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At a House Financial Services Committee hearing today, former MF Global CFO Christine Serwinski will testify that customer funds were used to cover proprietary bets.
In testimony prepared for a Wednesday hearing, the firm’s former chief financial officer, Christine Serwinski, says she learned that there was “a substantial deficit” in a financial buffer that was supposed to ensure that customer funds were safe.
When she asked why there was a shortfall, she learned that one part of MF Global had borrowed money from another “and had missed the wire deadline to pay it back,” Serwinski says in the testimony.
Such “intraday” lending was not unusual, Serwinski says, “but the loan should have been paid back before” the previous day’s close of business.
This comes on the heels of a treasurer at the company alleging that MF Global CEO Jon Corzine ordered $200 million to be moved from customer accounts to cover a payment to JPMorgan Chase.
Through the tumultuous time when MF Global collapsed, Serwinski was actually on vacation. But she checked in and found out about the buffer deficit, and sought clarity on the issue. By the time she got back to work, she had learned of a customer account shortfall of over $1 billion. Ultimately, $1.6 billion was stolen from customer accounts by MF Global. Nobody has yet been charged in the theft.
As mentioned in other testimony, JPMorgan Chase sought assurances on three separate occasions that MF Global was complying with all regulations regarding customer accounts:
J.P. Morgan three times asked MF Global to sign statements vouching for the propriety of its actions, Laurie Ferber, former general counsel of parent MF Global Holdings, says in testimony submitted for the hearing.
The first and second drafts that the bank asked MF Global to sign were too broad, partly because they encompassed future wire transfers, Ferber says.
The third version referred specifically to a pair of transfers: the movement on Oct. 28 of $200 million from an account for customer funds to an MF Global account, and a subsequent transfer from that MF Global account to another to cover an overdraft, Ferber says.
It doesn’t appear that MF Global ever sent back the drafts. One of their lawyers will testify at the hearing today, scheduled for 2:00pm ET. You can read all the testimony submitted at the hearing mini-page on the site of the House Financial Services Committee.
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Shorter JPMC: You’re 18, right?
And since JPMC’s white-shoe lawyers will say these requests show that there was no criminal intent,
there will be no prosecutions (on the receiving end, at least).
Moral of story: never, ever have money invested at a firm that is engaged in proprietary trading.
But how many of MF Global’s customers knew that Corzine had that little side bet in Europe?
And Corzine will never spend a day behind bars.
Sure he will, except they’ll be the “bars” that separates his exclusive gated community from the “riffraff”.
Emperor Obama will hang marijuana dispensary owners by their thumbs but an incompetent captain of industry like Corzine will probably be made a co chair of Obama’s Re Election Campaign.
To paraphrase Leona Helmsley, laws are only for the little people
.
It is absolutely amazing that no one is in the slammer or even arrested. Where is the DOJ?
.
Obama thinks looking forward rather than backward is going to get him on Mount Rushmore. Obama letting people get robbed and crimes be committed is his path to fortune and ending up with a permanent spot next to Lincoln.
up Eric Holder’s ass where the sun will never shine?
and you never know, but it may work. I mean, putting Obama on Rushmore would be chump change for the Koch brothers, wouldn’t it?
How can you even suggest someone will get in trouble for this? In this day and age? It’s outrageous to even consider it!
The treasurer, Edith O’Brien, took the 5th rather than testify.
Refused to use an opening statement, and took the 5th twice in a row. Then agreed that would be her response to any requests. It remains to be see if she has any sense of justice.
Would that be the MF Global headed by…
Jon Corzine…former Democratic Senator from New Jersy… former Democratic governor of New Jersy… and major Democratic Party campaign contributor and Democratic party fundraiser…and major fundraiser for Barack Obama’s presidential election campaign...and personal friend of Barack Obama.
Curious how those things are never mentioned when this subject comes up.
Both the Democrats and Republicans are corrupt to the core… equally.
Why did she take the fifth? Does that mean that Corzine was telling the truth, after all? Or did he tell her to initiate the transfer and she did? She wouldn’t be able to take the fifth in order to avoid implicating him because of fear of some sort of retaliation, could she? It would only be used to avoid self incrimination?
I didn’t see the second panel, did you?
The transfers would be under her supervision, if I correctly understand the structure of MF global. She’d either have to lie, or admit she was the one who conducted the transfers/had direct knowledge of them. She has a right to do so, but as the story has been leaking out she is probably looking for some sort of immunity/plea agreement. My hope is she can torpedo the company, or at least Corzine’s assertion that he did not remember giving instructions to do anything illegal.
