Jason Reed/ReutersRepresentative Randy Neugebauer, chairman of the House Financial oversight panel, which is investigating the downfall of MF Global.An internal MF Global document suggested that the firm was putting customer money at risk days before its bankruptcy filing, an executive said in prepared testimony that was released on Tuesday for a Congressional hearing on Wednesday.
The document showed “a substantial deficit” in the amount of firm money used to protect customer accounts, according to the testimony by Christine Serwinski, the firm’s North American chief financial officer. Futures firms typically keep a cushion of cash in customer accounts as a buffer to cover losses in case of volatile market swings.
The deficit, revealed in a report on Thursday, Oct. 27, did not in and of itself violate federal laws, she said. But Ms. Serwinski, who was on vacation during MF Global’s final week, had stated “clearly and repeatedly” that the firm should keep a surplus of cash to protect customer money.
“To me, even though the regulations would allow it, I was not comfortable with the firm putting customer funds at risk even just overnight in that manner,” Ms. Serwinski said in the prepared testimony. She added: “I communicated with my office and was assured that the matter was under control and being addressed and that the funds would be returned on Thursday.”
But then on Saturday, Oct. 29, she was told that customer money was missing. The update differed from the Thursday warning signal, which was only an indication of the firm’s so-called excess segregated money. Ms. Serwinski, who was communicating on her BlackBerry while on vacation, was assured that the customer shortfall was an accounting error and that events were “looking good” and that the firm was “under control.”
Ms. Serwinski’s testimony, which will be delivered Wednesday before the oversight panel of the House Financial Services Committee, is the first indication of an early warning sign that customer money may be in jeopardy at the commodities brokerage firm.
Her testimony also raises questions about why the firm did not say something about the shortfall earlier. In spite of the red flags, regulators were not notified of the potential hole in customer accounts until Sunday afternoon.
That shortfall, now pegged at about $1 billion, has been the subject of an intense federal effort to unearth wrongdoing at the firm and to make customers whole. MF Global clients, including farmers, grain elevators and hedge funds, have been missing their money since the firm collapsed.
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