[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
THE COLLAPSE OF MF GLOBAL, PART 3
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
MARCH 28, 2012
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-113
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
U.S. GOVERNMENT PRINTING OFFICE
75-085 PDF WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
SPENCER BACHUS, Alabama, Chairman
JEB HENSARLING, Texas, Vice BARNEY FRANK, Massachusetts,
Chairman Ranking Member
PETER T. KING, New York MAXINE WATERS, California
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois BRAD SHERMAN, California
GARY G. MILLER, California GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California JOE BACA, California
MICHELE BACHMANN, Minnesota STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan BRAD MILLER, North Carolina
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK, GWEN MOORE, Wisconsin
Pennsylvania KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
James H. Clinger, Staff Director and Chief Counsel
Subcommittee on Oversight and Investigations
RANDY NEUGEBAUER, Texas, Chairman
MICHAEL G. FITZPATRICK, MICHAEL E. CAPUANO, Massachusetts,
Pennsylvania, Vice Chairman Ranking Member
PETER T. KING, New York STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota MAXINE WATERS, California
STEVAN PEARCE, New Mexico JOE BACA, California
BILL POSEY, Florida BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio JAMES A. HIMES, Connecticut
FRANCISCO ``QUICO'' CANSECO, Texas JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee
C O N T E N T S
----------
Page
Hearing held on:
March 28, 2012............................................... 1
Appendix:
March 28, 2012............................................... 59
WITNESSES
Wednesday, March 28, 2012
Cosper, Susan M., Technical Director, Financial Accounting
Standards Board (FASB)......................................... 46
Ferber, Laurie, General Counsel, MF Global Holdings Limited...... 8
Genova, Diane, Deputy General Counsel, JPMorgan Chase & Co....... 43
Roth, Daniel J., President and Chief Executive Officer, the
National Futures Association (NFA)............................. 44
Serwinski, Christine, Chief Financial Officer, MF Global Inc..... 11
Steenkamp, Henri J., Chief Financial Officer, MF Global Holdings
Limited........................................................ 9
APPENDIX
Prepared statements:
Neugebauer, Hon. Randy....................................... 60
Cosper, Susan M.............................................. 61
Ferber, Laurie............................................... 77
Genova, Diane................................................ 89
Roth, Daniel J............................................... 98
Serwinski, Christine......................................... 101
Steenkamp, Henri J........................................... 105
Additional Material Submitted for the Record
Neugebauer, Hon. Randy:
Letter from the Commodity Customer Coalition, dated March 27,
2012....................................................... 109
THE COLLAPSE OF MF GLOBAL, PART 3
----------
Wednesday, March 28, 2012
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 3:02 p.m., in
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer
[chairman of the subcommittee] presiding.
Members present: Representatives Neugebauer, Fitzpatrick,
Pearce, Posey, Hayworth, Renacci, Canseco, Fincher; Capuano,
Lynch, and Waters.
Ex officio present: Representative Bachus.
Also present: Representative Royce.
Chairman Neugebauer. This hearing will come to order. I
would remind Members that the opening statements will be
limited to 10 minutes on each side, as previously agreed.
There are Members who may attend this hearing who are not
members of the Oversight and Investigations Subcommittee, and I
ask unanimous consent that those Members be allowed to
participate in the hearing today, as well.
I am going to go ahead with my opening statement. This is
the third hearing that we have had on MF Global. This hearing
is about the 8th largest bankruptcy in the history of this
country, but more importantly, it is about trying to ascertain
what happened where farmers and ranchers and customers lost
over a billion dollars worth of their money.
I would remind folks that this is a hearing and not a
trial, in that the bottom line of what we are trying to
accomplish today is basically to do an autopsy on how a 228-
year-old company came to its demise last year.
It is important that we understand what was going on
corporately, what was going on from a regulatory standpoint,
and really what was going on within the systems that support
this entity and these businesses. The reason that is important
is that, obviously, there was a breach and people lost their
money.
But, more importantly, it is going to be important for us
to make sure that whatever deficiencies happened, that
corrective actions are taken so that customers and farmers and
ranchers who use these kinds of services in the future have
confidence in those markets.
We have looked at different aspects of this--of the last
days and months and years of MF Global and, today, this hearing
will be focused on the last days of MF Global, and ascertaining
how and when and why farmers and ranchers and customers lost
their money.
And so, I appreciate the witnesses being here today. I
appreciate my fellow committee members. And I hope that when we
complete this hearing today, we will have a better
understanding of what happened and, more importantly, how we
can prevent these kinds of things from happening in the future.
And so, with that, I yield to the ranking member, Mr.
Capuano, for his remarks.
Mr. Capuano. Thank you, Mr. Chairman, and thank you for
having this hearing. And I want to associate myself with all
the comments you just made; that is exactly what I am doing.
I have approached this--I am not looking for someone who
stole money. If somebody stole money, the Justice Department
will find them. That is their role, not our role, as I see it.
I see our role as trying to find out what happened in order
to make sure that it doesn't happen again, to see if there are
rules that need to be clarified, to see if there are accounting
principles that need to be clarified, whatever it might be. Or,
if there is criminal wrong-doing, well then, just to encourage
the proper authorities to do their job, not necessarily us.
But I also want to talk today about some of the events that
led up to today's hearing. I think it was pretty well known
that there were some news stories last week that were based on
a memo that was leaked inappropriately.
I have spoken to the chairman about it. We agreed that
was--things happen unintentionally, so be it. It is done. And I
actually want to congratulate the chairman for the addendum to
the memo to clarify that position.
I think it took a lot of good wisdom and a lot of courage
and a lot of foresight to do that, and it was well-written and,
I think, right to the point.
But I also want to make sure--and the chairman and I have
talked and I think we both agree. I want to be clear that I am
on the record to say that up until now this subcommittee, in my
opinion, has worked very well.
I have a good relationship with the chairman. I don't know
that we--I am sure we have differences of opinions on certain
matters, but not to the approach of this committee.
We have a responsibility and we are doing it and we are
going to continue to do it, but it has been done mostly in a
bipartisan and in a cooperative manner.
This incident last week raised some issues with some of my
Members on my side--I think legitimate issues. I have raised
them with the chairman. I think they are worked out. I believe
they are worked out.
But I want to be clear that, as we go forward, material of
the committee belongs to the committee. It does not belong to a
Member. Material of the committee is required, by House Rule
11, to be shared amongst all members equally. Equally.
It is not subject to the determination of staff or any
other Member what to do with that material. And again, I think
that things this week were inadvertent and that is fine. Things
happen and you clear them up.
But I want to be clear that, going forward, I expect that
every person who works for or with this committee or other
Members who serve with this committee will try to work in a
cooperative manner, knowing full well that there will come a
time when we have differences of opinion and we will express
them appropriately and viciously and vociferously and all the
other ways that we do.
But as far as information, as far as trying to get to the
bottom of this and other matters, the Oversight Subcommittee's
job is to protect the American people. We may have different
views on how to do that, but I don't think any of us disagree
on that responsibility.
And with that, Mr. Chairman, I want to thank you for the
conversations we have had to try to clarify some
misunderstandings this week, and I look forward to working with
you in the future.
Chairman Neugebauer. Yes, and I want to say that I
appreciate the ranking member and I appreciate his cooperative
spirit.
I think this committee, quite honestly has--I agree with
him--worked in a very bipartisan way because ultimately, we
work for the American taxpayers.
They give us the responsibility to oversee markets and
entities and I know he takes this as seriously as I do. And so,
I thank him for his remarks.
Now, I yield to the chairman of the full committee, Mr.
Bachus, for 10 minutes.
Chairman Bachus. Thank you, Chairman Neugebauer, for
convening this hearing to examine events in the tumultuous
final days of MF Global. I commend you for the subcommittee's
continued careful and comprehensive review of the facts.
Through two hearings, this being the third, there have been
dozens of interviews by the staff, reviews of thousands of
pages of documents which--and those documents, as they came in,
Members were notified that they were here, but maybe we can
improve that communication.
But the Oversight and Investigations Subcommittee and the
full Financial Services Committee have sought to find out what
led to the loss of $1.6 billion in customer funds.
We need to understand what happened at MF Global, both for
the benefit of ranchers and farmers who lost money, as well as
the American public which benefits from a properly and
effectively functioning commodity market.
What we learned to date is that, notwithstanding the
promise of the Dodd-Frank Act, regulators do not work together.
There is very little evidence of regulatory coordination in the
supervision of MF Global.
In fact, FINRA, some 4 or 5 months before, was asking
questions, but those questions--the SEC and FINRA were on one
side and CME and the Commodities Futures Trading Board were on
the other side. We can find no communication where they were
sharing those concerns with the other regulators.
Better coordination, I think, could have and should have
led to greater vigilance over the safekeeping of MF Global's
customer funds. We also have learned that internal controls do
not work if they can be readily short-circuited by a company's
CEO.
And while not all of the facts are yet known about the role
of MF Global's CEO, Jon Corzine, in the spectacular collapse,
the subcommittee's investigation leaves little doubt that MF
Global was, in many ways, his corporate alter ego, and that
ultimate responsibility for what happened in the firm's chaotic
final days rests with him. Today's hearing will examine whether
customer funds were used to meet the firm's demand for cash in
its fateful last week. According to a preliminary report filed
by the bankruptcy trust, margin calls were a major source of
stress to the firm in its last week.
We hope to learn from witnesses today whether this
liquidity crunch at MF Global led someone at the firm to
improperly use customer funds to meet the firm's needs for
cash.
In order to get to the bottom of what happened and who was
involved, the subcommittee needed the cooperation of various
banks that conducted business with MF Global. A number of those
banks were contacted about testifying today, but only JPMorgan
Chase volunteered to appear before us.
Financial institutions may understandably be reluctant to
testify on complex transactions because of the time and
resources it takes to ensure the testimony is accurate and
complete. JPMorgan Chase's cooperation, therefore, is very much
appreciated.
MF Global was the 8th largest bankruptcy in the Nation's
history, but that is not what makes its failure noteworthy.
Firms of all size fail every day. For every reward, there is a
corresponding risk, but that is part of the free market.
However, a $1.6 billion loss of customer money is not a
risk that should exist in an effectively regulated free market.
I hope this hearing will bring us closer to understanding what
went wrong and where that money is.
Thank you to our witnesses. And let me say this, our
investigation--everyone testifying on this panel has a good
reputation. They have a good background. They are respected in
the industry, and so, as I think has been said before, this
hearing is to find out what happened, not to accuse any of you
of any wrongdoing, because that hasn't been demonstrated.
And so, we appreciate your testimony. You are not on trial
here. You were simply in a fact-finding mode. And I have been
struck by--I have looked at your resumes and your backgrounds.
You are very qualified and you have a very good reputation, all
of you. So thank you.
Chairman Neugebauer. I thank the chairman and now the
gentleman, Mr. Lynch, is recognized for 2 minutes.
Mr. Lynch. Thank you, Mr. Chairman.
I would also like to thank the witnesses here today for
helping this committee with its work.
Mr. Chairman, I believe that in many ways you should be
given credit for the attention you have given to the collapse
of MF Global. I think we can learn many lessons from the
collapse of MF Global, about the accounting treatment of
certain risky investments, about the ability of regulators to
meaningfully oversee financial institutions, and about what we
can do to make sure regulators have the tools to prevent a
situation like this from occurring in the future.
We have explored these issues in previous hearings, and I
hope we have an opportunity to revisit them today. However, I
must raise an issue of process with you today that has been
mentioned by my ranking member, Mr. Capuano.
I believe that your side, you and your staff, have been
unacceptably slow in sharing documents with our offices and
other Members on this side of the dais. In fact, my office did
not receive a copy of the MF Global ``break-the-glass plan,''
something that seemingly Republican Members apparently had a
copy of at least as of last February's hearings. Moreover, the
ranking member was unaware until this Sunday that you were in
possession of about 100,000 pages of documents relating to the
final days of MF Global.
House Rules, as my colleague has indicated, state that each
Member shall have access to all committee hearings, records,
data, charts, and files. I have not had access to the extensive
portfolio of documents that your staff has obtained from MF
Global in preparation for this hearing.
Mr. Chairman, I have no intention of going easy on MF
Global. We are of one mind here. And I am as incensed as you
are at the breathtaking lack of care shown by employees at MF
Global in the handling of customer funds.
But I am also disappointed that as a member of this
committee, I have not received the full extent of information
collected by your staff and circulated to Republican Members.
Now just like your side, we take our responsibility to
prepare for these hearings very seriously. We take our
responsibility to the taxpayer very seriously. And, again,
while I give you great credit for focusing on this issue and
you deserve that credit, I hope that this investigation will
move forward in a bipartisan collaborative way, and that our
office and the rest of the Members on this side of the dais
will be privy to all the information that your staff has
obtained and will obtain.
Mr. Chairman, I thank you for the time and I yield back.
Chairman Neugebauer. I thank the gentleman for his remarks.
And now, I yield to the vice chairman of the Oversight and
Investigations Subcommittee, Mr. Fitzpatrick, for 1 minute.
Mr. Fitzpatrick. Thank you, Mr. Chairman.
So here we are in hearing three of a series of hearings
investigating the facts surrounding the collapse of MF Global.
We know that throughout the week of October 24, 2011, MF Global
suffered a severe lack of cash that ultimately led to the firm
filing bankruptcy on October 31st, and in those chaotic final
days up to $1.6 billion in customer money went missing.
At a time when Americans already lack confidence in the
financial markets, MF Global provides another devastating
example of how multi-billion dollar securities firms can
seriously impact middle-class Americans.
Like many members of this committee, I have had
constituents affected by this event, and that is who I am here
to speak for. We owe it to customers who lost money to discover
exactly what happened at MF Global.
But what these hearings are also designed to do is to
provide insight into our financial markets and the regulatory
regimes designed to protect them.
The American people expect us to hold the wrongdoers
accountable and to protect those who played by the rules. So
here we are. As Members of the House of Representatives, we are
here to stand in the place of millions of Americans we
collectively represent.
We are here to find answers for them. And I commend the
hundreds of hours that the subcommittee has spent devoted to
digging deep into this matter. I look forward to the testimony
of today's witnesses and the answers that we hope they should
be able to provide.
Thank you, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
And I ask unanimous consent that a letter from the
Commodity Customer Coalition actually thanking the full
committee, or this subcommittee, for our work on MF Global be
made a part of the record today.
Without objection, it is so ordered.
Now, I would like to yield to the gentleman from Texas, Mr.
Canseco, for 1\1/2\ minutes.
Mr. Canseco. Thank you, Mr. Chairman.
Back in the fall of 2008 as the financial crisis was
unfolding, then-candidate Obama stated in a debate the
importance of ``holding ourselves accountable day in, day out,
not just when there is a crisis for folks who have power and
influence and can hire lobbyists, but for nurses, the teacher,
the police officer who frankly at the end of each month, they
have a little financial crisis going.''
There is a big financial crisis going on right now for
farmers and for ranchers across the country who can't access
their portion of $1.6 billion that has gone missing at MF
Global.
This past week, we learned that CEO Jon Corzine likely
wasn't the innocent bystander he claimed to be in front of this
committee back in December.
Yet, for all the rhetoric we hear from the Obama
Administration about holding people accountable, this
Administration sure has a way of clamming up when the person in
question is a former Democratic Senator and Governor.
I hate to sound cynical, but I can't help but think that
the ``power and influence''--as President Obama may call it--
that someone like Jon Corzine carries is exempt from a thorough
investigation by the Department of Justice.
The victims of MF Global deserve their money back, but they
also deserve to know what happened to it. This hearing and our
continued investigation is of extreme importance.
And I yield back the balance of my time.
Chairman Neugebauer. Thank you.
The gentleman from California, Mr. Royce, is recognized for
1\1/2\ minutes.
Mr. Royce. Thank you, Mr. Chairman.
The clear problem that arose here, the clear problem that
made bankruptcy the only option for MF Global, was that no one
could account for what happened to over $1 billion in
segregated funds, as we are going to learn today. But more than
leaving the various customers of MF Global high and dry, what
has happened is that those missing funds have rocked the
foundation of the CFTC's customer protection regime.
Rules governing segregated accounts have been around for 75
years. And they are not difficult to understand, reportedly
they are not difficult to enforce, yet the CFTC has failed in
this most basic task.
So we go to Commissioner O'Malia's observation at the CFTC.
He says that basically he is arguing that since 2010, the CFTC
has been consumed with drafting new rules to regulate not just
our derivatives market, but the world's derivatives markets,
with much of the manpower at that agency dedicated to enforcing
the Dodd-Frank Act.
According to Mr. O'Malia, the CFTC missed cracks in the
system and it has cost them over a billion here in terms of the
clients, at least hundreds of millions.
So I will end by quoting him: ``Since the Dodd-Frank Act
became law, the Commission has acted like a little child
abandoning the old toys and swapping them out for the new. It
has concentrated on swaps rulemaking, while averting its gaze
from the future's markets and their developments.''
Therein lies the concern, the broader question that has to
be answered here regarding the ability and willingness of the
CFTC to ensure customer funds are protected.
I yield back, Mr. Chairman.
Chairman Neugebauer. I thank the gentleman.
I yield to the ranking member, Mr. Capuano for--
Mr. Capuano. Thank you, Mr. Chairman.
Mr. Chairman, it is kind of interesting. We started off in
trying to be bipartisan and now I have just heard that both
President Obama and the Dodd-Frank Act caused this problem.
And I would like any Member here who has any information
whatsoever that the Justice Department, the SEC, the CFTC, or
any other appropriate agency has given Mr. Corzine or anyone
else a pass on the investigation related to this matter.
Because if you do, I would like to see it, and it would be
another matter that we don't have. I would like to know if
Dodd-Frank caused this problem, then what caused Lehman
Brothers, what caused Madoff?
