As we have chronicled from the first week that MF Global declared bankruptcy, the mystery of the missing “sacrosanct” segregated client funds was not something that could be explained away with run-of-the-mill corporate incompetence and executive malfeasance. If investors cannot trust the custodian of their brokerage funds, the system cannot work.

Friday we learned from a memo prepared by congressional investigators that the person of interest for directing segregated client funds be used as collateral for MF Global’s bad bets is non other than Ex- MF Global CEO, Ex- New Jersey Governor, Ex – NJ Senator, Ex- Goldman Sachs Co-CEO – Jon Corzine. Surprise. The memo describes background material for a March 28 House Financial Services subcommittee hearing focused on the firm’s collapse:

“Edith O’Brien, a treasurer for the firm, said in an e-mail quoted in the memo that the transfer was “Per JC’s direct instructions” according to a copy of the memo obtained by Bloomberg News. The e-mail, dated Oct. 28, was sent three days before the company collapsed…

O’Brien’s internal e-mail was sent as the New York-based broker found intraday credit lines limited by JP Morgan, the firm’s clearing bank as well as one of its custodian banks for segregated customer funds… Vinay Mahajan, global treasurer of MF Global Holdings, wrote an e-mail on Oct. 28 that said JP Morgan was “holding up vital business in the U.S. as a result” of the overdrawn account, which had to be “fully funded ASAP,” according to the memo.

Barry Zubrow, JP Morgan’s chief risk officer, called Corzine to seek assurances that the funds belonged to MF Global and not customers. JP Morgan drafted a letter to be signed by O’Brien to ensure that MF Global was complying with rules requiring customers’ collateral to be segregated. The letter was not returned to JPMorgan…”

Looking back at Jon Corzine’s statements before congressional committees investigating MF Global’s failure, it is clear that he knew that e-mail was out there. He used the committee hearing to lay the groundwork for a “he said / she said” defense vis-a-vis treasurer Edith O’Brien.

In his December testimony to the House Committee, he was asked the relevant question. CNBC:

“Questioned directly about the transactions leading to over $1 billion in missing client funds, Corzine could not offer clarification.”I never intended to break any rules. I’m not in a position given the number of transactions to know about the movement of any specific funds. I certainly would never intend to have segregated funds moved,” said Corzine.”

The operative word is “intend”. He was misunderstood. Just a simple CEO with a routine request that an employee solve a problem to prevent the company from crashing down all around them. He had no idea that his company treasurer would misinterpret his instruction to mean transfering segregated client funds to JP Morgan. That may be what happened, but that wasn’t his intent. Certainly not.

The preemptive defense becomes more explicit in this bit from the December Agricultural Committee hearing as reported by the Huffington Post:

“Lawmakers asked Corzine to lay out how he may have “unintentionally” contributed to the mixing of customer and firm money. He pointed to the chaos of the hours leading up to MF Global’s bankruptcy filing on October 31. “Someone could misinterpret ‘You gotta fix it,’ which I said the evening of October 30th,'” Corzine said.”

October 30th is two days after O’Brien’s e-mail specifying the money transfer was “Per JC’s direct instructions”. Let’s be fair. It is possible that O’Brien’s JC reference was not referring specifically to Jon Corzine. Perhaps O’Brien has a close personal relationship with Jesus Christ. Many do.

– Or – Perhaps O’Brien simply misunderstood JC’s intent. “You gotta fix it” could easily be misinterpreted to mean something like Raid the client accounts if you have to, but get me the time to sell this piece of crap before the street figures out we’re insolvent.” That kind of misunderstanding happens all the time.

Consider the off-the-cuff remark by King Henry II: “Will no one rid me of this meddlesome priest?”. He makes an innocent statement, it is overheard by nearby corporate treasurers knights in his employ, and the next thing he knows, the Archbishop of Canterbury is lying in a pool of his own blood.

These things happens. Nobody was really at fault. He was simply misunderstood. All he said was “Just fix it.”

Let’s call it The Becket Defense.

But should that defensive posture not pass the smell test, perhaps we should accept that the correct conclusion is derived from the simplest compilation of the Clues – It was Mr. Corzine, in the Boardroom, with the “Smoking Gun” E-mail.

Cross posted from “The Dividist Papers

Business Let's play "Clue" – Was it Mr. Corzine in the Board Room...