MF Global CFOs Confound Congressional Questioners

Finance executives of the bankrupt securities dealer frustrate House members with their lack of information about actions taken in the final days.
Vincent RyanMarch 29, 2012

Despite 90 minutes of pointed questioning by U.S. House members on Wednesday, one current and one former CFO of MF Global failed to shed much light on how the broker-dealer lost $1.6 billion in customer funds on its way to the eighth-largest bankruptcy in U.S. history.

At their third hearing on the matter, members of a subcommittee of the House Financial Services Committee repeatedly grilled the finance chiefs about how the firm commingled its own funds with those of its customers’ in its bank accounts. The questioners also zeroed in on crucial bank transfers in the firm’s waning days that may have violated securities regulations.

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Christine Serwinski, former CFO of the North American broker-dealer unit of MF Global, and Henri Steenkamp, CFO of parent company MF Global Holdings, denied having much knowledge of the circumstances that could have led to customers’ funds being misused and of the firms’ treasury operations in general. Serwinski was on vacation during the firm’s week of crisis, and Steenkamp testified that he was “taken up with other very serious matters.”

The collapse of MF Global, a big player in the futures markets, has stirred up a firestorm in the securities industry and among regulators because many of the customers who lost money were farmers and ranchers who used futures in nonspeculative ways to hedge against price volatility. The firm went from reporting a $192 million quarterly loss on October 24, 2011, to filing Chapter 11 on October 31. It underwent a frantic search for liquidity in its final days as it faced margin calls from futures clearinghouses, customer demands for withdrawals, and requests from counterparties for added collateral.

That search for liquidity may have caused $375 million to be inappropriately transferred from so-called customer “segregated” accounts, the theory goes. The transfers were used to cover an overdraft in one of MF Global’s own accounts in the United Kingdom and occurred three days before the company went bankrupt.

Questions have arisen about whether someone at the firm overrode internal controls that safeguarded customer funds. Also at issue is whether MF Global executives delayed in informing futures-industry regulators of a customer-account shortfall early in the final week.

In his written and live testimony, Steenkamp said he knew nothing of the movement of customer monies or any account shortfalls at the broker-dealer. He was busy talking to the credit-rating agencies at the time, since Moody’s had downgraded the firm’s debt to junk status, he said. Steenkamp added that he had the “daunting task” of overseeing the due diligence needed for a  sale of the company. “It was  a time of constant pressure and little to no sleep,” he said.

Meanwhile, on October 25 — just as things started to unravel for MF Global — Serwinski had gone on vacation in the United States. She had resigned from her position earlier in the year and was planning to arrive back at the firm on October 31 to start training her replacement. Although Serwinski was out of the office that week, “I was assured that everything was under control and at no time did anyone suggest I return to the office,” she testified.

Serwinski did say that as early as October 27, she was alerted that account reports showed there was possibly a “substantial deficit” in the so-called “firm invested in excess and segregated and secured funds.” That is money that a broker-dealer contributes to customer accounts (segregated from those of the firm) to serve as a buffer in case any one customer incurs substantial trading losses. While customer funds were still safe, Serwinski said, the shortfall violated the broker-dealer’s internal policy.

But neither Serwinski nor anyone else alerted regulators until four days later. Serwinski believed the shortfall was the result of a miscalculation — a reconciliation error. The $1 billion deficit was “inconceivable to me,” she said. Serwinski added that she got conflicting reports about the customer account “undersegregation,” and was not certain the account reports were accurate until Monday morning, October 31, when she returned from vacation. When she learned the shortfall was real, she tried to secure funds to bring the customer-segregated accounts back to their appropriate levels.

Corzine’s Role
Both Steenkamp and Serwinski appeared to have little knowledge of the activities of Jon Corzine, MF Global’s chief executive officer, and those of the members of the global companies’ treasury departments. Congress and federal investigators are particularly focused on the role of Corzine, the former CEO of Goldman Sachs and governor of New Jersey, and whether he purposely directed his treasury department to use customer funds to cover the company’s liquidity shortfall.

Corzine previously testified to Congress that he knew of the $375 million in bank transfers and that Edith O’Brien, the firm’s assistant treasurer, personally assured him that the transfers were proper. O’Brien invoked her constitutional rights on Wednesday at the House hearing. She refused to answer when asked if she had communicated with Corzine about the transfers.

At the hearing, House members asked Steenkamp if Corzine had the ability to override controls for the funds in customer accounts. Steenkamp said he was not aware of any such override authority. In response to questions about his attestations of internal controls under Sarbanes-Oxley, Steenkamp said that no problems with internal controls had come to his attention and that in its latest audit PricewaterhouseCoopers had not discovered any issues with the segmentation of customer money.

But committee members were skeptical. “Internal controls do not work if they can be readily short-circuited by the firm’s CEO,” said Spencer Bachus (R-Ala.), chair of the House’s Financial Services Committee. What the inquiry has discovered so far “leaves little doubt that MF Global was in many ways [Corzine’s] alter ego,” he added.

At present, it is unclear what civil or criminal charges MF Global executives could face. O’Brien is cooperating with a Justice Department investigation, and Serwinski and Steenkamp have both had dealings with federal investigators. Serwinski told the congressional hearing that she has twice met face-to-face with investigators, and Steenkamp said his lawyers were in discussions with investigators as a precursor to an interview.

Laurie Ferber, general counsel of MF Global Holdings, who also testified on Wednesday, said she is scheduled to meet with the Justice Department on April 6.

During the hearing, the executives’ inability to provide clear answers frustrated lawmakers at times. “I don’t have a clue what to ask of you. Apparently you weren’t responsible for anything,” Rep. Michael Capuano (D-Mass.) said to the four panelists. “How am I supposed to ask you a question if none of you knew what was going on or claim not to know what was going on?”

Committee chair Randy Neugebauer (R-Tex.) took Steenkamp to task for not being more involved in funds shortfalls at the broker-dealer. “Wouldn’t you think the liquidity of the company would be an important piece of the role of the CFO of an entity the size of MF Global?” Neugebauer asked.

Steenkamp responded that during the crisis he was not specifically concerned with the liquidity of the broker-dealer but instead was looking at liquidity “on a global consolidated basis. There were many liquidity events occurring across the globe that we were dealing with.”

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