September 22, 2023

DealBook: House Report Details Collapse of MF Global

Jon Corzine, the former chief of MF Global, at a House panel in 2011.Alex Wong/Getty ImagesJon Corzine, the former chief of MF Global, at a House panel in 2011.

2:52 p.m. | Updated

WASHINGTON – Congressional Republicans on Thursday delivered a long-awaited “autopsy” report on MF Global, sharply criticizing regulators for failing to share information as the brokerage firm was reeling.

The 100-page report, from Republican members of the House Financial Services Committee’s oversight panel, describes a “disorganized and haphazard” approach to regulatory oversight in the week before MF Global collapsed in 2011. The Commodity Futures Trading Commission and the Securities and Exchange Commission, according to the report, failed to coordinate as the firm was on the brink.

Two days before the collapse of the firm, top S.E.C. officials joked about three conference calls among regulators being scheduled for 10 a.m. “Ahhhh, coordination in action!” Mary L. Schapiro, chairwoman of the S.E.C., wrote in an e-mail to Robert W. Cook, the agency’s head of trading and markets.

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In the final hours before bankruptcy, the report said, MF Global officials said the futures commission “pressured” the firm to transfer $220 million to plug a hole in customer accounts. It did so over the objections of the S.E.C. and other regulators. When Ms. Schapiro learned of the futures commission’s orders, she responded in an e-mail to a colleague, “Without telling us? That is unacceptable.”

The e-mails underscored the breakdown in communication among federal officials that, according to the report, contributed to the firm’s demise. The report also took aim at the Federal Reserve Bank of New York, saying it “should have exercised greater caution” when approving MF Global’s application for the coveted status of selling securities on the Fed’s behalf.

Lawmakers suggested that investors and customers would have been better served if the S.E.C. and the futures commission streamlined their operations or combined into a single agency that oversaw all capital markets, citing “an apparent inability” of the regulators to coordinate their actions.

Mary Schapiro, chairwoman of the Securities and Exchange Commission, and Gary Gensler, chairman of the Commodity Futures Trading Commission, at a House panel in June.Daniel Rosenbaum for The New York TimesMary L. Schapiro, chairwoman of the Securities and Exchange Commission, and Gary Gensler, chairman of the Commodity Futures Trading Commission, before a House panel in June.

“We didn’t need additional regulation. We needed regulators actually doing their job,” Representative Randy Neugebauer, a Republican from Texas who led the investigation as chairman of the oversight panel, said at a news conference on Thursday.

Futures commission officials declined to comment. John Nester, a spokesman for the S.E.C., said his agency would review the panel’s findings. He added that the report did not mention the S.E.C.’s having informed the C.F.T.C. about capital charges imposed on MF Global in August.

The report, a sort of public shaming of MF Global’s employees and federal watchdogs, further traced the debacle to the firm’s top executives. Republicans placed blame on the former chief executive, Jon S. Corzine, who they say ratcheted up a bet on European debt without regard for internal controls or the danger to clients. The report also argued that the firm was not “forthright with regulators or the public” about the massive trade and its broader health.

Republicans released the report months later than anticipated and without the support of House Democrats.

Some dissent was sowed in Congressional hearings that at times featured political bickering among members. On Wednesday, the oversight panel’s top Democrat, Representative Michael Capuano of Massachusetts, declined to endorse Mr. Neugebauer’s findings, saying he agreed with a number of the conclusions but needed additional time to review the document. He said he would soon file an addendum to the report.

For the targets of the report, the splintered support provides a path to undermining the findings. Democratic regulators and Mr. Corzine, a former Democratic senator from New Jersey, could dismiss the investigation as a partisan attack.

House Republicans, however, say the examination relied on an exhaustive review of evidence rather than political motivations.

The report, the outgrowth of several Congressional hearings with MF Global’s executives and other officials, is the culmination of a yearlong investigation that sought to chronicle the firm’s undoing and rebuke those at fault. The House panel cobbled together its findings from dozens of interviews with former employees and more than 240,000 documents.

