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MF Global: Court rules against customers, Duffy says Corzine knew of loan from segregated accounts

A New York bankruptcy court today ruled against the farmers and others who were customers of MF Global Holdings Inc., allowing MF Global to use about $21 million in cash collateral from JP Morgan Chase & Co., its largest lender, Bloomberg has reported.

U.S. Bankruptcy Judge Martin Glenn in Manhattan overruled objections from customers who said the money could be part of the $1.2 billion missing from their segregated accounts, Bloomberg said.

Glenn said MF Global had reached an agreement with the New York-based bank about how it would use the cash.

“Proof, not speculation. I understand this is a fluid situation but you have to acknowledge at this point that there is no proof the money in the account is customer property,” Glenn said, adding that he would issue a written order about whether there should be a probe of the funds.

As much as $1.2 billion is missing from customer accounts that are supposed to be segregated. Customers are expected to get about 72 percent of their money back so far, but are trying to get all their funds.

The judge’s decision came one day after the Senate Agriculture Committee held a hearing on MF Global and a day before the House Financial Services Committee will hold another hearing.

Terrence Duffy
Terrence Duffy, CME Group
In late testimony at Tuesday’s Senate Agriculture Committee hearing, CME Group Chairman Terrence Duffy testified he had information that former MF Global CEO Jon Corzine knew that the firm had made loans within the company using customer segregated funds, but the significance of Duffy’s statement is unclear.

Corzine had already testified, and his spokeswoman declined to comment on Duffy’s testimony, the New York Times reported today. The subject is bound to come up when Corzine testifies before the House Financial Services Committee on Thursday.

Duffy testified that an auditor for the CME had participated in a phone call with MF Global employees, in which an employee from an MF Global affiliate in Europe indicated that CEO Jon Corzine knew about a loan from customer segregated accounts to the company’s own funds, DTN reported late Tuesday.

Duffy said the phone conversation took place over the first weekend when auditors from the CME were trying to find out what had happened to funds in the segregated accounts, according to the DTN report.

“We were told by MF Global they transferred money from customer segregated accounts to the broker dealer and stop looking for the accounting error,” Duffy told a senator, reiterating his testimony. “We were also told that one of our employees was on a call with one of their employees when they said Mr. Corzine was aware of the loans being made from segregated accounts.”

The loan may have been for $175 million to a European affiliate of MF Global, Duffy said, according to a Bloomberg report.

Duffy seemed to be accusing MF Global of improperly transferring funds and keeping regulators in the dark, but at the time it was legal under Commodity Futures Trading Commission rules for one division of a company such as MF Global to borrow cash from these accounts if it places other securities in the account during the time the money was borrowed.

Corzine testified Tuesday he was aware the company occasionally borrowed money from customer accounts while placing Treasury securities in the account, the New York Times noted.

The CME Group was in charge of regulating MF Global’s commodities trading division, and members of Congress are also asking why the CME Group did not spot problems earlier.