I know we are all out here to make political points. I am a
politician too, but let's stick to the matter at hand. What
happened here? If you know, go to the Justice Department and
tell them.
If you want to make political points, there are microphones
out in the hall, that is the appropriate--
Mr. Royce. Will the gentleman yield?
Mr. Capuano. I sure will.
Mr. Royce. I appreciate you yielding. The point that I am
making--I am quoting the Commissioner at the CFTC. It is his
observation. It is his observation that since the Dodd-Frank
Act became law, the Commission has acted in this way.
It is his observation that it has concentrated on swaps
rulemaking while averting its gaze from the futures markets and
their development.
Mr. Capuano. I would be happy to--
Mr. Royce. So perhaps you should address--
Mr. Capuano. --explain my comments. I would be happy to ask
the gentleman--
Mr. Royce. --his observation.
Mr. Capuano. I would be happy to join the gentleman to
invite the Director of the CFTC back and we will ask him that
question to see if he thinks, here publicly, on the record,
that Dodd-Frank caused this problem. And if he did, I will
simply agree with you and say, good job. But if he doesn't,
then I would expect you to do the same.
Chairman Neugebauer. I thank the gentleman.
And now, I am going to recognize our first panel: Ms.
Laurie Ferber, general counsel, MF Global Holdings Limited; Mr.
Henry Steenkamp, chief financial officer, MF Global; Ms.
Christine Serwinski, chief financial officer of North America;
and Ms. Edith O'Brien, assistant treasurer at MF Global.
I will now recognize each of you now for your opening
statement. And first of all, I need you to please stand and
raise your right hand.
[Witnesses sworn.]
Chairman Neugebauer. Thank you, you may be seated.
Without objection, your written statements will be made a
part of the record.
And at this time, I will recognize Ms. Ferber for your
opening statement.
TESTIMONY OF LAURIE FERBER, GENERAL COUNSEL, MF GLOBAL HOLDINGS
LIMITED
Ms. Ferber. Thank you. My name is Laurie Ferber. Since June
2009, I have served as the general counsel of MF Global. Since
the bankruptcy filing of MF Global Holdings, I have remained
with the company to assist the bankruptcy trustee and the
bankruptcy professionals in their efforts to maximize the value
of the MF Global estate.
I hope that my testimony will assist the subcommittee in
its effort to understand what happened at MF Global during the
firm's final days.
I was born and raised in the Bronx, New York. I received a
Bachelor's Degree from the State University of New York at
Buffalo and graduated from New York University School of Law.
Prior to joining MF Global, I served as general counsel of
the commodities and/or fixed income trading units of two
financial services firms.
As general counsel of MF Global, I supervised the legal and
compliance functions. My responsibilities included managing the
legal function to support the firm's evolving business,
advising the board and senior management, and facilitating MF
Global's relationships with its regulators.
MF Global's legal department included approximately 17
attorney and 12 other professionals. The firm's legal team was
supported by several highly skilled outside law firms with
expertise in various areas of law pertinent to MF Global's
operating businesses.
The global head of compliance, who had substantial
experience and expertise in compliance matters and managed the
global department of over 80 people, also reported directly to
me. I reported directly to the chief executive at MF Global and
interacted frequently with the board of directors.
My focus during the last week of MF Global's operations was
to make sure the legal and compliance departments and outside
counsel were available and prepared to support the firm as it
attempted to deal with the rapidly unfolding events of MF
Global's last days.
The firm's senior management and board of directors reacted
to those events by initially seeking to sell all or part of the
firm and severely reducing it's balance sheet, while also
seeking to make sure the firm met all of its obligations.
Ultimately, when the sale of the firm became impossible, MF
Global Holdings had no viable option other than to file for
bankruptcy protection. Throughout MF Global's final weekend, I
personally was in MF Global's offices in New York for all but a
very few hours, as were many members of MF Global senior
management. The board of directors was also present at MF
Global's offices, carefully monitoring events and receiving
almost constant updates.
My colleagues and I were in very frequent contact with many
of MF Global's regulators during this time, including the SEC,
the CFTC, the CMA, the CBOE, FINRA, and the Federal Reserve
Bank of New York, as well as the Financial Services Authority,
the U.K. financial services Regulator.
Keeping the regulators informed was one of my top
priorities, and that included spending most of Sunday evening,
October 30th, working with regulators to agree to the terms on
which the firm would be sold and its accounts transferred to a
buyer.
As best as I can recall, it was shortly after concluding
that process, and likely just before midnight on October 30th,
that I learned the firm was unable to reconcile its segregated
funds account. I was shocked, because I believed that the firm
had in place a fully compliant system operated by highly
qualified professionals for controlling and securing customer
segregated funds.
As a last effort, senior people from a potential buyer
worked with people from our finance and operations team to
provide a fresh set of eyes to help identify the reconciliation
errors.
Once the inability to reconcile the accounts became clear,
at approximately 2 a.m., we notified the regulators. Later that
morning after several hours of discussion with the regulators,
we made the bankruptcy filing.
Since that filing, I have been assisting in the complex
efforts--global efforts to maximize the value of the bankruptcy
estate for all MF Global stakeholders.
I will try to answer any questions you have.
[The prepared statement of Ms. Ferber can be found on page
77 of the appendix.]
Chairman Neugebauer. And up next will be Mr. Steenkamp.
TESTIMONY OF HENRI J. STEENKAMP, CHIEF FINANCIAL OFFICER, MF
GLOBAL HOLDINGS LIMITED
Mr. Steenkamp. Thank you for the opportunity to make this
brief statement.
My name is Henri Steenkamp and I am the chief financial
officer of MF Global Holdings Limited, a position I have held
since April 2011. Let me say at the outset that I am deeply
saddened, upset, and frustrated that money belonging to MF
Global Inc.'s customers has not been returned in full.
I know, however, that my reactions cannot be compared to
those of the people who are suffering with this issue.
Along with certain other senior executives of MF Global
Holdings Limited, I have remained at my post following the
bankruptcy filing and am working diligently with the Chapter 11
trustee to do what I can to maximize the value of the firm for
all interested parties.
That said, because of the SIPC trustee's rules and
policies, I have unfortunately not been able to participate in
the current efforts to return customer funds.
While I am deeply distressed by the fact that customer
monies have not yet been fully repaid, I unfortunately have
limited knowledge of the specific movements of funds at the
U.S. broker/dealer subsidiary, MF Global Inc., during the last
2 or 3 business days prior to the bankruptcy filing.
This is in part because of my global role, and in part
because during those days, I was taken up with other very
serious matters.
As the global CFO, I had many different functions, but
principal among them was the effort to: one, ensure that the
holding company's consolidated financial accounts complied with
all U.S. accounting and reporting requirements; and two, work
closely with our investors and the rating agencies.
As its name suggests, MF Global Holdings Limited, my
employer, is a global holding company with approximately 50
domestic and foreign subsidiaries.
Each of the regulated subsidiaries generally had its own or
a regional chief executive officer, chief operating officer,
chief financial officer, and others obligated to independently
discharge the customary duties of those offices according to
its home jurisdiction's regulatory requirements.
All of these positions were filled by highly experienced
professionals, dealing directly with local regulators. Direct
involvement with operational matters such as bank accounts or
fund transfers has never been part of my duties.
It is, of course, important to understand the way in which
segregation issues were handled at MF Global Inc., the
subsidiary that acts as a futures commission merchant in the
ordinary course of business.
To avoid confusion, when necessary to specifically refer to
MF Global Inc., I will call it ``MFGI.'' MFGI held all U.S. FCM
customer funds required by law to be segregated, and all
segregation calculations were performed by experienced MFGI
personnel in Chicago and overseen by MFGI finance
professionals. To my understanding, MFGI segregation of client
funds had been reviewed repeatedly by the firm's outside
auditors and regulators over a long period of time.
As a general matter, I was not involved with the details of
segregated funds in the course of my duties as global CFO, nor
were the complex segregation calculations performed by MFGI in
Chicago and reported to regulators on a daily basis.
The week prior to the bankruptcy filing saw, among other
things, multiple rating agency downgrades in very quick
succession, extraordinary liquidity stresses, and efforts to
sell all or a part of the firm. It was a time of constant
pressure and little or no sleep with a significant number of
critical issues to resolve.
As the CFO of the holding company, my attention was
appropriately focused on crisis management and strategic issues
relating to the sale of the company.
On Monday, October 24, 2011, Moody's announced it was
downgrading MF Global's credit rating by one notch, leaving the
firm with the lowest possible investment grade rating.
This was followed by further downgrades throughout the rest
of the week, the speed and severity of which were unprecedented
in my experience, placing extraordinary pressure on the firm's
liquidity.
As the situation deteriorated, the sale of the FCM merchant
business and/or the entire firm was pursued. In between my
dialogue with the rating agencies, I dedicated my time to the
daunting task of facilitating the due diligence necessary for
an acquisition or asset sale almost exclusively in the period
commencing on the evening of October 27th, and ending with the
decision to file for bankruptcy on the morning of October 31st.
As I recall, on Sunday, October 30th, when a deal for the
acquisition of all or part of the company appeared to be close
at hand, I first learned of a serious issue with MFGI's
segregated fund calculations.
Unfortunately, as the subcommittee is aware, the efforts to
reconcile the segregation calculations were not successful and
the deal fell through.
I, along with others from MF Global, promptly notified our
regulators about the segregation issues.
I understand that the subcommittee, MFGI's customers, and
the public have many unanswered questions about customer funds.
I share many of those questions and I am personally extremely
frustrated and distressed that the remaining outstanding client
funds have not been repaid in full.
I would be pleased to answer the subcommittee's questions.
Thank you.
[The prepared statement of Mr. Steenkamp can be found on
page 105 of the appendix.]
Chairman Neugebauer. Ms. Serwinski, you are recognized for
5 minutes as well.
TESTIMONY OF CHRISTINE SERWINSKI, CHIEF FINANCIAL OFFICER, MF
GLOBAL INC.
Ms. Serwinski. Thank you for the opportunity to testify
today. My name is Christine Serwinski. At the time of the
events in question, I was the chief financial officer of MF
Global Inc., the firm's North American broker/dealer and
futures commission merchant.
In my position as the CFO of MF Global Inc., I was
responsible for the accounting and regulatory accounting team.
In light of the subcommittee's focus on the events of the
week of October 24th, it is important to note that the
departments responsible for the transfer of funds into and out
of the company--treasury, treasury operations, and securities
operations--did not report to me.
I am aware that the subcommittee is particularly interested
in the events of the week prior to the October 30th bankruptcy.
I will do my best to provide whatever information I can, but I
was away for the majority of that week. And I apologize in
advance if I am unable to add a great deal of detail.
On Monday, October 24th, Moody's downgraded MF Global's
credit rating. On Tuesday, there was an earnings call. On that
same day, I left Chicago for a previously planned vacation. I
had every reason to believe that the firm was on solid ground
prior to my departure.
Before leaving, I spoke to members of my staff and drafted
e-mails to coworkers to ensure that all of the functions of my
office would be covered. All of my colleagues and subordinates
knew how to and did reach me as necessary during my absence. I
had access to e-mails via my BlackBerry during my week off, and
I read e-mails when I could. I also spoke to people at MF
Global on the telephone from time to time throughout the week.
All communications with MF Global employees indicated that
things were very busy, but I was assured that everything was
under control. And at no time did anyone ever suggest that I
should return to the office. Nonetheless, late in the day on
Thursday, I decided to come back to Chicago a day early, on
Sunday. I was not alarmed, but I believed that it would be
better to return early given the level of activity at the firm.
After receiving varying reports earlier in the day, and
upon arriving at the office on Sunday evening, I was informed
that in fact, there appeared to be a segregated and secured
deficit of approximately $900 million. I dove into the
accounting with my team, believing that this must be an
accounting error, because such a large deficit was simply
inconceivable to me.
Early Monday morning the assistant treasurer handed me a
piece of paper that identified a series of transactions that,
according to calculations, accounted for the shortfall in the
FCM's segregated accounts. I then realized the deficit in the
segregated and secured funds was not an accounting error.
We informed a representative of the CME, and my focus
immediately shifted to identifying all firm funds within MF
Global that might be transferred into the segregated and
secured environment as quickly as possible. We worked
relentlessly throughout the early morning hours and indeed
throughout most of the day on October 31st to try to bring the
segregated, unsecured accounts back to the appropriate levels.
Although some of the funds were transferred into the FCM's
segregated and secured accounts, a number of submitted wires
were not executed by the bank and we were unable to move
sufficient funds to make up for the shortfall. Sometime on
October 31st, I learned that MF Global had filed for
bankruptcy, that we were under SIPC protection, and that the
firm could no longer engage in further financial transactions.
Shortly thereafter, the SPIC trustee asked me to stay on at MF
Global to assist in the wind-down of the business, which I
agreed to do.
I look forward to addressing to the best of my knowledge
and ability any questions that the subcommittee may have.
Thank you.
[The prepared statement of Ms. Serwinski can be found on
page 101 of the appendix.]
Chairman Neugebauer. Thank you.
We have been instructed that Ms. O'Brien does not plan to
give an opening statement at this time, so we will therefore
begin our questions.
Ms. O'Brien, on Friday, October 28, 2011, MF Global
transferred $200 million from the segregated customer accounts
to the house account, and then subsequently sent $175 million
of money from the house account to the MF Global U.K. account
to cover an overdraft.
As you are aware, in December Mr. Corzine testified here
that you assured him that those transfers complied with the
CFTC rules about customer segregation. Reportedly, you dispute
Mr. Corzine's testimony.
So let me ask you today, Ms. O'Brien, did you give Mr.
Corzine assurances that the farmers' and ranchers' money that
was in MF Global's account, the segregated accounts, did you
give him assurances that that money was not their money?
Ms. O'Brien. [Off mike.]
Chairman Neugebauer. I am sorry. We--you are going to have
to--yes.
Ms. O'Brien. On the advice of counsel, I respectfully
decline to answer based on my constitutional rights.
Chairman Neugebauer. I am going to yield to Mr. Capuano and
see if he would like to--
Mr. Capuano. Ms. O'Brien, I just--I understand and I
respect your constitutional rights. But there was an article
in--I think it was today's Wall Street Journal, maybe
yesterday's, that stated that you are trying to negotiate an
immunity with Federal investigators. And I am just curious if
that article was accurate or inaccurate. I am not asking about
anything that happened at MF Global. What I am simply asking
is, is that news report an accurate report or not?
Ms. O'Brien. On the advice of counsel, I respectfully
decline to answer based on constitutional rights.
Chairman Neugebauer. Ms. O'Brien, the subcommittee asked
you here today to testify so that you could help use your
background and experience to solve a very serious matter, to
try to find out exactly what happened and how we can keep this
from happening again. We are extremely disappointed that you
have chosen to do that. I would just ask you now, do you intend
to invoke your Fifth Amendment right as to any question that
the subcommittee may ask you on these subjects today?
Ms. O'Brien. I will.
Chairman Neugebauer. I am disappointed by your answer
because I believe you have important knowledge, and I am
hopeful that maybe at some point you will reconsider and come
back and testify before this committee. But at this time, with
unanimous consent, I am going to dismiss Ms. O'Brien from the
panel.
Ms. O'Brien, you are dismissed.
Ms. O'Brien. Okay.
Chairman Neugebauer. I am going to continue the
questioning. I think what we will do at this particular point
in time is--Mr. Capuano, I used that time. We will reset the
time and we will begin the question-and-answer period again.
Ms. Serwinski, on October 28th, MF Global transferred $200
million from the segregated accounts and then subsequently
transferred $175 million to the U.K. affiliate to cover an
overdraft. In an interview that you had with our committee, you
stated that if you were working that day, it was very unlikely
you would have approved a $175 million transfer because it
could have violated the SEC's net capital rules. Can you
explain that to me?
Ms. Serwinski. The transaction, $175 million transaction as
I understand it, was an intercompany loan between MF Global
Inc. and its affiliate, MF Global U.K., Limited. As I
understand it, the $175 million was being taken out of
customers' segregation. There were two things I would have
looked at with respect to this transfer.
First, did the firm, what was referred to and has been
referred to as the firm-invested-in-excess-segregation-and-
secured-funds, with that $175 million, brought that level to a
negative. The firm could still be in regulatory compliance, but
it would have breached its own internal policy.
The second consideration that would have had to be
evaluated was a potential impact on the excess net capital of
the firm. So, if that number without being adjusted would have
brought, I believe, the firm to a potential under early warning
situation, which wouldn't have been a rule violation, but would
have required a reporting to the regulators.
Chairman Neugebauer. I want to go back to my question. If
you had been there on that day, would you have approved that
transfer? Yes or no?
Ms. Serwinski. I honestly don't know what all the
circumstances were around that transaction. But it would be--if
the impact would have breached a regulatory rule, I don't
believe I would have approved it.
Chairman Neugebauer. Knowing what you know today, would you
approve that transaction, yes or no?
Ms. Serwinski. No.
Chairman Neugebauer. Okay. Thank you.
You are aware of an e-mail in which Edith O'Brien described
this $175 million transfer. And the e-mail states that her, Mr.
Corzine, J.C. I believe that--is it normal course of business
for the CEO to make instructions on wiring funds? Did that
happen on a regular basis on your watch?
Ms. Serwinski. No.
Chairman Neugebauer. So, this would be out of the ordinary
for Mr. Corzine to start calling people and instructing them to
start wiring money?
Ms. Serwinski. Yes, I believe that would be an unusual
event.
Chairman Neugebauer. I thank you for that.
