Subcommittee Report Finds Decisions by Corzine, Lack of Communication
Between Regulators Led to MF Global Bankruptcy and Loss of Customer
November 21, 2012
The House Financial Services Subcommittee on Oversight and
Investigations, chaired by Rep. Randy Neugebauer, released the full
results of its year-long majority staff investigation into the collapse
of MF Global.
The report chronicles the demise of the 230-year old commodities
brokerage firm, which declared bankruptcy in October 2011. MF Global’s
failure was the eighth largest bankruptcy in U.S. history and resulted
in a $1.6 billion shortfall in customer funds.
“We conducted this investigation because MF Global customers deserve to
know how and why their funds went missing; market participants deserve
to know whether regulatory lapses have been identified and will be
corrected; and taxpayers deserve to know that regulators are being held
accountable so similar losses may be prevented from occurring in the
future,” said Chairman Neugebauer.
“Despite the promise of Dodd-Frank that regulators would work together,
what the Subcommittee’s investigation found is there was no meaningful
coordination among the regulators who were responsible for the
supervision of MF Global,” said Financial Services Committee Chairman
Spencer Bachus. “This left each regulator with an incomplete
understanding of the company’s financial health – and MF Global’s
customers paid the price. This, once again, raises the question of
whether regulators are so preoccupied writing hundreds of new rules that
they’re missing the basics like safeguarding customer funds and
protecting investors from financial frauds.”
The Subcommittee staff’s investigation of MF Global involved three
hearings, more than 50 witness interviews, and the review of more than
243,000 documents obtained from MF Global, its former employees, federal
regulators and other sources.
Report Findings and Recommendations:
Finding: MF Global Chairman and CEO Jon Corzine Caused MF Global’s
Bankruptcy and Put Customer Funds at Risk
· Corzine decided to transform MF Global from a futures broker to an
investment bank without having a complete understanding of the futures
business or the potential risks associated with such a radical
· Corzine was the driving force behind the decision to heavily invest in
the sovereign debt of struggling European countries.
· The risks associated with the firm’s repo-to-maturity (RTM) portfolio
were exacerbated by the lack of internal controls and an atmosphere that
Corzine created, in which nobody could challenge his decisions.
· The responsibility for failing to maintain the systems and controls
necessary to protect customer funds rested with Corzine.
Recommendation: Congress should consider enacting legislation that
imposes civil liability on the officers and directors that sign a FCM’s
financial statements or authorize specific transfers from customer
segregated accounts for regulatory shortfalls of segregated customer
Finding: The SEC and the CFTC Failed to Share Critical Information About
MF Global with One Another, Leaving Each Regulator with an Incomplete
Understanding of the Company’s Financial Health
· Both agencies focused on their respective jurisdictional interests and
not the firm as whole.
· There is no record of meaningful communication between the SEC and the
CFTC until the week before the company’s bankruptcy. When these
regulators finally tried to coordinate, it was disorganized and
· The SEC did not include the CFTC in discussions it had with other
securities regulators related to growing concerns about MF Global’s
financial health. The SEC also did not inform the CFTC about discussions
about MF Global’s failure to take haircuts on its RTM portfolio. Senior
CFTC officials said they “wished they were brought into the
conversation” about the haircuts earlier since it affected their
· The CFTC did not inform the SEC that MF Global was using the
Alternative Method, which left the SEC with an incomplete picture of the
firm’s liquidity situation.
· The CFTC “pressured” MF Global to transfer $220 million out of the
broker-dealer excess to the FCM without consulting the SEC first.
Chairman Schapiro: “Without telling us. That is unacceptable.” FINRA
also said in an email that MF Global ignored SEC instructions not to
transfer the funds.
Recommendation: The SEC and the CFTC streamline their operations, or
merge into a single financial regulatory agency that would have
oversight of the entire capital markets.
· The MF Global case alone does not necessitate the merger of the SEC
and the CFTC; however the evidence found in the MF Global case is
symptomatic of regulatory inefficiencies.
· As financial products, markets, and market participants have
converged, the SEC’s and the CFTC’s regulatory jurisdictions have
increasingly overlapped. It only makes sense to collapse these entities
and create a regulatory framework that brings us into the 21st century.
Finding: MF Global Was Not Forthright with Regulators or the Public
About the Degree of Its Exposure to Its European Bond Portfolio, nor was
the Company Forthright About Its Liquidity Condition.
