The regulatory arm of CME Group has turned over interviews to the Justice Department that allege former MF Global chief Jon Corzine knew that the now-bankrupt brokerage firm used customer money to lend to a European affiliate, a CME executive said on Tuesday.
The information is fourth-hand but is the strongest statement yet from a regulator that Corzine may have personally known customer funds were diverted for firm use.
Federal investigators are probing why hundreds of millions of dollars in customer funds are missing, and whether the futures brokerage raided customer money to try to counter a liquidity crisis, a major violation of industry rules.
Corzine, who resigned as chief executive of MF Global early last month, has given sworn testimony that he does not know where the money is, but it is unclear if this latest revelation will legally harm him.
CME Executive Chairman Terrence Duffy, testifying to the Senate Agriculture Committee, on Tuesday said a CME auditor participated in a phone call during which an MF Global employee indicated that Corzine knew of the loan.
During an internal CME interview, the auditor also revealed that the loan was for roughly $175 million to a European affiliate of MF Global and was likely made in the last couple of days prior to the firm's October 31 bankruptcy, Duffy said.
The CME is a front-line regulator for MF Global.
A CME auditor ... participated in a phone call with senior MF Global employees wherein one employee indicated that Mr. Corzine knew about the loans that had been made from the customer segregated accounts, Duffy said.
A spokesman for Corzine and his lawyer, Andrew Levander, declined comment.
Duffy said his company has provided this information to the Justice Department and the Commodity Futures Trading Commission, which are investigating the matter.
The Senate Agriculture Committee's hearing on Tuesday was the second to feature both Duffy and Corzine, among others, as lawmakers seek answers about the missing funds.
Corzine told lawmakers: I simply do not know where the money is, or why the accounts have not been reconciled to date.
Barry Pollack, a criminal defence attorney at Miller & Chevalier, said it is uncertain if the CME auditor's claims could hurt Corzine.
But he said that by testifying, Corzine knowingly opened himself up to the potential for charges beyond his conduct while MF Global CEO - from perjury to obstruction of justice.
It absolutely could be nothing more than a classic game of telephone, Pollack said. He also noted, Mr. Corzine is sophisticated enough that he knew going into this that if he gave testimony, he was going to open the flood gates.
'WHERE'S THE MONEY?'
Corzine appeared during a panel that preceded Duffy's testimony, dressed in a sombre dark suit and closely watched by his attorney seated behind him.
He used his opening statement to try to correct comments he gave the prior week before the House Agriculture Committee.
At that hearing, Corzine said that while he never intended to break rules, an employee may have misinterpreted instructions to try to save the firm, a comment he sought to clarify on Tuesday.
On Tuesday, Corzine said: I want to be clear, I never gave any instructions to misuse customer funds, I never intended anyone at MF Global to misuse customer funds.
Also testifying to the Senate panel on Tuesday were two top-ranking Mf Global executives - Chief Operating Officer Bradley Abelow and Chief Financial Officer Henri Steenkamp - who said they, too, lacked answers about the money.
Senators became agitated about the testimony, frequently asking the executives and Corzine Where's the money? and What happened?
Senator Pat Roberts, the top Republican on the committee, raised his voice, asking, How many heads do we have to have around here before we finally drill down and find somebody's name that knows what the heck is going on?
CME's Duffy provided the most answers.
He not only revealed the allegations about Corzine's knowledge about customer-backed loans, but also stated that $950 million dollars was moved out of the customer segregated accounts to MF Global's broker dealer.
Typhon Capital Management CEO James Koutoulas, who is helping MF Global customers recover their funds, was at the hearing on Tuesday and said Duffy's testimony was a breath of fresh air after the panel with Corzine and the executives.
We'd listened to the three stooges say they knew nothing and it wasn't their responsibility and then somebody like Duffy came in. The reaction was great. He dropped a total bombshell, he said.
'BREAK THE GLASS'
Senator Roberts also pressed the executives and Corzine about an internal report, asking whether it was an actual plan that would break the glass and tap into your customers' segregated accounts, perhaps described as a loan.
Corzine admitted there was such a break the glass report, but he said it did not involve raiding customer money.
To my knowledge and understanding of that report it was not ever the intent to recommend tapping into segregated customer funds.
According to a copy of the document obtained by Reuters, the contingency plan did not contain explicit recommendations to tap customer funds.
It did, however, lay out emergency methods for drawing down lines of credit and for exiting complex investments.
The document, which was undated but appeared to be drafted before October 20, estimated that under tested scenarios, there is sufficient liquidity to manage through one month under a severe stress event.
'CALLED STEALING BACK ON MAIN STREET'
Farmers who became collateral damage from the collapse of MF Global got a chance to air their frustrations, telling lawmakers that their confidence in the markets has been shaken.
Dean Tofteland, a corn and soybean farmer from Minnesota, said when he heard news that MF Global was having problems, he talked to his broker, who told him, No customer has ever lost a penny in customer segregated accounts.
But three days later his $253,000 account was frozen and he could not adjust his short positions.
Tofteland's positions were transferred to a new broker with only 15 percent of the required collateral, and he was forced to liquidate the hedges, he said. Since then, prices dropped and he lost another $100,000 without having the hedge.
Tofteland said he has not returned to the futures market.
What they call 'unlawful comingling' on Wall Street is called 'stealing' back on Main Street, he told lawmakers.
(Reporting by Alexandra Alper, Aruna Viswanatha, Christopher Doering and Lily Kuo, with additional reporting by Josephine Mason in New York; Writing by Karey Wutkowski; Editing by Tim Dobbyn, Gary Hill)