MF Global Holdings Ltd. (MFGLQ) General Counsel Laurie Ferber twice resisted providing assurances to JPMorgan Chase & Co. (JPM) that the broker was complying with rules to segregate customers’ collateral, saying language in a draft provided by the bank was too broad.
Ferber said JPMorgan was “specifically interested in two transfers” that occurred the morning of Oct. 28. The first was a $200 million transfer from a segregated customer funds account at MF Global Inc., the firm’s brokerage, to a “house” account, followed by a second transfer of $175 million from the house account to a London subsidiary’s account at JPMorgan.
“Although I had no reason to believe that any non- compliant transfers from segregated accounts had occurred or would occur, I did not think that any individual officer or employee should be asked to issue such a broad certificate,” Ferber said in testimony prepared for a March 28 House Financial Services subcommittee hearing. Any employee making such an assurance, she said, would have had to personally handle all the transfers or been able to review all the transactions within the available timeframe.
Representative Randy Neugebauer, a Texas Republican who leads the Financial Services investigations subcommittee, will hold a third hearing on the bankruptcy that left a customer funds shortfall estimated at $1.6 billion.
Treasurer to Testify
Among those set to testify this week is Edith O’Brien, an MF Global (MFGLQ) executive based in Chicago and identified by former Chief Executive Officer Jon S. Corzine as having knowledge of transfers of funds from customer accounts.
Ferber’s testimony addresses transfers that have come under question in the wake of a Financial Services panel staff memo circulated to lawmakers last week.
“On the afternoon of Friday, October 28, MF Global transferred $200 million from a segregated customer account at JPMC to cover a $175 million overdraft in one of MF Global’s JPMC accounts in London,” the five-page staff memo says. “Ms. O’Brien wrote in an e-mail that the transfer was ‘Per JC’s [Jon Corzine’s] direct instructions’.”
Barry Zubrow, JPMorgan’s chief risk officer, called Corzine to seek assurances that the funds belonged to MF Global and not customers. JPMorgan drafted a letter to be signed by O’Brien to ensure that MF Global was complying with the rules, the memo said.
In her testimony, Ferber said she spoke to officials at the bank on Oct. 28 and requested they narrow the language.
“I then spoke to the person in Chicago whom JPMorgan identified in the certificate and was given the understanding that she would sign the certificate if it were limited to the two transactions the bank had expressed interest in,” Ferber said.
Ferber does not identify the individual in Chicago. Ferber conferred a second time with JPMorgan, which complied with the request and provided a new draft the next day with narrower language. Ferber said she turned the revised draft over to a colleague and was not involved in discussions after that point.
The letter to JPMorgan was never signed, according to the House memo.
MF Global and its brokerage sought Chapter 11 bankruptcy on Oct. 31 after a $6.3 billion bet on the bonds of some of Europe’s most indebted nations prompted regulator concerns and a credit rating downgrade. Corzine quit MF Global Nov. 4.
A spokesman for Corzine, Steven Goldberg, said last week that the former MF Global chief “never gave any instruction to misuse customer funds and never intended anyone at MF Global to misuse customer funds.”
Corzine, in testimony before the House panel in December,said he didn’t order any improper transfer of customer funds. He also testified that he never intended a misuse of customer funds at MF Global, and that he doesn’t know where client funds went.
“I never gave any instruction to misuse customer funds, I never intended anyone at MF Global to misuse customer funds and I don’t believe that anything I said could reasonably have been interpreted as an instruction to misuse customer funds,” Corzine told lawmakers in December.
O’Brien is scheduled to appear before lawmakers with Christine Serwinski, another MF Global executive, and Henri Steenkamp, the firm’s chief financial officer.
Steenkamp, in his testimony, said he had “limited knowledge” of the movement of segregated customer funds in the final days before the firm’s failure. Steenkamp said he understood that lawmakers would have questions this week about the missing funds.
“I share many of these questions and I am personally extremely frustrated and distressed that they remain outstanding and the client funds have not been paid in full,” Steenkamp said in his prepared remarks.