May 18, 2024

DealBook: MF Global Trustee Sues Corzine Over Firm’s Collapse

 Jon Corzine, former chairman and chief executive of MF Global.Alex Wong/Getty Images Jon S. Corzine, former chairman and chief executive of MF Global.

4:23 p.m. | Updated

A bankruptcy trustee has sued Jon S. Corzine and other former MF Global executives, claiming they were “grossly negligent” in the lead-up to the brokerage firm’s collapse.

The action by the trustee, Louis J. Freeh, comes just weeks after he agreed to postpone the lawsuit and enter mediation with Mr. Corzine. By filing litigation that appeared to catch the MF Global executives off-guard, Mr. Freeh may have jeopardized those talks.

“We question why the trustee chose to file this lawsuit, which is filled with seriously flawed allegations, while he is participating in court-ordered mediation of these very claims,” said a spokesman for Mr. Corzine, Steven Goldberg.

Mr. Freeh, who represents hedge funds and other creditors of MF Global, said on Tuesday that “the mediation process is ongoing,” and that it was “in the best interests of the Chapter 11 estates to file the complaint.”

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The lawsuit, filed in United States Bankruptcy Court for the Southern District of New York late on Monday, echoes a report Mr. Freeh issued this month that blamed MF Global executives for engineering a “risky business strategy” and ignoring “glaring deficiencies” in internal controls. The report and the lawsuit accuse the executives of allowing more than $1 billion in customer money to disappear from the firm.

In the new complaint, Mr. Freeh took aim at Mr. Corzine, a former Democratic senator and New Jersey governor who became MF Global’s chief executive in 2010. Mr. Freeh, a former director of the F.B.I., also sued two of Mr. Corzine’s top deputies: Bradley I. Abelow, the chief operating officer, and Henri J. Steenkamp, the chief financial officer. Mr. Freeh labeled the men as “Corzine’s handpicked deputies.”

“Defendants, in their capacities as officers, breached their fiduciary duties of care, loyalty, and oversight over the company, and failed to act in good faith,” Mr. Freeh wrote.

The action against Mr. Abelow and Mr. Steenkamp is unusual in that both executives remained at MF Global for more than a year after the firm’s collapse, working under Mr. Freeh. They stayed to help sort through the bankruptcy process.

Gary P. Naftalis, a lawyer for Mr. Abelow, noted that Mr. Freeh had himself described that work as “invaluable.” Mr. Naftalis criticized Mr. Freeh for “now making allegations that lack any factual or legal basis.”

Mr. Goldberg, the spokesman for Mr. Corzine, also said the assertions in the suit were unsubstantiated. “There is no basis for the claim that Mr. Corzine breached his fiduciary duties or was negligent,” he said. “We look forward to proving the actual facts in court.”

The suit, which could help Mr. Freeh recover money for MF Global’s creditors, blamed Mr. Corzine for ramping up a risky bet on European debt. While the bonds were not by themselves to blame for the collapse of MF Global, the wager unnerved its investors and ratings agencies, further undermining the firm.

“Corzine engaged in risky trading strategies that strained the company’s liquidity and could not be properly monitored by the company’s inadequate controls and procedures,” Mr. Freeh said.

Mr. Goldberg in turn called the complaint “a clear case of Monday morning quarterbacking.” Mr. Corzine, he said, inherited a firm in 2010 that had lost money in each of the previous three years.

It is unclear whether the lawsuit will alter the mediation talks. While Mr. Freeh said the discussions were continuing, the lawsuit could derail or delay the mediation process.

The litigation might also complicate an effort to return money to customers. Mr. Freeh pursued his own case against Mr. Corzine, rather than join an earlier lawsuit filed by a second MF Global trustee, James W. Giddens, and some of the firm’s customers. Mr. Giddens, who has the task of recovering money for the customers, has already returned about 89 percent of the shortfall to MF Global’s clients in the United States. Some people close to the case say Mr. Giddens has identified a path to potentially making customers whole.

The lawsuit, coming on the heels of a bankruptcy judge approving Mr. Freeh’s plan to liquidate MF Global, could empower him to recover additional money for creditors. But the case might not sit well with customers.

In a statement, Mr. Giddens said he had joined the customers’ class-action lawsuit “because it was the most efficient way to get money to customers and creditors.”

Federal authorities, including the Commodity Futures Trading Commission, also continue to investigate the misuse of customer money. Mr. Corzine has not been accused of any wrongdoing by the agency, and internal e-mails suggest he was not aware that at least some of the customer money was improperly sent to the firm’s banks.

“Anyone who violates the law, and particularly anyone at MF Global who used a billion bucks of customer cash that should have been protected, should be punished appropriately,” said Bart Chilton, a member of the trading commission.

This post has been revised to reflect the following correction:

Correction: April 23, 2013

An earlier version of this article misstated when Lehman Brothers collapsed. It was 2008, not 2012.

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DealBook: Libor Case Energizes Gensler and the C.F.T.C.

Gary Gensler, the chairman of the Commodity Futures Trading Commission, in his office in Washington.Peter W. Stevenson for The New York TimesGary Gensler, the chairman of the Commodity Futures Trading Commission, in his office in Washington.

Months after he arrived in Washington in 2009, Gary Gensler knew he had a big case.

Huddled around his assistant’s desk with a colleague, Mr. Gensler, then Wall Street’s newest regulator, listened to a taped telephone call of two Barclays employees discussing plans to report false interest rates. When the brief recording ended, Mr. Gensler realized the gravity of the wrongdoing.

“We need to make this case even more of a priority,” he told his colleague at the Commodity Futures Trading Commission, Stephen Obie, who already had been investigating Barclays for more than a year.