Ms. Ferber, according to CME, on the afternoon of Thursday,
October the 27th, a representative of CME group sent a letter
to you, Ms. Serwinski, and Mr. Bolan, I believe, and all of the
MF Global senior managers. And it stated that effective
immediately any equity withdrawals from MF Global Inc., must be
approved in writing by CME's group audit department. Basically,
CME is telling MF Global not to move its own capital out of MF
Global without CME's approval.
Who did you disseminate that information to when you
received that letter?
Ms. Ferber. I really don't recall. At the time it obviously
went directly to our finance group and to myself. And I cannot
remember exactly what I did with it back on that Thursday. I
know I recall having conversations where people were aware of
it.
Chairman Neugebauer. Did you seek approval when you made
the $175 million transfer to MF Global U.K.? Before you moved
that money, did you notify CME that you were making that
transfer?
Ms. Ferber. I was not aware of that transfer before it was
made, so I would not know that.
Chairman Neugebauer. So you don't know who you disseminated
the information to and maybe not everybody got the memo. Is
that what you are--
Ms. Ferber. Again, the memo went directly to key finance
people, and the key people operating the transfers and things
were all in Chicago. I assume it was shared there, but I really
don't recall.
Chairman Neugebauer. Mr. Steenkamp, I was interested in
your testimony where you said you are the CFO for MF Global
Holdings Limited, and that you were addressing very important
issues facing the company at that time as their CFO.
Is that your testimony?
Mr. Steenkamp. That is correct, sir.
Chairman Neugebauer. Yes. Wouldn't you think the liquidity
of a company would be one of the important aspects of a entity
the size of MF Global?
And based on its businesses, would you think if they were
having liquidity problems, that would be something in which the
CFO should be involved?
Mr. Steenkamp. Sir, there were many things going on at that
point in time.
Chairman Neugebauer. No, that wasn't the question. The
question is, is liquidity of the corporation an important role
of the CFO?
Mr. Steenkamp. The liquidity of the financial firm--
Chairman Neugebauer. This is a yes-or-no question. This is
not rocket science here.
Is the liquidity of the corporation an important piece of
the role of a chief financial officer of a company?
Mr. Steenkamp. Sir--
Chairman Neugebauer. Yes or no, sir?
Mr. Steenkamp. Sir, the liquidity is critical on a
consolidated basis, yes.
Chairman Neugebauer. Yes. So I am surprised that you have
very little knowledge about the transfers and these were not
small transfers of money, margin calls, people trying to
liquidate a position as to create liquidity and you are saying
you really didn't have much knowledge of that?
Mr. Steenkamp. Yes. Sir, when it came to the liquidity, I
was looking at liquidity on a global consolidated basis. That
was a transfer within MF Global Inc., that obviously was
important, but there were many liquidity events that were
occurring across the firm, not just in Chicago, but across the
whole globe with which we were dealing.
Chairman Neugebauer. And how was the liquidity going?
Mr. Steenkamp. We slowly experienced throughout that week a
drastic change in liquidity, especially from Wednesday to
Friday, and we experienced in this last couple of days
significant liquidity stress, I think, but from the call not
too dissimilar on the Thursday and Friday as a run on the bank.
Chairman Neugebauer. I see my time is up.
I now turn to the ranking member, Mr. Capuano.
Mr. Capuano. Thank you, Mr. Chairman.
I actually don't have a clue what questions to ask any of
you. Because I have the general counsel to MF Global Holdings
saying, ``I didn't know what was going on. I had nothing to do
with this.''
I have the chief financial officer of MF Global Holdings
Limited saying, ``It was not my job. I didn't do it.''
And the chief financial officer--by the way, who also said,
``It is MF Global Inc.'s issue, not mine. I don't have anything
to do with it, and though they report to me, I don't know
anything.''
And I have the chief financial officer of North America, MF
Global Inc., saying, ``I was on vacation.''
So how am I supposed to ask you questions, when apparently
none of you knew what was going on, or claim to not know what
was going on, have no information whatsoever?
How did this company run? Did anybody in the company,
anyone, have authority to transfer customers' funds?
Mr. Steenkamp, I ask you, did anybody have that authority?
I know you said in your written statement you didn't, but who
did?
Mr. Steenkamp. Sir, my responsibility was to oversee the
global finance function. I was not responsible for--
Mr. Capuano. I know what you weren't responsible for. I
read the testimony. Apparently, you weren't responsible for
anything.
Who was responsible for deciding to transfer customers'
funds? Who? If not you, fine. I read your testimony. Who?
Mr. Steenkamp. Sir, the transfers of customer funds would
be resident--the authority would be resident in each of the
local regulated entities.
So in Chicago, those--
Mr. Capuano. Who would that be, a name?
Mr. Steenkamp. It would be between the finance team, Ms.
Serwinski's team. It would be between--
Mr. Capuano. So it is Ms. Serwinski--
Mr. Steenkamp. --Ms. O'Brien's team--
Mr. Capuano. And that is what I read in your testimony, but
I wanted to make sure I read it right.
Ms. Serwinski, apparently Mr. Steenkamp thinks that you
have the authority. Is that correct? Do you have the authority?
Did you have the authority to transfer customers' funds?
Ms. Serwinski. I did not have the authority to transfer
customer funds.
Mr. Capuano. Okay.
Ms. Serwinski. As I mentioned in my opening statement, sir,
the transfer of customer funds was managed by the treasury
group--the treasury operations group and the security
operations group.
Mr. Capuano. I thought you were the chief financial
officer. The treasury group didn't report to you?
Ms. Serwinski. No, they did not.
Mr. Capuano. Who did they report to?
Ms. Serwinski. They reported to the global treasurer.
Mr. Capuano. And who in the treasury group would be the
main person responsible for making that decision?
Ms. Serwinski. Making the decision to--
Mr. Capuano. To transfer a customer's funds?
Ms. Serwinski. It would be the assistant treasurer or the
global treasurer.
Mr. Capuano. Names?
Ms. Serwinski. Edith O'Brien and Vinay Mahajan.
Mr. Capuano. So I have not yet seen any corporate
organizational table for all MF Global. I understand there were
over 50 or 80 different companies, so it is going to be fun to
try to read it.
But of all the people who are probably going to show up on
the corporate ladder, I am willing to bet that Ms. O'Brien's
name or her position will not show up.
And she, however, was the only person--she was the top
ranking person to say, let's take all of the customer funds and
do whatever we feel like with them.
If that is the case, I think we have more than a little bit
of a problem here. And I will tell you that this hearing, after
reading this testimony and listening to you, reminds me an
awful lot of a hearing we had on this committee, I don't
remember how many years ago, on Enron.
We had Mr. Skilling. We had Mr. Lay. We had Mr. Fastow
here. And I told them exactly what I am going to tell you. I
said, okay, none of you did. Apparently, no one did anything
wrong but there is a billion dollars missing.
Here is what you should be concerned with, not us, we are
not the appropriate investigative body to determine who had
that responsibility. Here is your concern, the people sitting
next to you.
Because somebody is going say something to the appropriate
investigators to say, this is the person who had final
responsibility. And when that happens, there are going be
problems for those individuals.
So I wish I could find some wonderful things. I guess one
other question. All of you were working for MF Global before
these problems arose; is that correct?
Did I read your testimony correctly? You were all working
there before? And you are all still working there? Is that
correct?
Ms. Serwinski. No, I am--
Mr. Capuano. No, you are no longer there, Ms. Serwinski?
Ms. Serwinski. --no longer there.
Mr. Capuano. Then, I will ask you, Mr. Steenkamp, Ms.
Ferber, there have been some reports that MF Global is
considering bonuses.
Are you in line for some of those bonuses?
Mr. Steenkamp. As far as I am aware, there has been no
decision made on bonuses, sir.
Ms. Ferber. I think the trustee emphasized that in his
statement.
Mr. Capuano. So I have well-paid employees of a major
company that somehow has misplaced or misappropriated a billion
dollars of customer funds, and yet you are asking the trustee
in bankruptcy--and may--you may not, not you, but someone is
asking the trustee in bankruptcy to give bonuses to the very
people who may or may not have had something to do with this?
Do you see that as a potential little issue?
Mr. Steenkamp, do you think that would be appropriate for
this trustee in bankruptcy at this point, before we know what
happened, to be giving out bonuses to people who were there who
may have had something to do with creating this problem?
Mr. Steenkamp. Sir, that is not a decision that lies in our
hands. We believe the trustee will make a decision that is
appropriate.
Mr. Capuano. Ms. Ferber, do you think that is appropriate?
You are the general counsel, would you advise your clients that
is a good idea?
Ms. Ferber. I would totally defer to the trustee. My focus
right now is on helping the trustee. It is his responsibility
to figure out how to manage the bankruptcy estate and to retain
employees and everything else.
Mr. Capuano. That is fair enough. I appreciate your
consistency in having nothing to add to this discussion.
And again, as I said from the beginning, I wasn't sure what
questions I could ask to add the information, and apparently I
have now spent 6 minutes and done just that.
Thank you.
Chairman Neugebauer. I thank the gentleman.
And now, Mr. Fitzpatrick is recognized for 5 minutes.
Mr. Fitzpatrick. Thank you, Mr. Chairman.
Mr. Steenkamp, did you, on Sunday, October 30th, or any day
for that matter, instruct anybody at MF Global to hold off on
contacting the regulators about MF Global's segregated
deficiency?
Mr. Steenkamp. I have no memory of instructing anyone to
hold off, sir.
Mr. Fitzpatrick. You have no memory of instructing anybody?
Mr. Steenkamp. No.
Mr. Fitzpatrick. Ms. Serwinski, you state on page three of
your testimony that, ``on Saturday I was initially told that
the segregation and secured statement for Friday showed the
firm to be under-segregated.''
Who told you that?
Ms. Serwinski. Someone on our staff, I believe. I don't
recall who exactly the person was, but someone on my staff.
Mr. Fitzpatrick. Someone on your staff told you--
Ms. Serwinski. --in the finance team.
Mr. Fitzpatrick. And who was that?
Ms. Serwinski. I don't recall if it was the regulatory
capital controller or the controller.
Mr. Fitzpatrick. That would be a pretty significant piece
of information you received on the day that you returned back
from your vacation; correct?
You don't remember who told you that you had a significant
deficiency?
Ms. Serwinski. Originally, when the calculation was done on
Saturday morning, it showed a deficiency. My department was
assured by the treasury or treasury operations group that there
was a reconciliation item or issue to be resolved.
They were spending that Saturday afternoon to do just that.
On Sunday morning before I boarded a flight back to Chicago, I
was informed that in fact the firm might have been truly
undersegregated at that time--as of the 28th.
When I landed, I received information to say, no, we were
not actually undersegregated. When I went to the office I was
told that, yes, in fact, we were undersegregated, and that is
when the team started to look to see how that could possibly be
the case.
Mr. Fitzpatrick. Ms. Serwinski, did you inform anyone else
of that fact?
Ms. Serwinski. Once we determined that the funds had in
fact not been an accounting error, but an actual deficit, we
contacted the CME, who was on the premises, and I believe
contacted my colleagues in New York at that point.
Mr. Fitzpatrick. And what day was that? Was that Saturday?
Ms. Serwinski. No. That was probably very early in the
hours of Monday, October 31st, or very late Sunday, October
30th.
Mr. Fitzpatrick. So you would have waited approximately 2
days to let anybody at CME know about the deficiency?
Ms. Serwinski. We did not believe--I did not believe it was
a deficiency at that point.
As I mentioned, it was inconceivable to me that the firm
could be undersegregated by that substantial amount.
Mr. Fitzpatrick. But it was in fact deficient by that
substantial amount, correct?
Ms. Serwinski. It was brought to my attention later on, in
the very early hours of October 31st, that yes, in fact, it was
in deficiency.
Mr. Fitzpatrick. Undersegregation is a hugely significant
violation; is it not?
Ms. Serwinski. Yes. We were undersegregated.
Mr. Fitzpatrick. And yet, you didn't inform management or
any regulator of this significant fact? Is that your testimony?
Ms. Serwinski. I did after it was confirmed that it was an
actual undersegregation situation.
Mr. Fitzpatrick. Ms. Ferber, on Friday, October 28th,
JPMorgan Chase sent a letter asking MF Global to verify in
writing that it had the authority under CFTC rules to transfer
$170 million to replenish an account that MF Global U.K. had
overdrawn.
Apparently, JPMorgan sent three drafts of that letter
asking MF Global to confirm that the transfers were proper; is
that correct?
Ms. Ferber. Yes, I believe so.
Mr. Fitzpatrick. At any time, did anyone at MF Global
refuse to sign the letter?
Ms. Ferber. Not in any discussions with me. No.
Mr. Fitzpatrick. Were you told that anybody at MF Global
refused to sign the letter?
Ms. Ferber. No, I was not.
Mr. Fitzpatrick. So you have no information of anybody at
MF Global refusing to sign that letter; correct?
Ms. Ferber. You have to focus on which version of the
letter, so--
Mr. Fitzpatrick. Any of the letters.
Ms. Ferber. The first letter was asking one individual to
confirm that everything that has ever been done in the history
of those accounts, and everything that would ever be done in
the future, was in compliance with all CFTC rules.
And I think you know, as we certainly tried to convey, this
was a very, very hectic time. And no one individual, as far as
I know--and this is not an area that I supervise or am directly
involved with--would be making all those transfers.
My understanding was JPMorgan confirmed that they were
interested in two transfers, only two related transfers. That
is what they were seeking assurances on. And on inquiry,
thought it would be better if it was limited to that. We would
be able to make that. I understood the importance of getting
something to them quickly, getting them comfortable, and asked
them to limit the letter to what they needed and we would get
it signed.
Mr. Fitzpatrick. Did you tell Edith O'Brien, the assistant
treasurer, about the letter being sent?
Ms. Ferber. I forwarded a copy of the letter to Edith
O'Brien.
Mr. Fitzpatrick. Did you tell her it needed to be signed?
Ms. Ferber. Certainly that was the substance of our
conversation.
Mr. Fitzpatrick. What was her response?
Ms. Ferber. At the point that I discussed it with her, I
had erased those from JPMorgan. I understood their focus was on
those two transactions. And my clear understanding from
speaking to Ms. O'Brien was that if they limited it to those
two transactions, she would sign it.
Chairman Neugebauer. I thank the gentlemen.
Mr. Lynch is recognized for 5 minutes.
Mr. Lynch. Thank you, Mr. Chairman.
Ms. Ferber, how important is it for your firm, for MF
Global, to protect client funds? How important is that?
Ms. Ferber. It is a critical obligation of any FCM.
Mr. Lynch. Yes.
Ms. Serwinski, same question. How important is it that you
protect client funds? Is that a peripheral responsibility, or
how would you classify it?
Ms. Serwinski. No, it is a very critical and important--
Mr. Lynch. Mr. Steenkamp?
Mr. Steenkamp. That is a critical objective of the firm.
Mr. Lynch. All right. So this is a central core
responsibility. This isn't some esoteric rule. This isn't some
accounting error. This is central. This goes to the very trust
that your firm relies upon, and that the whole market relies
upon in order to function.
And we have $1.6 billion of customer money take a walk, and
none of you know anything about it. None of you are aware of
it. This is not a small amount of money, $1.6 billion in money
that was entrusted to you, and that the whole reason for a
segregated account is to protect the client's money.
It is absolutely disgraceful. It is utterly disgraceful
what has happened here. And it is disgraceful that you sit
there, and you say, ``We knew nothing about it.'' ``I was on
vacation.'' ``I was in Chicago.'' ``I was in New York.'' ``I
was doing the global thing.''
It is not believable, I have to tell you. It is not
believable at all up here. It is utterly disgraceful. It is
disgraceful not only for MF Global, but I think for anybody in
your industry, because it is such a central principle in
protecting clients, and hard-working farmers and grain
operators, families who invested their savings, their hard-
earned life savings. And they trusted you.
This industry is supposed to protect their interests. And
they were robbed. They were robbed. And nobody knew anything
about it, $1.6 billion.
Let me ask you, under CFTC Rule 1.23, it permits a firm
to--and I think this is a problem, and we have to look at the
regulations at some point--add its own funds to customer-
segregated accounts. I understand the practice.
How do you tag your firm funds that you put in there, and
you co-mingle with so-called segregated funds, which aren't
segregated funds if you are adding firm funds to it, in my
opinion. But how do you, Ms. Ferber, tag those funds?
Ms. Ferber. I think that is an accounting question. And I
would really defer to my colleagues who have more knowledge on
that. As you pointed out, it is fairly ingrained--
Mr. Lynch. But you don't know. As general counsel of this
central responsibility in protecting customer funds, you don't
know?
Ms. Ferber. How funds are tagged in a bank account, no, I
do not know. I know the customer funds need to be kept in a
bank account that is denominated as a customer-segregated funds
account.
Mr. Lynch. Okay.
Ms. Serwinski, Mr. Steenkamp, do you have any ideas on
this? If Rule 1.23 allows the firm to co-mingle funds, put a
buffer in there in that account, along with customer funds that
are segregated, so-called, how do you tag the firm's funds, and
distinguish them from customer-segregated funds?
Ms. Serwinski?
Ms. Serwinski. If I may for a moment--
Mr. Lynch. You may.
Ms. Serwinski. --I would like to take an opportunity to try
to explain ``segregation'' and ``secured funds,'' and the--
Mr. Lynch. How about you just answer my question? Judging
by your other responses, since I sat down here some time ago,
Ms. O'Brien's declaration of the Fifth Amendment was more
helpful to this committee than any of your answers.
So I don't want you going off on any long explanation.
Because based on everything else that has come out of your
mouths, all three of you, there has been nothing there that has
owned up to the responsibility for any of the stuff that has
gone on here, even though you are all three in major positions
of responsibility.
So please answer the question that I asked. How do you tag
the firm's funds and keep them separate from these customer-
segregated funds in the same account?
