Jon S. Corzine told lawmakers he never intended to break any rules as head of MF Global Holdings Ltd. and doesn’t know what happened to an estimated $1.2 billion in missing client funds.
“I’m not in a position, given the number of transactions, to know anything specifically about the movement of any specific funds,” Corzine said today at a House Agriculture Committee hearing in Washington. “I certainly would never intend to direct or have segregated funds moved.”
Under subpoena and under oath, the former Democratic senator and New Jersey governor testified on Capitol Hill for two and a half hours, repeatedly apologizing to investors, customers and employees of the failed New York brokerage.
“I simply do not know where the money is, or why the accounts have not been reconciled to date,” Corzine said. “I apologize, both personally and on behalf of the company, to our customers, our employees and our investors. I truly know that they are bearing the brunt” of the collapse.
Under repeated questioning, Corzine said that he did not knowingly authorize any movement of funds out of client accounts, and that any such transfers could have been a misunderstanding or misinterpretation of his intent.
Corzine said that on the evening of Oct. 30, the night before MF Global filed what has become the eighth-largest U.S. bankruptcy, he was informed of the shortfall in client accounts and told employees, “We’ve got to fix this,” and “We’ve got to find the money.” He speculated that someone “could misinterpret” such remarks.
James W. Giddens, the trustee overseeing the liquidation of the firm, has estimated that $1.2 billion in client money is missing. The Commodity Futures Trading Commission, Securities and Exchange Commission and Justice Department are investigating.
Corzine, who resigned as chairman and chief executive officer of MF Global on Nov. 4, said in his opening remarks that he was “stunned” when he learned that the company couldn’t account for “many hundreds of millions of dollars.”
Corzine’s appearance before the House Agriculture Committee, which oversees the CFTC, came after the panel voted to issue a subpoena to compel his testimony. The Senate Agriculture Committee and a House Financial Services subcommittee also voted to subpoena Corzine.
Answering All Questions
Corzine didn’t once decline to answer a question or invoke his Fifth Amendment right to remain silent.
“As a former United States senator who recognizes the importance of congressional oversight, and recognizing my position as former chief executive officer in these terrible circumstances, I believe it is appropriate that I attempt to respond to your inquiries,” Corzine said in a written statement to the committee.
Corzine said he offered to testify to Congress without subpoena in January, by which time he might have been better able to prepare. “While I intend to be responsive to the best of my ability today, without adequate time and materials to prepare, I may be unable to respond to various questions members might pose,” he told lawmakers.
CFTC commissioner Jill Sommers, testifying in advance of Corzine, said regulators are still working to trace all the transactions and that some client funds may be recovered.
“If there is any customer money that has been transferred out of the accounts, that is part of what we are working together to find and that money will be clawed back to be distributed back to customers,” Sommers, the commissioner overseeing the agency’s investigation of MF Global, told the committee.
MF Global employees could face civil or criminal penalties if rules or laws were violated, Sommers said.
“They are subject to civil prosecution under our rules, and there would also be potential for criminal violations,” Sommers said.
MF Global filed for bankruptcy protection after making risky bets on some of Europe’s most indebted countries. Sommers said that regulators haven’t found evidence that client funds were incorporated in the European debt positions.
Under current rules, customer money is supposed to be kept segregated from the firms’ accounts. “We were receiving daily segregation reports from MF Global and those did not raise red flags for us until right before the bankruptcy,” Sommers said.
If funds are missing because of internal errors at MF Global, Corzine may have breached responsibilities under Sarbanes-Oxley rules, according to Daniel Collins, a professor of accounting at the University of Iowa’s Tippie College of Business.
Under the 2002 law -- for which Corzine voted as senator -- top executives must certify the accuracy of financial statements and assess whether they have sufficient safeguards to catch fraud and bookkeeping errors. Corzine signed off on MF Global’s quarterly reports prior to the bankruptcy.
“Whether these are operational errors or not is a serious matter,” Collins said in a phone interview. “If effective controls for monitoring the flow of the funds from the clients through the different investments are not in place, then that would be a breach of the Sarbanes-Oxley responsibilities of top management.”
President George W. Bush signed Sarbanes-Oxley into law after accounting scandals at Enron Corp. and WorldCom Inc. eroded investor confidence. Executives must also have internal controls certified by an outside auditor under the law.
In his written statement, Corzine for the first time provided details on so-called repurchase-to-maturity transactions that have drawn legal and regulatory scrutiny in the weeks since the bankruptcy. He described himself as a “strong” advocate of the transactions while saying that because he isn’t an accountant he can’t vouch for the way the transactions were handled.
“I accept responsibility for the RTM trades that MF Global engaged in from the time that I arrived at MF Global until my departure, on November 3, 2011, and I strongly advocated the trading strategy that I have described,” he said.
MF Global’s board was told of the European debt trades and approved limits on the risk in the trades by specific countries, Corzine told lawmakers. “The directors approved sovereign risk limits for these RTM trades. At the time of the bankruptcy, MF Global was within these risk limits,” he said.
None of the foreign debt securities that MF Global used in the repo transactions has yet defaulted or been restructured, Corzine said.
He acknowledged lobbying the CFTC and its Chairman Gary Gensler, a former colleague at Goldman Sachs Group Inc., on a rule change relating to how client funds can be invested. Corzine said he took part in a conference call with Gensler on the matter, a conversation that involved other officials.
“I did not exert undue or improper influence on regulators,” Corzine told lawmakers. He said in his written statement that he and Gensler saw each other at a number of other personal and business events in 2010 and 2011, but that the two didn’t discuss regulatory matters.
Gensler has recused himself from involvement in matters related to the MF Global bankruptcy because of his ties to Corzine, who was co-chairman of Goldman Sachs before entering politics. The client funds rule, which was delayed by Gensler to give commissioners more time to debate the regulation, has since been completed.
Corzine’s testimony detailed events leading up to the firm’s bankruptcy, insisting that its losses were related to ratings downgrades on its European debt portfolio, not to direct losses on those positions. Following a disappointing earnings report, clients and counterparties began to withdraw business and collateral.
“Despite our best efforts to sell assets and generate liquidity, the marketplace lost confidence in the firm,” Corzine said.
Corzine reiterated that his knowledge of specific transactions involving client funds was limited.
“There were an extraordinary number of transactions during this period, the last few days of MF Global. And I do not know, for example, whether there were operational errors at MF Global or elsewhere, or whether banks and counterparties have held onto funds that should rightfully have been returned to MF Global,” Corzine said. “I am sure that the trustee in bankruptcy, the SIPC receiver, and the regulators are working to answer these questions and to understand precisely what happened during the firm’s last days and hours.”