by Chris Clayton, DTN Ag Policy Editor
OMAHA (DTN) — Six hours into a Senate Agriculture Committee hearing on the MF Global bankruptcy, the executive chairman of the CME Group dropped a bombshell.
Terrence Duffy, chairman of the CME Group, told senators at the hearing in Washington, D.C., that an auditor for the CME had participated in a phone call with MF Global employees, in which an employee from an MF Global affiliate in Europe indicated that MF Global CEO Jon Corzine knew about a loan from customer segregated accounts to the company’s own funds. The phone conversation took place over the first weekend when auditors from the CME were trying to find out what had happened to funds in the segregated accounts.
“We were told by MF Global they transferred money from customer segregated accounts to the broker dealer and stop looking for the accounting error,” Duffy told a senator, reiterating his testimony. “We were also told that one of our employees was on a call with one of their employees when they said Mr. Corzine was aware of the loans being made from segregated accounts.”
Prior to Duffy’s testimony on Tuesday, no one in congressional hearings or public statements had offered proof to what many had suspected: That MF Global employees took money from customer accounts to manage shortfalls in the company’s own accounts.
This conversation took place on Oct. 31, around 2 a.m., after a weekend of CME and Commodity Futures Trading Commission auditors trying to find an accounting error in MF Global’s books.
When asked for more details, Duffy said the phone conversation was specifically regarding a $175 million loan made to a foreign affiliate of MF Global.
“All I was told was Mr. Corzine was aware of the loan that was being made,” Duffy said.
Duffy said this information about the phone call has been turned over to the Department of Justice and CFTC staff investigating the loss of up to $1.2 billion from customer accounts at MF Global.
Agriculture Committee Ranking Member Pat Roberts, R-Kan., told Duffy: “You have sort of tossed a bomb here right in the middle of what we are trying to find out in who is responsible” for the lost customer funds. Roberts pressed for more information on what Corzine knew.
“All I was told was that Mr. Corzine was aware of the loans that were made,” Duffy said.
Duffy’s statement contradicted testimony from Corzine earlier in the day-long hearing in which he repeatedly stated he did not know what had happened to the customer funds. Corzine opened his testimony earlier in the day by telling senators he never gave anyone instructions to misuse customer funds. However, Corzine left open the door that a staffer at MF Global could have misinterpreted instructions.
MF Global President and Chief Operating Officer Bradley Abelow also told senators he did not have answers to what happened to the customer funds.
Farmers and commodity users testified early Tuesday that the MF Global bankruptcy, and the 38,000 futures accounts frozen in the process, had affected their ability to protect their farms from market risks. They stressed a need for customer accounts to be made whole in the process.
With about $4.2 billion provided back to customers, those accounts will be raised up to about 72{fe867fa2be02a5a45e8bbb747b653fe2e9d0331fd056b85cd0c1a3542435a96e} of what the accounts showed before the funds went missing. That last round of about $2.2 billion of distribution to customers will start on Wednesday but will likely take about four weeks to complete, bankruptcy trustee James Giddens testified on Tuesday.
Duffy’s testimony provided one of the most detailed explanations of the days leading up to MF Global’s bankrupty filing on Oct. 31.
Duffy told senators two auditors were at MF Global on Oct. 27 examining segregated accounts after MF Global’s stock had been downgraded repeatedly in the days before that. MF Global’s daily report on segregated accounts on Oct. 26 showed full compliance. The Oct. 27 report showed MF Global was not only in compliance with segregated accounts, but also showed MF Global held $200 million in excess of segregated funds, Duffy testified.
By the weekend, MF Global’s segregation report for Friday, Oct. 28, showed a more than $900 million shortfall in segregated accounts. CFTC and CME staff returned to the MF Global offices on Sunday, Oct. 30, and were told by MF Global staff that the $900 million discrepancy was “an accounting error,” Duffy testified.
“Our auditors worked with the CFTC the rest of the night to find the so-called accounting error,” he said. “No such error was ever found.”
MF Global staff then told CME and CFTC staff early Monday morning that there was no accounting error and the $900 million or so shortfall was real.
Further, MF Global turned over a new report on Monday, Oct., 31, updating the Oct. 27 account segregations showing a $200 million shortfall instead of excess funds. Duffy said that the shortfall “was hidden by the inaccurate report, a telling sign to keep regulators in the dark.”
Sen. Amy Klobuchar, D-Minn., called Duffy’s testimony “the most detailed account” of what had happened leading up to the bankruptcy.
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Posted with DTN Permission by Haylie Shipp
