Jon Corzine's third congressional grilling about MF Global's failure will likely examine his contacts with regulators and a fresh allegation about his role in the disappearance of clients' money.
Corzine is set to appear Thursday afternoon before the House Financial Services Oversight and Investigations Subcommittee, a Republican-led panel known for aggressive questioning. It's his first public appearance since a financial-exchange executive alleged Tuesday that Corzine knew more than he's admitted about the firm's transfer of client money in its final days.
About $1.2 billion of customer money was unaccounted for when MF Global collapsed in late October, becoming the eighth-largest bankruptcy in U.S. history. Lawmakers, regulators and law enforcement officials are trying to find out what happened to the money.
Corzine, a former Democratic New Jersey senator and governor, resigned as CEO of MF Global last month.
In his two previous Capitol Hill appearances, Corzine said he never told anyone to "misuse" customer money. He learned about the shortfall in customer accounts late on Oct. 30, the day before the bankruptcy filing, Corzine insisted.
CME Group Inc. Executive Chairman Terrence Duffy told a Senate panel Tuesday that Corzine might have known about a transfer of $175 million from customer accounts earlier than that. CME Group operates exchanges on which MF Global traded. It also was responsible for auditing some of MF Global's books.
According to Duffy, an MF Global employee told a CME auditor that "Mr. Corzine was aware" of the transfer. Duffy said he referred the matter to the Justice Department and the Commodity Futures Trading Commission. Both are investigating MF Global's failure and the disappearance of the customer money.
If true, Duffy's accusation would raise the possibility that Corzine misled Congress about when he learned that client money was missing.
The transaction Duffy described wasn't necessarily illegal. Brokers such as MF Global are allowed to borrow from customer accounts temporarily in some circumstances — to reduce their own risk, for example.
But such cases are a narrow exception. A firm couldn't use customer money to pay trading partners if its speculative trades lost value. Even in cases where borrowing clients' money was legal, the firm would have to replace it with a safe, cash-like investment such as a U.S. Treasury security.
Legal experts say it's hard to imagine how that would apply to the alleged MF Global transaction: a "loan" to an overseas affiliate.
"Whose money are they loaning?" asked Felix Shipkevich, an attorney and expert in the regulation of firms such as MF Global. "Is it the parent company loaning money to the foreign subsidiary, or are they taking money out of client accounts?"
If the money was from client accounts, Shipkevich said, the loan probably was illegal.
Duffy will likely be asked to elaborate on his accusation. He made the assertion Tuesday after Corzine had departed from the hearing. On Thursday, he will testify after Corzine has had a chance to respond.
The subcommittee also plans to ask Corzine whether he used his relationships with regulators to gain advantages for MF Global. Corzine has been a major fundraiser for Democrats. He was co-chairman of Goldman Sachs Group Inc. In that role, he worked with two other Goldman executives at the time: Gary Gensler, now chairman of the CFTC, and William Dudley, now president of the Federal Reserve Bank of New York.
Gensler has recused himself from the investigation because of his long history with Corzine. Neither he nor Dudley is scheduled to testify. Top lawyers from the CFTC and New York Fed will appear instead.
Along with other Wall Street executives, Corzine lobbied Gensler and his staff last summer against a possible CFTC rule that would limited how their firms can invest clients' money. Afterward, the CFTC delayed adopting the rule until earlier this month.
Early this year, the Federal Reserve allowed MF Global to join an elite group of 22 dealers that help the government sell Treasury securities. The Fed did not assess MF Global to see if it was taking on too much risk. Instead, Fed officials relied on oversight by the CFTC and the Securities and Exchange Commission.
The role of primary dealer conferred on MF Global a seal of financial strength. It gave the firm a competitive edge and likely lowered the interest it was charged to borrow, noted Janet Tavakoli, an expert on the markets that MF Global occupied.
"You participate in Treasury auctions, and being able to sell them, and of course you make money on that," Tavakoli said.
Because the Fed doesn't regulate its primary dealers, she said, "they should take all the more care in awarding the primary dealer status."
Given MF Global's size and past run-ins with regulators, Tavakoli said, "it's inexplicable that MF Global got their primary dealer status."
Corzine is set to appear alongside MF Global's president and chief operating officer, Bradley Abelow. At Tuesday's Senate committee hearing, Abelow said he didn't recall "any conversation about customer funds being used for anything other than their intended purpose."