to work with the various trustees and administrators to close the firm's operations, which i have attempted to do over the last six weeks. from my perspective, based on what i was able to observe at the time, there were a number of factors that led to mf noble's demise. first, it appeared in mid-october of this year the market had become increasingly concerned with the firm's exposure to european debt. second in late october, the rating agencies rapidly and repeatedly downgladed the firm's credit rating. third, the company reported disappointing earnings on

october 25. the combination of those three events increased concern about exposure to european sovereign debt, series of ratings downgrades and disappointing earnings, created an extremely negative perception in the market, resulting in large number of the firm's trading and financing counterparts pulling a. from mf, dramatically reducing liquidity, that led mf global to attempt to sell all or part of the firm in order to protect the interest of our employees, shareholders, creditors and customers. when those efforts failed, mf global filed for bankruptcy on october 31. i know this committee is interested in finding out what amount of segregated clients funds went missing in the final days, how it happened, where those funds are, and what might eventually be returned to the firm's clients. i am deeply troubled by the fact

that customer funds are missing and i can assure you i share your interest the and the public's interest in finding out exactly what happened. at this time, however, do not know the answers to those questions. they're being investigated by the trustees, who have taken over management of mf global, and have control over its records and accounts, and a host of regulatory and investigator agencies. i do know that all of the parties are working hard to find answers, and i hope they're able to get to the bottom of the issue as soon as possible. since the company filed for bankruptcy, i have focused every day on minimizing the effect on customers and employees. there's no way to turn back time and undo the damage, but in the last six weeks i have worked day and night to reduce costs and maximize the remaining value in the biggs. because mf global operated in

more than # 0 companies there are separate entitieses with separate systems and books around the world, and i worked to foster cooperation and communication among those entities. there are a number of different parties now response for unwinding the firm's administration, and it's been an enorm mouse effort to coordinate with them, and while it's only a small measure, begin the number of people who have lost their jobs, i'm doing whatever i can to help former employees find new employment. i believe it is important to examine the issues that led to mf global's demise, and the firm is attempting to be as transparent as possible. i hope to provide some assistance to the committee today. there's no way to undo the damage that has been done by the bankruptcy. it is my hope that efforts such as this one to gather facts and provide a clear picture of what occurred, will assist policymakers, regulators, and

participants in the financial services industry in avoiding such tragic events in the future. i look forward to answering your questions. >> thank you very much. >> chewoman stabenow, ranking member and distinguished members of the committee. thank you for this opportunity to make this brief statement. my name is henry steencom. i am deeply saddened, upexpect from frustrated that money belonging to our customers has been frozen or is missing. i know that my reactions cannot be compared to those of the people who are suffering with this issue. along with certain other senior executives of mg global holdings limited i remained at my post and arm working diligently to do

what i can to maximize the value of the firm for all interested parties. that said, bought of trustee rules and poll skis, i unfortunately have not been able to participate in the current efforts to find the missing funds. while i'm deeply distressed by the fact that customer moneys have not been fully accounted for, unfortunately i have limited knowledge of the specific movement of forms at mf global inc. during the last two or three hectic business days prior to the bankruptcy filing. this is in part because of my global role, and in part because during those days i was taken up with other serious matters. as the global cfo i had pink functions but principle was to ensure that the holding company's financial consolidated accounts complied with all u.s. accounting and reporting requirements and, two, to work closely with our investors and

rating agencies. as its name suggests, mf global holdings limited, my olympic is a global holding company with approximately 50 domestic and foreign subsidiaries. each of the regulated subsidiaries generally had its own, or a regional chief executive officer, chief operating officer, chief financial officer, and others, obligated to independently discharge the customary duties of those offices according to its home jurisdiction's regulatory requirements. all of these positions were filled by highly experienced professionals. direct involvement with operational matters such as bank accounts or funds transfer has never been part of my duties. it is of course important to understand the way in which segregation issues were handled at mf global inc. in the order course of business and to avoid confusion where it's necessary

