MF Global Holdings, Ltd. (fka MFGLQ)

[TheProfit]

MF's Corzine may have known of customer loan: CME

By Ronald D. Orol
Dec 13, 2011 17:49:32 (ET)

WASHINGTON (MarketWatch) -- An auditor with the CME Group Inc. was informed that former MF Global Chief Executive Jon Corzine may have known about a loan made using customer funds to one of the firm's European affiliates, CME Executive Chairman Terrence Duffy said Tuesday.

Duffy told senators on the Senate Agriculture Committee that he learned about the disclosure over the weekend and that the loan was for roughly $175 million. The CME Group (CME, Trade ) has provided this information to the Justice Department, according to Duffy, who declined to name the MF Global executive who said Corzine was aware of the breach.

Regulators are investigating whether the brokerage tapped into customer-segregated futures accounts for its own proprietary trading. No one at the firm has been charged, so far but a trustee overseeing the bankruptcy reported that roughly $1.2 billion in customer funds are missing.

New York-based MF Global (MFGLQ, Trade ) filed for bankruptcy on Oct. 31 after disclosing sizable exposure to derivatives and other investments related to billions of dollars in European sovereign debt.

Testifying before the committee immediately before Duffy, Corzine said he never authorized the misuse of customer funds, and that he doesn't believe it would be possible to construe anything he'd done as an authorization for that kind of activity.

"I have no reason to believe that until evening of Oct. 30 that there was a misuse of customer funds, Corzine said. "I think speculating should be done in context of facts that are being developed by the investigators."

Echoing Corzine's comments were Bradley Abelow, president and chief operating officer of MF Global, and Henri Steenkamp, the company's chief financial officer. Both Abelow and Steenkamp joined Corzine in telling lawmakers that they didn't know the whereabouts of missing funds.

"I do not know what happened and I am awaiting the results of the investigation to inform all of us. I was shocked to be informed on Oct. 30 that there was a shortfall in customer funds. I can't speculate beyond that," Abelow said.

Abelow testified that he did not recall participating in any conversation about the use of customer funds "other than for the intended purposes."

Senators on Tuesday presented scenarios for how the estimated $1.2 billion in customer funds may have been misappropriated at failed MF Global.

Sen. Pat Roberts, Republican from Kansas and the top Republican on the Senate Agriculture Committee, said he believed that it was "well within the realm of possibility" that a classic run on the bank overwhelmed MF Global, and that an executive could have communicated an order on Friday, Oct. 28 to use customer funds to cover the firm's liquidity -- thinking that by Monday everything would be fine because an infusion of capital from a new buyer would replace the missing money.

MF Global had been courting a potential suitor for the firm in the days before it filed for bankruptcy, according to executives at the firm.

"Could it be possible that one or more of your operational money movers who reported to you was told to cover the liquidity needs or margin calls overwhelming the firm's cash flow by taking money out of the segregated accounts?" asked Roberts.

Sen. Debbie Stabenow, Democrat from Michigan and chairman of the committee, asked Corzine and Steenkamp if knowing what they know now would they again sign documents required by the post-Enron Sarbanes- Oxley Act, assuring that MF Global's internal controls over financial reporting were accurate.

"Given what you know today and $1.2 billion in customer funds potentially missing, would you sign this document again?" she asked.

In response, Corzine and Steenkamp both said that they could not. "Knowing what we know today and knowing there are missing customer funds, I would not be able to sign that," the latter replied.

The Commodity Futures Trading Commission, Securities and Exchange Commission and the Federal Bureau of Investigation are conducting investigations into the failure.

Both Abelow and Steenkamp agreed to testify voluntarily, according to a spokeswoman for the Republican staff of the committee. They both swore an oath to tell the truth. Corzine, reiterating comments he made to a House Agriculture committee on Thursday, apologized to investors who appear to have lost money.

Sen. Kent Conrad, Democrat from North Dakota, raised concerns that demands on the company for cash at the end of the week ending Oct. 28 were extraordinary and that could have led to some misappropriation of customer funds.

However, Corzine declined to comment specifically on the question, adding that "there were increasing demands for margin in different places" and that the process slowed up the clearing and movement of transactions. He said that for specifics he wanted to look at records, which were not currently available for him to review

Conrad said knowledgeable people in the area of futures trading have speculated that the money may have been transferred under someone's authority from client accounts to be used by the firm's broker-dealer, with the expectation that the firm would be made whole the following week, because the company was owed money that would come in the normal course of business. The senator elaborated that based on this hypothesis, MF Global's declaration of bankruptcy means the funds owed to the firm likely were never transferred to it.

"Do you believe it is possible that at the end of the day there will be a finding at the end of the day that MF Global is owed money to cover the shortfall?" Conrad asked.

Corzine replied that he wouldn't speculate on that possibility, except to note that it was a possibility. However, he said he needed more information and time to study the situation.

Both Democrats and Republicans raised concerns about farmers and ranchers who appear to have lost money at MF Global, as well as for others who have lost trust in the system.

"They believed that there were safeguards in place to protect their money in exactly this situation," said committee chairman Stabenow.

So far, six weeks after the bankruptcy, thousands of former investors at MF Global have had accounts frozen or have received only partial distributions.

Lawmakers also said that they have heard from some farmers, who were in futures as a hedge, that the missing funds have had a chilling effect on investment in the markets.