--CME executive chairman Duffy says former MF Global CEO Corzine
may have known of a loan to one of the firm's European affiliates
using segregated customer accounts
--Duffy's testimony comes after Corzine earlier in the day
testified before Congress that he never told MF Global staff to
misuse customer funds
--CME's Duffy tells Senate panel that a senior MF Global
executive, whom Duffy didn't identify, told a CME auditor that
Corzine knew of the matter during a phone call with regulators
By Andrew Ackerman
Of THE WALL STREET JOURNAL
WASHINGTON (Dow Jones)--Former MF Global Holdings Ltd. (MFGLQ)
Chief Executive Jon Corzine may have known of a loan to one of the
firm's European affiliates using segregated customer accounts, the
head of CME Group Inc. (CME) told a Senate panel Tuesday,
contradicting Mr. Corzine's own testimony earlier in the day.
Terry Duffy, executive chairman of CME Group, told the Senate
Agriculture Committee that a senior MF Global executive told a CME
auditor that Mr. Corzine knew of the matter during a telephone call
with regulators. The call may have occurred just before the
company's collapse in late October.
"CME Group has provided this information and the name of this
individual to the department and the [Commodity Futures Trading
Commission] who are investigating these matters," Mr. Duffy said,
adding that the loan was about $175 million for a European
affiliate. He declined to publicly identify the MF Global employee
by name.
(This story and related background material will be available on
The Wall Street Journal website, WSJ.com.)
Mr. Duffy's testimony came just after Mr. Corzine told the
Senate panel that he never told staff to misuse customer money and
doesn't know what happened to the roughly $1.2 billion in missing
cash.
"I never gave any instruction to anyone to misuse customer
funds," Mr. Corzine said, largely repeating his testimony before a
House panel last week.
Mr. Corzine's remarks were echoed by two fellow executives at
the failed firm, Chief Operating Officer Bradley Abelow and Chief
Financial Officer Henri Steenkamp, who declined to speculate on
where the money went despite persistent questioning from
senators.
Six weeks after the firm's collapse, lawmakers expressed
frustration that it has taken so long to determine the location of
the missing funds.
"This isn't the Dark Ages," said Sen. Debbie Stabenow (D.,
Mich.), the chairman of the committee. "MF Global didn't keep their
books with feather quills and dusty ledgers."
Sen. Pat Roberts (R., Kan.) said Mr. Duffy had dropped a
"bombshell" on the committee. Earlier in the afternoon, Sen.
Roberts said facetiously that maybe a janitor was responsible for
the missing cash, after the executives said they couldn't recall
certain details about the firm's organization. Lawmakers began
turning the spotlight to lower-ranking executives, with Sen.
Stabenow saying the committee is talking to back-office personnel
about what happened. Another senator said his staff was talking to
the head of global treasury operations, Christy Vavra.
Sen. Roberts also pressed the executives on the existence of a
"break-the-glass" document that called for the firm to tap into
customer accounts as a last resort to prevent its collapse. Mr.
Corzine said that while there were certainly contingency plans,
they didn't recommend tapping into customer funds. Mr. Abelow
confirmed that such a document existed, to simulate what would
happen if the company lost liquidity, but he suggested it was only
a draft.
The U.S. futures industry has long prided itself on the way it
protects the assets of the ranchers, power companies and investors
that use the market to lay off risk. But the failure of MF Global,
and revelation that it can't account for as much as $1.2 billion in
client funds, was an eye-opener for many in the industry and
prompted calls for further overhauls.
Customer assets in the U.S. futures business are protected by a
regime known as "segregation," in which client money is pooled and
held in an account separate from a clearing firm's own funds. The
futures industry doesn't maintain an insurance-like shield, as the
securities industry does with the Securities Investor Protection
Corp.
"Funds don't simply disappear," Sen. Roberts said. "Someone took
action whether legal or illegal, to move that money. And the effect
of that decision is being felt across the countryside."
The MF Global executives acknowledged that there were large
demands on the firm for cash in its final days, suggesting that
could have led to the misuse of funds. But they denied knowing
there were any problems with account segregation until just before
the Oct. 31 bankruptcy filing.
In addition to lawmakers' inquiries, the Commodity Futures
Trading Commission is leading a regulatory probe into the missing
money. The Federal Bureau of Investigation and the Securities and
Exchange Commission are also investigating while the trustee in
charge of unwinding MF Global is working to recover funds and
return more money to customers.
On an earlier panel, some of the farmers hurt by the collapse of
MF Global called on lawmakers and regulators to tighten rules in
the futures industry to ensure the protection of customer money,
with some warning they wouldn't participate in the market until
they had certainty they are protected.
Dean Tofteland, a farmer from Luverne, Minn., compared the
regulations of futures firms to an electrified-fence around a cow
farm. Mr. Tofteland, who raises corn, soybeans and pigs on his
family farm, said he lost more than $100,000 in equity in an MF
Global account.
"Instead of building a bigger fence, we better make sure the
fence holes are fixed and that maybe we can put a little charge to
the fence" so that cows will get shocked if they try to go through
the fence, he said.
Jeffrey Hainline, president of Advanced Trading Inc. in
Bloomington, Ill., told senators he was unsure if commodities
regulators have enough authority to sufficiently oversee the
investment of customer funds.
Sen. Tom Harkin (D., Iowa), suggested the problem stems from a
series of exemptions created between 2000 and 2005 when Washington
adopted a lighter regulatory approach, and gave futures firms wider
discretion to invest customer money. The CFTC voted last week to
begin cutting back on those exemptions last week.
The CFTC agreed to ban so-called in-house repurchase agreements,
or repos, in which one part of a futures firm swaps customer assets
for securities such as municipal bonds or foreign-government bonds
held at another part of the firm, pocketing the higher interest
rates the securities yield. The arrangement, which was used by MF
Global to bet on European sovereign debt, introduced several
potential conflicts of interest, the agency said.
"Doesn't the MF Global disaster illustrate unavoidable
conclusion that we must have strong, transparent regulations for
the protection of the public?" Sen. Harkin said.
The committee was expected to hear additional testimony Tuesday
from Jill Sommers, the CFTC commissioner leading the agency's
investigation, as well as James Giddens, the trustee leading the
firm's liquidation.
-By Andrew Ackerman, The Wall Street Journal
-Aaron Lucchetti contributed to this article.