to refer to mf global inc., i will refer to mfgny my statement. mfgi held up a customer funds required toe by law to be segregation, and all calculations were performed by experienced personnel in chicago jefferson by mfgi finance professionals to my understanding, mfgis segregation of client funds has been repeatedly reviewed by the firm's outside audit fors and regulators over a long period of time. as a general matter, i was not involved with the details of the segregated funds in the course of my duties as global cfo, nor with the calculations performed by chicago and reported to regulatears on a daily basis. the week prior to the bankruptcy filing saw, among other things, multiple rating agencies downgrades in quick succession, accord liquidity distresses and efforts to sell all or part of the firm it it was a time of

constant pressure and little or no sleep and a critical number of issues to resolve. at the holding company my attention was focused on crisis management and strategic issues. and moodies announced it was leaving the firm with the lowest possible investment grade rating. followed by further downgrades throughout the week, the speed and severity of which were unprecedented in my experience and placed extraordinary pressure on the firm's liquidity. as the situation deteriorated, the sell of the business and/or the firm was're sued in between my dialogue with rating agencies -- almost exclusively in the period ending with the decision to file for bankruptcy on october 31. on sunday night, october 30th, when a deal for the acquisition

of all or part of the company appeared to be close at hand, learned of serious issue of the segregated fund calculations. unfortunately, as the committee is aware, the efforts to reckon -- reconcile were not successful and the deal fell through, and we promptly notified the regulators about the issues. i understand that the committee, mfgis customers and the public have many unanswered questions about the customer funds. i share many of these questions and i'm personally extremely frustrated they remain outstanding and client funds are missing. i would be pleased to answer the committee's questions. thank you. >> at the very meche. first, for your information, the members we will be breaking under business that will done at the caucus lunches so we'll break at 1:00, and come back at 2:15 to continue. we will take that opportunity to

break. mr. corzine and mr. steen block kamp, on may 2007 you sign the certificate awe suring internal controls were -- overfinancial report were accurate. and i have copies of that. given what you know today and the $1.2 billion potential in customer funds missing, would you sign this document again? mr. corzine? >> senator, given what we know today, you wouldn't sign that document because you would not have had the assurances of the people, the systems, the procedures verified by all of those that were responsible for internal confirmation that the data was accurate, and clearly,

as it's been repeated, there is certainly some amount, 1.2 or 600 million -- different numbers -- of dollars that are unreconciled with regard to segregation accounts. >> mr. steenkamp, would you sign this document again? >> senator, knowing what we know today, and knowing there are missing customer funds, from what we understand, i would not be able to sign that. but prior to this point, there were controls that, as far as i was aware, had not operated -- that had not -- not operated before this point in time. >> it's very difficult listening to the chief financial officer or the ceo or the coo indicating surprise that there weren't adequate controls over the

management of the money. i guess what we heard on the first panel was very simple. where's the money? i mean, how do you answer that? where is the money from funds that were supposed to be kept separate? customer money? as cfo, where is the money, mr. steenkamp? >> senator, unfortunately i do not know where the money is. >> who does? >> well, senator, part of my job was not to approve transfers of client funds, it was not to be involved in the process of client funds. those operational aspects ocured at mf global inc. and all the other regulated entities around the world, and we had experienced senior officers executing those operational

controls. >> mr. corzine, where is the money? >> senator, enormous numbers of transactions were taking place in those very final days. i tried to put that in my statement. about the 38,000 customers, the many countries, and those need to be parsed through to arrive at an answer. we need the facts on that, and it is not only from those of us who don't see those records, but even from the people who now have those records, it's a very, very difficult task. many of us had reasons to believe, when we signed statements like you presented, that we had the people, the policies and the procedures in place to give assurance. wouldn't have signed those on

may 20th, or other times, while we were there, with didn't feel those were secure. at the time that occurred on that sunday evening, october 30th, it's clear that something was amiss, and that needs to be discovered what that was, based through all of those transactions i tried to outline. >> mr. abelow for you as well. we're looking at the top three people in the company who are responsible for the overall internal controls of this company. and so, mr. abelow, where is the money? >> senator, as i stayed in my statement, i do not know where the money is. as of the filing of bankruptcy on october 31, investigations were commenced by a number of investigative authorities under the direction, presumably, of

the trustee who has been put in place, and we have not had access to the results of that investigation or any information about the status of that investigation. and i am as anxious as you are to hear the results of that investigation and be able to answer the question. >> well, let me ask if any of you authorized, approve, or know of money transfers from customers' segregated account to the firm's broker dealer accounts in the final days of weeks of mf global, or before then? mr. corzine? >> senator, as i said in my opening remarks, i never directed anyone at mf global to misuse customer funds.

