Lawmakers on the Oversight and Investigations Subcommittee of the House Financial Services Committee held a hearing on March 28 to investigate the events that led to the loss of customer funds at MF Global during its final days before going into bankruptcy. The witnesses included four current and former MF Global executives.
At the start of the hearing, Representative Randy Neugebauer (R-Tex.), the chairman of the subcommittee, emphasized to the witnesses that his committee is simply trying to discover what took place. “This is a hearing and not a trial,” Neugebauer said at the onset of the three-hour hearing. “It's important that we understand what was going on corporately, what was going on from a regulatory standpoint, and really what was going on within the systems that support this entity and these businesses.”
Representative Spencer Bachus (R-Ala.),the chairman of the full committee, also repeated that none of the witnesses have been accused of wrongdoing. “This hearing is to find out what happened, not to accuse any of you of any wrongdoing because that hasn’t been demonstrated,” he said.
The first panel of witnesses appearing before the committee consisted of Laurie Ferber, general counsel of the parent company, MF Global Holdings; Henri Steenkamp, chief financial officer of MF Global Holdings; Christine Serwinski, former chief financial officer for North America at MF Global Inc.; and Edith O’Brien, former assistant treasurer at MF Global Inc. O’Brien was dismissed early in the hearing after declining to testify. She invoked her constitutional right under the Fifth Amendment to avoid self-incrimination.
“I am disappointed because of your answer because I believe you have important knowledge and I'm hopeful that maybe at some point in time that you will reconsider and come back and testify before this committee,” said Neugebauer before dismissing O’Brien from the hearing.
Click Here for Prepared Testimony
Witnesses Offer No Insight into Whereabouts of Missing Funds
During questioning, witnesses were unable to explain how the funds went missing. “Obviously there was a terrible failure here of some kind, but what it was I don't know,” said Ferber. In her prepared testimony, she explained that throughout most of the weekend leading up to the eventual bankruptcy filing, it was her impression that the shortfall in customer segregated funds was likely due to a reconciliation discrepancy.
Serwinski also testified that until the early morning hours of Monday Oct. 31, she was “operating under the belief that there must have been an accounting error.” She said that on that Monday morning, O’Brien provided information to her that identified “three categories of transactions” that accounted for the shortfall. “Upon seeing this information, I realized that the deficit in the segregated and secured funds was real and not an accounting error.”
Steenkamp explained repeatedly that in his role as global CFO, he did not focus on fund transfers and customer segregated accounts.
Frustration among Both Democrats and Republicans
Both Republican and Democrats alike expressed frustration over the lack of knowledge from the MF Global witnesses over how the customer funds went missing. “How am I supposed to ask you questions if none of you apparently knew what was going on, or claim to not know what was going on, have no information whatsoever?” asked Representative Michael Capuano (D-Mass.), the ranking Democrat on the panel.
“To be the experts at a company the size of MF Global, the scope of MF Global, there's sure one hell of a lot you guys don't know,” said Representative Steve Pearce (R-N.M.).
“It's disgraceful and you sit there and you say ‘we knew nothing about it -- I was on vacation, I was in Chicago, it was in New York, I was doing the global thing,’” said Representative Stephen Lynch (D-Mass) to Ferber, Serwinski and Steenkamp. “It's not believable, I've got to tell you. It's not believable at all up here.”
Role of Regulators Questioned
Bachus faulted U.S. regulators for their lack of coordination in overseeing MF Global. “What we've learned to date is that notwithstanding the promise of Dodd-Frank that regulators would work together, there is very little evidence of regulatory coordination in the supervision of MF Global,” Bachus said.
Representative Ed Royce (R-Calif.) also criticized the CFTC on its oversight of customer segregation rules compliance. “Those rules have been around for 75 years, and they’re not difficult to understand. Purportedly they’re not difficult to enforce, yet the CFTC has failed in this most basic task.”
There was some discussion about the CFTC’s Rule 1.23, which permits a firm to add its own funds to customer segregated accounts. “We’ve got to look at the regulations at some time,” Lynch said.
Second Panel of Witnesses Questioned
The second panel of witnesses consisted of Diane Genova, deputy general counsel at J.P.Morgan Chase; Daniel Roth, president and chief executive officer of the National Futures Association; and Susan Cosper, technical director and chairman of the emerging issues task force of the Financial Accounting Standards Board.
In her prepared remarks, Genova discussed the transactions that took place between her bank and MF Global. Much of the questioning from lawmakers centered on fund transfers made to J.P. Morgan to cover an overdraft and the documentation that J.P. Morgan had requested from MF Global to confirm its compliance with customer segregation obligations.
Roth outlined the various efforts being undertaken by self-regulatory organization to improve oversight of firms and their protection of customer funds. The group’s recommendations include detailed bi-monthly reporting from futures commission merchants on how customer funds are being invested, daily reports on the amounts in segregation, more periodic “spot checks” for FCM compliance with segregation requirements, and increased documentation requirements if an FCM draws down its excess segregated funds by 25% or more.
FASB’s Cosper said new guidelines related to the accounting treatment of certain repurchase agreements and repos to maturity will likely be completed by year end.