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The Senate Agriculture Committee on Dec. 13 held its second hearing focusing on the MF Global bankruptcy. Lawmakers from both sides of the aisle grilled MF Global’s top executives on what took place at the firm that led to a loss of as much as $1.2 billion in customer funds.
Over the course of the seven-hour hearing, most of the members of the committee participated, listening to their agricultural constituents describe the impact of the firm’s collapse and trying to piece together the puzzle of where funds went missing. The lawmakers repeatedly expressed the concern that confidence in the futures markets has been severely damaged and said their top focus is to achieve the return of all customer funds. Many MF Global customers were ranchers, farmers and agricultural customers from states represented on the Senate committee.
“We made a decision to ask you to speak first because you're the focus of why we are here,” Senator Debbie Stabenow (D-Mich.), the committee’s chairwoman, said to the farmers and ranchers in the first panel of witnesses. “Our number one focus is to make sure that you are made whole and have confidence in the markets moving forward.”
“You certainly have our sympathy,” said Senator Kent Conrad (D-N.D.). “We are hopeful that before this is over there will be 100% recovery. We are very focused on trying to make certain that you get every dime back that you put in customer accounts that should not have been at risk.”
The second panel of witnesses consisted of three of MF Global’s top executives--Jon Corzine, the former chief executive officer of MF Global; Bradley Abelow, president and chief operating officer; and Henri Steenkamp, global chief financial officer. This hearing was the first time that Abelow and Steenkamp testified before Congress on the collapse of MF Global.
The third and final panel focused on oversight of the MF Global investigation and included Jill Sommers, the Commodity Futures Trading Commissioner in charge of the agency’s investigation; James Giddens, the bankruptcy trustee in the MF Global case; and Terry Duffy, executive chairman of CME Group.
Despite the numerous questions from the members of the committee, no details emerged from any of the MF Global executives on the whereabouts of the customer funds that went missing as the firm plummeted into the nation’s eighth largest bankruptcy. During the last panel, however, Duffy alleged that Corzine knew that customer funds had been transferred out of segregated accounts. Duffy told members of the committee that an unnamed CME auditor “participated in a phone call with senior MF Global employees wherein one employee indicated that Mr. Corzine knew about the loans that had been made from the customer-segregated accounts.”
Click Here for Testimony and Statements
Impact of the MF Global Collapse on Agricultural Sector
During the first panel lawmakers asked each of the agricultural sector witnesses to describe how they had been impacted by the MF Global collapse. The witnesses, who came from states such as Michigan, Minnesota, Illinois and Kansas, cited frozen accounts, additional margin calls, unwound hedges and higher borrowing costs. All four witnesses appealed to the committee to help find their lost customer funds. They also stressed that customers should take priority over creditor claims in the on-going bankruptcy proceedings.
“The segregated accounts need to be held above the bankruptcy, in my opinion. I think there needs to be a full investigation, and we need to have some safeguards in place where this can’t happen again,” said Robert Hupfer, a Freeland, Mich. grain elevator operator.
Both the CFTC’s Sommers and the court-appointed trustee agreed that returning customer funds is a higher priority over responding to creditor claims.
One witness, Dean Tofteland, a Minnesota farmer, explained that he is not using the futures markets anymore. “I just don’t have the confidence right now until we get 100% of our cash back,” Tofteland said. “I was forced to liquidate my hedges and we've not been able to hedge since that time.” Tofteland explained that days before the bankruptcy when he heard news that MF Global was in financial trouble, he was assured by his broker that his $253,000 in collateral would be safe. “I was told that no customer has ever lost a penny in segregated accounts,” he said.
“The use of these markets is important to reduce risk, but we must have the confidence to do so. As you know, this impact has been felt far across this country and not just in my local area,” Tofteland told the congressional panel.
Jeffrey Hainline, president of an introducing broker based in Bloomington, Ill. Called Advance Trading, said many of his customers are now considering using more than one futures commission merchant. “Numerous clients are asking about having more than one FCM so that at a moment’s notice, we can transfer accounts if somebody throws up a red flag,” he said, adding that there are inefficiencies in spreading business among several different FCMs.
When asked about what types of policies should be put in place to ensure that customer money will be protected in the future, the witnesses did not recommend new rules but rather emphasized the importance of enforcing existing rules and laws.
“I feel we need to enforce the regulations that are in place,” said Hupfer.
