MF Global's O'Brien Takes Fifth

Assistant treasurer Edith O’Brien declines to answer questions at House hearing.

Edith O’Brien, the MF Global Holdings Ltd. assistant treasurer who has become a key figure in the disappearance of as much as $1.6 billion in customer funds, declined to answer questions from House lawmakers.

O’Brien, who appeared today under subpoena before a House Financial Services subcommittee, invoked her constitutional right against self-incrimination during a hearing on the New York firm’s Oct. 31 bankruptcy.

After indicating that she would decline to answer all questions by members of the subcommittee, O’Brien was dismissed from the hearing room.

O’Brien was pulled from back-office obscurity onto center stage last year in testimony to Congress by former MF Global chief executive Jon S. Corzine.

She was identified by Corzine several times as an employee with knowledge of transfers that may have included customer funds in what he called the “chaotic” days before the firm sought Chapter 11 protection, becoming the eighth-largest bankruptcy in U.S. history.

“We’re basically doing an autopsy on how a 228-year-old company came to its demise last year,” Representative Randy Neugebauer, chairman of the Financial Services oversight and investigations subcommittee, said as he opened the hearing.

Today’s session is the panel’s third hearing on MF Global’s final days, when company executives discovered a nearly $1 billion deficit in customer segregated funds. The bankruptcy trustee overseeing liquidation of the firm’s brokerage unit has estimated the total shortfall between customer claims and assets available at $1.6 billion.

Attention on O’Brien heightened after the March 23 release of a memo drafted by congressional staff. The memo cites an e-mail from O’Brien noting that a transfer made in the days before the firm’s bankruptcy was done “Per JC’s [Jon Corzine’s] direct instructions.”

Christine Serwinski, chief financial officer of the firm’s North American broker-dealer, testified that she first learned on Oct. 27 that there was a “substantial deficit” the previous day in funds kept in segregated accounts including customer money, according to testimony prepared for the hearing.

The deficit stemmed from an intraday loan to the securities brokerage arm from the futures broker and wasn’t repaid by the close of business, she said. The segregation report for Oct. 27 showed that the funds had returned to a positive level, “which I believed at the time reflected the return of the borrowed funds, as promised,” she said.

 

‘Accounting Error’

Serwinski said that on Oct. 30 she was “still operating under the belief that there must have been an accounting error because such a large deficit was simply inconceivable to me.” She said she didn’t realize the shortfall was real until the morning of Oct. 31, hours before the firm filed for bankruptcy.

It was at that point, according to the congressional memo, that O’Brien approached Serwinski with a document outlining a shortfall of nearly $1 billion as a result of three different groups of transactions. Among those transactions was a $175 million transfer to MF Global’s London office, the memo says.

Another MF Global executive, General Counsel Laurie Ferber, testified that she sought O’Brien’s assurance of the propriety of a two-stage transfer -- a $200 million transfer from a segregated account at the firm’s brokerage to a “house” account, followed by the move of $175 million from the house account to a London subsidiary’s account at JPMorgan Chase & Co.

JPMorgan, by mid-afternoon of Oct. 28, contacted Corzine to request confirmation in writing that the transferred money was made up only of the firm’s funds, Diane Genova, a deputy general counsel for the bank, said in her prepared remarks.

“Mr. Corzine said he understood the request and would have someone in his organization review it,” Genova said. The bank then “e-mailed a proposed draft letter to Mr. Corzine.”

Corzine, 64, told lawmakers last year the firm’s back-office staff had “explicitly” informed him that the $175 million transfer made before the bankruptcy filing was legal.

“I never gave any instruction to misuse customer funds, I never intended anyone at MF Global to misuse customer funds and I don’t believe that anything I said could reasonably have been interpreted as an instruction to misuse customer funds,” Corzine told lawmakers in December.

JPMorgan dealt with Ferber and Dennis Klejna, MF Global’s deputy general counsel, on Oct. 28 and Oct. 29 as the bank sought to secure the letter. On Oct. 28, Klejna told JPMorgan the transfer complied with federal rules and “represented excess funds belonging to MF Global,” Genova said.

Klejna “intends to fully cooperate with the government investigation of MF Global and feels it would be premature to respond to any press inquiries at this time,” Helen Kim, Klejna’s lawyer and a partner at Katten Muchin Rosenman LLP, said in an e-mail.

The next afternoon, Ferber told the firm the transfer “represented a withdrawal of MF Global’s own funds held in a customer segregated account, and that we therefore did not need to be concerned,” Genova said. After “some further discussion,” Ferber told JPMorgan’s representatives she would arrange to get a revised letter signed, Genova said.

After rejecting the first two drafts of the JPMorgan letter, Ferber said a third draft focused specifically on the two transfers was “in satisfactory form.” She then turned the matter over to a colleague and doesn’t recall further involvement, she said in her prepared remarks.

The letter was never returned to JPMorgan, according to Genova.

 

 

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