Ms. Serwinski. Once firm cash and/or collateral is
deposited into the segregated or secured environment, they
become co-mingled with the customer secured and segregated
funds.
Mr. Lynch. So it is indistinguishable?
Ms. Serwinski. On a dollar-for-dollar basis, we just--
Mr. Lynch. So it is just a balance. It is just a balance,
the balance of segregated funds, and then you know what the
margin is that you have put on top of that. Is that basically
what you are telling me?
Ms. Serwinski. Yes.
Mr. Lynch. So there is no ability, once that fund is in
there, to distinguish any assets from another?
Ms. Serwinski. We would track the firm's investments in the
excess segregated and secured funds on a daily basis.
Mr. Lynch. But if you had to sell securities out of that
fund, you could take either securities out of that, that were
placed in there by customers, or you could take securities out,
based on the company's deposits in there?
I am trying to figure out a way to prevent this from
happening again.
Ms. Serwinski. I understand, sir.
Mr. Lynch. I think there is a loophole here that there
should be--this is a situation where the regulation that is in
place has not protected these people, these grain operators,
and these farmers, from having $1.6 billion stolen out of their
accounts.
And I think somebody in your firm, or somebody out there in
the industry should have recommended a better method of
protecting them than exists right now.
I realize I am over my time, and I yield back.
Chairman Neugebauer. I thank the gentleman.
And now, the gentleman from New Mexico, Mr. Pearce, is
recognized.
Mr. Pearce. Thank you, Mr. Chairman.
Ms. Ferber, I heard Mr. Lynch say that the clients were
robbed. I can sort of see his point. Do you think that is an
appropriate term?
Ms. Ferber. I--
Mr. Pearce. Yes or no?.
Ms. Ferber. Excuse me?
Mr. Pearce. Yes or no?
Ms. Ferber. Something--
Mr. Pearce. The money isn't there.
Ms. Ferber. Something terrible happened. But I don't know
how to describe it. Since October 31st, we have not had
access--
Mr. Pearce. At the end of the day, the money is not there.
They put the money there, and it is not there, and they can't
get it back.
Ms. Ferber. And that is terrible.
Mr. Pearce. And does that fit the definition of ``stolen''
or ``robbed?''
Ms. Ferber. Uh--
Mr. Pearce. I just love this. This is magnificent. You are
one of the highest-paid lawyers in the country. Bonnie and
Clyde, they were chumps. They drove around. They used gas money
to go out. You guys have people send things electronically to
you, and nobody is responsible. And you can't even declare that
it was robbed or stolen. What chumps those old-style bandits
were.
Ms. Serwinski, now, you seemed alarmed when you came back
to the office that these funds were taken. Why were you
alarmed? Now, we have gone through the 24 hours. Wednesday, it
didn't reconcile. And you are a little bit alarmed. Why were
you alarmed? You were distressed.
Ms. Serwinski. I don't think I was alarmed on Wednesday.
Mr. Pearce. Whatever term you used. You said you were
distressed. You wouldn't have done it. So why would you not
have done that? Why would you have not approved that?
Ms. Serwinski. Why would I have not approved it? One, based
on the previous day's information I had.
Mr. Pearce. No. Is it right or is it wrong, I guess, that
is what I am getting at. Is it right to take that money and not
pay it back by the end of the day? Is it illegal?
Ms. Serwinski. If it was utilizing customer funds--
Mr. Pearce. Is it illegal to hold it overnight? Or is it
illegal to hold it for a year? Is it illegal to take customer
funds and shore up the sinking ship, and use them for a year?
Ms. Serwinski. I don't know what was done--
Mr. Pearce. No. I didn't say you did. I am not accusing you
of knowing what was done. You just said that it was sort of,
you found it alarming, or whatever word you used. So--
Ms. Serwinski. I believe I said that if I was presented
with the request to approve a $175 million inter-company--
Mr. Pearce. We missed the deadline to pay it back. That is
your testimony. We had missed the deadline. So what was the
deadline? Was it a legal deadline? What deadline? What does it
matter?
Ms. Ferber said she doesn't know if it is stealing or not.
So what rule?
Ms. Serwinski. I think that I can explain. We were talking
about two different items. But my reference in the written
testimony with respect to the deadline being missed on the
Wednesday for the repayment of intra-company, intra-day loans
is what I was concerned about on Thursday, that had been
brought to my attention.
Those intra-day loans that were not paid back by the end of
the day did not violate the--we were still--the firm was in
regulatory compliance at the end of Wednesday. What had been
breached was an internal policy to ensure that the firm-
invested-in-excess-segregation-and-secured-funds--
Mr. Pearce. So it is not an external--there is no external
prohibition against using segregated funds?
Ms. Serwinski. Excess segregated and secured funds?
Mr. Pearce. There is no external prohibition?
Ms. Serwinski. Not that I am aware of.
Mr. Pearce. Mr. Royce testified that it is against the law
for 75 years. Mr. Royce's testimony was incorrect, then?
So you still have those funds, basically. You have taken
them. And so what you are telling me is that the $1.6 billion
is still not against the law; that you did what was fair and
square?
Is that right, Mr. Steenkamp?
Fair and square, I am hearing the other two witnesses say
it is fine; it is okay. Is it okay?
Mr. Steenkamp. Sir, not knowing what actually happened, it
is impossible to be able to comment on--
Mr. Pearce. No. You took the money and you are supposed to
give it back if they want it. If I put money in the bank, and
if I can't get my money back from the bank, then the bank has
taken it from me. If I can't get my money back, then the bank
has taken it. They put their money with you. These hog farmers
put their money with you and they can't get it back.
So is that right or is that wrong? Morally right, or is
that morally wrong? It doesn't matter now anymore. Your legal
counsel, obviously, she can't declare it to be against the law;
nothing like that.
So tell me?
Mr. Steenkamp. Sir, I think there are a lot of different
concepts that are being combined at the moment. And there are--
Mr. Pearce. Now I think I understand why Mr. Capuano and
Mr. Lynch were a little frustrated here. Nobody had authority
to move it. It is not against the law. It is missing now; it
will probably never get repaid, and that is okay, because we
can't really declare it, why it is okay. This is really
reassuring for the American people, who might want to know that
the money they are putting in the safekeeping of people like
you all is not quite in safekeeping after all.
I think it sends a loud enough message that you all can't
find the legality or illegality about it. I think that is the
message that is going out today.
I think Mr. Capuano said it perfectly: Shame on you, shame
on you.
Thank you. I yield back.
Chairman Neugebauer. I thank the gentleman.
And now, the gentlewoman from California, Ms. Waters, is
recognized for 5 minutes.
Ms. Waters. I thank you very much, Mr. Chairman.
I was just talking with the staff here about some of the
accounts that I have read in the newspaper where there has been
some attempt to describe accounts, customer accounts, as
opposed to other accounts.
And I suppose what I am hearing is that company money was
kept in the same account as client money. And of course, one
story said that the client money had been taken out and put in
another account. And then the money was taken from that account
to pay an overdraft. And when Mr. Corzine asked about where it
came from, someone was able to say that it came from an account
other than the client account.
So let me ask Mr. Steenkamp, do you know anything about
another account where the client money was placed prior to the
payout from that account to help take care of the overdraft?
Mr. Steenkamp. Ma'am, to the best of my knowledge, I was
not involved with any of those transfers. So I had not known
about the details of those movements.
Ms. Waters. Do you know about the details of what accounts,
official accounts of the company, are there are 1, 2, 3, 4, 5,
10, 15? Do you know that much?
Mr. Steenkamp. There were obviously accounts that were held
in the Finco, in the holding company. Those accounts are very
different than the separate accounts that are held in each of
the regulated entities. And in my role, I was not involved in
the detail of those accounts, which were managed by the senior
professionals we had in each of our regulated entities. But
each country is different, so there are very specific and
specialized rules that apply to each country.
Ms. Waters. Okay. As the CFO of MF Global, you signed
Sarbanes-Oxley 302 and 906 certifications attesting to the
internal controls of the Global Corporation as required in
every year-end. As the CFO, you attest that your certifications
are accurate, and you know that when they are not, you could
face civil and criminal penalties.
So with that, my question is: Were you confident that your
internal controls were adequate at the time that you signed
them at year-end in each quarter period--quarter-end?
Mr. Steenkamp. Ma'am, I became the CFO in April 2011. So I
signed two SOX controls, the year-end, as you mentioned, as
well as the first quarter and thereafter. As part of signing
those controls, which are a snapshot at a point in time, you go
through a lot of review, sub-certification, etc., over all of
the controls across the world.
Nothing came to my attention--
Ms. Waters. Again, let me just ask, if as the CFO you
attest that your certifications are accurate and you know that
they are not, you could face civil and criminal penalties. So
with that, my question is: Were you confident that your
internal controls were adequate at the time that you signed
them at year-end and each quarter-end? You felt good about your
signature?
Mr. Steenkamp. My last sign-off was in June and nothing
came to my attention at that point in time that indicated that
I shouldn't sign it.
Ms. Waters. So what you are telling us is that you were not
confident that there were internal controls that were adequate
at the time that you signed at year-end and at each quarter-
end?
Mr. Steenkamp. No, ma'am. I said nothing came to my
attention as of June when I signed the last SOX certification
that indicated there were any issues with internal controls.
Ms. Waters. So you were confident?
Mr. Steenkamp. At the time of my signing, nothing came to
my attention to indicate otherwise.
Ms. Waters. A lot of attention has been paid to the
question of why MF Global's auditor, PricewaterhouseCoopers
(PwC), gave the company a clean report in May, when their
internal controls turned out to be compromised enough for them
to lose $1.6 billion in customer funds.
To the best of your knowledge, did PwC ever raise concerns
about MF Global's internal controls as they relate to the
segregation of customer accounts while you were employed at the
firm?
Mr. Steenkamp. That is a very broad question and a very
long period of time. I would say that we worked closely with
PwC and they performed their own independent assessment of the
controls. To the best of my memory, nothing came up during my
time as CFO that indicated an issue with segregated funds, with
segregation of client monies.
Ms. Waters. So basically, PricewaterhouseCoopers gave the
company a clean report in May, when the internal controls
turned out to be compromised enough to lose $1.6 billion. Do
you think that Pricewaterhouse was incompetent in doing that?
That they should take some responsibility for that?
Mr. Steenkamp. Ma'am, I can't comment on the independent
review that PwC does. As of May, they did not raise any
concerns, to the best of my memory.
Ms. Waters. Yes, but do you not have to have confidence in
the auditor? You have to feel that your auditor is competent
and acting properly, and that you have no reason to question
them?
Mr. Steenkamp. The auditors perform their own independent
assessment of controls and reach their own independent
conclusion.
Ms. Waters. I yield back.
Chairman Neugebauer. I thank the gentlewoman.
The gentleman from Florida, Mr. Posey, is recognized for 5
minutes.
Mr. Posey. Thank you, Mr. Chairman.
These are going to be easy questions, really. When we had
the opportunity to question Mr. Corzine, I was advised and
shocked, quite frankly, that he had not yet apparently been
interviewed by the Department of Justice or any other
authorities.
And so I just wondered, Mr. Steenkamp, have you been
interviewed by the FBI, the Department of Justice, or any other
Federal investigators?
Mr. Steenkamp. My lawyers have done a proffer with all the
different, I guess, regulatory agencies and investigative
offices. That is the status of it at the moment.
Mr. Posey. I don't know whether you are mumbling or I don't
hear very well, but is that a yes or a no?
Mr. Steenkamp. Through my lawyers, a proffer, yes.
Mr. Posey. You haven't, face-to-face, talked to any
investigators yet?
Mr. Steenkamp. I have not, no.
Mr. Posey. Okay.
Ms. Serwinski?
Ms. Serwinski. Yes, I have.
Mr. Posey. You have talked to them face to face?
Ms. Serwinski. Yes, I have.
Mr. Posey. How long ago?
Ms. Serwinski. I have spoken to them twice.
Mr. Posey. Okay. What do you think was the most compelling
question or line of questions that they had?
Ms. Serwinski. I don't recall. There were a lot of
questions and a lot of topics discussed. I can't think of one
off the top of my head that was more compelling than another.
Mr. Posey. Okay.
Ms. Ferber?
Ms. Ferber. I am cooperating with the Department of Justice
and I am scheduled to meet with them on April 6th.
Mr. Posey. Okay. Have any of you been offered any immunity?
Let the record show all three said ``no.''
You have all indicated you thought the investors should get
their money back in one way or another. You have intimated
that.
Ms. Ferber, what do you think the odds are for the
investors to get their money back?
Ms. Ferber. I really have no--we have no basis to answer
that. It is really going to be up to the trustee.
Mr. Posey. Okay.
Ms. Serwinski?
Ms. Serwinski. I don't know. It depends on whether or not
the people who hold--
Mr. Posey. Okay.
Mr. Steenkamp?
Mr. Steenkamp. Sir, it is still too early in the bankruptcy
process. That is why we are there trying to work and maximize
it.
Mr. Posey. Who do you think is most at fault for investors
losing money from an account that was supposed to be
segregated?
Mr. Steenkamp?
Mr. Steenkamp. Sir, because I don't know what actually
happened, it is hard to answer that question.
Mr. Posey. Okay.
Ms. Serwinski?
Ms. Serwinski. Would you repeat the question, sir?
Mr. Posey. Ms. Ferber?
Ms. Ferber. Obviously, there was a terrible failure here of
some kind, but what it was I don't know, since the SIPA trustee
has controlled the investigation and all information since
October 31st.
Mr. Posey. Okay, thanks.
A good analogy is a gambler is at a casino and if the
casino doesn't provide more credit once the gambler's chips are
gone, he has to stop playing. He can't just reach over the
table and take somebody else's chips. If he did, he would be in
handcuffs quicker than you could say, ``segregated accounts.''
Isn't that, however, in essence what happened at MF Global?
Mr. Steenkamp. I don't know what happened, sir.
Mr. Posey. Ms. Serwinski?
Ms. Serwinski. I don't know.
Mr. Posey. Ms. Ferber?
Ms. Ferber. I don't know.
Mr. Posey. To be the experts of a company the size of MF
Global, the scope of MF Global, there is sure a lot you guys
don't know.
Is there anything else that you might know that you might
want to share with us to give us a little bit more insight?
Ms. Ferber. I am happy to address any questions. That is
extraordinarily broad.
Mr. Posey. Take a shot at it.
Ms. Ferber. I don't know where to start. We were talking
about what happened over a very few days in an area that was
handled by serious--as far as I knew--professionals, well-
staffed, expert in customer segregation rules, deeply within
the finance and treasury and operations groups in Chicago.
I share your frustration in not knowing what has happened.
But again, we learned about this hours before the bankruptcy
filing. So I am--you may have more access to information than
we do, but I share that frustration. And as I have done for my
entire career, I would have wanted to dive in on the first
moment of learning that there was a problem and understand it
and do everything I could with it, but we have been cut off
from that information.
Mr. Posey. Were any of you contacted by the CFTC in their
investigation?
Ms. Serwinski. The CFTC was at the meetings that I attended
with the Department of Justice.
Mr. Posey. Outside of that, were you contacted by them?
Ms. Serwinski. On occasion, after October 31st, I had--
there were representatives of the CFTC in our offices.
Mr. Posey. Would you have any idea why the CFTC would have
been asked to cease and desist their own investigation?
Ms. Serwinski. I do not, sir.
Ms. Ferber. I doubt if they were.
Mr. Steenkamp. I do not know, sir.
Mr. Posey. Thank you, Mr. Chairman. I yield back.
Chairman Neugebauer. I thank the gentleman.
And now the gentlewoman from New York, Ms. Hayworth, is
recognized for 5 minutes.
Dr. Hayworth. Thank you, Mr. Chairman.
Here we have three intelligent and able people who were in
positions of tremendous authority and responsibility at a firm
that was handling--who should have been handling with all
degree of integrity and trust the hard-earned monies of farmers
and ranchers and other clients who depended on you to do the
right thing.
And among you all, with no disrespect meant, and Ms.
O'Brien, of course, who is conspicuous in her absence, it seems
that there has been a great effort to maintain plausible
deniability. That is certainly the impression with which one is
left.
Ms. Ferber, in your written statement you note that as of
Wednesday, October 26th, you received a call from a
representative of the SEC informing you that the SEC wanted to
meet with management the following day to discuss various
issues including liquidity and funding, and that the CFTC would
also attend and would focus on segregated funds calculations.
Now, that presumably would have triggered a question in
your mind. Again, you are a highly capable person. You are a
very skillful attorney; you are in a very responsible position.
Didn't that trigger a question in your mind as to whether or
not there was actually a problem with the segregated funds?
Ms. Ferber. I--it would not trigger a question in my mind
that there was a problem, we would make sure we had the right
people there to discuss the status of the segregated funds. And
that is exactly what we did; we assembled for a detailed
meeting with the SEC and the CFTC that day.
Dr. Hayworth. But you didn't inform--the firm didn't inform
the regulators, as far as I can tell, of the deficiency, the
shortages, until early Monday morning; correct, Ms. Serwinski,
according to your testimony?
Ms. Serwinski. There was no regulatory deficiency that I
was aware of until that Sunday evening.
Dr. Hayworth. But it sounds as though there was an
insufficient level of communication between your department,
Ms. Ferber, and yours, Ms. Serwinski. Is that, so to say, in
the heat of everything that was going on? I would think that
the top level at a firm like this, which is clearly, it is
falling down around your ears practically, yet you say that,
your testimony, obviously Ms. Ferber, you were heavily involved
in trying to sell MF Global.
Would that not to an outside observer suggest that you were
endeavoring as vigorously as you could to make sure that the
potential buyers for MF Global were not alarmed by what would
have been an overt violation of everything a firm like MF
Global should be doing on behalf of their customers, and
indeed, the law itself?
