(The following press release from House Financial Services Committee was 
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Committee on Financial Services
For immediate release:  November 15, 2012 
Financial Services Subcommittee Report Finds Decisions by Corzine, Lack of 
Communication Between Regulators Led to MF Global Bankruptcy and Loss of 
Customer Funds 
WASHINGTON - The House Financial Services Subcommittee on Oversight and 
Investigations, chaired by Rep. Randy Neugebauer, released the full results of 
its year-long majority staff investigation into the collapse of MF Global on 
The report chronicles the demise of the 230-year old commodities brokerage 
firm, which declared bankruptcy in October 2011.  MF Global's failure was the 
eighth largest bankruptcy in U.S. history and resulted in a $1.6 billion 
shortfall in customer funds. 
"We conducted this investigation because MF Global customers deserve to know 
how and why their funds went missing; market participants deserve to know 
whether regulatory lapses have been identified and will be corrected; and 
taxpayers deserve to know that regulators are being held accountable so similar 
losses may be prevented from occurring in the future," said Chairman 
"Despite the promise of Dodd-Frank that regulators would work together, what 
the Subcommittee's investigation found is there was no meaningful coordination 
among the regulators who were responsible for the supervision of MF Global," 
said Financial Services Committee Chairman Spencer Bachus.  "This left each 
regulator with an incomplete understanding of the company's financial health - 
and MF Global's customers paid the price.  This, once again, raises the 
question of whether regulators are so preoccupied writing hundreds of new rules 
that they're missing the basics like safeguarding customer funds and protecting 
investors from financial frauds." 
The Subcommittee staff's investigation of MF Global involved three hearings, 
more than 50 witness interviews, and the review of more than 243,000 documents 
obtained from MF Global, its former employees, federal regulators and other 
The report can be viewed online at<> (in the 
"Spotlight" section). 
Report Findings and Recommendations: 
Finding:  MF Global Chairman and CEO Jon Corzine Caused MF Global's Bankruptcy 
and Put Customer Funds at Risk 
*         Corzine decided to transform MF Global from a futures broker to an 
investment bank without having a complete understanding of the futures business 
or the potential risks associated with such a radical transformation. 
*         Corzine was the driving force behind the decision to heavily invest 
in the sovereign debt of struggling European countries. 
*         The risks associated with the firm's repo-to-maturity (RTM) portfolio 
were exacerbated by the lack of internal controls and an atmosphere that 
Corzine created, in which nobody could challenge his decisions. 
*         The responsibility for failing to maintain the systems and controls 
necessary to protect customer funds rested with Corzine. 
Recommendation: Congress should consider enacting legislation that imposes 
civil liability on the officers and directors that sign a FCM's financial 
statements or authorize specific transfers from customer segregated accounts 
for regulatory shortfalls of segregated customer funds. 
Finding:  The SEC and the CFTC Failed to Share Critical Information About MF 
Global with One Another, Leaving Each Regulator with an Incomplete 
Understanding of the Company's Financial Health 
*         Both agencies focused on their respective jurisdictional interests 
and not the firm as whole. 
*         There is no record of meaningful communication between the SEC and 
the CFTC until the week before the company's bankruptcy. When these regulators 
finally tried to coordinate, it was disorganized and haphazard. 
*         The SEC did not include the CFTC in discussions it had with other 
securities regulators related to growing concerns about MF Global's financial 
health.  The SEC also did not inform the CFTC about discussions about MF 
Global's failure to take haircuts on its RTM portfolio.  Senior CFTC officials 
said they "wished they were brought into the conversation" about the haircuts 
earlier since it affected their regulatory equities. 
*         The CFTC did not inform the SEC that MF Global was using the 
Alternative Method, which left the SEC with an incomplete picture of the firm's 
liquidity situation. 
*         The CFTC "pressured" MF Global to transfer $220 million out of the 
broker-dealer excess to the FCM without consulting the SEC first.  Chairman 
Schapiro: "Without telling us.  That is unacceptable."  FINRA also said in an 
email that MF Global ignored SEC instructions not to transfer the funds. 
Recommendation: The SEC and the CFTC streamline their operations, or merge into 
a single financial regulatory agency that would have oversight of the entire 
capital markets. 
*         The MF Global case alone does not necessitate the merger of the SEC 
and the CFTC; however the evidence found in the MF Global case is symptomatic 
of regulatory inefficiencies. 
*         As financial products, markets, and market participants have 
converged, the SEC's and the CFTC's regulatory jurisdictions have increasingly 
overlapped.  It only makes sense to collapse these entities and create a 
regulatory framework that brings us into the 21st century. 
Finding:  MF Global Was Not Forthright with Regulators or the Public About the 
Degree of Its Exposure to Its European Bond Portfolio, nor was the Company 
Forthright About Its Liquidity Condition. 