i never intended to. as far as i'm concerned, never gave instructions that anybody could misconstrue. >> so you're saying you did not authorize, approve, or know of fund transfers. >> in a general sense, there are all kinds of fund transfers that are taking place. anytime there's a sale of $1.3 billion worth of commercial paper there will be fund transfers. >> i'm talking about between broker-dealer accounts, and you know what i'm asking. >> i'm trying be very direct in saying there's no direct authorization. i was not aware that the unreconciled can'ts existed until that sunday evening we talked about. >> mr. abelow, did you authorize, approve, or know of money transfers from customers'

segregated accounts to the firm's broker dealer can't -- accounts in the final weeks. >> i do not recall participating in the conversation about the use of customer segregated funds or assets for any purpose other than they were intended to be used for. >> mr. steenkamp? >> senator, i did not authorize, approve or know of transfers of customer funds for any house or broker-dealer purpose. >> thank you very much. senator. >> thank you, madam chairwoman. mr. abelow, as the coo, the employees responsible for executing transfers of money report to you, and you record directly to governor corzine. is that correct? >> senator, i'm not sure -- when

you framed your question, if you could repeat it for me, i'd appreciate it. >> let me put it another way. did treasury operations and security pressures ultimately report to you? >> yes, they did, through a chain of authority. >> mr. steenkamp, as a cfo, did mf global have internal controls how and where money could be moved? >> yes. there were controls implemented in mf global inc. and all of our sub sid areas. >> is it possible for the conduct rules to be overruled? >> to the best of my knowledge, these controls were operated and the approvals were resident in the legal entitieses, so i do not believe so. >> you don't believe that, but is it possible? >> i wouldn't want to speculate, senator. >> mr. abelow and governor, is it correct that at the end of

each trading day, mf global would receive margin calls? >> obviously. >> there's twice a day settlements of margin calls, if i'm aware of how the process goes. >> mr. abelow? >> i believe it was typical that mf did receive margin calls. >> did mf receive margin calls on friday, october 28th? for both of you. mr. abelow and governor corzine. >> snort robert is senator roberts i believe there were margin calls as there is every day. >> you indicated, i believe, 1.5 billion went out the door. >> i have repeatedly said there was $4.5 billion sold on that day. that was sale designed actually to produce margin coming back to the firm as opposed to margin

going out of the firm. >> we have heard a lot of 35-cent words being tossed around. rehigh pot indication. that's a big word here. we may not understand the ins and outs but we understand mar calls and chain of command. the company's cash flow situation was dire and the demand for cash kept coming in. is it the case that mf global didn't have enough cash on hand to cover the cash need that came in late friday? >> senator, from all reports that i had received, to my rex on -- recollection on that day, we were able to meet our cash demand. >> mr. abelow. >> i do not recall being made aware of our running out of cash on friday, the 28th, being unable to meet obligations.

>> as a captain in the marines and governor, i knew that if a full bird colonel told me to do something, would do it. if a two-star general gave me an order, wouldn't ask any questions. so could it be possible that one or more of your operational money moverrers, who reported to you, mr. abelow, and you, governor, was told cover the liquidity needs by taking money out of the segregated customer account? governor? >> senator, i don't believe that anyone would operate that way. we had no experience in the 19 months i had been there that anyone had overrid 'those systems, and so i have no reason to believe that that occurred in the last hours. >> mr. abelow. >> senator, i can't speculate about conversation is didn't see