Ms. Ferber. Let me be very clear. I was never aware during
the period you are describing or any time up until very late
Sunday night or Monday morning that there were any issues
regarding our segregated funds. I made it very clear I was
making sure that we were frequently updating the regulators.
That included finance and treasurer colleagues who were
directly involved in the various--in those updates. As we now
know, the CME was in our offices doing a review on Thursday and
Friday. The regulators were in our offices through the weekend.
There was every effort, at least in terms of myself and
everybody I encountered, to be very transparent with the
regulators.
Dr. Hayworth. Ms. Serwinski, your absence--were you out of
the United States when these things were occurring, just out of
curiosity?
Ms. Serwinski. No, I was not out of the United States.
Dr. Hayworth. Okay. It certainly would seem to me that,
again, if you were trying to stave off the inevitable. When
someone knew, and someone had to know, Mr. Corzine at the very
least knew, one assumes, that there was very, very bad news
coming.
Wouldn't it be in the company's best interest in terms of
trying to salvage itself in a sale, that they keep as many of
you ``siloed'' as possible, so to speak? It sounds as though
there was a profound failure of communication within the
company itself, that you guys don't know what happened, and
that you are in this position now?
Should the American consumer, should the American investor,
should our farmers and ranchers be concerned that there are
other firms like MF Global which operate in this same way?
Does your experience with MF Global lead you to express any
concern in that regard?
Should we be worried, Mr. Steenkamp?
Mr. Steenkamp. Ma'am, I think once we better know what
actually happened, what went wrong, then I think we will be
able to answer that question.
Dr. Hayworth. Mr. Chairman, I yield back.
Chairman Neugebauer. I thank the gentlewomen.
And now, Mr. Renacci is recognized for 5 minutes.
Mr. Renacci. Thank you, Mr. Chairman.
Mr. Steenkamp, I am going to go back to internal controls,
because we might not know the specifics, but would you agree--
you are a CPA, you worked for Pricewaterhouse. I am a CPA; I
understand internal controls.
You would admit that for this to occur, there had to be a
breakdown in internal controls? You would have to admit that;
correct? Yes or no? It is an important question, yes or no?
Mr. Steenkamp. I--
Mr. Renacci. And any time you have loss of money, you have
a situation like this, there has to be a breakdown in internal
controls; correct?
Mr. Steenkamp. I don't disagree that something obviously
went wrong.
Mr. Renacci. And it would probably be internal controls,
because internal controls is how you stop this from occurring,
wouldn't you agree?
Mr. Steenkamp. That could potentially have been what went
wrong.
Mr. Renacci. All right. I am going to go back to a follow-
up on some of the questions Ms. Waters asked, but
Pricewaterhouse identified the management override of internal
controls as a risk to MF Global in their audit work papers
produced in 2011. Are you aware of that?
Mr. Steenkamp. I can't specifically recall that.
Mr. Renacci. You are the CFO of the company and you don't--
I actually have the work paper here that shows that they
identified it. You are the CFO of the company and you were not
aware that there was significant concern because of the
override of internal controls, that your auditors had brought
that to the attention of the company?
Mr. Steenkamp. Sir, there are many discussions that are
held on all the various controls. As you know, there are a
hundred controls that operate in the firm, and so there are
many discussions around them.
Mr. Renacci. This is a significant one though.
Mr. Steenkamp. Sir, we asked for any documents to be
provided ahead of time for us to have a look. Unfortunately, we
didn't get it and--
Mr. Renacci. Let's keep going on, because again, your
answers are going around in circles. And that is the problem I
think most of my colleagues here are having.
MF Global's chief executive officer, Jon Corzine, stated in
his prepared testimony that he actively managed MF Global's
European sovereign debt repurchased to a majority portfolio.
Would this hands-on action by the CEO be some type of--
wouldn't it be something they were cautioning? Wasn't this what
they were talking about?
Mr. Steenkamp. Sir, again, I am not sure whether that was
controls for MF Global Inc., or any other entity, or whether it
was for the global that it was referring to. But you know, just
as a general point, I would say that any actions of Mr. Corzine
would still have to fall within the control framework that
exists at the regulated entity.
Mr. Renacci. If the internal controls say that he can do
anything he wants and nobody can stop him, that is not a very
good internal control. And I think when he was here and I asked
him the question, the only person who could stop him is the
board. He could override anybody except the board. Would you
agree that was the case?
Mr. Steenkamp. Sir, I have no memory of any comment like
that off the top of my head. I--
Mr. Renacci. He did testify to that. But I am saying, were
you aware that he could make any decisions he wanted and the
only person who could override it--it is an internal control
feature. You are the CFO.
Mr. Steenkamp. No, I--
Mr. Renacci. It is shocking that you are sitting here--
Mr. Steenkamp. I am not aware of a control such as that.
Mr. Renacci. You are not aware of it? You are not--wait a
minute, you are not aware of internal controls like that?
Mr. Steenkamp. No, I am not aware of a control that said he
could override any action, sir.
Mr. Renacci. Would that be a breakdown in internal control,
in your eyes as a CPA, and somebody who worked for
Pricewaterhouse in a global firm, would that be a breakdown in
internal control if the CEO could actually make decisions like
that without anyone else overriding it?
Mr. Steenkamp. If the CEO--
Mr. Renacci. Forget it is MF Global, any other company.
Mr. Steenkamp. If the CEO could just override any internal
control, I agree with you. There could be mitigating controls
in place further down, but that is the--
Mr. Renacci. You answered the question ``yes,'' and then
you started talking again. You did answer that it would be a
problem in internal controls; correct?
Mr. Steenkamp. If that is the control.
Mr. Renacci. Right, I said it doesn't matter what company
it is.
On October 22nd, I e-mailed a credit rating agency,
Moody's. You stated, MF Global's capital and liquidity has
never been stronger and that MF Global is in its strongest
position ever as a public entity.
How could this be, when 1 week later, MF Global Inc.'s
parent company filed for Chapter 11 bankruptcy?
Mr. Steenkamp. Sir, that e-mail and that comment was made
very early on Monday morning, the 24th. It reflected the
capital and liquidity as of the end of Friday.
Mr. Renacci. You are the CFO of this company. It is really
shocking. I have been a business man my whole life. I would
never be able to answer the questions they way you are
answering them. You are the CFO.
We are talking about liquidity, we are talking about the
strong corporate position. And you are testifying a week before
it that it is stronger than ever and it files for bankruptcy 1
week later?
Mr. Steenkamp. Sir, that comment was made before any of the
downgrades that took place. It reflected a cash position off of
two successful capital raises that we had completed in August
with that cash still in hand. And it is--
Mr. Renacci. This is in October, this is October 22nd.
Again--
Mr. Steenkamp. Correct.
Mr. Renacci. --it amazes me, as the CFO of any company,
that I would not know that we are in trouble, in the position
you are in. I am sorry but, again, I am a business guy, I am a
CPA. I have audited major global companies. I am totally
shocked that you would sit here and say that you believed it
was in the strongest position it could be a week before it
filed bankruptcy.
Mr. Steenkamp. Sir, that was prior to any downgrades; and
conditions--
Mr. Renacci. You should know prior to any downgrades, you
are inside the company.
I am running out of time. I am sorry.
I yield back.
Chairman Neugebauer. I thank the gentleman.
And now, the gentleman from Texas, Mr. Canseco, is
recognized for 5 minutes.
Mr. Canseco. Thank you, Mr. Chairman.
Ms. Ferber, hello.
Let me back up a little bit and follow up on some questions
that Mr. Fitzpatrick asked you, and this is regarding the
October 28th JPMorgan request to MF Global to certify and
confirm that funds being sent from MF Global to JPMorgan were
not customer assets.
How many iterations of these letters did you get?
Ms. Ferber. Three.
Mr. Canseco. Why?
Ms. Ferber. When I was first asked to take a look at the
certificate, I was also asked to call JPMorgan, understand what
they were focused on, and try to, if appropriate, get them what
they needed.
In that first call with JPMorgan, they indicated that very
specifically the two related transfers that they were focused
on, and that is what they were seeking assurances on.
As I tried to explain before, the certificate was
extraordinarily broad and not something that any one individual
could quickly sign. They could if they had time to make to make
reasonable inquiry, if you know, potentially to look at that.
Mr. Canseco. So it was your legal opinion that it was too
broad and could not be signed. Did you discuss it with anybody
else?
Ms. Ferber. It was too broad to quickly address what they
needed, and they were very clear that what they needed was
relating to two transactions.
Mr. Canseco. Okay. Did you speak to anybody about any of
those letters?
Ms. Ferber. I spoke to Edith O'Brien about the transfers
that JPMorgan was focused on. She provided me with copies of
the--actually the transaction reports on those two transfers.
They matched what JPMorgan has described to me. And again, my
very clear understanding was that if the compliance certificate
was limited to those two transactions, those two transfers, she
would be able to sign it.
Mr. Canseco. Right. But did she have any--did she express
to you any kind of concerns about whether she should sign it or
not?
Ms. Ferber. Not if it related to those two transfers.
Mr. Canseco. Were there any other transfers that she was
concerned about?
Ms. Ferber. We did not discuss any others, because again,
the compliance certificate asked somebody, one individual who
was probably involved in some transfers, not others, to say
that everything that has ever been done on those accounts from
the beginning of time, to any time in the future, was in
compliance. Again, the focus was that JPMorgan needed comfort
right now, let's get them comfort on what they need, provided
it is appropriate, and our main--
Mr. Canseco. Did she ultimately sign any of those letters?
Ms. Ferber. I understand that she did not.
Mr. Canseco. She did not. And do you know why?
Ms. Ferber. No, I don't.
Mr. Canseco. You don't. Did you ever talk to Mr. Corzine
about these letters?
Ms. Ferber. Only when he initially asked me to take a look
at it, and he may have that afternoon said, did you call
JPMorgan yet? Something like that. But that was my only
conversation about it.
Mr. Canseco. Why would MF Global not be able to certify, as
Ms. O'Brien did not, that the firm had not used customer funds
on October 28th and it would not use them in the future?
Ms. Ferber. Actually, first off, the certification is a bit
broader than that. It was every transfer within compliance
with, I believe, it was all CFTC rules.
I certainly expect that we would be able to make that with
time and that somebody would have to go back and make
reasonable inquiry, and should be able to make that
representation. Not one individual sitting there that day.
Mr. Canseco. Pardon me for interrupting you, but aren't
these forms that they sent out from JPMorgan or any other
house, aren't those normal forms? Aren't those standard forms?
Ms. Ferber. Not to my understanding. I had certainly never
seen one before, broad like that. And certainly in my general
legal experience, asking somebody to represent, make a
representation today that everything they might do in the
future is in accordance with certain rules is not something
that is appropriate. You could say, I have procedures in place
to reasonably assure they might be, or something.
Mr. Canseco. Were you not concerned about their concern?
Ms. Ferber. First, they did not express a concern. They
said they saw these transactions, because of the size,
whatever, and because of certain compliance procedures they had
in place because of their own history or experience, that they
were inquiring about those.
I knew that person, Ms. O'Brien, is somebody for whom I had
tremendous respect, and I knew that the futures industry
generally had great respect for her. She is the person I would
rely on generally with regard to Rule 125 in--and she is--
Mr. Canseco. Don't run the clock on me, please. I have very
little time here.
So on Sunday, October 30th, you were copied on an internal
MF Global e-mail at 4:27 p.m., in which one employee asked
another whether it was permissible to send the CFTC a customer
segregated funds statement that showed a $952 million
deficiency. Why would MF Global employees hesitate to share
such vital information with their regulator?
Ms. Ferber. I am not aware that they would be hesitant. In
fact, these regulate--remember, the CFTC was in our offices
here in New York, CME was in the offices working with those
people in Chicago.
I think, if had said this is the calculation in these
complex times and all, you would have some reasonable signoff,
and let people know that.
Mr. Canseco. Did you--
Ms. Ferber. And I believe the signoff people said yes, send
the report.
Mr. Canseco. All right. So then you instructed employees to
release the information to the CFTC?
Ms. Ferber. I did not, but if I recall correctly and I did
not review it here, but if I am recalling the e-mail you are
referring to, I think you said I was copied on it, somebody
else would usually respond yes, give it to them.
Mr. Canseco. Okay. Let me, before I run out of time, Mr.
Chairman, if I may have with Mr. Steenkamp, on what date did
there begin to be a shortfall in customer segregated funds at
MF Global?
Mr. Steenkamp. Sir, I have no memory of knowing about any
shortfall prior to the Sunday. On the Sunday, we found out that
there was a shortfall, and originally we had heard that the
shortfall was for the Friday, but that there might have been
for the Thursday as well, although that might just have been an
accounting error.
And at the time we were finding out, it was just so
unbelievable that there could be a shortfall that everyone was
under the impression Sunday night that there was some
accounting reconciliation that just wasn't working and that was
causing it. And that is why, as you have heard in the
testimonies, there was a big effort to work together to try and
resolve that.
Mr. Canseco. But you are ultimately aware, especially with
the SIPA trustee, that the shortfall began on October the 26th;
is that correct?
Mr. Steenkamp. I don't work with the SIPA trustee, so I
can't--
Mr. Canseco. But you are aware of October 26th being the
day of the shortfall?
Mr. Steenkamp. I have been reading in the papers that it
was the 26th.
Mr. Canseco. You are aware of it? Are you aware, or are not
aware of the 26th of October being the shortfall date?
Mr. Steenkamp. I am aware of what I am reading.
Mr. Canseco. From whatever source.
Mr. Steenkamp. Yes.
Mr. Canseco. Okay. The shortfall began on October 26th and
grew until the company went bankrupt on the 31st. Is that
correct?
Mr. Steenkamp. I don't have that knowledge, sir.
Mr. Canseco. My time is way over. I thank you.
Chairman Neugebauer. I thank the gentleman.
The gentleman from California, Mr. Royce, is recognized for
5 minutes.
Mr. Royce. Thank you, Mr. Chairman.
Ms. Ferber, did you have the opportunity to speak to Gary
Gensler prior to MFG declaring bankruptcy?
Ms. Ferber. Yes.
Mr. Royce. In your opinion, were his priorities protecting
customer funds, or making sure the company was sold to inter-
dealer brokers?
Ms. Ferber. My conversations with Mr. Gensler were related
to two topics. He was very focused on the customer funds. And
he, along with his colleagues, wanted an update on where we
were in concluding the sale of the firm.
Mr. Royce. Okay. Let me also ask you, to your knowledge was
Mr. Corzine in contact with Mr. Gensler prior to MFG declaring
bankruptcy?
Ms. Ferber. I assume you are talking about in those last--
in those very last days?
Mr. Royce. Prior to bankruptcy, right.
Ms. Ferber. I am not aware if they had any discussions.
Mr. Royce. So there wasn't any conversation Mr. Corzine had
with you about his conversations with Mr. Gensler?
Ms. Ferber. That is correct, to the best of my
recollection. Mr. Gensler may have been--may or may not have
been--I am not sure, on a call with a large number of
regulators, being updated. There was a call at 2:00 on Saturday
afternoon with many regulators. And I do not know whether Mr.
Gensler was on that call.
Mr. Royce. Let me ask you another question. If we go back
to June of 2011, FINRA was concerned about MF Global's European
debt exposure. And FINRA directed MF Global to increase its
capital requirements. Did you agree with FINRA's directive on
that score?
Ms. Ferber. But just as to the timeframe, my understanding,
and I was not involved in the early conversations. But over a
period of time, probably starting in June or early July, FINRA
had conversations as far as I know with the firm about their
view of the appropriate capital treatment for some of our
positions. And those conversations ultimately led to their
determination, I believe, quite late in August of 2011 that a
different capital treatment was appropriate.
Mr. Royce. Then let me ask you this: Did Jon Corzine agree
with it at the time? He apparently didn't, because he flew to
D.C. to meet with the SEC to set them to overrule FINRA.
Correct?
Ms. Ferber. First, I should say that my accounting
colleagues, our outside counsel, PricewaterhouseCoopers, all
disagreed, to my knowledge, with FINRA's view on what the
appropriate capital treatment was for these positions under the
rules as they were written. And so yes, the firm did make a
determination. And to some extent this certainly was a topic
that was discussed with outside counsel that there should be a
meeting directly with the SEC on something so important.
Mr. Royce. Let me go to another question, which is
interesting.
Ms. Serwinski testified that she would not have approved
the $173 million transfer on October 28th to cover MF Global's
overdraft. Do you remember that? Do you find it interesting
that MF Global blew past the same capital requirements that Jon
Corzine lobbied for?
Ms. Ferber. First, I think the--as I recall Ms. Serwinski's
testimony, was basically certain unassumed facts. If there was
a concern that it violated certain rules, then she would not
have approved the transaction. So, that is that part.
I am not sure that you said violated the same rules that
Mr. Corzine lobbied against. I need a little help understanding
the question, Mr. Royce. I am glad to address it.
Mr. Royce. My time has expired--
Ms. Ferber. Sorry.
Mr. Royce. --but I want to thank you for your testimony
here today. I appreciate it.
Chairman Neugebauer. I thank the gentleman.
We are going to just kind of have a little bit of follow-up
here. But what I wanted to do, because I think we kind of
danced around this issue a little bit--this is a glass of
water. And I hope you can see that black line. Can you all see
the black line there?
Ms. Ferber. Yes.
Mr. Steenkamp. Yes.
Chairman Neugebauer. So, this is the segregated account.
And so the segregated account, all of the water below the line,
it belongs to the customers. And all the water above the line--
and so that is illegal for, and common practice for, the
company to keep excess company funds in the segregated account.
Is that correct? You would sometimes have company funds and
customer money in the segregated account? Right?