*         MF Global was not forthright with FINRA about its exposure to 
European sovereign debt.  The company denied it had European exposure in 
September 2010, despite a nearly $2 billion portfolio.  FINRA thought this was 
"negligent" and "misleading." 
*         MF Global did not disclose its exposure to European sovereign debt in 
full until a full year after it began accumulating the positions.  There was no 
mention of net exposure in its September 2010 10-Q (when it had a $2 billion 
exposure) and December 2010 10-Q (a $4.5 billion exposure).  MF Global finally 
disclosed its exposure of $6.3 billion in its March 2011 10K - released in May, 
8 months after the firm entered into the trades. 
*         Executives presented a much more optimistic picture of its liquidity 
situation to the public than what was privately understood.  On October 6, 
2011, MF Global's CFO Henri Steenkamp informed Corzine that one of MF Global's 
affiliates was undergoing significant liquidity stress and characterized MFGI's 
liquidity as being in a state of "sustained stress".  However, on an October 
25, 2011 earnings call, Steenkamp described how MF Global had "improved [its] 
capital and liquidity positions" that quarter.  Corzine backed Steenkamp's 
claim by stating that MF Global's action had put the firm in a "much, much 
stronger liquidity position" as of September 30.  As a result of these public 
statements, investors were not aware of MFGI's liquidity issues and could not 
assess their impact on MF Global's overall condition. 
Recommendation: The Subcommittee recommends that the SEC investigate whether MF 
Global violated federal securities law or SEC rules in connection with its 
disclosures about the European RTM trades and the firm's overall financial 
health. The Subcommittee further recommends the SEC proactively conduct a 
review of off-balance sheet reporting, generally. 
Finding:  Moody's and S&P Failed to Identify the Biggest Risk to MF Global's 
Financial Health 
*         Despite being disclosed in May 2011, the rating agencies did not 
factor MF Global's European exposure into its ratings assessments until late 
*         The credit rating agencies (CRAs) did not understand the nature of MF 
Global's European sovereign exposure. 
*         The CRAs failed to conduct adequate due diligence.  Documents 
demonstrate that neither Moody's nor S&P asked sufficiently probing questions 
or pursued fundamental information related to MF Global's European exposure 
until 11 days before the firm's bankruptcy. 
*         Credit ratings were not based on a full and complete examination of 
all relevant information affecting the company's long-term health. 
Recommendation: Continue to press regulators to implement 939A reforms to 
remove references to credit ratings in statute; consider legislation to promote 
greater competition in credit rating industry; require some form of periodic 
monitoring by rating firms to ensure "fresh" ratings. 
Finding:  MF Global's Use of the "Alternative Method" Allowed the Company to 
Use Some Customer Funds as a Source of Capital for the Company's Day-to-day 
Operations, Which Subjected Customers to the Risk That MF Global Would Not Be 
Able to Return Those Funds to Customer Accounts Upon the Company's Insolvency 
*         The use of the Alternative Method by MF Global put customers who 
traded on foreign exchanges at risk of losing money. 
*         The substantial "excesses" resulting from the use of the Alternative 
Method made customer accounts a more attractive source of liquidity for MF 
Global's day-to-day operations. As a result, it is likely that MF Global's use 
of the Alternative Method contributed to the shortfall in customer segregated 
Recommendation: Agree with the CFTC to abandon the use of the Alternative 
Finding:  The New York Fed Should Have Exercised Greater Caution in Determining 
Whether to Designate MF Global as a Primary Dealer, Given the Company's Prior 
Risk Management Failures, Chronic Net Losses, and Evolving Business Strategy 
*         MF Global's risk management failure, chronic net losses, and untested 
business strategy, combined with the NY Fed's internal concerns that MF Global 
posed reputational risks, should have given the NY Fed pause before conferring 
primary dealer status on MF Global. 
*         MF Global's aggressive pursuit to become a primary dealer should have 
given the NY Fed further pause. 
Recommendation: The NY Fed should consider re-examining its selection process 
to provide for greater scrutiny of companies with questionable financial 
health, risk management histories, and ambitious business strategies; the NY 
Fed should consider whether to expressly forbid companies from speaking to the 
media about pending primary dealer applications. 
Finding: Differences Between Foreign and U.S. Law Gave Rise to the Potential 
that MFGI Global Customers Trading on Foreign Exchanges Would Experience a 
"Shortfall" in Funds Owed to Them, Despite the Fact that Such Funds Were Set 
Aside in Accounts Designated as Secured Accounts 
*         The disposition of funds in MFGUK's account was subject to British 
law following the collapse of MF Global.  As a result, MFGUK will not return 
these funds to MFGI until the question of ownership is resolved in the summer 
of 2013. 
Recommendation: Direct the CFTC to study whether it could better mitigate the 
risks customers face when they trade abroad. 
Jeff Emerson
House Committee on Financial Services
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