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VOL. 35 | NO. 50 | Friday, December 16, 2011

Corzine disputes that he knew more about money

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WASHINGTON (AP) — Jon Corzine on Thursday disputed an allegation that he knew about customer money that may have been transferred to a European affiliate just before MF Global collapsed.

"I did not instruct anyone to lend customer funds to MF Global or any of its affiliates," Corzine told a House panel. He also said he didn't know about "the use of customer funds on any loan or transfer."

Corzine made his first public appearance since Terrence Duffy, the CME Group Inc. executive chairman, alleged Tuesday that he might have known about the $175 million transfer.

If true, Duffy's accusation would raise the possibility that Corzine misled Congress about when he learned that client money was missing.

About $1.2 billion of client money disappeared when MF Global filed for the eighth-largest bankruptcy in U.S. history. Lawmakers, regulators and law enforcement officials are investigating.

Brokers such as MF Global generally are required to keep customer money separate from company money.

Corzine, a former Democratic senator and New Jersey governor, stepped down as the firm's CEO last month. He is appearing before the House Financial Services Oversight and Investigations Subcommittee, a Republican-led panel known for aggressive questioning.

Corzine said Duffy might have been referring mistakenly to an overdrawn account that MF Global kept with JPMorgan Chase & Co. in London. He said MF Global employees told him the shortfall was covered with company money.

JPMorgan later asked for confirmation that the money used was consistent with rules limiting what companies can do with client money, Corzine said. He said he "received assurance" from MF Global employees that the transaction was proper.

Massachusetts Rep. Michael Capuano, the panel's top Democrat, suggested that MF Global took advantage of looser financial rules in Britain to take on additional debt for high-risk trades.

"If you did anything wrong, the criminal investigators will find that, I won't," Capuano told Corzine.

At two previous hearings, Corzine said he never told anyone to "misuse" customer money. He learned about the shortfall in customer accounts late on Oct. 30, the day before the bankruptcy filing, Corzine testified.

Duffy testified Tuesday to a Senate panel, after Corzine's second appearance. CME Group operates exchanges on which MF Global traded. It also was responsible for auditing some of MF Global's books.

According to Duffy, an MF Global employee told a CME auditor that "Mr. Corzine was aware" of the transfer. Duffy said he referred the matter to the Justice Department and the Commodity Futures Trading Commission. Both are investigating MF Global's failure and the disappearance of the customer money.

The transaction Duffy described wasn't necessarily illegal. Brokers such as MF Global are allowed to borrow from customer accounts temporarily in some circumstances — to reduce their own risk, for example.

But such cases are a narrow exception. A firm couldn't use customer money to pay trading partners if its speculative trades lost value. Even in cases where borrowing clients' money was legal, the firm would have to replace it with a safe, cash-like investment such as a U.S. Treasury security.

"While a (broker) is permitted to invest customer funds, it is important to note that if a (broker) does so, the value of the customer segregated accounts must remain intact at all times," Dan Berkovitz, the CFTC's general counsel, says in testimony prepared for Thursday's hearing.

Any time money is transferred out of customer accounts, the broker must deposit something of equal value in the accounts at the same time, Berkovitz says.

Legal experts say it's hard to imagine how that would apply to the alleged MF Global transaction: a "loan" to an overseas affiliate.

"Whose money are they loaning?" asked Felix Shipkevich, an attorney and expert in the regulation of firms such as MF Global. "Is it the parent company loaning money to the foreign subsidiary, or are they taking money out of client accounts?"

If the money was from client accounts, Shipkevich said, the loan probably was illegal.

Duffy will likely be asked to elaborate on his accusation. He made the assertion Tuesday after Corzine had departed from the hearing. On Thursday, he will testify after Corzine has had a chance to respond.

Corzine was also questioned about whether he used his relationships with regulators to gain advantages for MF Global.

Corzine has been a major fundraiser for Democrats. He was co-chairman of Goldman Sachs Group Inc. In that role, he worked with two other Goldman executives at the time: Gary Gensler, now chairman of the CFTC, and William Dudley, now president of the Federal Reserve Bank of New York.

Gensler has recused himself from the investigation because of his long history with Corzine. Neither he nor Dudley is scheduled to testify. Top lawyers from the CFTC and New York Fed will appear instead.

Along with other Wall Street executives, Corzine lobbied Gensler and his staff last summer against a possible CFTC rule that would limited how their firms can invest clients' money. Afterward, the CFTC delayed adopting the rule until earlier this month.

Early this year, the Federal Reserve allowed MF Global to join an elite group of 22 dealers that help the government sell Treasury securities. The Fed did not assess MF Global to see if it was taking on too much risk. Instead, Fed officials relied on oversight by the CFTC and the Securities and Exchange Commission.

The role of primary dealer conferred on MF Global a seal of financial strength. It gave the firm a competitive edge and likely lowered the interest it was charged to borrow, noted Janet Tavakoli, an expert on the markets that MF Global occupied.

"You participate in Treasury auctions, and being able to sell them, and of course you make money on that," Tavakoli said.

Because the Fed doesn't regulate its primary dealers, she said, "they should take all the more care in awarding the primary dealer status."

Given MF Global's size and past run-ins with regulators, Tavakoli said, "it's inexplicable that MF Global got their primary dealer status."

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