While short on revelations, the document is the most significant Congressional effort yet to seek redress for MF Global’s errors.

Criminal authorities investigating MF Global’s collapse are leery of filing charges against the top executives, suspecting that chaos and lax controls resulted in customer money going missing. And while regulators are still pursuing civil enforcement actions, in which the legal bar is lower, officials have not yet decided a course.

Even after a year of overlapping investigations, MF Global’s customers remain in the lurch. Farmers and ranchers, who traded futures contracts through MF Global to protect themselves from the price swings of their crops, have recovered about 82 percent of their money but are still owed millions of dollars.

James W. Giddens, the court-appointed trustee seeking to recover money for MF Global’s customers, has joined a lawsuit against several top MF Global executives, including Mr. Corzine, to make up for the missing funds.

In a report that largely tracks the findings issued by Congressional Republicans, Mr. Giddens criticized MF Global employees for tapping customer money to pay the firm’s own bills in a last-ditch bid for survival.

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S.E.C. Official in Madoff Case May Draw a Criminal Inquiry

Federal ethics officials are expected to recommend that the Justice Department begin a criminal investigation into actions taken by David M. Becker, the former general counsel of the Securities and Exchange Commission, who determined the agency’s proposal for compensating victims of the Bernard Madoff Ponzi scheme when he had a financial interest in the outcome.

A possible criminal referral from the Office of Government Ethics is expected to be part of a report issued next week by H. David Kotz, the inspector general of the S.E.C., according to two people briefed on the report’s contents.

Mr. Kotz began investigating Mr. Becker’s role in reversing an earlier agency compensation plan for Madoff victims after the Becker family’s $2 million Madoff stake was disclosed publicly last February.

Federal conflict of interest law 18 U.S.C. § 208 requires government employees to be disqualified from participating in a matter “if it would have a direct and predictable effect on the employee’s own financial interests.”

Mr. Becker joined the S.E.C. in February 2009 at the urging of its chairwoman, Mary L. Schapiro. In that role, he persuaded the S.E.C. to change its victim compensation methodology to a more generous approach, even though he had received a Madoff stake through an inheritance from his late mother, who had invested with the money manager.

Mr. Becker left the commision this year.

William R. Baker III, a lawyer for Mr. Becker, declined to comment for this article. A spokesman for the S.E.C. declined to comment because the commission had not seen the report.

In early 2009, the S.E.C. agreed on a method that would give investors a claim to only the money they had put into their Madoff accounts.

But in the summer of 2009, Mr. Becker reversed this decision, arguing that the commission should allow victims to keep some of the gains their investments had generated, since the investment would have grown over time even in a low-interest account. The Becker family would benefit from this approach.

The S.E.C. approved the compensation plan backed by Mr. Becker. Mr. Kotz is expected to report that none of the commissioners knew of the Becker family’s Madoff holdings when they approved the new compensation plan. As a result, Mr. Kotz may urge the full commission to put the victim compensation matter to another vote.

Previously, Mr. Becker said that he had advised Ms. Schapiro and the S.E.C’s chief ethics officer of his financial interest in a Madoff account, “either shortly before or after” joining the agency in February 2009. The ethics officer, William Lenox, approved Mr. Becker’s role in the Madoff compensation deliberations after only a brief review. Mr. Lenox reported to Mr. Becker.

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DealBook: On Capitol Hill, Regulators Plead for More Money

Mary L. Schapiro, the S.E.C.'s chairwoman, and Gary Gensler, the C.F.T.C.'s chairman.Andrew Harrer/Bloomberg NewsMary L. Schapiro and Gary Gensler.

Financial regulators asked lawmakers on Wednesday for more money to enforce dozens of new rules and oversee Wall Street.

Although the Commodity Futures Trading Commission and the Securities and Exchange Commission received some additional money in April, the agencies say they are still hurting for cash. Now, the regulators are adopting a refrain more familiar to disappointed sports fans than powerful regulators: wait till next year.

