Dec. 13, 2011 — -- Sen. Pat Roberts, R-Kan., said a revelation from a Senate witness on Tuesday "tossed a bomb" near the end of the day-long hearing about $1.2 billion in missing client money from bankrupt company, MF Global.
The chairman of the CME Group, Terry Duffy, told the Senate Agriculture, Nutrition and Forestry Committee investigating MF Global that former CEO Jon Corzine was aware of loans that may have used customer money, contradicting Corzine's two testimonies to Congress and authorities investigating missing clients' funds.
Senators drilled the former MF Global CEO Jon Corzine who testifed before Congress again on Tuesday, as well as the chief financial officer and chief operating officer of the company.
Duffy said he learned on Saturday from lawyers of CME Group, the world's largest derivatives exchange, that Corzine was aware of a $175 million loan transfer to one of MF Global's European affiliates that may have involved client money.
"Somebody went and violated rules of CME and the government and transferred out customer money into a broker dealer account," Duffy told Congress. He said he informed the authorities, including the Securities and Exchange Commission, though he did not know the full details to describe how Corzine knew of the transfer.
Corzine, who resigned as CEO on Nov. 3, said the committee turned down his request to testify voluntarily in January. The former New Jersey governor said he had limited access to relevant documents, including internal communications and account statements, and his own notes.
"I had hoped that, by that time, I would have obtained and reviewed relevant records so that I could be more helpful to the committee," Corzine said earlier.
MF Global's chief financial officer, Henri Steenkamp, and chief operating officer, Bradley Abelow, earlier testified that they did not know where the missing client money is located. The two executives and Corzine said they did not authorize any transfers of customer money.
The bankruptcy of the commodities trading firm on Oct. 31 was the eighth largest in U.S. history.
"Senator, unfortunately I do not know where the money is," Steenkamp said in answer to a question from Sen. Debbie Stabenow, D-Mich., chairwoman of the Senate Committee on Agriculture, Nutrition and Forestry.
"This isn't the Dark Ages," she said in prepared remarks. "MF Global didn't keep their books with feather quills and dusty ledgers."
Abelow said he is "deeply troubled" by the missing segregated client funds. He said the missing money is being investigated by the bankruptcy trustees, who have taken over management of MF Global.
"I don't recall any conversation about customer funds being used for anything other than their intended purposes," Abelow said.
Edward Pekarek, assistant director and supervising attorney at Pace Law School's Investor Rights Clinic, told ABC News it is "quite conceivable" the three executives answered truthfully when stating that there were no directives to misuse or transfer customer funds.
"Whether the firm violated federal securities laws related to its non-disclosure of the off-balance sheet transactions that led to its demise is an entirely different question, both in terms of prospective civil and criminal," Pekarek said.
Pekarek said he suspects that U.S. and U.K. customer funds were "re-hypothecated," or pledged as collateral for a loan, through one of MF Global's British subsidiaries. Canadian customers were reportedly refunded their account proceeds within two weeks of the firm's collapse.
"How is it possible that Canadian customers were quickly made whole, yet U.S. and U.K. customers are now likely to proceed as mere unsecured creditors?" Pekarek asked.
Three representatives from the farming industry were invited to speak on Tuesday as witnesses to describe how the bankruptcy has shaken their confidence in the commodities futures market, which is intended to help them lower risks and lock in selling prices for their crops.
Dean Tofteland, a farmer from Luverne, Minn. testified that hundreds of thousands of dollars are missing from the required collateral he submitted to lock in a selling price for bushels of his crop.
Tofteland said his broker at JPMorgan told him on the brink of MF Global's bankruptcy that customer money was in separate accounts than funds reportedly used for risky bets. However, after the bankruptcy, Tofteland's account was frozen and he was forced to liquidate his hedges. He said he has not used the futures market since.
"The truth of the matter is that comingling money is stealing money," Tofteland told the Senate committee, urging the bankruptcy trustee to return customer funds.
Jeff Hainline, president of Advanced Trading in Bloomington, Ill. who also testified, said the futures market, which has existed since the Civil War, leads to efficiency in the commodities market. Without it, farmers lose flexibility and revenue, and consumer prices would increase.
Corzine testified before the House Agriculture Committee last Thursday, saying he was at a loss as to what happened to the misssing money.
"I simply do not know where the money is, or why the accounts have not been reconciled to date," Corzine said last week. "My understanding is that our books and records were reflecting the chaos that occurred in the last two or three days as the firm was under severe pressure and had lost the confidence of the marketplace."
The New York Times, however, reported that the former Goldman Sachs CEO "played a much larger, hands-on role in the firm's high-stakes risk-taking than has previously been known" and that Corzine, who became chief executive of MF Global in March 2010, was "convinced that he could quickly turn the money-losing firm into a miniature Goldman Sachs."
According to the Times, Corzine "compulsively traded for the firm on his BlackBerry during meetings, sometimes dashing out to check on the markets." In a move considered out of the ordinary for a chief executive, Corzine "became a core member of the group that traded using the firm's money. His profits and losses appeared on a separate line in documents with his initials: JSC."
Steven Goldberg, an attorney for Corzine, declined to comment.
Rep. Frank Lucas, R-Okla., chairman of the House Agriculture Committee, said last week's hearing was only the first step in MF Global's customers getting their money restored.
"Former MF Global CEO Jon Corzine's presence was critical to our objective, and unsurprisingly, we are finding that there are still more questions than answers about the missing customer funds," he said. "There is a great deal more to learn if we are to restore confidence in the futures markets."
"My No. 1 priority is to make sure that customers who have been devastated by MF Global's collapse get their money back," Sen. Stabenow, D-Mich., said in a statement.
The company's bankruptcy has "devastated thousands of customers – including farmers, ranchers, grain elevators, small business owners and others," she said.
The witness list for Tuesday's hearing included James Giddens, trustee over the liquidation of MF Global, and Jill Sommers, commissioner of the Commodity Futures Trading Commission.
Corzine is also the target of at least one lawsuit by former employees of MF Global. Last week, Monica Rodriguez, MF Global's former head of credit for the Americas, and Cyrille Guillaume, managing director of its commodities and stock division in London, sued Corzine and the company's top executives, claiming they lied about its finances and encouraged workers to put their retirement savings into company stock that later plummeted, the Associated Press reported.
The two are seeking class-action status for everyone who got company stock as a benefit of working for MF Global after May 2010.
Jacob Zamansky, an attorney representing the two employees, said Corzine and the company's board breached their fiduciary duty to their employees and "destroyed" their retirement savings.
"Corzine encouraged MF Global employees to invest their retirement savings and compensation in company stock and he destroyed their wealth with his risky and outsized bets on euro sovereign debt," Zamansky told ABC News. "If employees had known MF Global's true financial condition, they could have refused to buy in or insisted on compensation arrangements that were all cash."
Goldberg said he had no comment on Corzine's behalf and that a response to the lawsuit had not yet been filed.