopers should have scrutinized MF Global’s segregated accounts, not only because the broker was experiencing trouble but also because PricewaterhouseCoopers was at the time being investigated in Great Britain for telling regulators that client money at JP Morgan Chase was safe when funds were not.
Friday, Britain’s Accountancy Actuarial Discipline Board fined PricewaterhouseCoopers a record $2.2 million for not finding sufficient appropriate evidence that JP Morgan Chase wasn’t holding client money in segregated accounts.
British regulators in 2010 fined JP Morgan Securities $51.3 million for not keeping client accounts segregated. By not keeping client money separate, the bank risked taking its clients down with it had it become insolvent.
In the U.S. lawsuit filed Monday in Missoula, JP Morgan is accused of giving MF Global substantial assistance in converting segregated customer assets.
The lawsuit alleges that at one point, JP Morgan had given MF Global a $1.2 billion line of credit, which the broker had significantly drawn down.
MF Global didn’t have the money to pay its loan, which JP Morgan, as MF’s banker, should have realized, the plaintiffs allege. But MF Global still managed to make a payment, presumably with client money taken from segregated accounts, Edling said.
JP Morgan wrote MF Global asking if the money was, in fact, taken from client accounts. MF Global never responded and JP Morgan cashed the check anyway, Edling said.
None of MF Global’s takings from segregated accounts would have happened had its banker not obliged the transactions, according to the lawsuit.
“JP Morgan’s role wasn’t just a minimal role,” Edling said. “They were in on all MF Global’s major transactions. This was an institution that had their hands all over this. Jon Corzine might have robbed the bank, but JP Morgan and PricewaterhouseCoopers drove the getaway car.”
Attempts to seek comment from JP Morgan were unsuccessful Monday.
The trustee in the MF Global bankruptcy has assured clients a 72 percent asset recovery, but farmers are still waiting to be made whole. Klinker is still missing more than $160,000.
If customers receive 72 percent of their money, that will leave more than $300 million still unaccounted for, said Edling, who estimates that more than 1,000 Montana farmers and ranchers have suffered losses.
The other Montana customers filing suit Monday were Philip Timothy Johnson of Dutton; Wade Jacobsen of Sun River; and Rocking K Land and Cattle Inc., also of Fairfield and owned by the Klinker family.
The MF Global officials targeted by the lawsuit are CEO Jon Corzine; chief financial adviser Christine A. Serwinski; and David Simons, head of operations.
Corzine testified in congressional hearings that he personally was unaware of any money taken from segregated accounts.
The plaintiffs are seeking class-action status. They are represented by the Helena law firm Anderson, Baker and Swanson and the San Francisco firm Cotchett, Pitre and McCarthy.