After weeks of not knowing the whereabouts of the missing MF Global’s customer funds, events from last week’s Congressional hearings may have brought us one step closer to solving the mystery.
Corzine and the Missing Funds
Even before ex-CEO Jon Corzine appeared last week in front of the Senate Agriculture Committee to inform them that he didn't know where the $1.2 billion of customer funds had gone, he has consistently denied any wrongdoing:
He reiterated this claim last Tuesday and added, “I never gave any instruction to misuse customer funds.”
The next day, the Commodities Futures Trading Commission (CFTC) claimed that the missing customer funds had been "found."
Jill Sommers, who leads the CFTC investigation of MF Global, said in a Reuters article that regulators “are far enough along the trail” that they now know where the missing money went.
“Now it’s just finding out which ones of those transactions are legitimate and which ones of them are illegitimate,” she added.
However, it may not be as easy as Sommers makes it sound.
Another CFTC Commissioner Bart Chilton warned in a statement that the "thorough accounting of all customer funds remains a work in progress," according to Reuters.
"Based upon the most up-to-date information available, I do not have confidence that we know where all the money went," Chilton said.
CME's Duffy Vs. MF's Corzine
The star of last week’s hearing was the Chicago Mercantile Exchange (CME) Group Inc. Executive Chairman Terrence Duffy. Testifying as MF Global’s regulator and exchange, Duffy said the information would show that Corzine actually knew about the missing customer funds and the alleged improper transfers.
In short, Duffy used his testimony to contradict Corzine.
“A CME auditor also participated in a phone call with senior MF Global employees wherein one employee indicated that Mr. Corzine knew about loans that had been made from the customer segregated accounts,” Duffy stated, emphasizing that Corzine was well aware of what was happening with the money.
“CME Group has provided this information and the names of these individuals to the Department of Justice and the CFTC who are investigating these matters,” Duffy said.
Needless to say, the committee was not pleased by the news.
By Thursday night last week, the auditor noted by Duffy had been outed.
Meet Director of Audits Mike Procajlo. Procajlo has not yet spoken with the media and a CME spokesperson would not comment on a corporate timeline containing information about the missing funds.
Through the CME timeline for the House Financial Services Committee, the exchange paints the following picture:
Prior to the firm’s implosion, MF Global officials were adamant that the missing customer funds were an accounting error because it was “too big to be anything else.”
On the day of the firm’s bankruptcy, early on October 31, the MF Global executives told Procajlo the customer fund shortage was real with almost $700 million going to the broker-dealer side for liquidity problems due to transactions, possibly beginning from October 26.
In addition, Procajlo was also told by MF that a $175 million segregated fund loan went to the firm’s U.K. office.
Procajlo was involved in an early conference call with senior MF Global staff on October 31, “wherein one employee indicated that Corzine knew about loans that had been made from the customer segregated accounts,” according to Reuters.
A few hours later, the firm declared bankruptcy.
If investigators really want to know how MF Global was commingling funds, who was involved in those decisions, and where all that money went, Procajlo is probably their best bet. To put it plainly, he may be the person who implicates or exonerates MF Global's top brass.
The former New Jersey governor, senator and Obama fundraiser answered to the timeline and its allegations by informing the House Financial Services oversight subcommittee last Thursday that he was unaware of the improper use of customer funds.
He told Congress he had no idea what Duffy was talking about.
“Let me be clear. I did not instruct anyone to lend customer funds to MF Global or any of its affiliates, nor was I told that anyone had done so,” the disgraced ex-CEO reiterated.
What does it all mean?
Although Corzine and Duffy "barely know each other," as Reuters points out, their businesses were "enmeshed in the clubby futures trading world."
The CME made money from MF Global's trading, and was supposed to watch for violations of rules designed to protect investors. This business relationship has led some analysts to speculate that Duffy’s strongly-worded testimony was merely a “save face” ploy, and that he targeted Corzine in an attempt to draw attention away from CME.
But even if Duffy's testimony was given only in the interest of self-preservation, and that he was singling-out Corzine as a scapegoat, he may have unintentionally outed one of the most important characters in the MF Global drama: Mike Procajlo.
[Editor’s note: portions of the above originally appeared on Wall St. Cheat Sheet.]