Corzine: MF Staff Said Fund Transfer Legal

By Silla Brush and Clea Benson - Dec 16, 2011 2:29 AM GMT+0700

Jon S. Corzine, former chairman and chief executive officer of MF Global Holdings Ltd., told lawmakers today that the firm’s back-office staff “explicitly” informed him that fund transfers made before the company filed for bankruptcy were legal.

Corzine, testifying today before U.S. lawmakers for the third time in a week, was responding to allegations made at a U.S. Senate hearing earlier this week when the executive chairman of Chicago-based CME Group Inc. (CME) told lawmakers Corzine had known of a $175 million loan using client money that was made before the Oct. 31 bankruptcy.

Corzine used today’s hearing of an oversight panel of the House Financial Services Committee to rebut the suggestion that he may have authorized improper use of customer money.

Lawmakers and U.S. authorities are investigating what happened to as much as $1.2 billion in customer funds that is missing from MF Global accounts.

“I did not instruct anyone to lend customer funds to anyone,” Corzine said.

Corzine suggested Terrence Duffy, CME Group executive chairman, may have been referring to some funds transfers that occurred as MF Global was selling billions of dollars in securities. JPMorgan Chase & Co. (JPM), which was involved in the transactions, told MF Global the sale could not be completed until overdrafts in some accounts in London were corrected.

“I contacted the firm’s back office in Chicago and asked them to resolve the issues, which I understood they did,” Corzine said. He didn’t say explicitly whether he was aware at the time that the loan may have included funds from customer accounts.

Operations Staff

Corzine’s testimony today marked the second time that he appeared to be suggesting that MF Global’s Chicago-based operations staff might be the appropriate target for scrutiny over what happened to the missing money.

“The back office in Chicago explicitly confirmed to me that the funds were appropriately transferred,” Corzine said.

On Tuesday, Corzine named Christine Serwinski, the company’s chief financial officer for North America, as someone in charge of the responsible department, though he said she had been on vacation during the final days of MF Global. Serwinski did not respond to a message left at her home telephone number.

Texas Republican Randy Neugebauer, chairman of the oversight subcommittee, said he was uncomfortable with the amount of power Corzine held at MF Global before he stepped down.

“What we saw was one person had an extreme amount of authority, Mr. Corzine, as the chair of the board and the CEO of the company,” Neugebauer said in his opening statement. “And, according to people we have interviewed, one of the principal traders of this company. There was no real barrier or firewall for protecting the investors of the company.”

Second-Hand Account

Duffy, who is also scheduled to testify today, said Tuesday his information was based on a second-hand account of a conversation between CME and MF Global employees. He didn’t say whether Corzine learned of the loans in advance of the funds being moved. He also didn’t say whether the loans were a legitimate use of customer funds.

Corzine has repeatedly testified that he cannot explain why the money is missing, and that he had been surprised to learn of the shortfall on the night of Oct. 30.

Officials from regulators including the Federal Reserve Bank of New York, the Commodity Futures Trading Commission, and the Securities are also expected to appear at today’s hearing.

Illegitimate Transfers

Investigators are attempting to determine which transactions involving customer funds were illegitimate, Jill E. Sommers, the senior CFTC commissioner overseeing the investigation said in a telephone interview yesterday.

“We’re far enough along the trail to see the transactions going out” of segregated accounts, Sommers said. Investigators are searching e-mails and other documents to trace the transactions. “Following a trail is not as easy as it sounds because money isn’t just transferred from point A to point B and stopping,” she said.

Sommers said she expects regulators will eventually be able to determine where all the money went. There may still be a shortfall because some money may not be available to be clawed back for customers, she said.

Corzine and MF Global didn’t receive preferential treatment in a bid to become a primary dealer of government securities, Thomas C. Baxter Jr., general counsel of the New York Federal Reserve, said in testimony prepared for today’s hearing.

Corzine met with officials at the New York Fed on June 1, 2010, and discussed the broker’s efforts to improve its credit structure by raising $150 million in equity, Baxter said.

Primary Dealer

MF Global, starting before Corzine became CEO, sought to expedite a New York Fed review in order to become a primary dealer. The firm was under orders from the Commodity Futures Trading Commission to overhaul its internal controls. The Fed’s policy was to impose a one-year waiting period after such an enforcement action. MF Global argued the matter wasn’t material to its application, Baxter said.

The New York Fed disagreed and reviewed MF Global’s application “without fear or favor,” Baxter said in the testimony. MF Global was approved as a primary dealer on Feb. 2, 2011. That status was revoked by the Fed on Oct. 31, the same day the firm filed for bankruptcy.

Primary dealers participate in auctions of U.S. government debt and provide the New York Fed’s trading desk with information and analysis about the market as the central bank implements interest rate policies.

To contact the reporters on this story: Silla Brush in Washington at sbrush@bloomberg.net; Clea Benson in Washington at cbenson20@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net