‘Devastated’ Corzine Defends Actions
By SCOTT PATTERSON And ANDREW ACKERMAN
WASHINGTON A contrite Jon Corzine expressed both sorrow and a firm defense of his actions Thursday in his first public appearance since the collapse of MF Global Holdings Ltd. in late October.
Former MF Global CEO Jon Corzine takes his seat to testify about the firm’s bankruptcy during a hearing before the U.S. House Agriculture Committee.
“Like all of you, I am devastated by the enormous impact on many peoples’ lives resulting from the events surrounding the MF Global bankruptcy,” Mr. Corzine said at a hearing by the House Agriculture Committee, which subpoenaed the former MF Global chief executive last Friday. “Of course my distress and sadness pale in comparison to the losses and hardships that customers, farmers, ranchers and others ”employees and investors have suffered.”
Mr. Corzine, who resigned as chairman and CEO of MF Global after its Oct. 31 bankruptcy filing, is a former U.S. senator and governor of New Jersey.
He faced tough questioning by the Republican-led committee, creating an atmosphere fraught with political drama. Mr. Corzine, 64 years old, received President Obama’s support in 2009 for his unsuccessful campaign for re-election as governor and more recently held a fund-raising dinner for Mr. Obama.
Some of the initial questionings focused on a significant shortfall in customer funds at MF Global. As Mr. Corzine scrambled to stabilize the firm in its last days, it was discovered that hundreds of millions of dollars were missing in customer accounts.
Mr. Corzine said repeatedly that he became aware of the shortfall in customer accounts on “Sunday night,” referring to late Oct. 30 or early Oct. 31.
The trustee overseeing MF Global’s liquidation estimates the amount at $1.2 billion. Mr. Corzine said that he had little to do with the mechanics of moving customer cash and collateral and that he was “stunned” when he learned the money was missing.
“I simply do not know where the money is,” he said, noting that “there were an extraordinary number of transactions during MF Global’s last few days.”
The state of the firm’s books and records reflected chaos in the brokerage’s final days, he said.
Still, Mr. Corzine mounted a defense of his tenure at MF Global, arguing that he cut leverage at the company from 37.3 to 1 in the first quarter of 2010, when he took charge at MF Global, to 30 to 1 at the end. He also defended his bet on European debt. Mr. Corzine, who was also a former Goldman Sachs Group Inc. chairman, took the helm of MF Global in March 2010 and quickly started making big bets on European government bonds.
Mr. Corzine defended his decision to invest in European sovereign bonds of countries including Italy, Spain and Portugal. The bet grew to more than $6 billion in a strategy that was repeatedly discussed by the company’s board.
“I strongly advocated the trading strategy,” Mr. Corzine said, noting that he had identified the yields on the bonds as “favorable” at a time when he and senior traders at the firm were “discussing ways to improve the firm’s profitability.”
He also noted that the firm structured the trade as a “repurchase to maturity,” which reduced some of MF Global’s financing risk and market risks on the strategy.
“I believed that [MF Global’s] investments in short-term European debt securities were prudent,” Mr. Corzine said. “There were discussions at board meetings, at which the transactions were described, analyzed and debated.”
Mr. Corzine said that on Aug. 15, 2011, he met with officials from the Financial Industry Regulatory Authority and the Securities and Exchange Commission in Washington, D.C., to discuss the European bet.
Several days later, MF Global was told that it needed to raise capital to support its positions. He discussed a controversial lobbying effort he made to influence the Commodity Futures Trading Commission’s plans to change rules regarding how futures commission merchants such as MF Global can treat customer funds.
The CFTC was considering a ban on internal repurchase agreements, in which futures firms swap customer funds for higher-yielding assets such as government bonds.
In a July 20 conference call with CFTC officials, including Chairman Gary Gensler, Mr. Corzine said he argued that such transactions should continue to be permitted because they could be beneficial to the futures commission merchants.
Mr. Corzine also said that he spoke with Mr. Gensler “on only limited occasions” since the time he joined MF Global. Mr. Gensler, who for years worked alongside Mr. Corzine at Goldman Sachs, recused himself from the investigation into MF Global’s collapse to avoid the appearance of a conflict of interest.
In its final weeks as customers and counterparties fled the firm, MF Global undertook “extraordinary steps to ensure that it was able to honor customers’ requests to withdraw funds or collateral,” Mr. Corzine will say.
The firm unwound hundreds of millions of dollars of European debt trades and attempted to draw down loans from a consortium of banks led by J.P. Morgan Chase & Co. In its question and answer period following Mr. Corzine’s statement, the House committee is sure to press him for answers about the missing customer cash.
Investigators believe MF Global in the week before it filed for bankruptcy protection shifted funds from the customer accounts to its broker-dealer, which handled the European-bond bet, according to people familiar with the matter.
Futures firms such as MF Global are prohibited from using customer cash in their own accounts, according to the Commodity Exchange Act. Mr. Corzine is widely expected to avoid directly answering specific questions about MF Global’s activities by invoking his Constitutional right against self-incrimination.
He said repeatedly that he doesn’t have all the information he needs to provide informed answers and he hasn’t had complete access to the firm’s records or his own notes since the bankruptcy.
The Federal Bureau of Investigation is currently probing MF Global’s collapse and any statements could be used in a case against him. “He would be making a major mistake if he doesn’t take the Fifth on almost all of this,” said Anthony Sabino, a professor of law at St. John’s University who specializes in white-collar crime, referring to the Fifth Amendment to the Constitution. “He’s in a tight spot and he’s going to be under oath so he has to speak truthfully.”
Mr. Corzine is also expected to testify before a House Financial Services subcommittee and the Senate’s Agriculture committee next week. James Kobak, lead counsel for the trustee overseeing the liquidation of MF Global, and CFTC member Jill Sommers testified on an earlier panel at the Thursday hearing.
Ms. Sommers took on oversight of the agency’s investigation into MF Global after Mr. Gensler recused himself.
“While our current focus is returning as much money as possible to customers, we are expending an enormous amount of effort to locate the missing customer funds and pursuing the enforcement investigation,” Ms. Sommers said.
Several exchange representatives also testified, including CME Group Inc. Executive Chairman Terrence Duffy. Mr. Duffy disclosed in testimony new details about the final days of MF Global. CME auditors learned from the CFTC on Oct. 30, one day before MF Global filed for bankruptcy protection, that a draft segregation report provided to the CFTC on Oct. 28 showed a $900 million shortfall in customer funds. MF Global had said the shortfall was caused by an “accounting error,” according to Mr. Duffy.
Throughout the rest of the day and that night, CME auditors and the CFTC worked with MF Global to discover the error. After finding that the shortfall was not an error, MF Global told the CFTC and CME that “customer money had been transferred out of segregation to firm accounts,” Mr. Duffy said.
Aaron Lucchetti, Jamila Trindle and Jacob Bunge contributed to this article.