The Barclays case has now thrust Mr. Gensler — and his once-obscure agency — into the spotlight.

In June, the commission reached a settlement with Barclays in the rate-manipulation case, which produced the largest fine in the agency’s nearly 40-year history. The deal is expected to be the first of many, as Mr. Gensler’s team leads a global investigation into rate-rigging at more than a dozen big banks.

It is a new role for the agency, the industry’s smallest regulator. For years, it was viewed as the Rodney Dangerfield of the regulatory world, with a light touch and little respect.

When the agency first opened the rate investigation in 2008, some banks dismissed the regulator, telling it to narrow the focus to a particular time period or trading desk. Barclays questioned whether the American regulator had the authority to examine a British bank, according to people with knowledge of the matter.

Now, Wall Street is taking the commission more seriously.

Along with the inquiry into rate manipulation, the agency is playing a central part in several prominent investigations, examining the blowup of MF Global and the multibillion-dollar trading loss at JPMorgan Chase. Mr. Gensler has also aggressively — some say obsessively — pushed the agency to adopt dozens of new rules under the Dodd-Frank law, the financial regulatory overhaul.

“The change is night and day,” said Representative Barney Frank, Democrat of Massachusetts, the co-author of the sweeping law that bears his name.

“It was a toothless agency,” he said, but when “Gary became chairman, he was very aggressive.”

The agency’s revival stems from the wave of new regulation. Dodd-Frank, passed in 2010, greatly expanded the responsibility of the agency, stretching its reach to the dark corners of the $300 trillion derivatives market. Before that, the agency oversaw the $40 trillion futures business.

Mr. Gensler has positioned himself as a chief advocate of the law, initially lobbying lawmakers to close loopholes and now overseeing the flurry of rule-making at his agency. After a long career at Goldman Sachs and a stint in the Wall Street-friendly Clinton administration, the job has given Mr. Gensler a shot at redemption.

But Mr. Gensler and his agency have faced a steep learning curve with the bureaucratic and political ways of Washington.

To win support from fellow regulators, Mr. Gensler has agreed to dial back some rules. And while the agency’s rule-writing has outpaced other financial regulators, the trading commission has missed multiple deadlines for completing the crackdown on derivatives, a central cause of the 2008 crisis.

Mr. Gensler has also drawn the ire of Congressional Republicans, who say his commission is overstepping its authority. Some bankers have taken aim at the agency, saying its rules threaten profits.

“No one likes their regulator right now, however good they are, and Gary is good,” said Eugene Ludwig, head of the Promontory Financial Group and a former bank regulator who knew Mr. Gensler from their days in the Clinton administration.

The new identity of the agency reflects the personal evolution of its leader.

A math whiz who grew up in a working-class Baltimore neighborhood, Mr. Gensler attended the Wharton School at the University of Pennsylvania. After an 18-year career at Goldman Sachs as a mergers and acquisitions banker and later an executive, he joined the Treasury Department.

At the time, the department oversaw the broad deregulation of the same markets Mr. Gensler now oversees. In 2009, some liberal lawmakers stalled Mr. Gensler’s nomination to the commission, fearing that he remained a banker at heart.

Mr. Gensler, a father of three daughters, agrees that he has yet to shake his penchant for deal-making. When negotiating over the wording of a rule, he still props up his socked feet on an employee’s desk, a habit common to bankers. His efforts now, however, are directed at reforming the industry that once made him millions.

“I think what we’re trying to do is bring common-sense rules of the road to this really important marketplace,” he said in an interview.

As Congress debated Dodd-Frank, Mr. Gensler was a ubiquitous presence on Capitol Hill, pressuring lawmakers to beef up the details. The day the law became final, he stayed past 4 a.m. with Blanche Lincoln, then a senator from Arkansas, putting the finishing touches on several provisions.

“I told him that Dodd-Frank was his baby because he labored with it for at least nine months,” said Michael Dunn, a former C.F.T.C. commissioner who works at Patton Boggs.

With the intensity of a longtime banker, Mr. Gensler has pushed his staff to finish the rules promptly. He is an avid reader of the “Dodd-Frank Progress Report,” from the law firm Davis Polk Wardwell, a publication that tracks rule-writing. Once, when he mistakenly thought the publication failed to count a C.F.T.C. rule, Mr. Gensler phoned a lawyer at the firm to request a correction.

A marathon runner and mountain climber, his fixation with speed has made him a brusque taskmaster at times.

Last year, when a small earthquake forced the agency to evacuate its offices, Mr. Gensler arranged a staff meeting at a cafe in the building’s lobby. The employees, he said, could not afford to lose an afternoon of work.

Despite his demanding pace, colleagues say he is quick to compromise. When Scott O’Malia, a Republican commissioner of the agency, urged Mr. Gensler to tweak a complex derivatives rule, they convened the so-called Meiwah summit, referring to the Chinese restaurant in Washington where they completed a deal.

Mr. Gensler has also built relationships with other agencies, as they collaborate on Dodd-Frank. Mr. Gensler was a mock senator when Mary L. Schapiro, the head of the Securities and Exchange Commission, prepared for her confirmation hearing. Ms. Schapiro once baked cupcakes for Mr. Gensler’s birthday.

“Together we can make this the most successful partnership in government,” she wrote in his copy of the Dodd-Frank law.

Even so, some industry players paint Mr. Gensler as a stubborn negotiator with a knack for haranguing Wall Street. He was a co-author of a book, “The Great Mutual Fund Trap,” that criticized the industry in which his twin brother, Robert, works.

And after two Wall Street trade groups sued the agency over a rule curbing speculative trading, Mr. Gensler took a harsh tone with one executive who came to the commission to lobby on the issue. “You sued us, so it’s clear what you think about the rule,” he said, dismissing the executive’s concerns, said a person briefed on the meeting.