There have been tin foil hat claims that Corzine actually took out the customer funds rather quickly due to threats from JPM. I’m not sure anyone will really know the truth on that front, but if O’Brien randomly falls off the earth, You know what happened there. At the moment though she probably should have taken the fifth anyway if she is trying to tell the truth, because it will undoubtedly implicate herself as well.
I watched what I could of the second panel, it was cut a bit short because of the late starting time. The only really interesting thing was the JP Morgan Chase counsel claiming they were trying to help MFG by helping them short sell assets…. to JPM holdings…. in exchange for reductions in their debts to JPM. The counsel also danced around the issue quite nicely concerning the level of margin called for from MFG, and the resulting failure in the transfer of money from the operating capital into the UK side of MF global that was required, then did not become returned for open of business Monday.
The long story short is that a company that passed tests to become a primary dealer only a few months before its failure, exploded in such a way that proved the various levels of regulation we have do not communicate or have authority to stop the pillaging of customer accounts at an investment bank. It remains to be seen if anyone will put together the evidence and convict Corzine or anyone for certifying that their bank had collateral and proper controls and bookkeeping.
The real insult is that they held MFG together for the few days they needed to attempt to sell off assets and moving their excess reserves in customer accounts along with the customers funds (they lost more than 1.2 billion, those accounts used to have more than just the customer funds in them) while “hiding” or simply not being caught by the system. As some of the representatives today pointed out, this is making a mockery of our entire economic system of ownership. The curtain has been pulled back.
Guantanmo Bay ?..what the fuck am i smoking….
Actually I felt kind of sorry for Serwinski. She quit in July, but stayed on till her replacement arrived on 11/1. If I were in her lame duck state I’m not sure I would have run back into that burning house.
Having said that, she made a terrible choice by not alerting the regulators on Wed that there was an unprecedented accounting error at the firm, despite her disbelief that it could be real. Waiting until Sunday 10/30 for confirmation before alerting the regulators is indefensible. Her superiors should have taken responsibility from her on Wed and alerted the regulators immediately. The fact that the senior officers did not assume responsibility is damning. The CFO is directly responsible here. Serwinski was literally and effectively on vacation at a critical time. Someone else must have been delegated responsibility to act in her absence. If not, responsibility rests with her boss, the CFO. If no one was available to cover for her then there was a profound breakdown in internal controls.
The theater to catch Corzine in the $200m transfer authorization trap may backfire. Or it may expose that he really did overrule everyone under him. PWC did raise the issue that a significant control deficiency existed, management override of other controls, (read Corzine makes the rules) was a problem at the firm. It’s not clear this deficiency was ever cured, so the transfer inquiry may shed more light on the SOX violation issue.
But, the real theft of customer accounts seems to have occurred as a result of the Broker Dealer’s failure to return the $1b in FCM customer funds it borrowed on Wed 10/26. In retrospect the FCM customers fate was sealed by that event, which Serwinski, or her superiors failed to acknowledge and disclose. It seems the B/D never recovered the ability to return funds to the FCM. That suggests that the missing FCM funds were stranded at the B/D and the resulting bankruptcy doomed the FCM customers to losses.
Since this inter-company settlement was a daily event that was normally settled when the various settlement activities at the various entities were completed at end of day, this alarm could not possibly have been ignored or left unresolved for more than a few hours, let alone for 3 business days at a firm facing imminent bankruptcy.
Additionally, these events were all anticipated in the ‘break the glass’ memo. The events that actually did occur seem to have followed that script. That script was in the forefront of every responsible executives mind for the 3 preceding months (from 8/11, when it was commissioned, till 10/11, when it was executed), so Serwinski’s astonishment notwithstanding, the events should not have astonished anyone in a position of authority at the firm.
My hunch is that the 200 transfer was the least critical issue. That transaction may have resulted in some customer money disappearing from the FCM, but the amount of customer funds involved in that transaction may prove to be a fraction of the 200. They transferred the 200 based on a potentially faulty estimate of how much of the 200 was actually MFGs own money.
The rest of the customers funds were long gone, or at least stranded at the B/D.
The choice of bankruptcy was the final nail in the FCM customers coffin and the SEC and the CFTC have a lot of explaining to do to justify their choice. The SIPC decision favored the wrong party (the B/D) over the wronged parties (the FCM customers).
Gensler should be summarily fired, retroactively actually, were that possible. Schapiro needs to explain why a broker dealer favorable bankruptcy was justified.