MF Global: Corzine maintains innocence

@CNNMoney December 22, 2011: 9:37 AM ET

NEW YORK (CNNMoney) -- Former MF Global CEO Jon Corzine returned to Capitol Hill Thursday, where he rejected allegations aired earlier this week that he was aware of fund transfers from customer accounts.

Corzine's testimony came two days after Terry Duffy, head of exchange operator CME Group (CME), suggested in a separate Congressional hearing that Corzine may have been aware of unlawful money transfers out of customer accounts in the days before MF Global filed for bankruptcy. (MF Global: Sorting through the debacle.)

Lawmakers have been probing the brokerage's collapse, and in particular, the revelations that more than $1 billion in customer funds, mostly from commodities accounts, are still missing.

Corzine has consistently said he has no idea how the money went missing, never ordered that customer funds be misused and did not learn of the massive shortfall until less than 24 hours before the firm filed for bankruptcy. In the commodities business, customer money at brokerages like MF Global (MFGLQ) is supposed to be protected at all times, even in the event of a bankruptcy.

But Duffy claimed Tuesday that Corzine was aware that the firm had tapped customer accounts for its own use in its final days.

Such a transaction could be legal under some circumstances, and Duffy did not specifically say that Corzine himself had authorized illegal money transfers. He did say, though, that the firm had made at least some transfers from customer accounts illegally.

Corzine denied Duffy's allegations Thursday, saying he "did not in any way know about the use of customer funds on any loan or transfer." In the firm's last hours, he added, he learned of the massive hole in customer accounts but did not know how it was formed.

Investigators, however, have been developing a clearer picture of just what went wrong. Rep. Randy Neugebauer of Texas said at Thursday's hearing that a Congressional investigation had shown that MF Global moved at least $700 million out of customer accounts in the days before its bankruptcy "to meet liquidity needs of the firm".

This was apparently done without putting the collateral in place to make such a transaction legal, according to Neugebauer's account.

The allegations follow on similar claims from CME Group, which says MF Global broke the law in using customer funds for its own benefit. Duffy also claimed Thursday that the firm had falsified accounting statements to conceal the shortfalls in customer accounts.

Regulators under scrutiny: Witnesses also appeared in the latter half of Thursday's hearing from the New York Federal Reserve Bank and from regulators including the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Lawmakers quizzed them on how, in an era following the global economic meltdown, regulators could allow another big financial institution to fail, and lose more than $1 billion of its customers money in the process.

Thomas Baxter, general counsel of the Federal Reserve Bank of New York, testified on Thursday that his agency had scrutinized MF Global for more than two years before giving it the green light to trade U.S. securities.

But there were some major compliance issues along the way which the brokerage eventually fixed, he said.

Baxter said the U.S. Commodity Futures Trading Commission found that the company failed to supervise traders, neglected to transmit accurate prices of its natural gas options and didn't maintain written records of at least one of its clients.

Furthermore, MF Global's parent company was based in Bermuda, he said, noting that the Fed requires its primary dealers to be domiciled in the U.S.

But MF Global fixed all of these issues, said Baxter, and that's why the Fed finally approved the now-bankrupt brokerage to trade in U.S. securities.

"The New York Fed designated MF Global as a primary dealer to meet our highly specialized needs, and we followed our primary dealer policy to the letter without fear or favor," said Baxter, in prepared testimony to a Congressional subcommittee.

Lame responses from CEOs

The Fed designated MF Global as a primary dealer in February and conducted due diligence on the company through October, "when its financial condition deteriorated abruptly and quickly," said Baxter.

Moody's downgraded MF Global on Oct. 24 and the following day the brokerage reported its "largest quarterly earnings loss ever," said Baxter. At that point, he said the Fed blocked MF Global from dealing securities. To top of page

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