WASHINGTON — In testimony before Congress on Thursday, Jon S. Corzine, the former chief executive of MF Global Holdings and a former United States senator and Democratic governor of New Jersey, defended his decision to invest heavily in European sovereign debt and said he was “stunned” by a huge shortfall in client funds.
Mr. Corzine appeared on Thursday before the House Committee on Agriculture, where he discussed his tenure at MF Global, his lobbying efforts with regulators and the final days before the beleaguered brokerage filed for bankruptcy.
The panel also heard from industry players, including Terrence A. Duffy of the CME Group and William J. Brodsky of the Chicago Board Options Exchange. While Mr. Corzine broke his silence in his first public appearance since the firm filed for bankruptcy, he is expected to avoid questions about the scandal swirling around the firm.
“Considering the circumstances, many people in my situation would almost certainly invoke their constitutional right to remain silent – a fundamental right that exists for the purpose of protecting the innocent,” Mr. Corzine said. “Nonetheless, as a former United States senator who recognizes the importance of Congressional oversight, and recognizing my position as former chief executive officer in these terrible circumstances, I believe it is appropriate that I attempt to respond to your inquiries.”
MF Global collapsed on Oct. 31 amid revelations that about $1 billion in customer money was missing from the firm. Regulators and the Federal Bureau of Investigation are now hunting for the money and examining potential wrongdoing at the firm.
In its final days, MF Global tapped its customers’ accounts to meet its own financial obligations, people briefed on the matter have said. The act violated a fundamental Wall Street regulation that firms never commingle customer money with company funds.
Mr. Corzine, a former head of Goldman Sachs, is prepared to tell the committee that he was “stunned” upon learning that customer funds were missing.
“I remain deeply concerned about the impact that the unreconciled and frozen funds have had on MF Global’s customers and others,” he said.
The hearing was to be a role reversal for Mr. Corzine, who spent five years on Capitol Hill before becoming New Jersey’s governor. At first, Mr. Corzine was an unwilling witness.
The committee voted last week to subpoena Mr. Corzine after he declined to attend voluntarily. In his prepared testimony, Mr. Corzine said he volunteered to testify in January.
“I had hoped that, by that time,” he said, “I would have obtained and reviewed relevant records so that I could be more helpful to the Committee.”
Mr. Corzine will be a regular presence on Capitol Hill this month. Two other Congressional panels, the Senate Agriculture Committee and the oversight arm of the House Financial Services Committee, have also demanded that he testify next week. At the upcoming hearings, lawmakers will also hear from the firm’s chief operating officer, Bradley Abelow, who was Mr. Corzine’s chief of staff in the governor’s mansion.
In his testimony, Mr. Corzine notably took umbrage with reports that leverage — the use of borrowed money — rose under his watch. He asserted that risk was tempered, with leverage dropping to roughly 30 to 1, from around 37.3 when he joined the firm.
He also emphasized that his own personal money was at stake. In June 2010, Mr. Corzine said he bought a $2.5 million stake, and invested an additional $500,000 this year.
“I was hopeful about the prospects for the company, and I invested in it personally,” he said. “Much of my compensation was in the form of options to purchase stock, which would have value only if the company prospered.”
Still, Mr. Corzine was contrite about the effect of the firm’s bankruptcy on his former employees and customers.
“I sincerely apologize, both personally and on behalf of the company, to our customers, our employees and our investors, who are bearing the brunt of the impact of the firm’s bankruptcy,” Mr. Corzine said.
Much of his prepared testimony focused on the decision to invest in European sovereign debt. He justified the move, saying it was part of a push to improve the profitability of the firm. As he saw it, the transactions — executed through complex repo-to-maturity deals — were “attractive,” in part because they reduced “finance risk and market risk.”
“At the time that MF Global entered into the transactions,” he said, “I believed that its investments in short-term European debt securities were prudent.”
The MF Global board, he said, approved the risk limits for the trades, which were set on a country by country basis. At times, he said, the firm exceeded those limits and “it took appropriate steps” to reduce the risk. When MF Global filed for bankruptcy, Mr. Corzine said the firm was “was within the risk limits set by the board of directors.”
Mr. Corzine also defended his dealings with regulators. Months before the firm failed, he began a personal lobbying blitz, urging regulators at the Commodity Futures Trading Commission to weaken a rule that would rein in the use of customer funds. Mr. Corzine took his pitch directly to the agency’s director, Gary Gensler, who worked for Mr. Corzine at Goldman Sachs in the 1990s.
