Boss’s Remark, Employee’s Deed and Moral Quandary
By JAMES B. STEWART, NYTIMES
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About 9 a.m. on Friday, Oct. 28, 2011, Jon Corzine, chief executive of MF Global and formerly a United States senator, governor of New Jersey and chief executive of Goldman Sachs, called Edith O’Brien, the assistant treasurer of MF Global in Chicago, according to a complaint filed last week by the Commodity Futures Trading Commission.

For Mr. Corzine to call a midlevel back-office employee like Ms. O’Brien was in itself extraordinary. But this was no ordinary day. That morning, his bold effort to transform MF Global, a plain-vanilla commodities firm, into a full-blown investment bank was teetering on collapse. And the firm surely would collapse if it didn’t quickly deal with overdrawn accounts at JPMorgan Chase, which was the firm’s principal bank and was threatening to stop doing business with MF Global.

Ms. O’Brien could solve the immediate overdraft problem — if she could find the money. Her job was to oversee the transfer of funds at MF Global, ordinarily a fairly routine back-office task. But that morning, the firm didn’t have the cash to cover the overdrafts. It had just $82 million in cash the previous night, as Mr. Corzine had been told, according to the complaint, and JPMorgan needed $134 million just for the overdrafts.

One source from whom Ms. O’Brien could certainly not take the money was MF Global’s customers. Protecting customer assets is a near-sacred obligation at any securities firm, as Ms. O’Brien well knew, and it is a “cornerstone” of customer protection laws, as the trading commission puts it. Within the industry, Ms. O’Brien was known as an expert on protecting customer funds and had spoken on the subject at conferences.

Finding the funds and transferring them to JPMorgan to cover the overdrafts was “the most important thing” that she could be doing that day, Mr. Corzine told her, according to the trading commission’s complaint, which was quoting a recorded conversation between Ms. O’Brien and a co-worker.

No one asserts that Mr. Corzine told Ms. O’Brien to take customer money. Mr. Corzine’s lawyer, Andrew J. Levander, said Mr. Corzine was told the night before that the firm had $82 million in cash and another $602 million in unencumbered securities, and “it never dawned on him” that Ms. O’Brien or anyone else might “violate the golden rule” about safeguarding customer assets.

But how would Ms. O’Brien have interpreted Mr. Corzine’s comment? When I discussed this with John Hasnas, director of the Georgetown Institute for the Study of Markets and Ethics, he drew an analogy to the murder of Thomas Becket, archbishop of Canterbury, after Henry II is said to have uttered, “Will no one rid me of this troublesome priest?”

“He didn’t actually tell anyone to murder the archbishop,” Professor Hasnas noted. “But people knew what would make him happy.” Indeed, history records that four of Henry’s courtiers promptly set off and dispatched the archbishop in the nave of Canterbury Cathedral.

It was no mystery what Mr. Corzine wanted. At 9:26 a.m. just minutes after the call, Ms. O’Brien told Mr. Corzine she was transferring $175 million to cover the overdrafts, according to the trading commission’s complaint. Ms. O’Brien moved $200 million from an account that held customer assets — known as a segregated account — into an MF Global account with the firm’s money. She then transferred $175 million from that account to cover the overdrafts. The next day, in another phone call that was recorded, she told a colleague, “The only place I had the 175 million, O.K., was in seg.” She added, “That’s what we do all the time because we don’t have enough capital.”

Ms. O’Brien seems to have been aware that what she was doing was wrong. Subsequently asked by Mr. Corzine (at JPMorgan’s insistence) for a written explanation of the two transfers that cured the overdrafts, she explained the second — the move of $175 million — but said nothing about the first, which was the removal of $200 million from a segregated account. (The contents of the e-mail were first reported in The New York Times in March 2012.) As she told a colleague in another recorded call, “I don’t want to take anyone down with me,” according to the trading commission’s complaint.

By the following Monday, when MF Global had to declare bankruptcy, about $900 million in customers’ money had been taken and dispersed to meet the firm’s obligations. Last week, the commission named both Mr. Corzine and Ms. O’Brien as defendants in a civil enforcement action, with Ms. O’Brien accused of “numerous illegal transfers” of customer money.

Ms. O’Brien’s lawyer, Reid H. Weingarten, declined to comment.

Mr. Corzine, Mr. Levander said, “never directed Ms. O’Brien or anyone else regarding which account should be used to cure the overdrafts, and he never directed that customer funds should be used for that purpose. Nor was he informed that customer funds had been used for that purpose. In fact, later that same day, Ms. O’Brien explicitly confirmed to Mr. Corzine and others at MF Global that she used house funds to clear up the overdrafts.”