Bristling at the sometimes-abrasive approach, Republican lawmakers have fought to freeze or depress the commission’s $205 million budget.

While the figure is a fraction of other regulatory budgets, lawmakers and lobbyists say Mr. Gensler could cut costs by tempering his ambitions.

“I wonder if Mr. Gensler is more focused on building a personal legacy and expanding his agency’s powers than making the economy stronger and safer,” said Steven Lofchie, a partner at the law firm Cadwalader, Wickersham Taft.

Others, however, have praised Mr. Gensler for marshaling resources and stepping up the agency’s game. Mr. Gensler has sharply increased his staff to more than 700 employees. He also hired a former federal prosecutor, David Meister, as the head of enforcement.

The agency, which has previously had big cases against energy companies, brought a record number of enforcement actions last year, notably against Wall Street firms.

“We’ve come into our own as a regulator to be reckoned with, out there doing our best to protect investors and consumers every day,” said Bart Chilton, a Democratic commissioner.

The rate-rigging case is the commission’s biggest investigation yet. The case centers on how banks set a key benchmark, the London interbank offered rate, or Libor, which affects the cost of borrowing for consumers and corporations.

The investigation heated up after Mr. Gensler heard the Barclays recording. As the examination broadened, the agency assigned additional employees to the case, nearly 15 enforcement lawyers, up from three.

Mr. Gensler also championed measures to prevent Barclays from repeating its mistakes. The new controls forced the bank to report rates based on actual transactions when possible and to prevent conflicts of interest.

After more than four years of investigating, the agency filed its action against the bank on June 27. For Mr. Gensler, it was a bittersweet day. While it was the biggest moment in his regulatory career, it also was the sixth anniversary of his wife’s death from breast cancer.

Publicly, he has focused on the win. “It’s about the integrity of the market,” Mr. Gensler said. “This agency stood up for the public and said that rates have to be based on honest figures.”

A version of this article appeared in print on 08/13/2012, on page B1 of the NewYork edition with the headline: Libor Case Energizes a Wall Street Watchdog.

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DealBook: Trustee Report Details Possible Claims Against Corzine and Others

James Giddens, trustee for MF Global Holdings.Andrew Harrer/Bloomberg NewsJames Giddens, trustee for MF Global Holdings.

A court-appointed trustee said in a report on Monday that he might pursue claims against Jon S. Corzine and other top executives of MF Global, citing their “negligence” in the collapse of the brokerage firm.

The 275-page report sheds new light on the firm’s disastrous last days, detailing its rapid downfall. In addition to Mr. Corzine, the trustee also cited Henri Steenkamp, the chief financial officer, and Edith O’Brien, an assistant treasurer who has become the focus of government investigations. The report states that the trustee believes there are “claims for breach of fiduciary duty and negligence, that may be asserted” against the three officials.

The report also focuses on banks like JPMorgan Chase that received customer money in the chaotic days before the firm went under. The trustee, James W. Giddens, said he would decide whether to pursue litigation to recover money for customers, who are missing some $1 billion, within 60 days.

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Based on interviews with more than 100 people and the review of hundreds of thousands of documents, the trustee’s report is the most comprehensive telling to date of MF Global’s bankruptcy last October.

The findings focus on the tenure of Mr. Corzine, a former Democratic governor of New Jersey who became MF Global’s chief executive in early 2010 and immediately began transforming it from a sleepy commodities brokerage firm into a something more akin to a mini-Goldman Sachs. As part of the transformation, he placed a big bet on the debt of shaky European nations, a gamble that incited a crisis of confidence that paved the way to the firm’s collapse.

“As attempts were made to transform MF Global into a full-service global investment bank, management failed to add to its treasury department and technology infrastructure, which was needed to meet the demands on global money management and liquidity,” Mr. Giddens said in a statement. “My investigation has concluded that management’s actions, along with the lack of sufficient monitoring and systems, resulted in customer property being used during the liquidity crisis to fund the extraordinary liquidity drains elsewhere in the business, including margin calls on European sovereign debt positions.”

The positions prompted rating agencies to cut MF Global’s credit rating in late October, a final straw for a market already on edge. As panic ensued, trading partners and customers demanded money from the firm, which was forced to sell billions of dollars in securities to meet the obligations. Chaos reigned internally, too, as money flowed between divisions and out of the firm.

Since MF Global filed for bankruptcy on Oct. 31, farmers, hedge funds and other customers have been without at least a third of their money. Among those who received cash belonging to futures customers were banks, clearinghouses and even MF Global’s own securities customers.

The report highlights the banks and other companies on the receiving end of transfers involving customer money. Mr. Giddens specifically names JPMorgan Chase, which has already returned some money to the trustee. As MF Global’s main bank, JPMorgan was a central recipient of customer money in that final week. The trustee noted in his report that the bank was cooperating with his investigation.

Other banks in the trustee’s line of sight include Bank of New York Mellon, which is also cooperating with the investigation.

The trustee also said he was investigating the conduct of a major clearinghouse, the Depository Trust Clearing Corporation, that processed trades in the final weeks of the firm’s existence. That conduct includes the clearinghouse’s demands for additional cash from MF Global to clear trades, money that may have belonged to customers.

The report illuminates the vulnerabilities of the firm, including a desperate need for cash prompted by increased risk-taking under Mr. Corzine.

Mr. Corzine, the former head of Goldman Sachs, took over at the mid-level commodities brokerage firm in March 2010, fresh off an election loss for his second term as New Jersey governor. Almost immediately, he began adding risk at the firm to bolster earnings and resuscitate a deeply troubled business model, which relied almost exclusively on matching commodities trades for customers.