“I was not the only representative of the industry that had calls with members of the C.F.T.C., including Chairman Gensler, regarding the proposed changes,” he said.
Their relationship has comes under the microscope on Capitol Hill, and Mr. Gensler has recused himself from the investigation of MF Global. He did so after Sen. Charles Grassley, Republican of Iowa, raised questions about Mr. Gensler’s past acquaintance with Mr. Corzine.
Now, some Republicans are criticizing Mr. Gensler for stepping back at such a crucial moment for the agency. Representative Timothy V. Johnson, Republican from Illinois, said on Thursday that it was “entirely unacceptable” for Mr. Gensler to not testify at the hearing. He also criticized what he has called a “Goldman Sachs fraternity.”
Jill E. Sommers, a Republican member of the futures commission, has taken over the lead role on the case and testified on Thursday. Lawmakers asked Ms. Sommers whether the agency should have sounded the alarms about MF Global before its final days.
Ms. Sommers replied that the agency was “not the front-line regulator.” That job belongs to for-profit exchanges like the CME Group.
Terrence A. Duffy, chairman of the CME Group, the self-regulator charged with watching over MF Global, defended the exchange’s actions before MF Global’s collapse to ensure customer money was still intact.
Mr. Duffy told members that his exchange sent two auditors — unannounced — to the Chicago offices of MF Global on Oct. 27 to review the customer accounts, just days before the firm filed for bankruptcy and the customer money went missing. At the time, Mr. Duffy said, the accounts had $200 million in excess funding in them, a figure his auditors checked with the firm’s general ledger and third-party sources.
But Mr. Duffy said MF Global corrected the number on Oct. 31, just before it was taken over by the trustee in charge of liquidating the brokerage. The amended report showed a $200 million shortfall.
“Our audit and spot check of MFG were performed at the highest professional level; the transfer of segregated funds out of the appropriate accounts was disguised from all regulators,” he is expected to tell the panel. “CME Group has and continues to take extraordinary measures to minimize the impact that this unprecedented event has had on the futures industry and its participants. MFG appears to have broken a number of rules and obligations to protect customer collateral resulting in customer losses.”
Mr. Brodsky of the Chicago Board Options Exchange told the panel that his exchange first discovered the sovereign debt position at the end of May, tucked in MF Global’s annual report. As other governmental regulators urged MF Global to increase its cash to support the European sovereign debt trades, the C.B.O.E. initiated its own examination in late August, Mr. Brodsky said.
The C.B.O.E. review involved looking at the sovereign debt position as well as customer accounts on the securities side of the business, and the exchange requested supporting documents from the brokerage on both fronts. The exchange also began requesting daily financial information from MF Global, but none of those documents ever reflected any shortfalls, Mr. Brodsky said.
Mr. Brodsky said that almost every day of the last few months, the options exchange had been on site reviewing the books and wire transfers in and out of MF Global during its final week, including customer withdrawals and margin calls. He said his firm was working with the S.E.C. and others to piece together the transfers that created the shortfall in customer funds.
Since 2003, when the Chicago Board Options Exchange began its oversight of MF Global, the self-regulator has conducted nine routine examinations and three financial investigations, prompting five disciplinary actions against the firm, Mr. Brodsky said
Mr. Corzine, in his testimony, offered little insight into the missing money. He said he had learned about the shortfall on Oct. 30, the day before MF Global filed for bankruptcy. He also said there “were an extraordinary number of transactions during MF Global’s last few days,” calling it a “chaotic” period that was “extremely difficult” to “reconstruct.”
“As the chief executive officer of MF Global, I ultimately had overall responsibility for the firm,” he said in testimony. “I did not, however, generally involve myself in the mechanics of the clearing and settlement of trades, or in the movement of cash and collateral. Nor was I an expert on the complicated rules and regulations governing the various different operating businesses that comprised MF Global. I had little expertise or experience in those operational aspects of the business.”
Ms. Sommers said she was unsure when regulators would find the money.
“We can’t overemphasis the complexity of MF Global’s books and regulators,” she said, adding that “at the end of the day, we’ll know.”
Jon S. Corzine’s statement to the House Agriculture Committee