· MF Global was not forthright with FINRA about its exposure to European
sovereign debt. The company denied it had European exposure in September
2010, despite a nearly $2 billion portfolio. FINRA thought this was
“negligent” and “misleading.”
· MF Global did not disclose its exposure to European sovereign debt in
full until a full year after it began accumulating the positions. There
was no mention of net exposure in its September 2010 10-Q (when it had a
$2 billion exposure) and December 2010 10-Q (a $4.5 billion exposure).
MF Global finally disclosed its exposure of $6.3 billion in its March
2011 10K - released in May, 8 months after the firm entered into the
· Executives presented a much more optimistic picture of its liquidity
situation to the public than what was privately understood. On October
6, 2011, MF Global’s CFO Henri Steenkamp informed Corzine that one of MF
Global’s affiliates was undergoing significant liquidity stress and
characterized MFGI’s liquidity as being in a state of “sustained
stress”. However, on an October 25, 2011 earnings call, Steenkamp
described how MF Global had “improved [its] capital and liquidity
positions” that quarter. Corzine backed Steenkamp’s claim by stating
that MF Global’s action had put the firm in a “much, much stronger
liquidity position” as of September 30. As a result of these public
statements, investors were not aware of MFGI’s liquidity issues and
could not assess their impact on MF Global’s overall condition.
Recommendation: The Subcommittee recommends that the SEC investigate
whether MF Global violated federal securities law or SEC rules in
connection with its disclosures about the European RTM trades and the
firm’s overall financial health. The Subcommittee further recommends the
SEC proactively conduct a review of off-balance sheet reporting,
Finding: Moody’s and S&P Failed to Identify the Biggest Risk to MF
Global’s Financial Health
· Despite being disclosed in May 2011, the rating agencies did not
factor MF Global’s European exposure into its ratings assessments until
· The credit rating agencies (CRAs) did not understand the nature of MF
Global’s European sovereign exposure.
· The CRAs failed to conduct adequate due diligence. Documents
demonstrate that neither Moody’s nor S&P asked sufficiently probing
questions or pursued fundamental information related to MF Global’s
European exposure until 11 days before the firm’s bankruptcy.
· Credit ratings were not based on a full and complete examination of
all relevant information affecting the company’s long-term health.
Recommendation: Continue to press regulators to implement 939A reforms
to remove references to credit ratings in statute; consider legislation
to promote greater competition in credit rating industry; require some
form of periodic monitoring by rating firms to ensure “fresh” ratings.
Finding: MF Global's Use of the “Alternative Method” Allowed the Company
to Use Some Customer Funds as a Source of Capital for the Company's
Day-to-day Operations, Which Subjected Customers to the Risk That MF
Global Would Not Be Able to Return Those Funds to Customer Accounts Upon
the Company’s Insolvency
· The use of the Alternative Method by MF Global put customers who
traded on foreign exchanges at risk of losing money.
· The substantial “excesses” resulting from the use of the Alternative
Method made customer accounts a more attractive source of liquidity for
MF Global’s day-to-day operations. As a result, it is likely that MF
Global’s use of the Alternative Method contributed to the shortfall in
customer segregated accounts.
Recommendation: Agree with the CFTC to abandon the use of the
Finding: The New York Fed Should Have Exercised Greater Caution in
Determining Whether to Designate MF Global as a Primary Dealer, Given
the Company’s Prior Risk Management Failures, Chronic Net Losses, and
Evolving Business Strategy
· MF Global’s risk management failure, chronic net losses, and untested
business strategy, combined with the NY Fed’s internal concerns that MF
Global posed reputational risks, should have given the NY Fed pause
before conferring primary dealer status on MF Global.
· MF Global’s aggressive pursuit to become a primary dealer should have
given the NY Fed further pause.
The NY Fed should consider re-examining its selection process to provide
for greater scrutiny of companies with questionable financial health,
risk management histories, and ambitious business strategies; the NY Fed
should consider whether to expressly forbid companies from speaking to
the media about pending primary dealer applications.
Finding: Differences Between Foreign and U.S. Law Gave Rise to the
Potential that MFGI Global Customers Trading on Foreign Exchanges Would
Experience a “Shortfall” in Funds Owed to Them, Despite the Fact that
Such Funds Were Set Aside in Accounts Designated as Secured Accounts
· The disposition of funds in MFGUK’s account was subject to British law
following the collapse of MF Global. As a result, MFGUK will not return
these funds to MFGI until the question of ownership is resolved in the
summer of 2013.
Recommendation: Direct the CFTC to study whether it could better
mitigate the risks customers face when they trade abroad.