Mr. Corzine added new lines of business and began making bets with the firm’s own capital, efforts that were applauded by the market but led to an increased need for cash to finance operations. In particular, the trustee report notes, the bet Mr. Corzine placed on European sovereign debt “presented substantial liquidity risks.”

““The underlying liquidity problems at MF Global, however, did not commence in the fall of 2011,” the trustee states in the report. “Rather, liquidity had been a cause for concern before and throughout Mr. Corzine’s tenure at MF Global, yet systems and tools would enable accurate real time monitoring of liquidity were never implemented.”

Liquidity concerns became worse in the summer of 2011, prompting an assistant MF Global treasurer to write in an e-mail on Aug. 11 that she was having to spend “hours every day shuffling cash and loans from entity to entity,” the report says. Around that time, the Financial Industry Regulatory Authority, Wall Street’s self-regulator, became worried about MF Global’s European debt positions and ordered the firm to build up cash reserves.

The report outlines the disputes that emerged within MF Global about how to resolve the liquidity needs — including through customer money.

While customer money must be kept separate from the firm’s, it is common for a company like MF Global to add its own money to customer accounts as a buffer in the event of a volatile market move. The firm’s money, called excess funds, can we withdrawn by the company at will. But “confusion and differences of opinion existed within MF Global regarding the extent to which excess funds might be available to meet liquidity needs across the MF Global enterprise,” the report said.

Nevertheless, senior management began relying increasingly on this money to stay afloat, the report says. An internal conflict also arose around the use of a loophole that allowed the firm to use customer money sitting overseas, not simply the excess.

The company prepared an action plan in the event of a downgrade from the ratings agencies and other negative news, a move executives knew would cause significant problems. The document lists ways to maintain cash reserves, keep clients and generally stay alive should the market react poorly to the news.

But the trustee’s investigation found the risk analysis “seriously underestimated both the speed and extent of demands on liquidity,” by a magnitude of $600 million to $1 billion.

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DealBook: U.S. Inquiry of MF Global Gains Speed

Tina Fineberg for The New York Times

The investigation into MF Global is intensifying as federal authorities unearth new details and confront potential obstacles in their hunt for roughly $1.2 billion in customer money that disappeared from the brokerage firm.

While prosecutors and regulators have jointly conducted dozens of depositions with former and current employees, a senior official in the Chicago office of MF Global recently declined to meet with the federal authorities, people briefed on the investigation said.

That official, Edith O’Brien, a treasurer at MF Global, is considered a “person of interest” in the investigation, the people said. Federal authorities suspect that she transferred about $200 million to JPMorgan Chase in London on the eve of the bankruptcy of MF Global, money that turned out to be customer cash.

Authorities had expected to interview Ms. O’Brien last month. She instead balked at meeting voluntarily, asking first to strike a deal with criminal authorities that would excuse her from prosecution. the people said. The criminal investigation is led by the Federal Bureau of Investigation and federal prosecutors in Chicago and Manhattan.

The request by Ms. O’Brien is the first in this case, one person briefed on the investigation said. Still, such requests are common in federal investigations and it does not suggest that she violated Wall Street regulations. Ms. O’Brien has not been accused of any wrongdoing, and there is no indication that she intentionally transferred customer money to JPMorgan.

Ms. O’Brien’s lawyer, Reid H. Weingarten, did not respond to requests for comment.

The investigators are deposing employees as they search for the missing money. Some authorities are now examining whether MF Global used money from futures customers to pay securities customers who were closing accounts as the firm began to collapse, according to a person briefed on the matter.

Federal authorities also suspect that some customer money passed through MF Global’s banks, including JPMorgan Chase, and the clearinghouses that helped unwind the firm’s balance sheet, including the Depository Trust and Clearing Corporation.

While Ms. O’Brien’s testimony could prove crucial, investigators lack access to other important sources that could help unravel the mystery surrounding the missing money. The potential impediments to the case include the lack of access to certain internal documents at MF Global. The firm has withheld the e-mails and other documents from investigators on the grounds of attorney-client privilege.

Louis Freeh, the trustee overseeing MF Global's bankruptcy case.Alex Brandon/Associated PressLouis Freeh, the trustee overseeing MF Global’s bankruptcy case.

Louis Freeh, the trustee overseeing the bankruptcy proceedings of MF Global, has not waived the legal provision, which shields records from examination by law enforcement.

The trustee’s office said they have not received any complaints from investigators, and would be “inclined to waive privilege” if it were hampering the investigation. Experts say it is common for trustees to assert attorney-client privilege in such cases to protect the interest of the company’s creditors and shareholders, whom the trustee represents.

Mr. Freeh has already agreed to share the confidential documents with a separate trustee overseeing the distribution of customer cash, James Giddens, according to a person with knowledge of the matter.

The agreement allows Mr. Giddens access to the documents that could help expedite the return of customer cash — so long as his office does not share them with law enforcement and others. The agreement continues an earlier deal reached with the firm’s general counsel, Laurie Ferber, the person said.

But federal investigators have been too busy to miss the documents, according to one of the people briefed on the inquiry. Authorities are still sorting through the mountains of paperwork already before them, the person said. Still, at least one regulator worries that any delay could stymie the federal investigation in the coming weeks.

“We don’t have time to play 20 questions regarding what’s privileged and what’s not,” said Scott O’Malia, a Republican commissioner for the Commodity Futures Trading Commission

A patchwork of federal regulators has descended on the case, with the C.F.T.C. taking the lead role. Criminal charges, however, would come from the Justice Department.

