U.S. authorities are investigating whether MF Global Holdings Ltd. intentionally tapped customer funds to cover the bankrupt firm’s margin payments on European government bond trades while lawmakers press top company officials on the possible misuse of as much as $1.2 billion.
Investigators including the Securities and Exchange Commission, the Justice Department, the Commodity Futures Trading Commission and the bankruptcy (LEHMQ) trustee are reviewing the brokerage’s accounts seeking proof of fraud, which would allow them to recover some of the lost $1.2 billion, said people with knowledge of the probe who declined to be identified because the investigation is ongoing.
Unless authorities find illegal activity, margin payments on repurchase trades can’t be returned under bankruptcy law, said Lauren Teigland-Hunt, a lawyer who has represented money managers in the Lehman Brothers Holdings Inc. bankruptcy.
“It has to be actual intent to defraud, and that’s a high bar,” said Teigland-Hunt, managing partner at Teigland-Hunt LLP in New York. “The whole goal is to try to ensure that if you’re a participant in the market and receive payment of margin, that won’t be reversed on you if a customer goes down.”
MF Global’s failure and the customer-funds deficit were the focus of a hearing at which former chief executive officer Jon S. Corzine told lawmakers he “never gave any instructions to misuse customer funds” and didn’t give orders that could be misconstrued.
Corzine, 64, made the comments yesterday before the Senate Agriculture Committee in Washington, the second of three congressional hearings being held to probe the collapse of the firm and the disappearance of customer funds. Corzine resigned from MF Global his position Nov. 4.
Corzine’s statement appeared to revise his testimony at a hearing last week when he left open the possibility that transfers of funds from client accounts might have been a misinterpretation of his intent by company officials.
The agriculture committees in the House and Senate preside over the CFTC, which oversaw MF Global’s commodities and derivatives arm.
Two other top executives of MF Global Holdings Ltd. also told the Senate panel that they didn’t know what happened to the client funds that went missing in the days before the New York- based brokerage filed for bankruptcy.
Henri Steenkamp, chief financial officer of MF Global, and Bradley Abelow, the firm’s president and chief operating officer, said during the hearing that they still don’t know the location of the funds. Both Steenkamp and Abelow still work at the bankrupt firm.
One working theory for the missing money is that it was taken from customer accounts and not replaced with equal collateral, as mandated by law, according to the people familiar with the investigation. Then, they said, after the funds were moved to the broker-dealer unit of MF Global, the funds may have been used to pay margin on the repurchase agreements.
Under U.S. law, futures brokers are required to keep customer money segregated from their own accounts so that if a firm fails its clients can quickly move positions and cash to a new company. MF Global’s bankruptcy is “unprecedented” in that for the first time, customer funds have gone missing, said Terrence Duffy, executive chairman of Chicago-based CME Group Inc. (CME), the world’s largest futures exchange and auditor of MF Global.
$175 Million Loan
Corzine knew of $175 million in loans involving customer segregated funds at the bankrupt broker, said Terrence Duffy, executive chairman at CME Group Inc. Auditors at CME, which had authority to oversee MF Global, learned from an employee of the brokerage that Corzine knew about the loans involving a European affiliate, Duffy told committee members.
Duffy did not say whether Corzine learned of the loans in advance of the funds being moved. He also did not say whether the loans were a legitimate use of customer accounts.
For their part, Corzine and Abelow said that officials below them in MF Global’s hierarchy might know more than they do about the missing funds.
Corzine suggested that investigators should look at the company’s treasury office, which was in charge of ensuring that customer funds were used in accordance with federal regulations.
“The people who headed that are probably closest to the scene of the action,” he said.
Corzine named Christine Serwinski, the company’s chief financial officer for North America, as someone in charge of that department although he said she had been on vacation during the final days of MF Global. Roberts identified Christy Vavra as the head of treasury operations at the firm. Abelow said the head of treasury operations ultimately reported to him.
Vavra and Serwinski did not respond to messages left at their home telephone numbers.
James W. Giddens, the trustee overseeing the bankruptcy, said he was attempting to recover all money that MF Global was owed by its counterparties in order to help make customers whole.
“We’re looking at all the transfers for months out of the firm,” he told the Senate panel. “And if there is a legal basis for recovering that, we’ll make a demand and will also engage in litigation if we have a sound basis.”
Meanwhile, Giddens also said in a court filing yesterday that he was likely to investigate certain actions of JPMorgan Chase & Co. (JPM), a lender to MF Global. Giddens said he would review whether the bank received preferential payments before the brokerage went into liquidation.
David Skeel, a University of Pennsylvania law professor who studies bankruptcy and corporate law, said any transfers out of customer accounts might be fraudulent.
Unless fraudulent intent or another overriding legal principle can be found that trumps the protection of margin payments under the liquidation laws, any MF Global customer funds used for the repo trades would be lost, two of the people familiar with the probe said.
If the money were recovered, customers may not have top priority in being repaid, Skeel said.
“I don’t think they would have any special claim,” he said. “They would just be treated like general creditors with respect to funds retrieved, and would have to share with other general creditors.”
The Senate panel is the second of three congressional committees to hold hearings this month to probe the collapse of MF Global. Corzine is scheduled to appear under subpoena from the House Financial Services oversight and investigations subcommittee on Thursday.