Ms. Serwinski. Yes.
Chairman Neugebauer. This is not rocket science. And so
this is the company's account. And so, this little black line
here was what it would take to get the company back from being
overdrawn. So, what the only way that customers lose money is
when you pour--you take some of the company's money out. And as
long as you are at the line, you are in compliance. Is that
correct?
Ms. Ferber. Yes.
Ms. Serwinski. Yes.
Chairman Neugebauer. When you do this, though, are you in
compliance?
Ms. Ferber. No.
Chairman Neugebauer. No. So the only way customers can lose
money is when you take their money and you put it in the
company's or somewhere else. Is that right? Because you
weren't--and what you are supposed to do is if you take money
out and borrow it, you are supposed to securitize it. So
theoretically, if this does not have water in it, it has
collateral in it. Is that correct?
Ms. Serwinski. Yes.
Chairman Neugebauer. Okay. So, now we have that clear.
Everybody understands that money was lost because money was
taken out of that segregated account that belonged to farmers
and ranchers and investors, right? Does anybody disagree with
that? Because that is the only way you can do that. How else
does the money get out if you don't take it out? This is not
rocket science, folks--
Ms. Ferber. Based on what I know--
Chairman Neugebauer. Can you show me, Mr. Steenkamp, can
you tell me another way where customers would lose their money,
other than the money being taken out?
Mr. Steenkamp. They could. The only other way is they could
be losing money on their trades, if they are making losses.
Chairman Neugebauer. There might be losses but the
customer's account would go down proportionately.
Mr. Steenkamp. Correct. Absolutely.
Chairman Neugebauer. So, Mr. Steenkamp, I want to go back
to something that is kind--and I know we are all perplexed
there. Are you familiar with a Mr. Roseman and a Mr. Stockman?
Mr. Steenkamp. Yes. They were the chief risk officers of
the firm.
Chairman Neugebauer. And were you aware that they made--
both of them made recommendations that the repo-to-maturities
in the foreign sovereign debt were a potential risk to the
company? Were you aware of that?
Mr. Steenkamp. Sir, I only became CFO in April. So, what I
was aware was that there were numerous and many discussions
between the board and Mr. Corzine and the chief risk officer in
the board meetings around risk limits and risk parameters.
Chairman Neugebauer. Are you aware of a document called
``Break the Glass'' that was put together by your firm?
Mr. Steenkamp. I am, sir.
Chairman Neugebauer. Who prepared that document?
Mr. Steenkamp. There was a working group put together in
the firm to--
Chairman Neugebauer. And who was in that working group
then?
Mr. Steenkamp. There were members of treasury, members of
finance, members of risk, treasury operations. Because that was
like a scenario, straight scenario analysis-type document. And
so, it required the input--
Chairman Neugebauer. Did you participate in that?
Mr. Steenkamp. I did, yes.
Chairman Neugebauer. When did you put that document
together?
Mr. Steenkamp. The original request for the document was
made in August, I believe, by the board.
Chairman Neugebauer. And it was completed when?
Mr. Steenkamp. It was presented to the board sometime
around the middle of October.
Chairman Neugebauer. Isn't it kind of ironic that you put
together a ``Break-the-Glass'' scenario and you finish it 14
days before you declare bankruptcy?
Mr. Steenkamp. Sir, it is very prudent and common to have a
document like this. I think all firms do it. And the initiation
of it was many months prior.
Chairman Neugebauer. Do you disagree with any analogy that
I made here that the only way that the customers would have
lost money is if people took money out of that account and
didn't put it back? Yes or no?
Mr. Steenkamp. Except for the example I made--
Chairman Neugebauer. No, just yes or no. We are not going
to ``except.'' The only way customers lose money other than if
they lose money on their positions, but it is their money. But
if you net out their positions, the only way that the customers
lost over a billion dollars is if somebody took more than money
out than they were supposed to. Yes or no? Yes or no?
Mr. Steenkamp. That appears reasonable, sir.
Chairman Neugebauer. Yes or no?
Mr. Steenkamp. Sir, I am not an expert enough on that--
Chairman Neugebauer. Yes--
Mr. Steenkamp. --to be able to know whether there are other
ways in which--
Chairman Neugebauer. I am not talking about what happened.
I just want to truly get some definitive answer here. Under the
way that the law operates, the only way someone can lose money
is--from a customer, other than his net position, is that money
is taken out of an account that shouldn't have been taken out.
Yes or no?
Mr. Steenkamp. Sir, I guess what I am saying is I don't
have enough knowledge to be able to answer that.
Chairman Neugebauer. I am appalled that you can't answer a
simple question like that. I think you are not being honest
with this panel.
Ms. Serwinski, do you agree with the analogy that the only
way that customers, net of their positions, lose money is if
people take money out of the account and do not put it back?
Ms. Serwinski. There is a permissible secured--a secured
calculation.
Chairman Neugebauer. But it had to be--there would be
collateral in that other--
Ms. Serwinski. The secured calculation rules allow and
permit if a client gave the firm $100, under the secured rule
there is an alternative method available that does require--can
require--less than that $100 be required to be maintained in
the secured environment.
Chairman Neugebauer. But if we--I am not talking about
security, but I am just talking about if this was the money
that belonged to customers, and you poured it all out, that is
the way you lose money, right?
Ms. Serwinski. I am--if--yes. Yes.
Chairman Neugebauer. Okay. Thank you.
Ms. Ferber--
Ms. Ferber. I think that is correct.
Chairman Neugebauer. This is where you lose money for
customers, right? If you took money out that shouldn't have
been taken out?
Ms. Ferber. With the exception of what Ms. Serwinski
described, yes, you still have an obligation to return customer
funds, be able to return customer funds. I would agree with
you, yes.
Chairman Neugebauer. Exactly. And so what happened on--when
they declared bankruptcy was--nobody put the money back, did
they?
Ms. Ferber. Not to my knowledge.
Chairman Neugebauer. Yes.
Are there any other Members who want to follow up with this
panel?
Mr. Pearce, yes?
Mr. Pearce. Mr. Steenkamp, I am sorry. I was looking
through my papers and I don't find your resume. Where did you
get your education?
Mr. Steenkamp. I am from South Africa, so I did my graduate
degree and post-graduate degree in accounting in Johannesburg.
Mr. Pearce. Accounting?
Mr. Steenkamp. Correct.
Mr. Pearce. What kind of a grade point average did you
graduate with, just more or less?
Mr. Steenkamp. It works differently in South Africa. It is
percentages. So I probably had an average was around 78
percent, somewhere there.
Mr. Pearce. How many hours of accounting did you have?
Mr. Steenkamp. I don't know off the top of my head in
hours. It is 4 years: 3 years, graduate; and 1-year, post-
graduate. And then, you are at your CPA equivalent to C.A..
Mr. Pearce. All right. I am just trying to establish that
you do remember things in the past, but you don't remember some
really, really, really, really big significant things from less
than 6 months ago.
I am just trying to bring that to the attention of the
public, who is watching today, because they are wondering who
is in charge of all these companies up here.
Ms. Serwinski, when we have an overage, when we have taken,
we have dipped into those segregated funds like the water
poured out of that glass and it is not secured, do you have
to--was there a requirement to notify someone?
Ms. Serwinski. Yes, there is a report--
Mr. Pearce. Who would have to be notified?
Ms. Serwinski. The regulators would all have to be
notified, and we did--
Mr. Pearce. Nobody inside the institution?
Ms. Serwinski. They would be notified, but it is not--the
regulatory requirement is that you report--
Mr. Pearce. But you didn't have an internal process that
would say, ooh, we just kind of messed up here. Let's see that
we don't do it again.
And the treasurer or the assistant treasurer, I think is
who we ascertained earlier could have made those calls. So you
have a couple of people and maybe they have authorized the
dipping into those funds out of that little paper and out of
that little plastic glass.
And so, who would they have to notify that, who had just
poured the funds out here?
Ms. Serwinski. There would have been a process whereby the
situation would have been escalated to, at the very least, our
SOX committee to rectify whatever contributing factors existed
that led to--
Mr. Pearce. So there was somebody notified?
Ms. Serwinski. Yes.
Mr. Pearce. Yes, so you had a process.
Ms. Serwinski. You are right, you are--
Mr. Pearce. You had a process. Okay. So we know--
Ms. Serwinski. --required, yes.
Mr. Pearce. So we dipped into those funds and we are
supposed to securitize them and we are supposed to return them
by the end of the day or something and supposed to balance all
the accounts and all that jazz.
And we didn't do that. And so, at what level does it--did
you ever discuss at what level it should go to Mr. Steenkamp?
These guys are the umbrella, and so if we are doing things that
take people's money away from them without losing it, if you
lose it fair and square, that is fine.
But if the shepherd takes the wool off the sheep and sells
it on the side, so at what level did you--should you--have
notified, should have--not you, because you are out and I
understand.
And at what level should Mr. Steenkamp have been notified,
or maybe Ms. Ferber, because now we are dealing with issues
that somebody is going have to answer some questions for
someday.
Surely you all have discussed that. Is there a level?
Ms. Serwinski. Once the numbers were confirmed to be a true
deficit, I believe they were informed.
Mr. Pearce. I am sorry. Say it again.
Ms. Serwinski. Once it was confirmed that the $900 million
was a true and factual shortfall--
Mr. Pearce. Was $900 million the threshold, or would $100
million--
Ms. Serwinski. No. One dollar would have been the
threshold, sir.
Mr. Pearce. Now, so you got back on Thursday and nobody had
been notifying anybody and everybody just said okay. Mr.
Steenkamp saying in his testimony I don't--that wasn't my deal.
I wasn't really concerned. I don't much care if they were doing
that.
But what was the--surely there was some sequence that
somebody was supposed to say the place is on fire.
Ms. Ferber, you didn't--you were saying that it never rose
to your attention, that it was not really your concern. At what
point would you be concerned with missing customer accounts?
Ms. Ferber. I would be concerned with any missing customer
funds. I--
Mr. Pearce. Okay. So if she found that on Wednesday--she
says that we have dipped in and maybe you don't have it
collateralized and that was on Wednesday or Thursday.
Wednesday or Thursday it really became evident.
Ms. Serwinski. Excuse me, sir--
Ms. Ferber. Yes.
Ms. Serwinski. --I don't believe I said that. The firm was
in regulatory compliance to the best of my knowledge on
Wednesday.
Mr. Pearce. So you are saying that we did it all on
Saturday night? We did it all on Saturday? You are saying there
was no build-up over time?
Ms. Serwinski. No, what I am saying, sir, is that the firm
was in regulatory compliance with the excess segregated and
secured rules until I was aware on Sunday night that we were
not in compliance on Friday, close of business Friday.
Mr. Pearce. So you think that entire billion went in one
day? Okay.
Thanks, Mr. Chairman. I yield back.
Chairman Neugebauer. Thank you.
Any other Members? All right.
Mr. Posey, you will be the last one.
Mr. Posey. Thank you, Mr. Chairman.
Ms. Ferber, I appreciate you actually trying to help us
unravel some of this. You are the only one who has answered
questions beyond a yes or a no, or I don't know, mostly I don't
knows. And we do appreciate that, your willingness to do more
than dodge questions.
Mr. Steenkamp, is it correct that your work now consists
primarily of making assets available for trustee-free?
Mr. Steenkamp. Yes, one of the top priorities--
Mr. Posey. Okay. The answer is yes.
Are the assets you recover for the benefit of customers?
Mr. Steenkamp. Sir, I am not an expert in bankruptcy. I
don't know how the--
Mr. Posey. Okay.
Mr. Steenkamp. I don't know--
Mr. Posey. Or, do they go to the creditors and MFG
Holdings?
Mr. Steenkamp. Sir--
Mr. Posey. You don't know that either.
Mr. Steenkamp. I am just--
Mr. Posey. Okay. So you wouldn't know if any of the assets
he pays out would reduce the potential pool of assets available
to pay back customers?
Mr. Steenkamp. Sir, that is for the trustee to determine if
the assets are eligible--
Mr. Posey. You don't know that? You have no idea? You
absolutely have no idea?
Mr. Steenkamp. Sir, I--
Mr. Posey. Under oath, you have no idea what I am talking
about?
Mr. Steenkamp. No, sir, I believe the Chapter 11 trustee
obviously of--is of the holding company, so he works with the
creditors.
But I am not sure how that process works around allocating
out assets amongst the firms and paying--
Mr. Posey. Did Mr. Freeh recently propose paying you, and
others like Mr. Abelow, substantial bonuses for helping recover
assets?
Mr. Steenkamp. Sir, there had been one discussion, but no
bonuses have been proposed as of yet. It was being finalized.
Mr. Posey. Do you believe you deserve a bonus?
Mr. Steenkamp. Sir, I believe for all the hard work that we
are doing, we are just asking to be fairly compensated. We are
not part of the discussions on whether that includes bonuses or
not.
Mr. Posey. Yes, fairly compensated in the future, but not
de-compensated for the humongous losses that you might have
been culpable in.
Will you accept bonuses if the motion is approved by the
bankruptcy court?
Mr. Steenkamp. Sir, if the trustee determines that is fair
and reasonable compensation.
Mr. Posey. Because you told us how brokenhearted you are
over the losses suffered by these investors?
How do you think the customers will feel about the idea of
using money that could potentially be used to reimburse them
for the money stolen from their segregated accounts underneath
the watch of you and others, to pay for the bonuses and legal
fees of the very people who were running the company that
looted the accounts?
Mr. Steenkamp. Sir, I am sure the customers want all their
money returned.
Mr. Posey. Are you familiar with the principle called
``willful blindness?''
It is a term used when an individual seeks to avoid similar
criminal liability for a wrongful act by intentionally putting
himself in a position where he claims to be unaware of facts
which would render him liable.
Mr. Steenkamp. I am not specifically aware of that, no.
Mr. Posey. Okay. Do you have any idea whether that applies
in this case or not?
Mr. Steenkamp. I would assume if one takes the Fifth, for
example, that is something one is concerned about.
Mr. Posey. Okay.
Ms. Ferber, who was involved in the decision to put MF
Global Inc. into SIPA liquidation?
Ms. Ferber. First just let me say, we had bankruptcies--
Mr. Posey. All right. Let me make it shorter. Anyone from
the SEC, the CFTC, or representing creditors or trading
counterparts?
Ms. Ferber. The SEC would have been involved only--one
cannot file themselves under SIPA. I believe it is the SEC that
has to make that application or do that.
I also--obviously there was a period of time overnight
where the regulators were deep in conversations among
themselves.
Mr. Posey. Was Mr. Cook with the SEC involved?
Ms. Ferber. He was certainly one of the people who
organized the conference call where we asked to notify the
regulators--
Mr. Posey. Okay.
Ms. Ferber. --early in the morning on the 31st.
Mr. Posey. Who was involved in placing MFGH, the holding
company, in Chapter 11, allowing the assets to flow to
creditors and counterparties?
Ms. Ferber. The board made the determination that the
company would file for bankruptcy.
Mr. Posey. Okay, the board and particularly, anyone in
particular on the board?
Ms. Ferber. No, the board of directors.
Mr. Posey. Okay.
I yield back.
Chairman Neugebauer. I thank the gentleman.
And I thank this panel. At this time, you are dismissed,
and we will call up the second panel. Thank you for coming.
I want to welcome the second panel: Ms. Diane Genova,
deputy general counsel, JPMorgan Chase & Company; Mr. Daniel
Roth, president and chief executive officer of the National
Futures Association; and Ms. Susan Cosper, technical director
and chairman, Emerging Issues Task Force, Financial Accounting
Standard Boards.
I would remind each of you that your written statements
will be made a part of the record and we would ask you to
summarize your testimony in 5 minutes.
Ms. Genova, you are now recognized.
STATEMENT OF DIANE GENOVA, DEPUTY GENERAL COUNSEL, JPMORGAN
CHASE & CO.
Ms. Genova. Thank you.
Chairman Neugebauer, Ranking Member Capuano, and members of
the subcommittee, my name is Diane Genova. I am the deputy
general counsel for the investment bank of JPMorgan Chase. As
such, I was one of the JPMorgan officials dealing with MF
Global over the weekend before it filed for bankruptcy
protection on October 31, 2011.
I appreciate the opportunity to appear before the
subcommittee to describe those events and I would also like to
thank Chairman Bachus for noting JPMorgan's cooperation in
appearing before this committee.
As I will describe in more detail, JPMorgan professionals
worked through the week of October 24th to accomplish two main
goals: first, to provide first-rate operational clearing and
settlement support and services to MF Global; and second, to
make sure that we did not wind up in a position where we had
extended credit to MF Global without proper collateral and
security protections.
To understand what we were trying to accomplish, let me
describe briefly the banking services that JPMorgan, along with
other financial institutions, provided to MF Global. These are
fairly standard services that clearing banks typically provide
to support the day-to-day broker/dealer and futures commission
merchant operations of firms like MF Global.
First, MF Global maintained a large number of cash demand
deposit accounts, much like a retail checking account, at
JPMorgan, as well as other banks.
Second, MF Global used JPMorgan, as well as Bank of New
York Mellon, and other banks for clearing services.
Third, JPMorgan served as the administrative agent for two
committed revolving credit facilities, one consisting of 22
banks and one consisting of 10 banks that MF Global had put in
place.
Finally, MF Global had entered into securities lending and
repurchase arrangements with JPMorgan. These arrangements
served as a financing tool for MF Global.
As noted in my written statement, we worked hard to assist
MF Global, our client, when it began experiencing problems.
These efforts, which would in turn benefit MF Global's
customers, included several actions.
We sent a JPMorgan team to MF Global's offices on Friday,
October 28th, to assist MF Global with its ongoing efforts to
unwind its securities lending arrangements. By doing so, MF
Global was able to regain access to the securities it had
posted as collateral and then sell those securities to generate
additional liquidity.