More than two months after the funds vanished from client accounts at MF Global, customers have questioned why investigators still have not retrieved all of their money. There are some signs of progress, however. The C.F.T.C., the Justice Department and the Securities and Exchange Commission have collected thousands of documents and are tracing the money.

But reclaiming the missing money may prove harder than locating it. That’s because much of it went overseas, where bankruptcy laws often conflict with those in the United States. The complication could mean much legal wrangling before determining what money belongs to whom.

The search for the missing money is separate but related to the effort to uncover who is responsible for its disappearance.

Government authorities are aiming to build a case from the bottom up, and have largely spent time focusing on lower-level employees at the firm. Jon S. Corzine, the former chief executive of MF Global and a former New Jersey governor, has not yet been interviewed. Neither has his deputy, Bradley Abelow, who was the chief operating officer at MF Global, according to a person close to the case.

Neither Mr. Corzine nor Mr. Abelow has been accused of any wrongdoing in the case.

Spokesmen for the C.F.T.C. and the F.B.I. declined to comment.

The testimony of Ms. O’Brien — a senior official at the firm — was supposed to be an important element of the investigation. Ms. O’Brien has appeared numerous times before the C.F.T.C, often testifying as an expert. Her specialty: the protection of customer money at futures firms like MF Global.

Mr. Corzine told a congressional panel last month that she had assured him on Oct. 28 that the firm was not misusing customer money in its transfer to JPMorgan. After it was discovered that customer money was missing, MF Global filed for bankruptcy on Oct. 31.

Federal authorities have reviewed internal MF Global e-mails that instructed Ms. O’Brien to transfer roughly $200 million to JPMorgan Chase to satisfy an overdrawn account, though there is no indication that she knowingly transferred customer money. MF Global’s sloppy records may have obscured the fact that staff was dipping into customer cash to cover the firm’s own needs.

It is unclear who told Ms. O’Brien to transfer the money.

Just three weeks ago, regulators were optimistic about interviewing Ms. O’Brien, who has been a central character in the saga of the missing money.

That optimism began to wane in recent days, when her lawyer approached federal prosecutors about immunity from criminal charges. It is unclear whether the Justice Department is considering Ms. O’Brien’s request for a deal.

Ms. O’Brien has deep roots in Chicago’s financial world. In the 1990s she worked at Chicago-based Mesirow Financial and in 2000 she was named controller of Web Street Securities Inc. She later found a job at Man Financial, according to a court document. In 2005, Man Financial bought the remains of Refco, which had filed for bankruptcy.

In October, Ms. O’Brien was scheduled to speak at an industry conference at the Art Institute of Chicago a panel titled “Dodd-Frank Boot Camp: Margin and Collateral.”

Susanne Craig contributed reporting.

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DealBook: MF Global Scrutinized on Money Move

Jon S. Corzine testified at a House panel hearing on the collapse of MF Global.Jonathan Ernst/ReutersJon S. Corzine testified at a House panel hearing on the collapse of MF Global.

Federal authorities investigating the demise of MF Global think that the firm began improperly moving customer money to a middleman on Oct. 27, according to people briefed on the matter.

The transfers, which indicate the brokerage firm misused client funds earlier than previously believed, represent a new line of inquiry in the hunt for more than $1 billion in missing money.

In MF Global’s last days, the brokerage house was frantically winding down trades to shore up its balance sheet and stave off bankruptcy. Investigators are examining whether the firm — as part of that effort — began moving client funds to the Depository Trust Clearing Corporation, a financial intermediary responsible for closing out some of MF Global’s transactions, these people say.

The new details bolster claims that MF Global was careless with customer money, regardless of the company’s intentions. Authorities previously found that MF Global had used roughly $200 million of client funds to replenish an overdrawn account at JPMorgan Chase in London on Oct. 28, the last business day before the firm filed for bankruptcy.

Now, investigators are also looking at billions of dollars of transfers from MF Global to the Depository Trust Clearing Corporation, a fraction of which is believed to be customer funds. People briefed on the matter say the middleman passed some of the money to banks and other firms that traded with MF Global, which was once run by Jon S. Corzine, the former governor of New Jersey.

In addition, federal authorities are reviewing whether MF Global used customer money to pay the clearing corporation as part of a margin call. Financial intermediaries routinely require extra collateral when firms run into trouble. A different clearinghouse in London forced MF Global to pay roughly $300 million to back some of its bond holdings during its last week.

It is unclear how much customer money was transferred to the Depository Trust Clearing Corporation, and whether officials at MF Global knew they were using client funds. Haphazard recordkeeping and the flood of transactions in its final days might have concealed whether MF Global was deploying the customer cash for firm needs.

A spokesman for the clearing corporation declined to comment.

Kent Jarrell, a spokesman for the trustee overseeing the liquidation of MF Global’s brokerage unit, said that the trustee “has not made a determination about customer cash that went through” Depository Trust.

“We will make a legal determination about whether customer money can be recovered,” Mr. Jarrell said. If it can be recovered, “we will use all legal avenues to do so,” he added.

As MF Global transferred funds to the clearing corporation, regulators started to raise concerns about the customer money after a routine inquiry. In the firm’s final week, senior officials at the Commodity Futures Trading Commission asked MF Global employees to identify the whereabouts of the money. In response, the firm provided a document that highlighted specific MF Global units, according to a person briefed on the matter.

But one of the units, MF Securities, was not listed on the firm’s broader organizational chart, the person said. That discrepancy raised red flags among regulators that the firm might have been misusing customer money.

A person close to MF Global says that the firm’s broker-dealer unit used to be called MF Securities, and people in the company often referred to it by that name. Even so, regulators at the Commodity Futures Trading Commission pushed for assurances that the money was safe. MF Global asked for more time.

