Corzine Accepts Prop Trading Ban in His Wall Street Resurrection
Corzine Accepts Prop Trading Ban in His Wall Street Resurrection
(Bloomberg) -- Jon Corzine’s commodities firm blew up the last time he was trading on Wall Street. Now regulators want to make sure his new hedge fund doesn’t suffer the same fate.
The Securities and Exchange Commission will place a series of restrictions on the firm Corzine is using to stage a comeback, according to a June filing. The most humbling: an unusual ban on the wagering of his own capital separately from investor money. It was this kind of proprietary trading that helped sink his prior firm, MF Global Holdings Ltd., eight years ago.
It’s a remarkable turn of events for Corzine, whose gilded pedigree in finance and national politics was tarnished when MF Global went bankrupt and he was banned from the futures industry. Indeed, his new fund, JDC-JSC Opportunity Fund, has failed to generate the buzz -- or the money -- that could be expected from the former co-chairman of Goldman Sachs Group Inc.
Corzine’s firm, JDC-JSC, which bears his initials and those of his late son Jeffrey, launched early last year in New York. Corzine, 72, who served as a Democratic U.S. senator and governor of New Jersey, aimed to meld his experience on Wall Street and Capitol Hill to anticipate how President Donald Trump’s policies would affect markets.
He set a goal of raising $100 million to $300 million in outside capital during his first year of trading. But the Opportunity Fund had only taken in about $53 million from U.S. investors as of early February, according to filings.
The total changed in late March, when the fund reported that its regulatory assets exceeded $600 million. At least some of the 12-fold jump in assets stems from leverage, which firms must include when reporting to the SEC.
SEC Agreement
Since the firm’s regulatory assets surpassed $150 million, it had to apply to register with the SEC. While the regulator automatically approves most applications, it can reject managers who have a disciplinary record, including violations of the Commodity Exchange Act.
A JDC-JSC lawyer worked with the SEC to develop the restrictions to improve the likelihood that regulators would grant the registration in the wake of the meltdown of MF Global, according to an industry source. Corzine and an SEC spokesman declined to comment.
In a proposed agreement with the SEC, Corzine can put personal capital in the Opportunity Fund, but is prohibited from trading his own money in a separate pool at the firm, the industry source said. Some managers do set up internal funds to trade money from principals or employees. Corzine’s startup must also adopt procedures to protect customer cash and hire an independent compliance consultant, among other limits.
‘Eyes on Him’
“It’s more of a burden, but it’s not insurmountable” for Corzine, said Jason Scharfman of Corgentum Consulting, which provides due diligence on hedge fund and private equity managers. “There are going to be more eyes on him, but as a result, he will be more careful and more insulated.” Scharfman hasn’t worked for Corzine.
The limits reflect events at MF Global that unfolded after Corzine became chief executive officer in 2010. Seeking to boost trading revenue, he employed the firm’s capital plus leverage to make at least $6 billion in proprietary bets on European sovereign debt.
When the firm got hit by a cash crunch tied to the trades in 2011, some $1 billion in client funds went temporarily missing and MF Global was forced to file for bankruptcy. The Commodity Futures Trading Commission later filed suit against MF Global and Corzine, stating that the use of client cash to cover the firm’s obligations violated customer protection rules “on a scale never previously seen in the U.S. futures market.”
Corzine in January 2017 settled allegations that he failed to properly supervise the firm by paying a $5 million penalty and consenting to the lifetime ban from the futures industry. He didn’t admit or deny wrongdoing.
The CFTC didn’t block Corzine from other parts of Wall Street, providing him with the leeway to start his hedge fund. Now he has to win SEC approval to expand it.
“If Corzine wants people to give him money, he will do what he has to do to make sure that happens,” Scharfman said.
To contact the reporters on this story: Miles Weiss in Washington at mweiss@bloomberg.net;Hema Parmar in New York at hparmar6@bloomberg.net
To contact the editors responsible for this story: Alan Mirabella at amirabella@bloomberg.net, Vincent Bielski, Josh Friedman
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