JPMorgan also facilitated an auction of a portfolio of $4.9
billion of securities held by MF Global involving multiple
market participants. This was another way to assist MF Global
in its ongoing efforts to generate liquidity.
We also agreed to provide same-day liquidity for the
auction sales where JPMorgan was acting as agent for MF Global
with respect to securities custodied with JPMorgan. This
measure provided MF Global with liquidity on the fastest
possible basis, far faster than the typical one to two business
days for regular way settlement for such securities trades.
Since the bankruptcy, JPMorgan has engaged with committee
staff to assist the subcommittee in its examination. Among
other items, we have shared our perspective on the events
surrounding overdrafts that MF Global had in accounts with
JPMorgan in London, and the questions we asked MF Global to
make sure that customer segregated funds were not used to
satisfy those overdrafts.
In my written submission, I explained the principal points
of contact between MF Global and JPMorgan. I also discuss the
circumstances on Friday the 28th that caused us to ask MF
Global to confirm in writing that they were in compliance with
their customer segregation obligations.
Briefly, I took the lead in reaching out to Laurie Ferber,
MF Global's general counsel, and Dennis Klejna, MF Global's
deputy general counsel, and I received assurances from both of
them that MF Global understood the customer segregation rules
and had complied with them.
Over the course of our conversations, we discussed the
contents of a letter that we had requested to confirm MF
Global's compliance with customer segregation rules.
As you heard Ms. Ferber testify earlier today, she and her
deputy, Mr. Klejna, raised concerns about the scope of our
proposed letter. We narrowed the letter as they requested. And
as Ms. Ferber also confirmed earlier during this hearing, we
were told the narrowed version of the letter would be signed.
Although the letter ultimately was not signed that weekend
before MF Global filed for bankruptcy, we believed we had been
given clear and credible assurances that the transfers were
lawful.
I would like to thank the committee for the opportunity to
share with you our perspective on this matter, and I am happy
to answer any questions you may have.
[The prepared statement of Ms. Genova can be found on page
89 of the appendix.]
Chairman Neugebauer. Thank you.
Mr. Roth, you are recognized.
STATEMENT OF DANIEL J. ROTH, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, THE NATIONAL FUTURES ASSOCIATION (NFA)
Mr. Roth. Thank you, Mr. Chairman.
My name is Dan Roth and I am the president of the National
Futures Association.
For the longest time, for decades and decades, the futures
industry had an impeccable reputation and a well-earned
reputation for financial integrity. Obviously, the events
surrounding MF Global have dealt a blow to that reputation and
I think all of us involved in the regulatory process need to be
thinking about the types of regulatory changes that we can make
to try to prevent this kind of an occurrence from ever
happening again.
At NFA, when we considered the changes that we might
implement, they fell into three basic categories. There were
certain changes which we felt we could accomplish only in
coordination with other self-regulatory organizations. There
are other changes that we thought we could implement just
through NFA rulemaking. And there is a third category of
changes that we think would require either congressional or
CFTC action.
And what I would like to do today is just sort of describe
for you where we are in each of those three categories and what
our initial recommendations have been.
With respect to the issues involving coordination with
other self-regulatory bodies, those issues involve how we
monitor firms for compliance with segregation requirements, and
coordination with the other SRO's is very, very to us critical
here.
All FCM's are required to be members of NFA, but we are the
designated self-regulatory organization only for those FCM's
that are not members of the exchanges. So it is very important
for us to work with the exchanges to try to develop these
changes.
With that in mind, back in December the Chicago Mercantile
Exchange and NFA jointly announced the formation of an SRO
committee. The other participants included the exchange members
of NFA, the Kansas City Board of Trade, the Intercontinental
Exchange, and the Minneapolis Grain Exchange.
That group has been meeting for the last several months. We
have taken a look at what we do and how we do it and how we can
do it better. And we have developed some initial
recommendations. We reviewed those recommendation with other
committees at NFA, including members of the FCM community and
our public directors, and we just several weeks ago announced
four initial recommendations. And these are just initial
recommendations. There is more work to be done.
But those four basically are, number one, to require all
FCM's to submit daily segregation reports with their designated
self-regulatory organization. Right now, that obligation
extends only to those FCM's that are members for which NFA is
the DSRO. We want to extend that to all FCM's.
In our experience that will be a very useful risk
management tool, because you can see not just where the firm is
on a given day, but you can spot trends, you can spot
fluctuations, you can spot things that seem unusual and that
catch your attention and that will prompt further action.
The second change that we are recommending has to do with
what we call a segregation investment detail report. Currently,
we get these reports on a monthly basis from those FCM's for
which we are the DSRO.
These reports show how customer funds are being invested
and where those investments are being held. We want to take
that requirement, and again, it extends to all FCM's, and move
those reports from a monthly to a bi-monthly basis.
The third thing we want to do is perform more periodic spot
checks for FCM compliance with segregation requirements. Each
FCM is audited twice a year: once by its DSRO; and once by its
outside accounting firm. We want to supplement those
examinations, which go into great detail testing for
segregation compliance, with periodic surprise visits to
monitor compliance with various components with the segregation
regime.
The fourth rule that we are proposing has to do with
accountability. We want to make sure that if a firm is drawing
down its excess segregated funds, that if a firm is making in
any given day, draws down its excess seg by 25 percent, then
two things have to happen: number one, a principal of the firm,
such as the CEO or the CFO, has to sign off on those
disbursements that are drawing down the segregated funds; and
number two, there has to be immediate notification to the
regulators.
That will not only improve accountability and also give
regulators important notification about potential problems to
which they can react, it will also capture intraday
transactions. The daily segregation reports that we get now
just reflect the firm's status as of the close of the previous
day. It does not--if a firm were to wire funds out of
segregation during the day and wire them back in by the end of
the day, that will not be captured in the daily segregation
reports. They would be captured under this rule.
Those are the four initial recommendations of the SRO
group. Let me mention that we also have a special committee of
our public directors that is looking at other issues. One of
those is FCM disclosures. We want to make it easier for
customers, especially small customers, to do due diligence on
their FCM's.
We are trying to identify that information which would be
most meaningful to customers without overwhelming them. We
want--it is information like the firm's capital requirement in
its excess capital, it is segregation requirement and it is
seg. Maybe the amount of leverage the firm employees, whether
it allows trading as a principal that is not hedge trading. We
want to identify those pieces of information and then require
FCM's to disclose that information to NFA so that NFA will then
put it on its Web site and make it available for customers to
try to make it easier for them to do their due diligence.
Let me emphasize again that these are our initial
recommendations. Both our special committee and the SRO
committee continue to work. There are other issues we want to
look at, including possible changes to the Bankruptcy Code, and
we look forward to working with the industry and the Commission
and Congress to try to develop the regulatory changes that are
needed.
Thank you.
[The prepared statement of Mr. Roth can be found on page 98
of the appendix.]
Chairman Neugebauer. Thank you.
Ms. Cosper, you are recognized for 5 minutes.
STATEMENT OF SUSAN M. COSPER, TECHNICAL DIRECTOR, FINANCIAL
ACCOUNTING STANDARDS BOARD (FASB)
Ms. Cosper. Chairman Neugebauer, Ranking Minority Member
Capuano, and members of the subcommittee, my name is Susan
Cosper and I am the technical director of the Financial
Accounting Standards Board, also known as the FASB. I oversee
the staff work associated with the projects and the Board's
technical agenda. I would like to thank you for this
opportunity to participate in today's important hearing.
I understand the subcommittee would like me to explain the
current accounting and reporting standards related to
repurchase agreements. I will do my best to do so, but first, I
would like to give you a brief overview of the FASB and the
manner in which accounting standards are developed.
The FASB is an independent private sector organization
which operates under the oversight of the Financial Accounting
Foundation and the Securities and Exchange Commission. Since
1973, the FASB has established standards of financial
accounting and reporting for public and private entities and
not-for-profit organizations. Those standards are recognized as
authoritative, Generally Accepted Accounting Principles, or
GAAP, by the SEC for public companies and by the American
Institute of Certified Public Accountants for other
nongovernmental entities.
An independent standard-setting process is the best means
of ensuring high quality accounting standards, since it relies
on the collective judgment and input of all interested parties
through a thorough, open, and deliberative process. The FASB
sets accounting standards through processes that are open,
afford due process to all interested parties, and allow for
extensive input from all stakeholders.
It is important to note that although FASB sets the
accounting standards, it does not enforce them. The SEC has the
ultimate authority to analyze whether public companies have
complied with accounting standards. The PCAOB is charged with
ensuring that auditors of public companies have performed an
audit in accordance with auditing standards.
Let me try now to explain how repurchase agreements work
and how they are treated under current accounting standards. In
a typical repurchase agreement, a company, also known as a
transferor, transfers securities to a counterparty, the
transferee, in exchange for cash with a simultaneous agreement
to the counterparty to return the same or equivalent securities
for a fixed price at a future date.
The price paid by the transferor includes an interest rate,
which is like a lending rate for secured borrowing. The
motivation for entities to use repurchase agreements is
generally finance related: the desire to borrow or lend cash.
Current accounting guidance results in most repurchase
agreements being accounted for as secured borrowings. The
accounting guidance is based on the concept that the transferor
maintains effective control of the security under most
repurchase agreements, since the transfer is temporary and
because the transferor has to repurchase the asset before its
maturity.
Another type of repurchase agreement, a repo-to-maturity,
is accounted for as a sale with a separate agreement to
repurchase the security. In these transactions, the transferor
never actually gets back the transfer security. Because the
repurchase date is the same as the securities maturity date,
the counterparty instead redeems the security and the
transferor simply pays the transferee the difference between
the proceeds received by the transferee and the redemption in
the agreed-upon repurchase price.
In this transaction, the transferor does not have effective
control over the transfer security. I understand that a
specific question is how a loss in value in the underlying
security would be accounted for if the repurchase agreement is
considered a secured borrowing or sale?
In a transfer of the securities that is accounted for as a
secured borrowing, the transferor recognizes the cash as
proceeds of the transaction, together with the liability for
the obligation to return the cash to the transferee. The
security remains as an asset on the transferor's balance sheet,
and declines in the value of the security would reduce a
company's overall net worth.
In a repo-to-maturity, the transactions are accounted for
by the transferees of sales of securities, cash is increased,
the security is removed from the balance sheet, and a gain or
loss is recognized. A forward repurchase commitment, a
derivative, is also recognized in the financial statements.
Since the transferor maintains the credit risk associated with
the securities it transferred, any reduction in the value of
the security after the inception of the agreement is accounted
for as a liability, which reduces the company's overall net
worth.
Finally, whether the transaction is a repo or a repo-to-
maturity, companies are required under GAAP to make extensive
disclosures about assets that have been transferred, including
both quantitative and qualitative information about the
transferor's continuing involvement, the risk that the
transferor continues to be exposed to, including credit and
liquidity risk, the amount to be recognized, and gains or
losses on transferred assets.
Thank you again. And I would be pleased to answer any
questions about the standards.
[The prepared statement of Ms. Cosper can be found on page
61 of the appendix.]
Chairman Neugebauer. Thank you very much.
I now recognize Mr. Capuano for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman. I appreciate the
opportunity.
Again, thank you all for coming today. And I actually find
this panel a little more technical, and hopefully more
enlightening. We will find out.
I guess I want to start out by making clear what I think
our role is, or where I am at the moment, based on the hearings
we had and research I have done. If there was criminal activity
at MF Global, I just don't think that is Congress' role to
investigate criminal activity. Expose it, but then let the
people who do a better job at it, do it. And if that is the
case, so be it. But of course at the moment, I am not aware
that anybody knows that or doesn't know that.
But so far, there have been two issues, and I think this
panel actually relates to both; two issues that have really
come to my attention that raise serious questions: the so-
called segregated accounts; and some of the FASB rules.
Again, I want to distinguish the FASB rules from the way
they--if they might have been used improperly. That would be an
inappropriate use of it. But the rules, even if they were
applied properly, still raise questions to me.
I guess I would like to start with the FASB rules. To me,
it is mostly a statement 140. But reading your statement, there
are other ways to refer to it, 860 and whatever the number is.
It is basically the rule that says a repo is booked as a sale.
And that has been reported in the media, whether it is
appropriate or not.
It is appropriate to the layman, not necessarily to the
technician. But that effectively takes it off the books. And it
makes it look--it makes the company look like it is healthier
than it really is, in any normal sense of the word, because in
my definition, even reading the FASB rules, it is not a sale.
They still have control over it. They are still getting it
back. And I understand that is a reasonable difference of
opinion.
But I wanted to make sure that--or not make sure. First of
all, I wanted to ask Ms. Cosper, is FASB reviewing the current
standards? Not necessarily as it relates to MF Global. I
understand that is not your function. That is PCAOB's and
others' function. But at least having--now knowing where we
are, being here today, knowing that this rule has had something
to do with the concerns here, and knowing it is subject to
debate as to how it should be interpreted. I need to know
whether FASB is reviewing whether this rule is an appropriate
rule moving forward, in order to provide the true transparency
and the consistent application of whatever rule you come up
with. Because thus far, I think this rule is applied
inconsistently. Not necessarily intentionally, but just because
it is a difficult rule with lots of subsets.
So I guess I wanted to hear from you as to whether FASB is
reviewing the current rules as you have them. Again, not even
giving away what you may or may not do. But at least I need to
know whether you are reviewing them with a thought of possibly
addressing them at some point.
Ms. Cosper. Thank you. FASB strives to continue to improve
our accounting standards. And once we became aware that there
were concerns with respect to repo-to-maturities and repurchase
agreements in general, we actually undertook an effort to
understand what concerns were in the marketplace.
We have performed an extensive amount of outreach to
practitioners, to users, to understand what the concerns may
be. That outreach did not identify that there were application
issues associated with the rule or perhaps diversity in
practice. However, users have advised us that they have
concerns because of the market practices that have changed
since the rule was originally put into place.
That is, originally, repo-to-maturities, the securities
that were generally transferred, were high-quality treasuries.
And it has come to our attention that companies are now using
riskier securities. So, taking that information, we discussed
that with the Board. The Board has added a project to its
agenda to revisit those rules and to understand whether there
are changes that need to be made, and/or enhanced disclosures
that need to be made.
Mr. Capuano. In the normal course of events, when you
individually--I know it is not the first rule you have made. I
know it is an ongoing process. Just that is what we do with
laws you are doing with accounting rules. In the normal course
of events, what would you expect? I will not hold you to it.
Just give me a ballpark idea how long you think it might take
for FASB to conclude its review of this and decide whether to
amend it or not to amend it. How long do you think that might
take?
Ms. Cosper. We expect to start discussing the changes that
we make next month. And we expect to issue a standard by the
end of the year.
Mr. Capuano. By the end of the year? Okay. Thank you. I
appreciate it.
Ms. Genova, just out of curiosity, if I had some money that
I was holding with you, would you let Chairman Neugebauer pick
up the phone to you and say, hey, I want to use Mike's money
for a day or two and I will pay it back tomorrow. Would you let
him do that? I know he is a nice guy and I trust him. But would
you let him do that?
Ms. Genova. I am not sure what the context is, but it
doesn't sound like I would.
Mr. Capuano. Good. I guess I feel better that you wouldn't,
because I am not aware that any financial institution in the
world would let that happen in any legal capacity. Yet, we have
commingled funds. It is kind of funny. It is a classic.
I actually think they ought to be in politics, whoever came
up with this term. They are commingled funds, yet they are
called ``segregated accounts.'' It is the opposite of
segregated. It is commingled. And under that responsibility,
from everything that I read, how could you possibly know whose
money is whose in a commingled account?
Ms. Genova. The obligation to keep a minimum of client
money in the account belongs to the FCM. So, it is the FCM that
has the obligation to figure out what money is theirs and what
money belongs to clients.
Mr. Capuano. Just for clarity, the FCM in this case would
be--
Ms. Genova. It would be MF Global.
Mr. Capuano. That is what I thought. So, you would--there
is no way in the world you would know what they had in an
account of $100 or $100 million or a billion, how much money is
customer money and how much money is not customer money. Is
that correct?
Ms. Genova. That is correct. We would not have the
information.
Mr. Capuano. So, you kind of have to trust the other guys?
Ms. Genova. We know that they have a legal obligation to
comply with the rules and that they are regulated entities.
Mr. Capuano. Okay.
Mr. Roth, I will tell you that I read your statement. I
actually like some of the things you are proposing. I want to
congratulate you for it.
I guess I would first ask, because you are trying to
address this very issue, I am going to go a little further in a
minute, but at least for my first question: Are the other SROs
following your lead on this issue, reviewing this issue and
maybe making some proposed changes to how this gets done?
Mr. Roth. The four recommendations I outlined are supported
by all of the SROs that were part of that SRO committee, as
well as other exchanges that we spoke to that weren't on the
committee, as well as our FCM advisory committee that we spoke
to, as well as our public directors on our board. They have all
been supportive of those four changes.
Can I just go back for one second? I don't mean to use up
your time--
Mr. Capuano. You can try. As long as the chairman is
indulgent.
Mr. Roth. I just wanted to point out that excess segregated
funds are a very important thing for the protection of
customers. There are multiple customers with money in those
accounts. If one customer incurs substantial trading losses,
that excess segregated fund is a way of making good that
customer's shortfall to protect all the other customers.
Mr. Capuano. Yes, I guess at some point, somebody is going
to have to explain to me how using my money protects my money.
Today is not the day. And I guess my last question, and I am
way over my time, so my last question, and I think I know the
answer, but I am going to ask it anyway, is why don't you just
say stop commingling funds? If you want to invest--if any of
the companies want to invest their own money, good luck. Why do
they need to use my money?