Three days later, on Oct. 30, MF Global alerted federal authorities to the shortfall.

Since then, regulators and the trustee, James Giddens, have been searching for the money. The shortfall is now estimated at $700 million to $1.2 billion. The situation has left customers like farmers and hedge funds without a third of the money in their MF Global accounts.

In Congressional hearings, Mr. Corzine and his top deputies have defended their actions, saying they were unsure what happened to the money. No one has been accused of any wrongdoing. A spokesman for the Commodity Futures Trading Commission, which is leading the investigation, declined to comment.

Regulators are focusing on transactions in the firm’s last days to determine when MF Global violated a strict rule that prohibits the mingling of customer money and firm funds.

On Oct. 28, the firm moved roughly $200 million to JPMorgan, after overdrawing an account in London. People briefed on the investigation have said that the money belonged to customers.

“At that time, I was trying to sell billions of dollars of securities to JPMorgan Chase in order to reduce our balance sheet and generate liquidity,” Mr. Corzine told lawmakers on the oversight panel of the House Financial Services Committee. “JPMorgan Chase told me that they would not engage in those transactions until overdrafts in London were cleaned up.”

After the transfer, JPMorgan, one of MF Global’s main banks, questioned Mr. Corzine about the source of the money. Mr. Corzine said he was assured that the cash was legitimate.

The transfers to Depository Trust are of particular interest to regulators. Authorities believe that the transactions represent one of the earliest misuses of customer funds by MF Global.

In part, MF Global transferred money to the clearing house to unwind large positions in its proprietary trading portfolio. The brokerage firm, for example, may have used some funds to cover losses when it sold corporate debt and commercial paper holdings.

The vast majority of the transfers were related to a common transaction on Wall Street known as repurchase and reverse repurchase agreements. In these arrangements, MF Global exchanged securities and short-term cash with investors like hedge funds or banks and promised to return the money and securities at a later date.

As MF Global started to deteriorate, the firm moved to unwind the transactions to reclaim money they posted to support the agreements, an amount of capital thought to be in the hundreds of millions of dollars. The transactions largely took place through the Depository Trust.

But trading partners and clearinghouses — dealing with a large amount of transactions and concerned about the welfare of MF Global — did not immediately return the cash to the brokerage firm, according to the people briefed on the transactions. Without the capital in hand, MF Global may have tapped customer funds to continue unwinding its portfolio, the people said.

At the same time, the clearing corporation ordered MF Global to hand over more cash against its remaining trades, as part of a margin call. The amount of money MF Global was required to post is unclear, but the brokerage unit may have used customer cash to meet those new demands, the people said.

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DealBook: Jefferies Reports $39 Million Profit

Jefferies has been whipsawed by investor fears over its European exposure.

The Jefferies Group reported a $39 million profit for the fourth quarter on Tuesday, as it grappled with choppy markets that have crimped once highly lucrative trading operations.

Jefferies’ earnings for the three months ended Nov. 30, which exclude some onetime accounting gains, amounts to 17 cents a share. Analysts, on average, had expected the bank to earn 14 cents a share, according to data from Bloomberg.

For the year, the firm earned $232 million, a slight improvement from the $224 million it earned last year.

The quarterly results were anxiously awaited by analysts and investors, hoping to scrutinize how well Jefferies had fared after weeks of pressure over its European sovereign debt holdings.

In recent months, the firm has been whipsawed by investor fears over its European exposure. The bank’s shares have tumbled nearly 20 percent since Oct. 31, when MF Global filed for bankruptcy protection after its outsize bets on European bonds prompted a run on that firm.

Eager to avoid becoming the next victim of a European scare, Jefferies detailed its sovereign holdings, then drastically cut its inventory of such debt to demonstrate the liquidity of its balance sheet. Top executives have also stridently battled purported rumormongers allegedly spreading lies about the firm’s financial position.

“We are proud of our 3,851 employee-partners who successfully navigated an extremely challenging fourth quarter that included continuing global volatility compounded by a November filled with a barrage of misinformation about Jefferies,” Richard B. Handler, the chief executive, said in a statement.

Analysts have praised Jefferies’ candor and risk management as signs of a firm both stronger and more careful than MF Global. But some of these same analysts have added that they were concerned that Jefferies might have taken those lessons a bit far, shedding too much risk to build up a safety cushion.

Jefferies “appears to be significantly deleveraging its balance sheet in addressing those concerns, which could further crimp profitability,” analysts at Bank of America Merrill Lynch wrote in a research note on Nov. 28.

In other respects, Jefferies is expected to foreshadow what lies ahead for its larger peers. While banks have said the fourth quarter reflected a rebound from a particularly ugly third quarter, both investment banking and trading businesses are expected to post only modest improvements.

Jefferies’ core trading business reported $286 million in revenue for the fourth quarter, down 25 percent from the period a year earlier, amid a continued slowdown in debt and equity trading. The drop was most noticeable in the firm’s principal transactions group, where revenue plunged 81 percent as Jefferies pulled back from its European sovereign bets.

The investment banking unit reported a drop of about 11 percent, to $261.3 million.

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DealBook: Corzine Defends His Actions at MF Global

Jon S. Corzine, MF Global's former chief executive, testifying at a House hearing into the collapse of his firm.Michael Reynolds/European Pressphoto AgencyJon S. Corzine, MF Global’s former chief executive, testifying at a House hearing into the collapse of his firm.

9:05 p.m. | Updated

WASHINGTON — Jon S. Corzine, who came to Washington in 2001 as a Democratic senator from New Jersey, made a humbling return on Thursday, defending his tenure as MF Global’s top executive and sounding a note of contrition about the brokerage firm’s startling collapse.

