September 22, 2023

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: House Committee Subpoenas Corzine

Jon S. Corzine, the former chief of MF Global.Pool photo by Andrew HarrerJon S. Corzine, the former chief of MF Global.

The House Agriculture Committee voted on Friday to force Jon S. Corzine to appear at an upcoming hearing about the collapse of MF Global, the brokerage firm that he once ran.

The committee’s hearing, set for Thursday, will present the first public grilling of Mr. Corzine since MF Global filed for bankruptcy on Oct. 31. It also will give lawmakers a platform to delve into the demise of MF Global, where as much as $1.2 billion in customer money remains missing. Customers of the brokerage firm included farmers and agriculture companies, as well as hedge funds and other investors.

“We agree that his testimony is essential to fulfill our objectives on behalf of our constituents and to complete the hearing record,” the committee’s chairman, Frank Lucas, Republican of Oklahoma, said at a committee meeting.

The disappearance of the money has spawned a sprawling federal investigation into MF Global, with the Commodity Futures Trading Commission leading the search for the missing money and the Federal Bureau of Investigation examining a potential criminal case.

On Friday morning, the House committee voted unanimously to issue a subpoena to Mr. Corzine, who ran MF Global before he resigned on Nov. 4. He also faces requests to testify from two other Congressional panels.

Mr. Corzine has not been accused of any wrongdoing. A representative for Mr. Corzine declined to comment.

The hearing will be an awkward return to Capital Hill for Mr. Corzine, who spent five years in Washington as a Democratic Senator from New Jersey. He left his Senate seat to become the governor of New Jersey, a job he lost in 2009.

The House panel’s hearing will be quickly followed by two other Congressional committee hearings into MF Global. The Senate Agriculture Committee will hold its hearing on Dec. 13, and the oversight panel of the House Financial Services Committee will host a hearing on Dec. 15.

In a preview of the upcoming examinations, lawmakers on Thursday grilled MF Global’s regulators about the firm’s collapse. With the customer money still missing more than a month after the Chapter 11 filing, lawmakers noted, some futures industry customers are losing patience.

“MF Global has shattered the faith of customers in the futures markets,” Debbie Stabenow, a Michigan Democrat and the Senate Agriculture Committee’s chairwoman, said at the hearing.

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DealBook: MF Global Is Said to Have Used Customer Cash Improperly

MF Global improperly diverted customers’ cash for its own use in the days before its bankruptcy, an act that regulators believe may help explain why $600 million of customer funds remains missing, people briefed on the investigation say.

Investigators have now zeroed in on hundreds of millions of dollars in suspect borrowing at the commodities and derivatives brokerage firm, which at the time of its collapse was run by Jon S. Corzine, the former Democratic governor of New Jersey. At least some of that money was used to cover trading losses at MF Global, regulators suspect, meaning the money may no longer be simply missing. It may be gone.

MF Global, like other brokers, can use customer cash if it puts up sufficient collateral. But the firm did not provide enough backing in late October, essentially taking free loans, said the people briefed on the investigation, who spoke on the condition of anonymity because the inquiry was continuing.

As customers rushed to withdraw money while the firm was teetering on the brink of bankruptcy, that questionable borrowing worsened a liquidity crisis at the firm.

It is unclear what MF Global did with all of the money or whether it can be recovered. The firm may have used some of the cash to keep its own lenders at bay, which means the money could be sitting in an account at another firm.

And some of the $600 million may yet materialize. As a patchwork of federal agencies and the trustee overseeing the firm’s liquidation reconstruct MF Global’s books, they expect to find that in the chaotic last days the firm failed to record when some customers received their money.

But a big chunk will most likely be much harder to recover, the people say, because it was used to pay off losses, rather than back trades.

The search for the missing money has touched the breadth of the commodities futures business, from Wall Street hedge funds to Midwest farmers. As hundreds of examiners pore over records around the clock, comb through 38,000 customer accounts and interview former employees, brief moments of hope have emerged only to later be proved false.

An MF Global spokesman declined to comment. Neither the firm nor Mr. Corzine have been accused of wrongdoing.

A lawyer for MF Global, Marc E. Kasowitz, said the company and its employees were cooperating with regulators as well as the trustee.

“Any characterization at this point of what occurred at MF Global is premature and inappropriate,” Mr. Kasowitz said in a statement.

The failure of the brokerage firm set off a wave of panic among its tens of thousands of customers. Many of them are farmers and small-business owners, who use these markets to protect themselves from swings in the prices of crops and metals.

In a federal bankruptcy court hearing in Lower Manhattan on Thursday morning, a federal judge approved the transfer of about 60 percent of the cash-only accounts sitting at MF Global to its 23,000 rightful owners, totaling about $520 million. The trustee, James W. Giddens, plans to begin dispersing the money before Thanksgiving.

The missing money strikes at the very heart of the futures industry. Brokerage houses and traders have long depended on the promise that customer cash will be kept separate from the firm’s money. This ensured that even if the firm were on the cusp of collapse, customers could safely access their money.

To unravel the mystery, the federal government has dispatched an assortment of regulators and criminal investigators. The Commodity Futures Trading Commission is leading the search for the missing money.

Investigators believe that money was transferred from the futures business to its securities brokerage division, according to people with knowledge of the inquiry. The Securities and Exchange Commission is helping to trace where that money went. The Federal Bureau of Investigation, meanwhile, is examining potential criminal wrongdoing, and the United States attorney’s offices in Chicago and Manhattan have issued subpoenas in the matter.

Of interest to authorities are these two main businesses run by MF Global. The futures side of the operation traded contracts for wheat, corn and metals. That is where the customer money went missing. The other side, which focused on securities, was where the firm placed a $6.3 billion bet on the sovereign debt of five European countries. Those wagers alarmed investors when they were disclosed, prompting a crisis of confidence that led to the firm’s demise.

On Oct. 24, Moody’s Investors Service lowered its credit rating on MF Global, citing concerns about its European debt exposure. Trading partners began demanding more collateral.

MF Global held a fire sale that week, reducing its assets to $23 billion from $55 billion, according to a person with knowledge of the matter. But the flood of requests kept coming from both customers and trading partners, and MF Global began to shift money to its securities division.

Like many futures shops, MF Global routinely borrowed money from customers and replaced it with assets like United States Treasury securities. Firms often keep a cushion of cash to protect customer funds, which they are allowed to tap with certain restrictions.

But according to the people briefed on the investigation, MF Global depleted this buffer and then dipped into the customer accounts to the tune of hundreds of millions of dollars. And in the days before the collapse, the firm stopped backing the loans it took from customers.

It is unclear whether MF Global officials knowingly used customer money or if they believed the buffer was intact. If investigators determine that MF Global intentionally tapped the customer funds, they could file both civil and criminal charges.

MF Global’s customers who acted fast got their money back. The rest now must wait in line, and may never fully recover their funds. Bankruptcy experts doubt the trustee will be able to claw back money secured by clients who rushed out the door.

The process will almost certainly be painful. The trustee has transferred some money backing open trades from MF Global to other brokers. And soon, the trustee will begin the transfer of 60 percent of cash accounts back to its owners.

But as proof of how complex and messy these affairs can be, customers with cash as well as open trades do not yet qualify to get any of their cash back.

Jason Skole, an investor in Boca Raton, Fla., had about $200,000 trapped at MF Global when the firm filed for bankruptcy, a fraction in open trades and the majority in cash.

“You don’t worry about any insurance in this industry because your money is protected, but it’s not,” Mr. Skole said. “It’s a terrible situation. It’s doesn’t make for a good Thanksgiving or Christmas.”

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