Gary Gensler, the Commodity Futures Trading Commission’s chairman, and Mary L. Schapiro, the S.E.C.’s chairwoman, told a Senate appropriations subcommittee that they needed hundreds of millions of dollars in 2012 to prevent another financial crisis.

“In 2008, both the financial system and the financial regulatory system failed the test for the American public,” Mr. Gensler said in testimony before the subcommittee that doles out money to financial regulators.

In the wake of the crisis, Congress passed the Dodd-Frank Act, which requires Mr. Gensler and Ms. Schapiro to oversee the $600 trillion swaps market, an industry at the center of the financial crisis.

“An investment in the C.F.T.C. is warranted, because, as we saw in 2008, without oversight of the swaps market, billions of taxpayer dollars may be at risk,” Mr. Gensler told the subcommittee. The panel is weighing whether to increase regulatory budgets during the government’s fiscal year 2012, which starts on Oct. 1.

Ms. Schapiro said any cuts would have a “profound impact” on her agency.

Still, the agencies are hardly poor.

Both agencies received more money in April, on top of earlier budget increases approved in the aftermath of the crisis. The S.E.C.’s budget increased 6 percent this year, to $1.18 billion, which is nearly triple what it was a decade ago. The Commodity Futures Trading Commission’s budget recently grew 20 percent, to $202 million.

But the new money falls short of what President Obama had requested for the agencies and what the Dodd-Frank Act had called for them to receive.

As DealBook reported on Tuesday, the agencies are still struggling to fill crucial jobs, enforce new rules and upgrade market surveillance technology. Regulators warn that their money problems have also jeopardized their most important duty: keeping an eye on Wall Street.

The Commodity Futures Trading Commission says the uncertainty has forced it to delay some investigations and forgo other potential cases altogether. The S.E.C.’s enforcement division has adopted cutbacks, too, including curbing its use of expert witnesses in some securities fraud trials.

The agencies also face substantial new responsibilities under Dodd-Frank, which requires the S.E.C. to write more than 100 new rules, open five new offices and publish more than 20 studies.

To do so, the S.E.C. has requested a $1.4 billion budget for 2012, a roughly $220 million increase over its current funding. The Commodity Futures Trading Commission wants to add $106 million to its budget, which would bring it to $308 million.

But Republicans are looking to slash the agencies’ budgets, as the nation’s budget deficit swells. The Republican-controlled House of Representatives recently approved a 2012 budget plan that would roll back spending to 2008 levels, which would make huge dents in the regulators’ budgets.

“We’re all aware of our budget deficit,” said the subcommittee’s ranking Republican, Jerry Moran of Kansas. “Simply increasing funding does not ensure that an agency can successfully achieve its mission.”

Mr. Moran also questioned whether Mr. Gensler’s budget should focus more on increasing the agency’s market surveillance technology, rather than hiring new lawyers.

Mr. Gensler agreed that “technology is absolutely critical,” and his agency would roughly double its technology budget if it received a flood of new money. But he added: “You can’t send a computer into court to plead a case.”

Ms. Schapiro also warned that funding cuts “would have a devastating impact on the agency’s ability to protect the public from financial fraud.” The agency, she said, would begin fewer investigations into Wall Street wrongdoing, delay examinations of banks and other public companies and suspend its “tips and referrals” system that alerts the agency to potential fraud.

Ms. Schapiro noted that her agency costs taxpayers nothing. The agency offsets its budget with fees collected from the financial industry, often turning a profit for the government.

The Commodity Futures Trading Commission does not collect such fees, although its budget for 2012 would allow the commodities commission to start doing so, which would generate $117 million for the budget.

“The C.F.T.C. is a good investment for the American public,” Mr. Gensler said. “We recognize that the budget deficit presents significant challenges to Congress and the American public. But we cannot forget that the 2008 financial crisis was very real. “

The regulators on Wednesday received some reason to hope for bigger budgets, as the subcommittee’s Democratic members expressed support for the agencies.

“We depend on their foresight and leadership,” said Senator Richard J. Durbin of Illinois, the Democratic chairman of the panel.

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