By Dan Primack
November 2, 2011

This may just be the beginning of Jon Corzine’s troubles.

Jon Corzine is unlikely to ever again work in finance, after overseeing this week’s collapse of brokerage MF Global. But he may have much bigger things to worry about. Like going to jail.

Federal officials reportedly say that MF Global (MFGLQ) has admitted to transferring hundreds of millions of dollars of client money into company accounts, perhaps to cover investment losses. This is on top of Craig Donohue, CEO of the Chicago Mercantile Exchange, saying that MF Global wasn’t “in compliance” with the CMOE’s cash management regulations.

“The first thing you learn on the first day of your first financial job is that client money is not to be mixed with corporate money,” says a source familiar with MF Global. “Nobody could have done this by accident.”

Corzine has not commented publicly on MF Global’s collapse, let alone to say if he authorized the fund transfers. But multiple sources tell me that the sentiment within the MF Global ranks is that Corzine either gave explicit orders to mix the funds or at least was aware of what was going on, adding that only a limited number of people could have made such a decision. Fortune has been unable to confirm the underlying veracity of that sentiment but, if accurate, Corzine would seem to be in violation of the law.

What’s amazing, however, is how little attention such a possibility is receiving in the media. The vast majority of articles and blog posts on Corzine have discussed his voracious appetite for risk, rooted in a Wall Street that hasn’t existed since Lehman Brothers went broke. Or about how Corzine may be entitled to around $12 million in severance.

“If this was a former Republican senator and governor, the press would be all over it,” argues a GOP-affiliated investment professional. “They’d be talking about how it is emblematic of corruption on Wall Street. But because it’s a Democrat, everyone keeps focusing on bad investments rather than the possibility of fraud.”

Also not getting much attention is Corzine’s intimate relationship with J.C. Flowers & Co., a private equity firm run by Christopher Flowers, one of Corzine’s former colleagues at Goldman Sachs (GS).

It has been noted that Flowers invested in MF Global and stands to lose nearly $50 million, but the partnership is far deeper than that. Corzine took the MF Global job at Flowers’ urging, and simultaneously joined the private equity firm as an operating partner and advisor. In exchange, Corzine reportedly received carried interest in a pair of J.C. Flowers funds (albeit not in the older one housing MF Global).

Flowers has already called many of his fund’s investors to apologize for the MF Global mess, and a source tells me that Corzine will soon be relieved of his role at the firm (but, as of this moment, he remains an employee). Moreover, there is no indication that Flowers had any inkling of MF Global’s alleged misdeeds.

But, if Corzine ultimately faces trial and is found guilty — I know, big suppositions here — it could be interesting to see what type of liability, if any, J.C. Flowers itself could face. PE firms typically have indemnity from the actions of their portfolio companies, but most PE firms don’t have one of their own causing the mess.

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