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Andrew Harrer/Bloomberg NewsRandy Neugebauer leads the House oversight panel that will hold a hearing on MF Global.MF Global employees repeatedly gave oral assurances to JPMorgan Chase that a crucial payment to cover an overdraft at the bank was not funded by customer money, a lawyer for the bank is expected to tell a Congressional panel on Wednesday.
The transfer of $175 million to JPMorgan on Oct. 28 has become a central focus of the investigation into how more than $1 billion in customer money vanished from MF Global. While much of the narrative in the written statement of Diane Genova, a deputy general counsel at JPMorgan, is known, her testimony will be the first time an employee of the bank will speak publicly about MF Global’s fateful last week.
What emerges from the testimony is the myriad ways that JPMorgan interacted with MF Global. The bank held four segregated customer accounts for the commodities brokerage. It also cleared securities and administered two lines of credit for MF Global — one for $1.2 billion and another for $300 million.
Those many roles meant that the bank served an important function for MF Global beyond holding customer accounts — it was central in the brokerage firm’s effort to unwind its trades to raise cash needed to stay afloat.
“JPMorgan sought to support the clearing and settlement operations of MF Global during a very challenging and difficult week, and to do so in a prudent manner so that JPMorgan did not inadvertently extend credit to MF Global without adequate and appropriate protections and MF Global could continue to serve its customers,” Ms. Genova plans to say.
Still, she is expected to note: “We were always mindful that despite our best efforts, there was a lot going on inside MF Global during that week that we were not seeing and could not see.”
What the bank did see was the trail of transfers that allowed the brokerage to cover its $175 million overdraft. JPMorgan told MF Global that the overdraft must be fixed before the bank would facilitate an auction of $4.9 billion in government and agency bonds needed to raise liquidity, Ms. Genova plans to say.
MF Global first drew $200 million from customer accounts and placed the money in its own coffers. The brokerage then transferred $175 million of it to cover the overdraft in an account at JPMorgan in London. The transfer, the bank explains, was not problematic on its face. Futures firms often keep a cushion of cash in customer accounts, to facilitate day-to-day operations in the event of situations like market swings, and can draw upon the cushion at will.
But JPMorgan knew MF Global was in distress, and reached out to the firm’s chief executive, Jon S. Corzine, for answers.
“Thus, around early to midafternoon on Friday, Oct. 28, JPMorgan reached out to Mr. Corzine to explain JPMorgan’s understanding of how the London overdrafts had been covered by a series of transfers originating with a withdrawal of funds from a customer segregated account, and to ask that MF Global confirm in writing that the funds it had transferred represented its own funds,” Ms. Genova plans to say.
The conversation set off a back-and-forth between the bank and MF Global that should figure prominently in the Wednesday hearing, held by the oversight panel of the House Financial Services Committee.
The hearing is to feature several executives from MF Global, including the general counsel, Laurie Ferber, and the North American chief financial officer, Christine Serwinski. Edith O’Brien, who was a central player in the transfer of customer money, is also expected to appear before Congress, though she plans to invoke her constitutional right against self-incrimination.
JPMorgan sent three letters to MF Global, each more specific than the last. The bank was told the first letter was too broad, because it sought assurances about all transfers, not just the ones in question.
Finally, a revised letter was sent that mentioned just the transfer of Oct. 28. The lawyer dealing with the letters was Dennis Klejna, a deputy counsel who was no stranger to crisis at futures firms. An industry veteran, Mr. Klejna was a former general counsel at Refco, the defunct brokerage that was taken over by MF Global after it collapsed in scandal. Mr. Klejna, who also served as the enforcement chief at the Commodity Futures Trading Commission, agreed to forfeit $1.25 million to be distributed to victims of the Refco fraud. He was never charged with wrongdoing.
Mr. Klejna assured the bank that the transfers complied with federal regulations. A revised letter was sent to him the evening of Oct. 28, and was followed up by a call the next afternoon. During that call the bank asked again for assurances, and MF Global’s general counsel, Ms. Ferber, who was on the call, told the bank not to worry. She told officials at JPMorgan that she would arrange to have the letter signed.
“Knowing it had been a busy week for MF Global, we thought that our request would help to focus the attention of appropriately senior MF Global officials,” Ms. Genova’s written testimony states. “In retrospect, events appear to have overtaken MF Global during the weekend before it filed for bankruptcy, and, as a result, the letter was not signed.”
Ms. Genova’s written statement adds: “Nevertheless, our request did result in our receiving multiple clear oral assurances from senior MF Global officials that MF Global was in compliance with its obligations under the C.F.T.C. rules.”
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