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CME Chief Suggests Corzine Knew MF Global Dipped Into Customer Money

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Image by AFP/Getty Images via @daylife

Jon Corzine was back in Washington to answer questions on the downfall of MF Global Tuesday, and offered slightly stronger language to defend his ignorance of whether any commingling of customer funds took place as alleged, but the real bombshell came later in the day when CME Group Executive Chairman Terrence Duffy said he heard a different story from an MF Global employee.

Testifying before the Senate Agriculture Committee after an earlier panel featuring Corzine and two other top MF Global executives, Duffy said during Q&A that one of the firm's employees told the CME that Corzine knew about a loan to European affiliates shortly before the company's Oct. 31 bankruptcy filing, a loan that came from commingled customer funds.

The CME's auditors were told at 2 a.m. on Oct. 31 to stop looking for an accounting error, Duffy said, that MF Global had dipped into customer segregated funds and that Corzine was aware of the fact.

CME is not undertaking its own investigation, Duffy said, after being told not to by the Commodity Futures Trading Commission and the Department of Justice. Duffy estimates the MF Global shortfall at between $700 million and $900 million. The $1.2 billion figure estimated by bankruptcy trustee James Giddens goes beyond the U.S. futures accounts that comprise the CME's estimate. (Prepared remarks from the hearing can be found on the Committee's website here, and the ongoing testimony is streaming live here.)

Corzine, who told a House committee last week that he had no knowledge of how as much as $1.2 billion in customer money went missing and that it was not his intent that any funds would be improperly moved, said Tuesday that he “never gave any instruction to misuse customer funds.”

During the hearing, before the Senate Agriculture Committee, Corzine appeared with MF Global COO Bradley Abelow and CFO Henri Steenkamp. When Chairwoman Debbie Stabneow, D-Mich., asked all three where the missing customer funds went, Abelow and Steenkamp said they did not know either.

JPMorgan Chase shares lost 2.3% on the not-so-surprising news that Giddens could take a look at the bank's actions tied to MF Global accounts it held in the firm's final days. Raising the possibility of an investigation, first picked out of a court filing from the trustee by Bloomberg News, could be the trustee's way of making it clear that previous work his law firm Hughes Hubbard & Reed did for JPMorgan does not create a conflict of interest, Dealbook suggested.

The grilling of the MF Global executives came after testimony from farmers who told stories of how they had been personally impacted by the firm’s collapse, from the loss of money invested in hedges for crop prices to shattered trust in the commodities market.

Stuart Slotnick, a lawyer at Buchanan Ingersoll & Rooney, said last week he did not anticipate Corzine would testify to much, due to concerns that his responses could lead to openings for civil litigation or that he could inadvertently perjure himself. (See "Corzine Heads Back To Capitol Hill For MF Global Hearings.")

MF Global made a leveraged bet on European sovereign debt at the behest of Corzine. While those trades may prove to be fortuitous, the market and counterparties took a skeptical view on the risky bets that provoked a loss in confidence that proved too much for the firm’s capital standing to bear.

The collapse of MF Global came as the focus on European exposure at firms like Morgan Stanley and Jefferies reached a fever pitch, with the latter detailing its holdings down to the individual bond in order to soothe market fears after Corzine's firm crumbled.