“I do believe that we have regulations in place and I'm not sure that they were enforced,” said C.J. Blew, a Hutchison, Kan. rancher and chairman of the board of directors for the Mid-Kansas Cooperative Association.
Where Is the Money?
The second panel was the lengthiest part of the hearing with several rounds of questions directed at the three MF Global executives. In their testimony and in their answers to questions from members of the Agriculture Committee, all three repeated that they did not know how the customer funds were lost or where they might be located.
“Where is the money?” Stabenow asked each of the executives who sat before members of the committee. “This isn't the dark ages. MF Global didn't keep their books with feather quills and dusty ledgers. The rules about keeping customer money segregated are pretty straightforward. That it's been over a month and teams of lawyers and forensic accountants still can't figure out what happened raises very troubling questions,” Stabenow said.
Frustrations and disbelief about the missing money came from both sides of the political aisle during the course of the hearing. “Funds don't simply disappear. Someone took action, whether legal or illegal, to move that money. And the effect of that decision is being felt across the countryside,” said Senator Roberts (R-Kan.), the ranking Republican on the committee.
In his testimony, Corzine outlined some of the larger transactions his firms undertook over the last few days before filing for bankruptcy, including the sale of $1.3 billion in commercial paper and the sale of “hundreds of millions of dollars of MF Global proprietary assets” and $4.5 billion in government agency bonds. “As I sit here today, I do not know whether all of these and many other transactions were properly recorded and effectuated, or whether banks and other counterparties involved in such transactions properly credited the right accounts for these sales or are holding money that is rightfully due to either MF Global or its customers,” Corzine said.
All three MF Global executives maintained that it was not until late Sunday night before they heard of the shortfall in customer funds. Each of them explained repeatedly that they were not involved in the daily management of customer funds.
“As a general matter, I was not involved with the details of the segregated funds in the course of my duties as global CFO, nor with the complex segregation calculations performed by MFGI in Chicago and reported to regulators on a daily basis,” said Steenkamp.
Lawmakers on the panel did not react favorably to those comments.
“It’s very difficult listening to the chief financial officer or the CEO or the COO indicating surprise that there weren’t adequate controls on the management of money. Where is the money from funds that were supposed to be kept separate?” said Stabenow, who then asked if any of the executives had authorized or knew of any money transfers from customer segregated accounts.
“I never directed anyone at MF Global to misuse customer funds. I never intended to and as far as I am concerned, I never gave instructions that anybody could construe,” Corzine repeated.
Several lawmakers on the panel asked for details about how customer segregated reports are managed and the timing of when officials were notified of the shortfall. They also asked the executives to name the officials who had been involved in managing the customer segregated accounts.
“Do you realize how incredible your testimony and the other two gentlemen’s sounds to this committee?” said Senator Mike Johanns (R-Nev.). “That $1.2 billion, the first time in history this had ever happened, could get drained away from customers and it doesn’t come to your attention… doesn’t that strike you as incredible?”
Update from Regulators and Trustee
Sommers discussed briefly the CFTC’s ongoing investigation to recover the missing customer funds. She also stated that it is all but certain there will be policy changes once the investigation is concluded.
“I think there’s no doubt that after the investigation is concluded and we look back to know exactly what happened, that there will be a number of lessons learned and a number of different recommendations that we can bring to you for your consideration,” Sommers said.
Giddens, in his first appearance before Congress, gave a report on progress in returning customer money, explaining that with the latest court-approved distributions, customers will have 72% of their assets returned. He also agreed that returning customer funds takes priority over creditor claims.
Responding to questions from committee members, Giddens could not say when or if the missing customer funds would be found. “At this time we do not know with certainty the extent of the potential segregation and compliance shortfalls, but I estimate the figure is not less than $1.2 billion for U.S. futures, foreign futures and for securities customers,” Giddens said.
Duffy outlined all the steps the CME had taken in its review of MF Global’s customer segregation reports. He stated that a draft report for Wednesday Oct. 26 showed MF Global held $200 million in excess segregated funds. Duffy explained that it was not until Sunday Oct. 30 that the CME learned of a possible accounting error showing a $900 million shortfall in the segregated accounts. He further alleged that Corzine knew that funds had been transferred from those accounts.
When asked about the possibility of establishing an insurance fund similar to the insurance provided in securities markets through the Securities Investor Protection Corporation, Duffy said it would not be feasible. He also asserted that current customer protections have worked for decades.
“This potential violation has never happened since this has been put into place since 1936. So I don't think that the system is broken. I think someone violated the rules,” Duffy said.
