With legislators attempting to get to the bottom of the collapse and bankruptcy of MF GlobalTerrance Duffy, CME Group’s executive chairman, testified before the Senate Agriculture Committee on Tuesday.
Duffy, who followed the testimony of a trio of MF Global executives, said that the firm’s brass were not as clueless to the loss of customer funds as they have claimed. Duffy, said Kansas Sen. Pat Roberts, had “sort of tossed a bomb” with the revelations.
The relevant portion of Duffy’s testimony:
“By the middle of the week of Oct. 24, MF Global had announced poor earnings and was downgraded by several credit rating firms sparking rumors it would sell its brokerage business.
“CME was the designated self-regulatory organization for MF Global with responsibility for auditing its futures business. On Thursday, Oct. 27, two of our auditors went to MF Global’s Chicago offices to review (the firm’s) daily segregation report for the close of business on Wednesday, Oct. 26.
“Wednesday’s segregation report, which is not available until Thursday, showed full compliance. Our auditors asked for the material necessary to check the numbers on the report against the general ledger and third-party sources and began the process of tying out the numbers for Wednesday’s report.
“That substantial review process of the Wednesday segregation report continued on Thursday and Friday.
“MF Global’s segregation report for Thursday, Oct. 27 — delivered to CME on Friday, Oct. 28 — also stated that MF Global remained in full compliance with segregation requirements. In fact, it showed the firm held $200 million in excess segregated funds.
Showed a shortfall
“On Sunday, the CFTC informed us they were aware of a draft segregation report for the close of business on Friday, Oct. 28, which showed more than a $900 million shortfall in required segregation.
“CFTC and CME staff and auditors returned to the firm on Sunday, Oct. 30, and were informed by this discrepancy was caused by ‘an accounting error.’ Our auditors, working with the CFTC, devoted the rest of the day and night, to find the so-called ‘accounting error.’ No such error was found.
“Instead, at about 2 a.m. Monday morning, Oct. 31, MF Global informed both the CFTC and CME that the shortfall was real and that customer segregated funds had been transferred out of segregation to the firm’s broker dealer accounts.
“After receiving this information, CME remained at MF Global while (the firm) attempted to identify funds that could be transferred into segregation to reduce or eliminate the discrepancy.
“A CME auditor also participated in a phone call with senior MF Global employees, wherein one employee indicated that Mr. Corzine knew about the loans made from the segregated accounts.
“CME Group has provided this information and the names of these individuals to the Department of Justice and the CFTC, who are investigating these matters.
“On Monday, Oct. 31 ... MF Global revised its segregation report for Thursday, Oct. 27, indicating that the alleged $200 million in excess segregated funds should have been reported as a deficiency of $200 million. This shortfall on segregation on Thursday, Oct. 27, was hidden by the inaccurate report, a telling sign to keep regulators in the dark.
“It remains to be seen whether this failure to disclose permitted additional segregated funds to be improperly transferred.
“Throughout this time, the firm and its employees were under the direction and control of MF Global management. Transfers of customer funds effectuated by MF Global for the benefit (of the firm) constitute very serious violations of our rules and of CFTC regulations.”