A contrite Jon S. Corzine will express both sorrow and a firm defense of his actions Thursday in his first public appearance since the collapse of MF Global Holdings Ltd. in late October.
"Recognizing the enormous impact on many peoples' lives resulting from the events surrounding the MF Global bankruptcy, I appear at today's hearings with great sadness," Corzine plans to say in testimony prepared for a hearing by the House Agriculture Committee, which subpoenaed the former MF Global Chief Executive Friday. A copy of the testimony was released early Thursday on the panel's website.
The testimony Thursday is sure to be contentious. Corzine, who resigned as chairman and CEO of MF Global after its Oct. 31 bankruptcy filing, is a Democrat and former U.S. Senator and governor of New Jersey.
He will face an intense grilling by the Republican-led committee, creating an atmosphere fraught with political drama. Corzine, 64 years old, received President Barack Obama's support in 2009 for his unsuccessful campaign for re-election as governor, and more recently held a fund-raising dinner for Obama.
Much of the day's testimony is likely to focus on a significant shortfall in customer funds at MF Global. As Corzine scrambled to stabilize the firm in its last days, it was discovered that hundreds of millions of dollars were missing in customer accounts.
The trustee overseeing MF Global's liquidation estimates the amount at $1.2 billion. Corzine will say in his testimony that he had little to do with the mechanics of moving customer cash and collateral and that he was "stunned" when he learned on Oct. 30 that the money was missing.
"I simply do not know where the money is," he will say, noting that "there were an extraordinary number of transactions during MF Global's last few days."
Corzine will mount a defense of his tenure at MF Global, arguing that he cut leverage at the company from 37.3 to 1 in the first quarter of 2010, when he took charge at MF Global, to 30 to 1 at the end. He will also defend his controversial bet on European debt. Corzine, who was also a former Goldman Sachs Group Inc. chairman, took the helm of MF Global in March 2010 and quickly started making big bets on European government bonds.
Corzine will defend his decision to invest in troubled European sovereign bonds of countries including Italy, Spain and Portugal. The bet grew to more than $6 billion in a strategy that was repeatedly discussed by the company's board.
"I strongly advocated the trading strategy," Corzine said, noting that he had identified the yields on the bonds as "favorable" at a time when he and senior traders at the firm were "discussing ways to improve the firm's profitability."
He also noted that the firm structured the trade as a "repurchase to maturity," which reduced some of MF Global's financing risk and market risks on the strategy.
"I believed that [MF Global's] investments in short-term European debt securities were prudent," Corzine will say. "There were discussions at board meetings, at which the transactions were described, analyzed and debated."
Corzine planned to say that on Aug. 15, 2011, he met with officials from the Financial Industry Regulatory Authority and the Securities and Exchange Commission in Washington, D.C., to discuss the European bet.
Several days later, MF Global was told that it needed to raise capital to support its positions. He also planned to discuss a controversial lobbying effort he made to influence the Commodity Futures Trading Commission's plans to change rules regarding how futures commission merchants such as MF Global can treat customer funds.
The CFTC was considering a ban on internal repurchase agreements, in which futures firms swap customer funds for higher yielding assets such as government bonds.
In a July 20 conference call with CFTC officials, including Chairman Gary Gensler, Corzine will say that "I argued, in substance, that such transactions should continue to be permitted because such transactions could be beneficial" to the futures commission merchants.
Corzine will also say that he spoke with Gensler "on only limited occasions" since the time he joined MF Global. Gensler, who for years worked alongside Corzine at Goldman Sachs, recused himself from the investigation into MF Global's collapse to avoid the appearance of a conflict of interest.
In its final weeks, as customers and counterparties fled the firm, MF Global undertook "extraordinary steps to ensure that it was able to honor customers' requests to withdraw funds or collateral," Corzine will say.
The firm unwound hundreds of millions of dollars worth of European debt trades and attempted to draw down loans from a consortium of banks led by J.P. Morgan Chase & Co. In its question and answer period following Corzine's statement, the House committee is sure to press him for answers about the missing customer cash.
Investigators believe MF Global in the week before it declared bankruptcy shifted funds from the customer accounts to its broker dealer, which handled the European-bond bet, according to people familiar with the matter.
Futures firms such as MF Global are prohibited from using customer cash in their own accounts, according to the Commodity Exchange Act. Corzine is widely expected to avoid directly answering specific questions about MF Global's activities by invoking his Constitutional right against self-incrimination.
He planned to say in his testimony that he doesn't have all the information he needs to provide informed answers and he hasn't had complete access to the firm's records or his own notes since the bankruptcy.
The Federal Bureau of Investigation is currently investigating MF Global's collapse and any statements could be used in a case against him. "He would be making a major mistake if he doesn't take the fifth on almost all of this," said Anthony Sabino, a professor of law at St. John's University who specializes in white-collar crime, referring to the Fifth Amendment to the Constitution.
"He's in a tight spot and he's going to be under oath so he has to speak truthfully." Corzine is also expected to testify before a House Financial Services subcommittee and the Senate's Agriculture committee next week. James Kobak, lead counsel for the trustee overseeing the liquidation of MF Global, and CFTC Commissioner Jill Sommers are also scheduled to testify at the Thursday hearing.
Ms. Sommers took on oversight of the agency's investigation into MF Global after Gensler recused himself.
"While our current focus is returning as much money as possible to customers, we are expending an enormous amount of effort to locate the missing customer funds and pursuing the enforcement investigation," Ms. Sommers will say.
Several exchange representatives will also testify, including CME Group Inc. Executive Chairman Terrence Duffy. Duffy will disclose in testimony new details about the final days of MF Global in his prepared statement. CME auditors learned from the CFTC on Oct. 30, one day before MF Global declared bankruptcy, that a draft segregation report provided to the CFTC on Oct. 28 showed a $900 million shortfall in customer funds. MF Global had said the shortfall was caused by an "accounting error," according to Duffy.
Throughout the rest of the day and that night, CME auditors and the CFTC worked with MF Global to discover the error. After finding that the shortfall was not an error, MF Global told the CFTC and CME that "customer money had been transferred out of segregation to firm accounts," Duffy plans to say.
This story originally appeared on WSJ.com.
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