Jon Corzine, the former head of bankrupt broker MF Global Holdings Ltd., was sued by the holding company’s trustee, Louis J. Freeh, for failing in his duty to oversee the company and causing the eighth-biggest bankruptcy in U.S. history.

The suit, filed in U.S. bankruptcy court in Manhattan, alleges that Corzine, the company’s chief executive officer and a former governor and senator from New Jersey, along with senior executives Bradley Abelow and Henri Steenkamp, failed to act in good faith and implemented strategies that caused the company to fail.

“The trustee brings this action for acts and omissions that culminated in the business collapse of the company and the bankruptcies of the debtors,” according to the complaint.

The suit follows a 124-page report published this month by Freeh, the bankruptcy trustee, which blamed Corzine and his management team for bungling an expansion of the company’s traditional business model while ignoring deficiencies in its risk controls. Corzine’s strategy invested heavily in European sovereign debt and produced no significant revenue, and he and Chief Financial Officer Steenkamp, the Chief Financial Officer, knew that the company’s controls were flawed as early as May 2010, according to the report.

Wrong-Way Trade

The parent company of brokerage MF Global Inc. filed for bankruptcy on Oct. 31, 2011, after a wrong-way $6.3 billion trade on its own behalf on bonds of some of Europe’s most-indebted nations. The company listed assets of $41 billion and debts of $39.7 billion.

Freeh’s findings come five months after U.S. House Republicans also faulted Corzine’s leadership in a report released in November. That report, reached by majority Republicans on a Financial Services subcommittee, described a lack of coordination between the Commodity Futures Trading Commission and Securities and Exchange Commission, primary regulators for MF Global’s U.S. operations.

Freeh has been unwinding the company under Chapter 11 bankruptcy in an effort to repay creditors. James Giddens, a separate trustee for the failed brokerage arm, is liquidating assets to repay customers under the Securities Investor Protection Act.

Giddens Claims

Giddens, who has conducted his own probe into how the company failed, said in a report last year that he determined claims for breach of fiduciary duty and negligence against Corzine, Steenkamp and other officials.

Freeh’s report paints Corzine as a tunnel-visioned leader, insulated from criticism, who, although fully aware of the limitations of the company’s system, pushed to transform MF Global into an investment bank by taking on greater risk.

Corzine moved to diversify the company away from traditional investment of client funds and make it a broker dealer and full-scale investment bank. By September 2010, he had begun asking the board to increase the company’s risk limits to invest in more European sovereign debt issued by countries such as Italy, Portugal, Spain and Ireland, according to Freeh’s report.

Corzine had unlimited power in his role at MF Global, holding positions that were previously filled by two different individuals, according to Freeh’s report. Corzine hired Chief Operating Officer Abelow, who was once his chief of staff as governor, and favored Steenkamp over then-CFO Randy McDonald. Under Corzine, the board reduced its executive committee to four members from five, according to the report.

To implement his strategy for the company, Corzine handpicked traders with whom he worked and began trading on his own, under minimal supervision, in June 2010 using an existing Treasury Department account, according to the report. He maintained his own portfolio for the company in accounts that bore his initials JSC and was known to place trades in the middle of meetings.

Driving Force

Corzine was the driving force behind MF Global’s European trading portfolio and personally instructed traders “when to enter and exit various positions,” Freeh said in the report.

The company’s problems were exacerbated by MF Global’s method of accounting for its European trades, according to the report. The so-called repurchase to maturity transactions allowed MF Global to immediately recognize income while removing the transactions from the company’s balance sheets, according to the report.

Under Corzine, MF Global’s position in such investments increased from $400 million in mid-September 2010 to $8.3 billion at the end of August 2011, according to the report.

The trades, which required a margin payment, “jeopardized the company’s available liquidity and left the company highly leveraged,” Freeh said in the report.

Hedge Exposure

In the summer of 2011, former Chief Risk Officer Michael Stockman recommended that MF Global stop investing in the European debt and start hedging its exposure, according to the report. Management ignored the advice and searched for additional sources of liquidity to support the trading strategy, even debating how aggressively brokers could borrow on an intraday basis customer funds that were required to be kept in segregated accounts, Freeh said.

By the week leading up to its collapse, MF Global needed to rely on its Operations, Risk and Treasury Department systems, which were fatally flawed, Freeh found. The failure of Corzine and other members of his management team, including Abelow and Steenkamp, to address the deficiencies contributed to the company’s demise, Freeh found.

Deficient Controls

“In the end, the scale of the company’s trading put pressure on the company’s deficient controls without producing any significantly improved revenues,” Freeh said in the report.

Freeh estimates the losses to MF Global and its finance subsidiary from $1.5 billion to $2.1 billion. Giddens, the brokerage trustee, estimated a shortfall of $1.6 billion in customer funds.

The SEC didn’t include the CFTC in several meetings in 2011 about the brokerage’s capital and business strategy that would have been helpful for oversight, according to the Republicans’ report. The CFTC didn’t inform the SEC that the broker was using an alternative method of calculating customer funds, the report showed.

Freeh’s report didn’t focus on the causes for the shortfall in customer funds because recovery of those funds is outside the scope of his authority, lawyers for the trustee said in the court filing.

The holding company’s Chapter 11 case is In re MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The liquidation of the broker is In re MF Global Inc., 11-bk-02790, in the same court.