Bloomberg News

NY Fed Didn’t Give Corzine Preferential Treatment, Baxter Says

December 16, 2011

Dec. 15 (Bloomberg) -- MF Global Holdings Ltd. and Jon S. Corzine, the broker’s former chairman and chief executive officer, didn’t receive preferential treatment in a bid to become a primary dealer of government securities, said Thomas C. Baxter Jr., general counsel of the New York Federal Reserve.

Corzine met with officials at the New York Fed on June 1, 2010, and discussed the broker’s efforts to improve its credit structure by raising $150 million in equity, Baxter said in testimony prepared for a hearing today of the House Financial Services subcommittee on oversight and investigations.

MF Global, starting before Corzine became CEO, sought to expedite a New York Fed review in order to become a primary dealer. The firm was under orders from the Commodity Futures Trading Commission to overhaul its internal controls. The Fed’s policy was to impose a one-year waiting period after such an enforcement action. MF Global argued the matter wasn’t material to its application, Baxter said.

The New York Fed disagreed and reviewed MF Global’s application “without fear or favor,” Baxter said in the testimony. MF Global was approved as a primary dealer on Feb. 2, 2011. That status was revoked by the Fed on Oct. 31, the same day the firm filed for bankruptcy.

Primary dealers participate in auctions of U.S. government debt and provide the New York Fed’s trading desk with information and analysis about the market as the central bank implements interest rate policies. Being designated a primary dealer “is consistent with our global strategy of expanding our broker-dealer activities, as we seek to serve our clients with broader execution services and greater market insight and ideas,” Corzine said on Feb. 2.

Third Hearing

Baxter is set to appear during the third congressional hearing into the collapse of MF Global, which filed for bankruptcy protection on Oct. 31. James W. Giddens, the trustee overseeing the bankruptcy, has estimated that the firm is short by as much as $1.2 billion in client funds that were supposed to be kept in segregated accounts.

Corzine, who has said he doesn’t know what happened to the money, is scheduled to testify for the third time in a week.

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, said people with knowledge of the probe who declined to be identified because the investigation is ongoing.

Investigators are attempting to determine which transactions involving customer funds were illegitimate, Jill E. Sommers, the senior CFTC commissioner overseeing the investigation said in a telephone interview yesterday.

‘Following a Trail’

“We’re far enough along the trail to see the transactions going out” of segregated accounts, Sommers said. Investigators are searching e-mails and other documents to trace the transactions. “Following a trail is not as easy as it sounds because money isn’t just transferred from point A to point B and stopping,” she said.

Sommers said she expects regulators will eventually be able to determine where all the money went. There may still be a shortfall because some money may not be available to be clawed back for customers, she said.

If a transaction that was legitimate in the beginning “becomes illegitimate” later in a chain of transactions, then the chances of recovering the funds could be slim. “It may be gone,” Sommers said.

Dan Berkovitz, CFTC general counsel, Robert Cook, director of the division of trading and markets at the Securities and Exchange Commission, and Bradley Abelow, president and chief operating officer at MF Global, are also scheduled to testify at the hearing today.

The CFTC’s internal watchdog plans to review the agency’s oversight of MF Global after the probe into the missing funds runs its course, Judith Ringle, attorney-adviser in the inspector general’s office, said yesterday.

--With assistance from Matthew Leising in New York. Editors: Lawrence Roberts, Maura Reynolds

To contact the reporter on this story: Silla Brush in Washington at sbrush@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net


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