or participate in. i can only tell you i did not recall participating in any conversation about use of customer assets other than the intended purpose. >> as i stated the cme knew that mf global was attempting to hide something. in fact didn't mf global leadership even go so far as to request and receive an actual plan that would break the glass and tap into your customer's segregated account, perhaps described as a loan, if such a scenario arose? >> senator, there certainly were contingency plans that i think fall under the rubric you were talking about, break the glass. to my knowledge and understanding of that report, it was not ever the intent to

recommend tapping into segregated customer funds. >> mr. abelow? >> senator, i have not reviewed the specific document that you are referencing, but my recollection is that the key driver of liquidity, source of liquidity, under that see anywhere, you're was the use of an evolving credit facility. >> you might whatnot to take a look at it. by all can'ts on the friday before bankruptcy, mf global thought it found a boyer to save you. seemed well within the rem of possibility, a classic run of on the bank overwhelmed your cash flow, and an executive could have communicated somehow an order to use your customer segregated funds to cover the firm's liquidity crunch, thinking by monday morning everything would be fine, the company would be bought out and

the infusion of money from the new owner could reapplause custom funds. is this plausible? >> senator, as any number of questions, i think being asked to speculate -- and i really don't -- don't really think i should speculate -- i had no reason to believe, until the evening of october 30th, that there was a misuse of customer funds. >> mr. abelow? >> senator, i was shocked to be informed on sunday that there -- >> but is this plausible? >> a shortfall in customer funds. i can't speculate beyond that, sir. >> well, if this isn't what happened, then what did happen? what is your speculation on that? >> senator, i think speculating

is -- should be done in the context of the facts that are being developed by the investigators. as in my oral statement and also in my written statement, i have put forward issues about whether money was returned properly that should be looked at, put forward, transactions that i think would be obvious that people should check all the details on, but how that would come to a conclusion without records, without the ability to go through it, it's speculative and i think would be inappropriate could be misleading. >> madam chairman, i am out of time but like mr. abelow to respond. >> what did have? >> you can respond briefly. >> senator, i do not know what happened and i'm awaiting the results of the investigation to

inform all of us. >> thank you, madam chairwoman. >> we well have a second round. senator conrad. >> thank you. madam chairman. you know, as this has unfolded, i have had contacts from my home state, several customers, several broker dealers, one missing a half million dollars, and absolutely through no fault of their open, and as one kind of tries to pierce the veil here and fir -- figure out what happened, it's incredibly difficult to do. had a chance to read the lengthy article in "the new york times", which has some interesting tidbits in it. one is that i have operated under the assumption that these

european trade on european debt were losing money. the assertion in this article is that they made money. this is -- second paragraph from the end, ultimately, the bets corzine placed wound up better than the firm itself. the european debt trades were profitable, though too late for mf global. is that the case, governor corzine were they profitable trades? >> senator, at the time of the bankruptcy on october 30th, they were still positive trades. the positive positions, but they clearly were part of the ingredients that led to the loss of confidence in the firm.

so, really two different issues. i think mr. abelow talked about, as i think i did in my written testimony, that the ingredients that led to that loss of confidence and the foreign sovereign positions are certainly part of that process. >> well, that really comports with this article. basically this article says there was a loss of confidence. the moody's downgrade was devastating because that affected the firm's liquidity. you've indicated there were margin calls, but that wasn't atypical. that you would have margin calls in a firm like this. but was the level of margin call unusual at the end of that week?

that is, were the demands on the company for cash at the end of that week extraordinary? >> senator to the best of my recollection there were increasing demands for margin in different places. the process slowed up in the clearing and movement of transactions, but specifics, i'd really want to rely on being able to look at records to answer in precision. >> this article, by the way, suggests the day after the bankruptcy, you, mr. corzine, sifted through transactions in the hope of locating the missing money. is that the case? >> senator, to the best of my recall, i sat with a group of internal folks who might be able to give me the kind of information that i think you'd like to get from me today, to

see if we would be able to identify some sources of where these missing funds might be. i was stunned. and the first of my knowledge of segregated funds being out of reconciliation, was that evening, on the 30th. >> you believed you were -- the funds were where they were supposed to be. but they weren't. so, something has happened here. i mean, i have heard speculation from people, who are deeply knowledgeable in this area, that money was transferred that came from client accounts by -- on somebody's authority, with the idea that those funds would be