Mr. Corzine told the House Agriculture Committee that he was “stunned” when he learned late on Oct. 30 that about $1 billion of customer money could not be located, a discovery that thwarted a sale of the firm and led to its filing for bankruptcy. Regulators and the Federal Bureau of Investigation are now hunting for the money and examining potential wrongdoing at the firm.

Thursday’s testimony was his first public comments since the bankruptcy and came after the committee voted last week to subpoena him.

The former senator insisted that he always tried to “do the right thing.”

“I never intended to break any rules,” said Mr. Corzine, dressed in a dark suit but without his trademark sweater vest. “I know I had no intention to ever authorize the transfer of segregated moneys. I know what my intentions were.” Mr. Corzine has not been accused of any wrongdoing.

He did not rule out possible wrongdoing at MF Global. In theory, an employee may have misused customer cash after misinterpreting the chief executive’s words, he said.

Still, over three hours of testimony, Mr. Corzine danced carefully around questions touching on the scandal of the missing funds, using phrases like “never intended” and “not to my knowledge.”

And he offered little insight into the whereabouts of the missing money. He surmised that one potential cause of the shortfall was the “extraordinary number of transactions during MF Global’s last few days,” calling it a “chaotic” period that was “extremely difficult” to “reconstruct.”

Yet it was not known until Thursday whether Mr. Corzine would directly respond to the lawmakers’ questions at all.

“Considering the circumstances, many people in my situation would almost certainly invoke their constitutional right to remain silent — a fundamental right that exists for the purpose of protecting the innocent,” he said. “Nonetheless, as a former United States senator who recognizes the importance of Congressional oversight, and recognizing my position as former chief executive officer in these terrible circumstances, I believe it is appropriate that I attempt to respond to your inquiries.”

Mr. Corzine, who ran Goldman Sachs before entering politics, eagerly defended his decision to invest heavily in European sovereign debt, saying that it was part of a crucial push to return the firm to profitability. The firm had a $6.3 billion bet on the debt of five European nations.

“At the time that MF Global entered into the transactions,” he said, “I believed that its investments in short-term European debt securities were prudent.”

The MF Global board, he said, approved the risk limits for the trades, which were set on a country-by-country basis. At times, he said, the firm exceeded those limits and “it took appropriate steps” to reduce the risk.

When MF Global filed for bankruptcy, Mr. Corzine said the firm was “within the risk limits set by the board of directors.” He said that he resigned from the firm on Nov. 4 at the request of a senior member of the board.

Mr. Corzine, who was defeated for re-election as governor of New Jersey in 2009, also defended his dealings with regulators. Months before the firm failed, he began a personal lobbying blitz, urging regulators at the Commodity Futures Trading Commission to weaken a rule that would rein in the use of customer funds. He took his pitch directly to the agency’s chairman, Gary Gensler, who worked for Mr. Corzine at Goldman Sachs in the 1990s.

Their relationship has come under a microscope on Capitol Hill. Mr. Gensler recused himself from the investigation of MF Global after Senator Charles E. Grassley, Republican of Iowa, raised questions about Mr. Gensler’s past acquaintance with Mr. Corzine.

Now, some Republicans are criticizing Mr. Gensler for stepping back at such a crucial moment for the agency. Representative Timothy V. Johnson, Republican from Illinois, said on Thursday that it was “entirely unacceptable” for Mr. Gensler to not testify at the hearing. He also criticized what he has called a “Goldman Sachs fraternity.”

Jill E. Sommers, a Republican member of the futures commission, has taken over the lead role on the case and testified on Thursday. Lawmakers asked her whether the agency should have sounded the alarm about MF Global before its final days.

Ms. Sommers replied that the agency was “not the frontline regulator.” That job belongs to for-profit exchanges like the CME Group.

Lawmakers were not satisfied.

“It appears to me that no one has learned a thing; that Wall Street is still operating as if 2008 never happened,” said Collin C. Peterson of Minnesota, the committee’s ranking Democrat.

Mr. Corzine will remain a regular presence on Capitol Hill for weeks. Two other Congressional panels, the Senate Agriculture Committee and the oversight arm of the House Financial Services Committee, have also demanded that he testify next week.

The House panel on Thursday also heard testimony from the firm’s regulators, including Ms. Sommers and the CME Group.

But throughout the stop-and-start proceedings, the attention was centered on Mr. Corzine. And with the world watching, he began his testimony with a mea culpa.

“I sincerely apologize, both personally and on behalf of the company, to our customers, our employees and our investors, who are bearing the brunt of the impact of the firm’s bankruptcy,” Mr. Corzine said.

“My sadness, of course, pales in comparison to the losses and hardships that customers, employees and investors have suffered as a result of MF Global’s bankruptcy.”

In its final days, MF Global tapped its customers’ accounts to meet its own financial obligations, people briefed on the matter have said. The act violated a fundamental Wall Street regulation that firms never commingle customer money with company funds.

Mr. Corzine told the House committee that he learned of the missing money about 11 p.m. on Oct. 30. “I remain deeply concerned about the impact that the unreconciled and frozen funds have had on MF Global’s customers and others,” he said.

The former senator at times seemed comfortable sitting on the other side of the hearing room. When faced with questions about MF Global’s complex trading, he took a professorial tone, explaining the intricacies of his business and even cracking an occasional smile.

And while lawmakers peppered Mr. Corzine with questions about his European sovereign debt bet and the missing money, they kept a cordial tone with their former colleague. One congressman even congratulated the former Goldman executive on achieving considerable wealth.

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DealBook: Live Blog: House Panel Hearing on MF Global

Jon S. Corzine, former chief of MF Global, arrived to testify at a House Agriculture Committee hearing.Jay Mallin/Bloomberg NewsJon S. Corzine, former chief of MF Global, arrived to testify at a House Agriculture Committee hearing.

