Poor management decisions by MF Global’s former CEO Jon Corzine triggered the brokerage firm’s collapse, while lax protections for customer funds contributed to the loss of an estimated $1.6 billion of customer money, congressional investigators have determined.
Evidence unearthed by the House Financial Services Subcommittee on Oversight puts the blame squarely on Corzine, the panel’s chairman Rep. Randy Neugebauer, said in a preview of the report that will be released on Thursday.
“The responsibility for failing to maintain the systems and controls necessary to protect customer funds rests with Corzine,” the report says. “This failure represents a dereliction of his duty as MF Global’s chairman and CEO.”
Corzine, a former co-chairman of Goldman Sachs who also served as a U.S. senator and as governor of New Jersey, has denied any wrongdoing.
MF Global filed for bankruptcy more than a year ago, as investors scrambled to pull out funds after revelations the firm bet heavily on European sovereign debt and after credit downgrades.
Regulators, prosecutors and lawmakers have been looking into the estimated $1.6 billion in customer funds revealed to be missing after the firm’s collapse.
A ruling in the case of failed futures brokerage Sentinel Management Group could make it more difficult for customers to recoup money lost in the much larger collapse of MF Global, according to Sentinel’s bankruptcy trustee.
A federal appeals court on Thursday upheld a ruling that puts Bank of New York Mellon ahead of former customers of Sentinel in the line of those seeking the return of money lost in the 2007 failure of the suburban Chicago-based futures broker.
The appeals court affirmed an earlier district court ruling that the bank had a “secured position” on a $312 million loan it gave to Sentinel, which turned out to have been secured by customer money.
Futures brokers are required to keep customers’ funds in dedicated accounts to protect them from being used for anything other than client business.
However, Thursday’s ruling suggests that brokerages can use customer funds to pay off other creditors, Sentinel trustee Fred Grede told Reuters.
“I don’t think that’s what the Commodity Futures Trading Commission had in mind” with its requirement that brokers keep customer money separate from their own, he said.
“It does not bode well for the protection of customer funds.”
The sole owner of Peregrine Financial Group admitted to using a combination of faked bank statements and “blunt authority” to hide a nearly two-decade-long fraud at the failed futures broker, authorities said.
Russell Wasendorf Sr was arrested Friday on criminal charges of making and using false statements to trick regulators into believing the broker held customer funds in excess of $200m when the real balance was less than $10m.
“I have committed fraud,” Mr Wasendorf wrote in a signed statement found next to a suicide note and his unresponsive body in a car outside the company’s Iowa headquarters Monday, the Federal Bureau of Investigation said in an affidavit. “For this I feel constant and intense guilt.”
The shortfall at Peregrine, which regulators uncovered after Mr Wasendorf’s suicide attempt, has raised fresh doubts about the security of customer deposits in a futures industry still damaged by the massive hole in customer accounts that followed MF Global’s 2011 collapse.
Mr Wasendorf’s statement, excerpted in the affidavit, lays out a detailed summary of a how a hard-charging and increasingly powerful entrepreneur spent years deceiving not only regulators but his own staff to embezzle millions from customers.
Regulators now have a more complete picture of money transfers in the final days of bankrupt brokerage MF Global, but must sort out which transactions were legitimate before more money can be released to customers, a top official told Reuters on Wednesday.
Jill Sommers, who is heading the Commodity Futures Trading Commission’s review of MF Global, said regulators “are far enough along the trail” that they know where the money went.
“Now it’s just finding out which ones of those transactions are legitimate and which ones of them are illegitimate,” Sommers said.
The CFTC and the trustee liquidating the firm are under intense pressure from lawmakers and customers to provide answers about what happened to hundreds of millions of dollars in customer money that went missing as the firm collapsed.
MF Global officials, including former Chief Executive Jon Corzine, have told lawmakers they simply do not know where the money is, and deny authorizing any misuse of customer money.
“We certainly don’t want to lead anyone to believe we don’t know what happened. We do know, and we see where all the transactions went,” said Sommers, a Republican commissioner, in an interview on Wednesday.
She declined to reveal details on the fund transfers until investigators have determined the purpose of all the transactions. Sommers could not estimate when regulators will complete their investigation, but said “really good progress” is being made.
Fellow CFTC Commissioner Bart Chilton, a Democrat, tempered expectations. Chilton said in a statement after Sommers’ remarks were published that a thorough accounting of all customer funds remains a work in progress.
“Based upon the most up-to-date information available, I do not have confidence that we know where all the money went,” Chilton said.
MF Global filed for bankruptcy on October 31 after it was forced to reveal that it had made a $6.3 billion bet on European sovereign debt, spooking investors and customers.
The ensuing search for missing money has sent reverberations through the farm belt and trading floors, and has attracted the attention of the FBI and federal prosecutors.
A trustee liquidating the firm has estimated the shortfall could be as high as $1.2 billion.