Bloomberg News

Corzine Wasn’t Too Close with CFTC Chief, Review Finds

July 31, 2012

Corzine Link Didn’t Merit Gensler MF Global Recusal, Review Says

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission speaks during a Senate Banking Committee hearing in Washington, D.C. Photo: Andrew Harrer/Bloomberg

They crossed paths at Goldman Sachs Group Inc. (GS:US), the U.S. Senate, New Jersey campaign events and Princeton University. One man once borrowed the other’s number in the New York Marathon.

Still, Jon S. Corzine, the former chairman and chief executive officer of failed brokerage MF Global Holdings Ltd. (MFGLQ:US), and Gary Gensler, chairman of the Commodity Futures Trading Commission, didn’t have a close relationship, an internal analysis by CFTC lawyers found. They didn’t attend each other’s weddings, Corzine didn’t go to the bat mitzvahs of Gensler’s daughters and they haven’t socialized together in 14 years.

The agency’s review of Gensler’s links to Corzine and other MF Global executives culminated in a 15-page “confidential memorandum” dated Dec. 13. The lawyers, who interviewed only Gensler, concluded that the chairman’s Nov. 8 decision to recuse himself from the agency’s probe of MF Global wasn’t necessary.

“From a legal and ethical perspective, Chairman Gensler’s participation in commission matters involving MFGI would not be improper,” Dan M. Berkovitz, general counsel and ethics officer, and John P. Dolan, counsel and alternate ethics official, concluded in the memo.

The review, a copy of which was obtained through a public records request, was conducted while Gensler and the CFTC were under criticism from lawmakers for their oversight of MF Global, which sought bankruptcy protection Oct. 31. The failure, along with the recent collapse of Peregrine Financial Group Inc., undermined confidence in the futures industry and has spurred calls for new regulations.

Lawmaker Complaints

Some in Congress have complained that Gensler’s recusal made it harder for them to monitor the agency’s actions.

“From our standpoint, we want a person to come before us and answer the hard questions,” Senator Mike Johanns, a Nebraska Republican, told Gensler at a Senate Banking Committee hearing Dec. 6. “That’s what your job is about. And it just feels to me like you’re not discharging the responsibilities of that job.”

The CFTC, alongside the Securities and Exchange Commission and Justice Department, has spent nine months investigating the collapse of MF Global and a resulting $1.6 billion gap in customer funds. Jill E. Sommers, a Republican commissioner, was named the senior member to oversee the investigation, and frequently testifies to Congress in Gensler’s place. The government hasn’t filed claims or charges.

Gensler, who worked for 18 years at Goldman Sachs and rose to become co-head of finance before leaving in 1997, was already thinking about the appearance of a conflict of interest when he joined the CFTC. In 2009, Gensler “determined not to participate in any CFTC matters involving GS,” referring to the Wall Street bank, according to the agency review.

‘A Distraction’

On Nov. 3, agency lawyers told Gensler he didn’t need to withdraw from the MF Global investigation. Gensler decided the same day to recuse himself anyway. In a Nov. 8 statement, Gensler said that he didn’t want “my participation to be in any way a distraction in this important matter.”

The agency’s lawyers decided to produce a written justification for their opinion for the record, Steve Adamske, a CFTC spokesman, said yesterday. Adamske said the lawyers based their analysis on an interview with Gensler and said he didn’t know of additional interviews with Corzine or others named in the memo.

Steven Goldberg, a New York-based spokesman for Corzine, declined to comment.

Early Partners

The December memo produced by the lawyers describes an overlapping set of business and political relationships, while not revealing close personal ties with any of five people related to MF Global.

Gensler, 54, and Corzine, 65, were among between 100 and 200 Goldman Sachs partners in the early 1990s, working together on the trading floor of the bank’s fixed-income division.

In January 1993, Corzine asked Gensler to serve as co-head of fixed-income trading in the Tokyo office, which made Corzine one of Gensler’s direct supervisors. “Their relationship during this period was solely professional,” the memo said.

Between 1995 and 1997, Gensler, then in New York, was co- head of finance, reporting to Corzine and Henry Paulson. In all, Corzine spent 24 years at Goldman Sachs, rising to co-head of the firm with Paulson, who later became President George W. Bush’s Treasury secretary.

After Gensler and Corzine left Goldman, they had infrequent discussions, according to the memo. Corzine, a Democrat elected as U.S. senator from New Jersey and later governor of the state, occasionally spoke with Gensler in 2002, when Gensler was serving as an adviser to lawmakers drafting the Sarbanes-Oxley Act. They stood together on the Senate floor as lawmakers moved toward final passage.

Washington Fundraiser

In the following years, Gensler and Corzine saw each other at political events, including a 2005 fundraiser in Washington at which Gensler contributed $10,000 to the New Jersey State Democratic Party. Gensler was a host, according to the memo.

Corzine was named head of MF Global in March 2010 and began to remake the futures brokerage firm into a smaller version of an investment bank, much like Goldman Sachs. Shortly after, Corzine and Gensler had a “meet and greet” at the headquarters of the CFTC, the primary U.S. derivatives regulator that was four months away from winning new authority to regulate swaps under the Dodd-Frank Act. Corzine didn’t make any requests Gensler could remember, according to the memo.

In November 2010, Corzine introduced Gensler at a seminar at Princeton University in New Jersey. They both attended dinner later that day with 15 or 20 students. In June 2011, the two sat at the same table during a lunch at a Sandler O’Neill and Partners conference held in New York, the memo said. Corzine didn’t invite Gensler, the keynote speaker at the conference.

‘An Adjustment’

While Corzine and Gensler didn’t personally discuss any issues related to MF Global, according to the memo, Corzine said at the conference that MF Global might exit the derivatives clearing business if the CFTC completed a rule limiting how brokers invested client funds. “If it comes out exactly as written, we’re going to have to make an adjustment, no question about it. It will be costly,” Corzine told the conference.

The next month, Corzine and Gensler were on a telephone conference call about the rule. Gensler has said he didn’t provide preferential treatment to MF Global or Corzine through delayed consideration of the rule.

“I’ve been consistent on this rule, and I allowed more time for others to continue to look at it,” Gensler told reporters on Nov. 7. The agency on Dec. 5 completed the regulation, which members of the CFTC dubbed the “MF rule.”

Not ‘Special’

“I do not believe we were given special treatment,” Corzine testified at a Dec. 15 House Financial Services Committee hearing.

Aside from crossing paths at such professional gatherings, Corzine and Gensler haven’t socialized in more than 14 years, according to the memo. Gensler doesn’t have Corzine’s personal number among his cell phone contacts, and Gensler couldn’t remember exchanging e-mails with Corzine for at least a decade.

“Chairman Gensler and Mr. Corzine have never attended any of each other’s major non-professional life-events,” the lawyers wrote. Corzine didn’t attend Gensler’s wedding which occurred while Gensler was at Goldman Sachs; Corzine didn’t attend the bat-mitzvahs of Gensler’s three daughters. And Gensler didn’t attend Corzine’s wedding in 2010.

Marathon Men

The memo even explored why Gensler ran the New York Marathon with Corzine’s number more than 20 years ago. According to the report, Gensler learned that Corzine had registered to run the 1991 race. Gensler asked Corzine’s secretary if Corzine was actually going to run. Several weeks later, the secretary informed Gensler that Corzine had decided against running and wouldn’t need the number, the memo said. The secretary gave the number to Gensler.

The electronic archives of the New York Road Runners don’t list a marathon result for Gensler or Corzine in 1991. In 1992, Corzine is listed as running the marathon in four hours, 21 minutes. In 1996, Gensler is listed as running the marathon in three hours, 34 minutes.

The CFTC analysis also reviewed Gensler’s relationship with Bradley I. Abelow, president and chief operating officer at MF Global and who also worked with Gensler at Goldman, and Laurie R. Ferber, general counsel at MF Global and also a former Goldman employee. Gensler didn’t have frequent conversations with either, the analysis found.

The review then looked into Gensler’s relationship with J. Christopher Flowers, an investor in MF Global who recruited Corzine to lead the brokerage. Gensler and Flowers worked at Goldman’s mergers and acquisitions department for 12 years. They frequently discussed mergers, but dealt with different industries and didn’t work on the same deals, according to Gensler’s interview with the lawyers.

Financial Distress

Gensler and Flowers didn’t have a social relationship, the memo said. Flowers called Gensler twice at the CFTC, including on the day of MF Global’s bankruptcy. Several other CFTC employees were present when Gensler returned the call.

As MF Global grappled publicly with financial distress, Gensler was also in communication with Jacob Goldfield, another former Goldman Sachs partner who co-managed Corzine’s blind trust while he was an elected official, the memo said.

Goldfield and Gensler met in 1991 or 1992 at Goldman Sachs’ fixed-income department. Gensler had co-supervisory responsibility for trading of Yen currency swaps while he was based in Tokyo; Goldfield, then located in New York, oversaw the firm’s worldwide swaps book, according to the memo.

‘Novel Insights’

On Oct. 30, Goldfield sent Gensler an e-mail to inform him that he was present at MF Global “in case there are questions.” Goldfield told Gensler that he had “no financial interest in the company and [was] not looking at it for investment,” according to the memo. Gensler asked Goldfield if there were observations to pass along.

“Not as of now, I want only to send along novel insights that are useful,” Goldfield replied.

“Novel and useful. Now those are limiting conditions, though I would say that most everything you have shared over our long knowing each other has been useful,” Gensler said.

Goldfield responded: “Also want to make sure that I am right before I comment.”

The next day, Oct. 31, Gensler was awakened by a 2:30 a.m. call from regulators and executives at MF Global, informing him that hundreds of millions of dollars of customer funds were missing. Within a week, he’d decided to recuse from the matter.

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

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net


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