Jon S. Corzine, the former chief of MF Global, is set to appear before the House Agriculture Committee on Thursday to answer questions about the collapse of his brokerage firm and the disappearance of up to $1.2 billion in customer money. The panel began at 9:30 A.M.

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DealBook: MF Global’s Collapse Spurs Curbs on Brokers

Gary Gensler, chairman of the Commodity Futures Trading Commission, testified on Dec. 1 at a Senate Agriculture Committee hearing.Yuri Gripas/ReutersGary Gensler, the Commodity Futures Trading Commission chairman, testified last week before the Senate Agriculture Committee.

8:04 p.m. | Updated

Federal regulators approved tougher constraints on Wall Street risk-taking on Monday, adopting the MF Global rule, named after the collapsed brokerage firm that is believed to have improperly used millions of dollars of customer money.

The new rule will limit how the brokerage industry can invest customer money, largely barring firms from using client funds to buy foreign sovereign debt. It also prevents a complex transaction that allowed MF Global, in essence, to borrow money from its own customers.

The Commodity Futures Trading Commission, which voted unanimously to approve the rule, planned to finish it months ago.

But the agency delayed action as a result of strong opposition from Jon S. Corzine, who at the time was chief executive of MF Global. Mr. Corzine resigned on Nov. 4, four days after MF Global filed for bankruptcy protection.

“I believe that this rule is critical for the safeguarding of customer money,” Gary Gensler, the agency chairman, said Monday.

The revelation that client money was missing at MF Global has incited panic in the futures industry. MF Global’s customers, including farmers and hedge funds, are still owed millions of dollars.

Now, some customers say they are losing faith in a system that promised to protect their money. While brokerage firms can invest client money, such funds must never be commingled with company funds. MF Global violated that principle in its final chaotic days, tapping its segregated client accounts to meet its own financial obligations, people briefed on the matter have said.

The missing money, thought to be about $1.2 billion, has prompted several federal investigations in recent weeks. The futures commission is leading the hunt for the money, while the Federal Bureau of Investigation is examining possible wrongdoing.

Some regulators are also examining a flood of new rules for brokerage firms, part of an effort to prevent a repeat of the MF Global debacle. MF Global’s collapse has also led to renewed calls for federal regulators to keep a closer watch on brokerage firms, reclaiming oversight authority now delegated to for-profit exchanges like the CME Group.

Bart Chilton, a Democratic member of the commodities commission, is pushing for Congress to create an insurance fund for futures industry customers.

The rule adopted by the commission on Monday is aimed at the industry’s use of customer money. While firms can invest customer funds in United States Treasury securities and other plain-vanilla funds, the agency reined in riskier bets.

Until now, brokerage firms could invest client money in a number of securities, including sovereign debt. Under the new rule, if firms want to invest customer funds in foreign government bonds, they must petition the agency for an exemption. The new rule also bars firms from using client money so that one arm of the company can lend to another, a transaction known as an in-house repurchase agreement.

“As recent events have highlighted, the protection and preservation of customer funds is fundamental to our markets,” Scott O’Malia, a Republican member of the commission, said in a statement.

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DealBook: Details Emerge on MF Global’s Last-Ditch Effort to Fill Shortfall

Jon S. Corzine on the trading floor of MF Global last year.David Goldman for The New York TimesJon S. Corzine on the trading floor of MF Global last year.

After MF Global discovered a nearly $1 billion shortfall in customer money in the early hours of Oct. 31, the brokerage firm lined up a last-ditch — but ultimately unsuccessful — effort to fill the hole, according to people briefed on the matter.

At the time, the revelation of missing money was about to scuttle a last-minute deal to sell part of MF Global to another brokerage firm. MF Global executives scrambled to assemble money from a variety of sources, including its own accounts at banks and clearinghouses, said these people, who requested anonymity because investigations into the matter were incomplete.

The firm was ready to proceed with the wire transfers, but was forced to abort at the last second. Hours later, MF Global filed for bankruptcy protection. And within days, Jon S. Corzine, the former New Jersey governor, had resigned as the firm’s chief executive.

Details surrounding the failed transfers are spotty, though investigators have since criticized the poor condition of MF Global’s books, which may have presented an incorrect picture of how much money the firm had at the time.

It is possible that MF Global lacked the necessary money to complete the transfers. In other cases, the firm’s banks, including JPMorgan Chase, may have needed additional time to verify its account balances.

Part of the reason that MF Global’s records were in disarray was a flurry of asset sales that the firm made in its last week in a frenzied effort to raise money.

What caused the initial shortfall remains the subject of wide-ranging investigations by regulators and the Justice Department. Even the precise amount that is missing has caused some dispute, with estimates ranging from about $600 million to more than $1.2 billion.

What is clear to investigators is that MF Global improperly used customer funds for its own needs during its final chaotic days, according to people with knowledge of the inquiries. That move essentially breached a fundamental Wall Street rule: customer money must remain separate from company cash.

Neither MF Global nor Mr. Corzine has been accused of any wrongdoing.

About $200 million in customer money that disappeared from MF Global surfaced at one point at JPMorgan in Britain during that last week, the people with knowledge of the inquiries have said.

That discovery could prove to be a major breakthrough in the weeks-long search for the missing funds, though hundreds of millions of dollars in customer money remains unaccounted for.

MF Global sent the $200 million to JPMorgan, some people close to the investigations believe, after it overdrew an account at the bank. JPMorgan raised questions about the money , but it never received assurances from MF Global.

It is possible that JPMorgan no longer holds the money, having served only as a middleman between MF Global and several trading partners.

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