Mr. Roth. The reason we allow FCMs to have their own funds
in the segregated account is for precisely the reason I already
described, which is to say to protect other customers. In the
event of one customer incurring a substantial trading loss and
creating a shortfall in that account, the customer--
Mr. Capuano. How does it protect me if some other customer
loses their money and, to me, somebody else uses my money to
cover their losses? I didn't--it wasn't my game.
Mr. Roth. I--
Mr. Capuano. It is my money. I didn't play that game, and
yet, you are taking my money to protect some other customer--
Mr. Roth. No, sir.
Mr. Capuano. --who lost their money, because they took a
gamble.
Mr. Roth. No, sir. If I could, can I try to explain it?
Mr. Capuano. You can try.
Mr. Roth. If there is an FCM and it has two customers and
each customer has $100 in the account so that the seg required
is $200. Customer number one loses not only all of his money,
he goes into a debit position so that there is only--he has
incurred--he has a $50 trading loss. He is in the hole $50.
That account, which had $200, now has $50. And to protect that
customer who didn't have that loss, that is why the firm has
its own money in there.
Mr. Capuano. But you didn't protect me. I didn't have the
loss. You protected the guy--
Mr. Roth. No.
Mr. Capuano. I guess I am way over time. We are going to
have to go through this another day, Mr. Roth. I have yet to
understand how me not gambling and protecting Randy's gambling
losses somehow helps me.
And I am willing to be educated. I am looking forward to
education, but I have to tell you, it makes no sense to anybody
else I know, except--and, by the way, Ms. Genova, is there
anyplace else where people can pick up the phone and use other
money at JPMorgan? Is this the only one, or is there someplace
else?
Ms. Genova. I am not aware of any other circumstance.
Mr. Capuano. Okay, and Mr. Roth, this is not the place. I
am way over--
Mr. Roth. I would just like to visit with you sometime, if
that would be possible.
Mr. Capuano. I would like to. Thank you.
Chairman Neugebauer. I would just say that one of the
things, as you know, or part of the goal of this committee, is
once we have completed our investigation and our oversight, we
are going to publish a report that will be approved by the
committee.
And one of the things that we hope to accomplish from that
is once we ascertain exactly where the pitfalls are, we want to
work with everybody to come up with what are some reasonable
solutions.
If there are some holes in the current system that we need
to fill and, obviously, the MF Global thing points out that
there are ways to do that, whether one of the issues I think we
have to always make sure we address is if people--if there is
malfeasance there, you can pass all the rules and laws that you
want to do and that is not going to keep malfeasance from
happening. So we look forward to having that discussion.
And I now yield to the gentleman from New Mexico, Mr.
Pearce, for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
And, just for the record, I have not seen Mr. Neugebauer
gambling away his life savings, and I so appreciate Mr.
Capuano's generosity, but I did want to keep the good name of
our chairman clear.
So, Mr. Roth, you hear what Mr. Capuano is saying. Should
there be a statement that warns Mr. Capuano that his money
could be used to cover other people's losses? And we could--
should that--
Mr. Roth. I think--
Mr. Pearce. That wasn't in your suggestion.
Mr. Roth. There is fellow customer risk of loss; it is one
of the things that they talk about in the segregated funds
regimen. And that is a situation in which one customer incurs
huge trading losses, the firm's own capital is not sufficient
to make good those trading losses, that can result in a
shortfall in which non-defaulting customers suffer a loss.
Mr. Pearce. And all customers know that?
Mr. Roth. That has nothing to do with MF Global, as far as
I know.
Mr. Pearce. All customers know that?
Mr. Roth. And I think there are disclosures about that. But
I think whether we need to--I think it is certainly an issue
that we can look at to see whether those disclosures can be
sharpened and made more clear.
Mr. Pearce. Yes, if those disclosures are something like
the app disclosures; you have to read the thing and say, I
agree.
Mr. Roth. No, it is not a click thing.
Mr. Pearce. Yes, so.
Mr. Roth. But and I think that is an area that is certainly
ripe for study.
Mr. Pearce. Yes, it ought to be in blinking lights, because
there are people who lost $1.6 billion. Did MF--
Mr. Roth. Excuse me, I am sorry. That sort of fellow
customer loss, risk of loss that I talked about, as far as I
know, had nothing to do with MF Global.
Mr. Pearce. Did MF Global break any laws, in your opinion?
Mr. Roth. I don't know the facts of this investigation. I
know that there is a shortfall in customer funds and that
shouldn't happen.
Mr. Pearce. No, it shouldn't happen. They shouldn't be able
to take that. Do you know of any other of the trading firms
that are dipping into the segregated accounts to make things
whole?
Mr. Roth. No. We monitor our firms on a daily basis. We
have done special visits to these, the firms for the DSRO back
in December, confirmed all the balances to outside sources. I
am not aware of any other firm that has a shortfall in
segregated accounts.
Mr. Pearce. Were you all monitoring MF Global?
Mr. Roth. I beg your pardon?
Mr. Pearce. Were you monitoring MF Global?
Mr. Roth. No, we were not the designated self-regulatory
organization for MF Global. Chicago Mercantile Exchange--
Mr. Pearce. Who are the other self-registered organizations
that you would not be monitoring?
Mr. Roth. There are around 75, 80--
Mr. Pearce. Right, don't list them here then. I thought
there was just one or two.
Mr. Roth. --that are holding customer funds to trade
futures. We are the designated self-regulatory organization for
about 26 of them. The other ones, for the most part, are the
CME is the DSRO.
Mr. Pearce. Okay.
Ms. Cosper, on your FASB rules. So, now I have the money. I
get Mr. Capuano's money and I buy some security that he has
asked me to buy. Is that basically the initial transaction?
Ms. Cosper. Basically--
Mr. Pearce. Just, yes, I am trying to simplify it down
where people like me can understand it.
Ms. Cosper. Basically, Congressman Capuano would have a
security, which he would transfer--
Mr. Pearce. Yes, we would give him a piece of paper saying
we bought this for you and have your promise--
Ms. Cosper. He would transfer it to you--
Mr. Pearce. Yes.
Ms. Cosper. For cash.
Mr. Pearce. Okay. And so then the repo account--
Ms. Cosper. And at the same time he has entered into a
agreement to repurchase--
Mr. Pearce. So the repo account takes that same security
and sets it over here and borrows money back against it, right?
Ms. Cosper. That is correct.
Mr. Pearce. And then we buy another security for someone
else or ourselves. So now then--
Ms. Cosper. No, you enter into the--Mr. Capuano--
Mr. Pearce. You have done something with the money that you
got, right? You don't just sit it in the bank. They want--
Ms. Cosper. They would do something with the cash,
presumably--
Mr. Pearce. They want it to turn, right?
Ms. Cosper. But at the same time, you enter into a forward
purchase commitment and that is recognized--
Mr. Pearce. Yes, there are all sorts of legalities at the
bottom of the line. At the bottom of the day, I take money that
he gives me and I buy a security and then I trade that security
to someone else to get cash, right?
And I still have the control over it, but I get cash,
right? I bring that cash back and those--MF Global wasn't
sitting that money in the bank. They weren't keeping it in
JPMorgan's bank, they were then doing something else with it.
They were buying something else, right?
Ms. Cosper. I can't comment as to what they would have done
with the cash.
Mr. Pearce. It is possible in a repo account to buy
something else, right?
Ms. Cosper. They can use the cash however they would like
to use the cash.
Mr. Pearce. Yes, okay. My question is, is there a limit?
You said that is all kosher from accounting standards, right?
Ms. Cosper. In a repo-to-maturity transaction.
Mr. Pearce. Yes, so it is all kosher. Is there a limit to
the number of times we can--so we get this security and then we
trade it over here and we get money back and we trade it, so we
can have 50 or 60 RPAs.
Is there a limit at where the accounting board says well,
that is pretty confusing and maybe somebody has some exposure
here and it is all based on that one deal. Do you all ever--
Ms. Cosper. That is--
Mr. Pearce. Is there a limit to the number of RPAs?
Ms. Cosper. That is a regulatory matter, so we wouldn't be
able to comment on if there was a limit.
Mr. Pearce. You, as accountants, don't think that investors
would really have an opinion about that?
Ms. Cosper. However, the company that initially transfers
the security is fully culpable for the credit risk associated
with that security, so as the value of that security declines,
they recognize the liability and it hits their net worth. It
reduces their net worth.
Mr. Pearce. I know, but I am back to the number of RPAs
that can be stacked on that initial transaction and I just
think that investors, from an accounting standpoint, I don't
know much about accounting and I don't know much about anything
really.
We grew pigs growing up, but this kind of it just seems
like that would be a kind of a significant thing for investors
to know that their money is being--
Ms. Cosper. I think--
Mr. Pearce. RPA'd back and forth and back and forth until
there is a house of cards stacked up with not much underneath
it.
Ms. Cosper. There is no doubt that GAAP requires that the
company that transfers the security continues to make
disclosures about the involvement and the risk associated with
that--
Mr. Pearce. When you start your meeting--
Ms. Cosper. That is required under GAAP.
Mr. Pearce. Yes, I know my time is over, Mr. Chairman.
But when you start your meetings, you ought to probably be
talking about these things, because people like us sitting up
here you see, most of us are not really knowledgeable about MF
Global. All we know is that $1.6 billion worth of money
disappeared and we have a panel full of people and none of them
can remember anything and they don't know who did that
transaction. Nobody internally had to tell anybody else
anything.
And we are the ones who get to answer the questions when we
go back to the House. You guys are the sheriffs, so please
mention that, at some point, you might want to consider the
ethical legality questions.
Thanks.
Mr. Chairman, you have been very tolerant.
Chairman Neugebauer. I thank the gentleman from New Mexico
and I would just let the gentleman from New Mexico know that if
he would like to know more on how you do that, you can call Mr.
Corzine. I think he can share some information on that.
I now yield to my good friend from Texas, Mr. Canseco, for
5 minutes.
Mr. Canseco. Thank you, Mr. Chairman, thank you.
Ms. Genova, why did JPMorgan Chase request assurances from
MF Global that the firm was not improperly moving money out of
customer accounts?
Ms. Genova. As I previously mentioned, it is the obligation
of the FCM to know what funds in the account are their own and
what are the customers' funds. And, therefore--and we wouldn't
have the information to be able to tell.
So normally, we don't ask questions for every account
transfer. That would just be untenable in a normal banking
relationship. But, in this case, we did take the unusual step
of asking questions and that was for two reasons.
First, it has been my experience that when firms have had
issues with clients--with compliance with client segregation
rules, it is often due to innocent operational errors. And
those operational errors tend to occur under times of stress
when there is a lot of trading and a lot of things going on in
a company.
So given the situation in MF Global, I thought that was
just something that--it gave me some pause.
The second was that the funds were being--we knew that the
funds were going to ultimately be used to pay an overdraft in
an account with JPMorgan. So therefore, if there was an error,
JPMorgan would be the one benefiting from that error. And we
did not want to benefit from an error. So we thought it was
prudent to seek assurances.
Mr. Canseco. And is that why the first letter was written
so broadly?
Ms. Genova. The first letter was written broadly, because
it was sort of put together, ``Oh, let's just get assurances.''
And we hadn't really thought it through completely as to what
did we really need.
Mr. Canseco. And then the subsequent letters sort of
satisfied their needs and their desires; is that correct?
Ms. Genova. Yes, that is true. We revised the letter to
reflect what we really wanted to know.
Mr. Canseco. And did they ultimately sign it and send it to
you?
Ms. Genova. No, they didn't. I personally had conversations
with both Ms. Ferber and her deputy, Mr. Klejna, who gave me
oral assurances that they knew the rules, they were in
compliance with the rules, and that--and when we finally
revised the letter to only refer to the two transfers that we
really had some concerns about, that in fact the letter would
be signed.
Mr. Canseco. One more question. On October 29th, Mr.
Corzine told regulators that JPMorgan was one of two possible
buyers of MF Global. Is that true?
Ms. Genova. I know that there was some discussion within
JPMorgan about evaluating whether pieces of the MF Global
business might be attractive to us. And after an evaluation, we
decided that it really wasn't a good business fit.
Mr. Canseco. Thank you, Ms. Genova.
Mr. Roth, Congress passed the Dodd-Frank bill using the
logic that more rules and regulations are an adequate
substitute for enforcing existing laws.
Right now, the CFTC is writing new rules at a furious pace.
But in the case of MF Global, they failed to enforce the most
basic of rules that monitor commodities accounts. In your
opinion, how do the new rules and regulations written by the
CFTC benefit producers in rural areas that in many cases rely
on small, local banks for credit?
Mr. Roth. I believe the expression is ``above my pay
grade.''
Mr. Canseco. Can you venture an answer nonetheless?
Mr. Roth. I can tell you that I have been at NFA for about
29 years. So I have been in the regulatory process for futures
for a long time. And I know that whenever bad things happen,
there is a tendency to write new rules. That is sometimes very
helpful. I think the rules that we are proposing here are very
helpful rules.
But ultimately, it comes down to a matter of enforcement. I
don't care what set of rules you have, ultimately, at the end
of the day, it is about enforcement. And I think that is true
of the rules in the futures regulation area, and I am sure it
is going to be true in the swaps area as well.
Mr. Canseco. Thank you. Should the CFTC be focusing its
efforts on writing new rules, or do you feel they first need to
do a better job enforcing them? And I guess your answer is
``yes.''
Mr. Roth. I believe that the way the statute is set up, is
that the CFTC is an oversight agency for NFA. NFA is not an
oversight agency for the CFTC.
Mr. Canseco. Thank you for your candor.
And I yield back the balance of my time, if there is any.
Chairman Neugebauer. I thank the gentleman.
I just have a couple of questions.
Ms. Genova, this $200 million, $175 million transaction has
gotten a lot of scrutiny with Mr. Corzine.
I think what gave it some of that scrutiny is that it was
precipitated by the fact that Mr. Zubrow, I guess, from
JPMorgan, actually called Mr. Corzine directly and said, ``You
are overdrawn. You need to take care of that.''
Would that be a normal call that Mr. Zubrow would call the
CEO of the company, or would you have called the treasurer?
What was significant about Mr. Zubrow calling Mr. Corzine and
telling him he was overdrawn?
Ms. Genova. I think in the context, this would be in the
context of the fact that the company had just been downgraded
to junk. Mr. Zubrow, who is the chief risk officer for the
entire firm, would have concerns about this company. It would
be his normal practice, if there were issues such as a large
overdraft in an account, for him to call the most senior person
in the company that he knew.
So, this would be something that would be actually an
ordinary step for a company that was in some distress.
Chairman Neugebauer. And was it about this time that you
dispatched your team to go over and have a presence at--when--
just refresh my memory. When did you all dispatch your team to
go over to MF Global?
Ms. Genova. We went to MF Global on Friday, October 28th.
And it was to help them see if we could do things to help them
raise some liquidity.
Chairman Neugebauer. That was on which day, now?
Ms. Genova. Friday, October 28th.
Chairman Neugebauer. Okay. So is that the same day that
they covered the overdraft?
Ms. Genova. That was the same day that they covered the
overdraft, yes.
Chairman Neugebauer. I think one of the things you said is
that a debit alert was placed on this company. So you are
looking at the deposits, the out-goes, the in-goes, kind of
making sure that everything is appropriate. So someone was
approving those transfers in JPMorgan, then, if you are on
debit alert?
Ms. Genova. I would just like to clarify what ``debit
alert'' really means.
Chairman Neugebauer. Okay.
Ms. Genova. ``Debit alert'' means that, because of concerns
about the company's financial condition, we will not transfer
funds out of the account unless there are actually funds in the
account. So in the normal course of business, to facilitate
client transactions, we would transfer funds out of the
accounts that aren't really there, and in a sense, creating--
Chairman Neugebauer. --an overdraft.
Ms. Genova. --an overdraft. So basically, the day of the
debit alert, means no overdrafts. But it does not mean that we
approve each transaction. And if there is money in the account,
and the client asks us to move the money, we just execute the
client's instructions.
Chairman Neugebauer. So you kind of put them on a COD. You
had to have the cash in the account.
Ms. Genova. Yes.
Chairman Neugebauer. Okay. Thank you.
Mr. Roth, I used a little analogy--I don't know if you were
in the room or not--about how the customer funds went missing,
that they were--the bottle was full, and the water below this
belonged to the customer. The water below that, we poured it
into that glass.
Mr. Roth. Right.
Chairman Neugebauer. And that is the way customer funds go
missing, except for the fact, and I think you brought that
point up, is that if somebody, some of the money, some of the
people in the account, had big losses.
Mr. Roth. Right.
Chairman Neugebauer. Do you have any reason to believe that
there were significant customer losses that precipitated the
fact that the farmers' and ranchers' bottle is empty now?
Mr. Roth. Mr. Chairman, my knowledge is based on what I
have read in the press. What I have read in the press, I don't
have any reason to believe that that issue was involved in this
case.
Chairman Neugebauer. So the way the money went missing is
people took money out that shouldn't have been taken out?
Mr. Roth. As far as I can make out from the press reports,
that is exactly right.
Chairman Neugebauer. Okay. I want to thank this panel. I
want to thank the previous panel. I want to particularly thank
the members and the ranking member. This is an important
hearing. And it is important not only to the people who lost
money in MF Global, but it is extremely important, I think, to
the marketplace moving forward.
And Mr. Roth would probably agree with me. We will need to
make sure that people have the confidence that when they do
business with these firms, that their money--the only risk they
are taking is their own risk, and they are not taking the
firm's risk as well.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for Members to submit written questions to these
witnesses and to place their responses in the record.
And with that, we are adjourned.
[Whereupon, at 5:57 p.m., the hearing was adjourned.]
A P P E N D I X
March 28, 2012
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]