The commission’s complaint goes a long way toward explaining how customer money could have disappeared, and it turns out the answer is fairly simple. There were no meaningful controls in place at MF Global, beyond Ms. O’Brien’s conscience, to protect customers. The complaint suggests that Mr. Corzine, the firm’s chief executive and a commanding figure apart from his position at the firm, showed scant interest in regulatory issues or compliance in his rush to transform MF Global into another Goldman Sachs. When asking Ms. O’Brien for the money that morning, he didn’t ask where it would come from, which seems a conspicuous oversight given the firm’s dire cash position.

In contrast with Mr. Corzine’s lofty status, Ms. O’Brien’s biography qualifies her as a middle-management Everywoman. She’s married, with two children. She grew up in suburban Oak Park, Ill., after her family emigrated from Ireland. She still speaks with a trace of an Irish brogue and appears to be religious: she held a rosary while invoking the Fifth Amendment during a Congressional hearing last June.

Thrust into a crisis not of her own making, why would she have done something she knew, or should have known, was wrong? Put another way, how many of us in her shoes would have told Mr. Corzine what he clearly didn’t want to hear, which is that the money to cover the overdrafts wasn’t there?

After the trading commission unveiled its charges last week, I spoke to several experts in business ethics and organizational psychology for clues about why otherwise ethical, law-abiding, well-educated and highly compensated people often do something they either know or should know is wrong. Often they aren’t widely known wrongdoers, but people lower in the chain of command who are nonetheless indispensable to the schemes.

Research shows that most people put a high priority on following orders from authority figures, a trait that is cultivated and rewarded in families, schools, churches, the military and the workplace despite an occasional nod to the heroic dissenter, like Becket, who was later canonized for his defiance of Henry II.

“As human beings, we are predisposed to be obedient to authority, no matter how malevolent it may be,” said Edward Soule, an associate professor at the McDonough School of Business at Georgetown who has a Ph.D. in philosophy and focuses on the intersection of morality and management. He and others pointed to the groundbreaking work of the Yale University psychologist Stanley Milgram, who tested the willingness of people to administer what they were told was an electric shock of increasing (and potentially fatal) voltage to participants in an experiment. As the voltage increased, accompanied by screams from the purported subject, most of those administering the shocks showed signs of severe stress, and some tried to end the experiment, but were instructed to continue.

In Professor Milgram’s first set of experiments, 65 percent of the participants administered the final shock when told to do so. “People would administer electrical shocks because some guy in a white lab coat said things like, ‘The experiment must go on,’ and similarly benign forms of encouragement,” Professor Soule noted.

Professor Milgram’s work has been replicated many times and in many contexts, and the results were consistent.

Ms. O’Brien’s plight “isn’t unusual,” said Raymond J. Fisman, professor of social enterprise at Columbia Business School. “There are many examples of corporate leaders who put people below them in untenable situations. They don’t explicitly say, ‘Break the law,’ but they can put very strong pressure on someone to do what is required. I’m not a lawyer, but does Corzine bear moral responsibility for what happened? Did he set a tone so that this woman felt compelled to do what he wanted? It seems that way.”

This can be especially true in a corporate context, where obedience and loyalty are prized. “For evolutionary reasons, group membership is a central feature of the human condition,” Professor Soule said. “Neuroscientific research has shown that the mere thought of being rejected from a group is painful.” And people in corporations learn quickly that “if you defy authority, you get into trouble,” Professor Hasnas said. “It takes great strength of will to say no.”

Under the circumstances, should Ms. O’Brien have been charged? If the trading commission’s account of the facts is correct, she is clearly the person who moved hundreds of millions of dollars in customer money out of protected accounts. The commission is seeking to bar her from working in the commodities business, to forfeit any pay derived from illegal activity and may impose a big fine.

David Meister, director of enforcement at the commission, said the agency had little choice but to seek to punish her. “When a company illegally uses customer funds,” he said, “we will seek to use our enforcement authority against those with responsibility anywhere in the corporate hierarchy to ensure that customer funds are properly safeguarded every minute of every day.”

And deterrence is critical, especially given the apparent human predilection to obey orders. If Professor Milgram’s subjects had been told they might face murder charges if they shocked their subjects to death, the results might have been different.

Though Professor Hasnas said he was often skeptical of federal charges against lower-ranking corporate executives, he also said that “charges are usually justified if there was intentional, knowing wrongdoing.” Even if she seems a sympathetic character, he added, people “shouldn’t confuse sympathy with justice.”