Corzine: Tax Changes Caused MF Global Demise, Not EU Debt Bets


Seen on a monitor in the press overflow room, former MF Global CEO Jon S. Corzine testified in front of the House Agriculture Committee December 8 about the firm’s Halloween  bankruptcy filing and the $1.2 billion in missing client funds. Corzine, a former New Jersey senator and governor, said he was stunned to learn client funds were missing.

Human Events Photo by Neil W. McCabe

Testifying Dec. 8 before the House Agriculture Committee, the former CEO of commodities brokerage MF Global blamed new tax laws, not his bets on European sovereign debt, nor the $1.2 billion in missing client funds for the company’s Halloween bankruptcy filing.

The company’s losses that forced the Chapter 11 bankruptcy filing came from new tax regulations removing assets from the company, said Jon S. Corzine, former New Jersey governor and senator, who is an intimate member of both the Clinton and Obama political families.

“The lion’s share of the quarterly loss was a write-off of approximately $119.4 million that reflected a valuation adjustment against a deferred tax asset,” he said.

The company’s repurchase transaction derivatives, also called RTM’s, were used to facilitate its bets on high-yield debt issued by European governments and carried an asset, not a liability, he said.

“That asset had been created by years of non-RTM tax losses cumulated—mostly before I arrived at MF Global—in the firm’s United States and Japanese subsidiaries, which had allowed MF Global to recognize as an asset potential tax benefits in future years,” he said.

“Under applicable accounting rules, by the second quarter of MF Global’s 2011 fiscal year the firm was no longer permitted to recognize those tax benefits as assets, and therefore, with the advice and knowledge of its external auditor, it recognized a loss in that amount,” he said.

This bookkeeping adjustment, related to practices that predated his tenure, caused the firm’s downfall, he said.

Corzine said the company did not fail due to risky European investments, which he conceded were done at his initiative.

“In light of the attention that has been given to RTMs, and the press reports that attributed MF Global’s loss to RTMs involving European debt securities, it is important to make clear here that the loss was not related to these positions,” he said.

The fallen CEO’s testimony was preceded by appearances from Jill E. Sommers, who leads the MF Global investigation for the Commodity Futures Trading Commission, and James B. Kobak, Jr., counsel for the trustee appointed to execute the Securities Investor Protection Act liquidation of the firm.

Corzine was often confident and engaging during his testimony, but when he spoke about the missing $1.2 billion in client funds, he played as perplexed as the congressmen glaring at him under hot television lights.

“I was stunned when I was told on Sunday, Oct. 30, 2011 that MF Global could not account for many hundreds of millions of dollars of client money,” he said.

“I remain deeply concerned about the impact that the un-reconciled and frozen funds have had on MF Global’s customers and others,” he said.

Responding to questions from Rep. K. Michael Conaway (R.-Texas) about the missing funds, Corzine said that because of the turbulence in the days leading up to the bankruptcy, which came on the heels of his November 3 resignation, he only knows what is already in the public record.

“There were an extraordinary number of transactions during MF Global’s last few days, and I do not know, for example, whether there were operational errors at MF Global or elsewhere, or whether banks and counterparties have held onto funds that should rightfully have been returned to MF Global,” he said.

“I have not had access to my emails or any of the reconciliations,” he said.

Corzine said he hoped the situation will change as his attorney works to open company records to him before the end of the year.

The former CEO, who joined MF Global in March 2010, said he has no access to information on botched customer accounts.

“I simply do not know where the money is, or why the accounts have not been reconciled to date. I do not know which accounts are un-reconciled or whether the un-reconciled accounts were or were not subject to the segregation rules,” he said. Segregation rules regulate how a company can put a client at risk against its own proprietary trading.

Sommers said MF Global’s issues revolve around customer segregated accounts: as a futures commission merchant, also known as an FCM, the firm was permitted to invest funds in protected accounts, but under certain restrictions.

“While an FCM is permitted to invest customer funds, it is important to note that if an FCM does so, the value of the customer segregated account must remain intact at all times,” she said.

“In other words, when an FCM invests customer funds, that actual investment, or collateral equal in value to the investment, must remain in the customer segregated account at all times,” she said.

“If customer funds are transferred out of the segregated account to be invested by the FCM, the FCM must make a simultaneous transfer of assets into the segregated account. An FCM cannot take money out of a segregated account, invest it, and then return the money to the segregated account at some later time,” she said.

As long as FCMs followed this protocol, they could always invest customer segregated accounts in foreign sovereign debt as long as they followed this protocol, she said.

A recent amendment to Commission Regulation 1.25 after MF Global’s collapse, foreign sovereign debts are no longer on the permissible investment list, said Sommers.

Committee Chairman Rep. Frank D. Lucas (R.-Okla.) said protection on segregated accounts forms the bedrock of futures markets.

“Unfortunately, the very cornerstone of the futures markets, customer funds segregation, has been severely and suddenly called into question,” he said.

In his testimony, Kobak said the investigation has not yet uncovered to what extent MF Global failed to maintain proper protections over segregated accounts.

“The trustee is not yet in a position to make any definitive conclusions. However, he has determined that even if he could recover everything that is at U.S. depositories, there will be a significant shortfall in what MF Global management should have segregated at U.S. depositories for the benefit of customers,” he said.

The CFTC and SIPA trustees hope to restore at least two-thirds of the $1.2 billion lost funds back to customers soon, he said.

The Committee’s senior Democrat, Minnesota Rep. Collin C. Peterson, said the media has amused him with accounts expressing surprise at the unanimous bipartisan agreement on the congressional subpoena: the committee usually avoids partisan games, he said.

“It’s how we do things on the Ag Committee,” he said.

Peterson said the bankruptcy illustrates the futility of current regulation, even after the Dodd-Frank financial regulation law passed in 2010.

“Ironically, it is very possible that there is nothing in Dodd-Frank that would have prevented MF Global’s financial collapse,” he said.