House GOP Faults Corzine, Regulators for MF Global Collapse

November 15, 2012
by Jason M. Breslow Digital Editor

Former MF Global Holdings Ltd. Chairman and Chief Executive Officer Jon Corzine testifies on Capitol Hill in December 2011. (AP Photo/Susan Walsh)

Watch the Six Billion Dollar Bet, FRONTLINE’s investigation into the collapse of MF Global.

House Republicans have released a scathing postmortem of the collapse of MF Global, blaming the leadership of Chief Executive Jon Corzine and a breakdown in regulatory oversight for the brokerage’s 2011 bankruptcy.

An estimated $1.6 billion in customer funds went missing from MF Global last year following a failed $6 billion bet on European government debt — an investment that marked a departure from the firm’s traditional role as a commodities broker. In its report Thursday, the Subcommittee on Oversight and Investigations suggested customer losses may have been avoided had Corzine not “charted a radical new course for the financially troubled company.”

“By expanding MF Global into new business lines without first returning its core commodities business to profitability, Corzine ensured that the company would face enormous resource demands and exposed it to new risks that it was ill-equipped to handle,” according to the report.

The subcommittee faulted MF Global for failing to disclose the full extent of its European debt holdings. Investigators wrote that when the Financial Industry Regulatory Authority contacted the firm in September 2010 to determine its exposure to European sovereign debt, “the company responded that it had no such exposure even though it had already acquired between $1.5 and $2 billion of bonds.” When the firm’s own auditor, PricewaterhouseCoopers, pressed MF Global to disclose more about its bond trades, Corzine was left feeling “ambushed” and “bushwhacked,” according to the report.

The findings also detail a breakdown in communication between the Securities and Exchange Commission (SEC) and the Commodities Future Trading Commission (CFTC) in their oversight of MF Global. The agencies “failed to share critical information about MF Global with one another, leaving each regulator with an incomplete understanding of the company’s financial health,” the report found.

E-mail exchanges cited in the investigation highlight a lack of coordination between CFTC and SEC officials in the lead up to the firm’s bankruptcy. MF Global officials told the subcommittee they were “pressured” by the CFTC officials to transfer $220 million to fill a shortfall in customer accounts. That directive contradicted earlier guidance from the SEC. When Mary Schapiro, the chairwoman of the SEC was informed of the order, she wrote to a colleague, “Without telling us? That is unacceptable.”

The subcommittee recommended “Congress explore whether customers and investors would be better served if the SEC and CFTC streamline their operations or merge into a single financial regulatory agency that would have oversight of capital markets as a whole.” Regulatory failings around the MF Global collapse will be further addressed by a report from the CFTC’s internal watchdog, expected to be released in the next few months.

To date, nearly all of the customer money that went missing in MF Global’s collapse has been located, but millions remain stuck in litigation. Former customers of the firm in the U.S. have recouped roughly 80 percent of their money.

Thursday’s report was issued by Republicans on the oversight and investigations committee. The panel’s top Democrat, Michael Capuano of Massachusetts, said he would not be endorsing the findings because he had not had enough time to review the findings.

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