In yesterday’s senate hearing about the collapse MF Global, CME Group executive chairman Terrence Duffy tossed a grenade when he implied that Jon Corzine, the former CEO of the brokerage firm, knew about the transfer of customer funds, though he stopped short of suggesting it was illegal.
According to today’s New York Times, Duffy told lawmakers that MF Global had used $175 million in customer funds to lend from the futures side of the business over to another part of the firm, and that Corzine knew about the transfer.
“Mr. Corzine was aware of the loans being made,” Mr. Duffy told the Senate Agriculture Committee, adding that MF Global had submitted documents to the CME, the major exchange where MF Global did business, that kept “regulators in the dark.”
But CME’s executive did not mention this piece of controversial information in his prepared remarks submitted prior to his testimony, so it surprised lawmakers.
As for the source of this information, Duffy told lawmakers he heard it from one of his lawyers, who learned of the details from a lower-level CME auditor, who had spoken with an MF Global employee. The unidentified MF Global employee indicated that Mr. Corzine had known MF Global had used customer funds to lend to itself. Duffy told lawmakers that he referred the information to the Justice Department, which is investigating some of the customer’s missing money.
But Corzine was no longer in the room to defend himself, or to offer an alternative version of the story.
Duffy dropped this bombshell at a time when the CME, the front-line regulator for MF Global, has been criticized for not discovering that cash had vanished from the brokerage firm’s segregated customer accounts.
The comment caused “confusion” at the Senate Agriculture Committee hearing where Corzine along two of his two former colleagues, MF Global’s COO Bradley Abelow and CFO Henri Steenkamp had testified minutes before. All three executives claim to know nothing about the $1.2 billion in missing customer funds that were allegedly moved from the futures side to the proprietary trading side to invest in European sovereign debt.
However, brokerage houses are allowed to borrow customer funds if they replace it immediately with collateral, according to Jill Sommers, commission of the Commodity Futures Trading Commission (CFTC) who testified last week.
While such a transfer may not be illegal, brokers need to replace the customer cash with a placeholder security.
“Reg 1.25 never allowed an FCM to take funds out of a customer aggregated account and invest it without simultaneously putting it back,” stated Sommers.
“If the money is moved from a [segregated] account to a permissible investments, the exact amount has to be put back into the customer segregated accounts,” said Sommers last week.
Corzine told lawmakers in the prior panel that he knew nothing about the transfer of customer funds. Corzine drummed away at the point that he never gave any instructions to authorize misuse of customer money and that he didn’t have access to documents.
When the former MF Global executives were pressed by lawmakers to name which employees were responsible for safeguarding customer money, or had the power to authorize transfers, former CFO Steenkamp evasively answered — “In MF Global Inc. my understanding is there were numerous controls in place.”
Lawmakers who represent farmers, grain elevator operators and food companies – are furious since their constituents are out of cash and relying upon them to get answers, so there is a lot of finger pointing going on, and regulators are on the hot seat too.
With plenty of blame to go around, one MF Global client is blaming the CME for not detecting the shortfall in customer-segregated accounts. “They’re the designated regulatory authority. They should have been in there five days leading up to this…to verify customer funds,” says Ken Kinkopf, founder and president of Kinkopf Capital Management, a commodity trading advisor (CTA) in Chicago whose assets are frozen in the MF Global bankruptcy. “They were stating that everything was secure and they were meeting their requirements. But obviously this wasn’t true.”Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio