MF Global Holdings Ltd. (MFGLQ:US) collapsed last year because of mistakes made by former chairman and chief executive officer Jon S. Corzine, U.S. House Republicans said in a report on the futures brokerage’s path to bankruptcy.
Corzine, a Democrat who served in the U.S. Senate and as New Jersey governor before taking the helm at MF Global, pushed the firm into new areas without reviving its core commodities trading business, lawmakers led by Representative Randy Neugebauer of Texas said in a 101-page report stemming from a year-long investigation. U.S. regulators under President Barack Obama failed to coordinate oversight of the company, they said.
“We found that Jon Corzine contributed greatly to the demise of this company,” Neugebauer said at a news conference in Washington. “There was a breakdown in communication in the regulatory community.”
MF Global’s Oct. 31, 2011, bankruptcy, the eighth biggest in U.S. history, left a $1.6 billion shortfall in customer funds that were supposed to be segregated. Corzine, who was Goldman Sachs Group Inc. (GS:US)’s co-chairman before entering politics, told lawmakers he doesn’t know what happened to the money.
“Mr. Corzine acted in good faith and did what he believed was necessary to turn around MF Global,” Steven Goldberg, a spokesman for Corzine, said yesterday in an e-mail statement.
The report released today reflects conclusions reached by majority Republicans on a Financial Services subcommittee led by Neugebauer who were in contact with Democrats during the probe, according to Jeff Emerson, spokesman for the Financial Services Committee. It was released without support from Representative Mike Capuano of Massachusetts, the ranking Democrat on the Oversight and Investigations subcommittee.
“I am not co-sponsoring the majority’s staff report on MF Global primarily due to an insufficient amount of time to review the report and go over it with other Democratic Subcommittee Members,” Capuano said yesterday in an e-mail statement. Democrats are preparing an addendum, he said.
The report describes a lack of coordination between the Commodity Futures Trading Commission and Securities and Exchange Commission, primary regulators for MF Global’s U.S. operations. The SEC didn’t include the CFTC in several meetings in 2011 about the brokerage’s capital and business strategy that would have been helpful for oversight, according to the report. The CFTC didn’t inform the SEC that the broker was using an alternative method of calculating customer funds.
On the day before the bankruptcy, the two agencies set three conference calls at 10 a.m., according to e-mails in the report.
“Ahhhh, coordination in action!” SEC Chairwoman Mary Schapiro said in an e-mail to Robert Cook, the agency’s director of the division of trading and markets.
“If we were really coordinated, we wouldn’t have 3 calls at 10am!!” Cook responded.
The CFTC instructed MF Global to transfer funds to the futures brokerage side of the company after the SEC told the company to keep $220 million on the securities brokerage side, according to the report. “Without telling us? That is unacceptable,” Schapiro wrote in an e-mail to Cook on Nov. 1.
“Behavior like this violates a trust the American people have in our government,” Representative Spencer Bachus, the Alabama Republican who leads the Financial Services Committee, said at today’s news conference.
Both Schapiro and CFTC Chairman Gary Gensler, who worked for Goldman Sachs while Corzine was there, were appointees of Obama’s Democratic administration.
“With respect to communications between the SEC and the CFTC regarding the capital charges required of the firm in August 2011, the report neglects to note that our staff in fact informed the CFTC staff of these charges at that time, a fact confirmed by CFTC’s general counsel in testimony before the subcommittee,” John Nester, an SEC spokesman, said in an e-mail statement.
Steve Adamske, spokesman for the CFTC, declined to comment on the report. Jill E. Sommers, the Republican commissioner leading the CFTC’s MF Global probe, also declined to comment.
With the CFTC, SEC and Justice Department all reviewing the collapse of MF Global, congressional investigators had trouble determining who was responsible for the gap in client funds, Neugebauer said in an interview last month.
“Those people may be talking to the regulators or law enforcement officials, but they aren’t talking to us and so it makes it difficult for us to make that call,” Neugebauer said in an Oct. 31 interview in Chicago.
Louis Freeh, a trustee for parent company MF Global Holdings Ltd. has been unwinding the company under Chapter 11 of the U.S. Bankruptcy Code in an effort to repay creditors. James Giddens, a separate trustee for the failed brokerage, MF Global Inc., is liquidating assets to repay customers under the Securities Investor Protection Act. Each trustee has conducted his own probe into how the company failed and they have been at odds over whether certain sums belong to creditors or customers.
Among the House report’s recommendations was a call to merge the CFTC and SEC as a way to prevent regulatory overlap and conflict. That suggestion drew opposition from Senator Pat Roberts, a Kansas Republican involved in CFTC oversight as a member of the Agriculture Committee.
“It has been clear from the outset that Governor Corzine was largely responsible for what happened at MF Global,” Roberts said in a statement. “The CFTC has already made changes in an effort to prevent this from even happening again. I don’t see how merging two regulators who regulate different aspects of our economy would have made any difference in Governor Corzine’s bad decisions or in preventing such a problem in the future.”
The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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