--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.

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