made whole the following week because the company was owed money that would normally come to it in the normal course of business, and of course, when everything went south, funds didn't transfer money to mf global that were really do mf global. do you think it's possible at the end of the day there will about fining that in fact mf global is owed money that will cover the shortfall here? >> i think it would be speculative on my account to opine about that. as i said in my written and oral statements, those are possibilities but without having the ability -- probably not even

by myself but by experts -- to go through some of that, which is exactly what the trustee and other investigators are doing -- would be virtually impossible to speculate. >> well, at the end of the day, what we know is customers are out funds that are due them. you have all expressed your regret at that, and your sympathy for those who have been adversely effected and came across as sincere to me. but somehow customer funds were transferred in a way that is inappropriate. and in searching your memory now, is there any conversation that you were part of that could have been misinterpreted by someone to authorize the

transfer of customer funds to cover margin calls or for any other purpose that was not appropriate? >> senator, i specifically put in my opening statement that -- i want to be very clear. i never authorized the misuse of customer funds. i didn't intend to authorize the missy of customer funds, and i don't believe it would be possible to construe anything that i said as an authorization. >> so searching your memory, mr. abelow, anything that -- any conversation you were part of, any conversation you know about, any conversation where it could be misconstrued, what you said, that would have led somebody to

believe they should transfer customer funds? >> senator, i don't recall participating in any conversation about the use of segregated funds other than for their intended purposes. >> in searching your memory, you were in a chaotic crisis situation. you don't remember a conversation where somebody comes and says, hey, we could transfer funds from customer accounts and consecutive these and -- cover these and we get the money back on monday anyway any. >> senator, do not recall any conversation about using customer funds for other than their intended purpose. >> thank you very much, senator luger. >> thank you, madam chairman. we have heard, at least according to my notes, there were as many as 38,000 customers of mf global, and we discussed

with the previous panel, who were some of the customers of mf global, or through affiliates were -- why they retained this affiliation. i'm curious, bus -- because we have heard at least some testimony that in april or may there were already hints, a perhaps because of european bond transactions or other investments of mf global, an anxiety on the part of rating agencies. in any event, before the crucial weekend in october, an actual declaration, apparently, of a downgrade in earnings of the firm. our concentration today, obviously, has been on the customers. many are our constituents who for the time being had the

segregated funds and don't have the money. i have raised with the previous panel sort of the business judgments which led people to want to be affiliated as a customer with your firm. was there no early warning that might have led some of them to decide or do business with somebody else? i mean, appears to me that throughout this period of time, there was a considerable degree of anxiety in the financial markets about all of this. you have testified, governor corzine, that the final bank transactions were doing better than some of the other things you had there, but that surely must not have been true if you were out the entirety of the year, it was your business to try to determine how you were going to make money for mf

global. i'm just curious, was any of this traps parent, with any of the $38,000 customers have some idea of your portfolio, your transactions, your movement towards loss of earnings? was this entirely opaque as far as customers? >> well, senator, i really would not be able to tell you what kind of credit work an individual customer would do or any particular customer, but most of our introducing brokers -- i think you heard from one this morning, and there were many -- it's not unique with advance -- who represented and introduced clients to us. certainly have the capacity to read a 10k or a 10q, the public filings. certainly have the ability to

review credit rating agency elements and, as you know, probably know, most public companies, ourselves included, had quarterly presentations of our earnings -- not in our case, i guess -- our results -- and those were open to general distribution and understanding of what we best understood at the point in time existed, and those are -- those are pieces of information that are in the public forum on a regular basis, that certainly sophisticated investors and counterparties look to. >> well, many sophisticated investors must have come to a

conclude that continuing on with mf global was not a very good idea for themes or their customers, but, perhaps, they said even if mf global goes into bankruptcy, still our segregated accounts will be sample that's the law of the land and it's almost bound to occur. i'm trying to gauge how you reached the situation in which we still had the 38,000 customer and the farmers who were hoping to hedge and so forth, tied up here, because, clearly the distress today is what the overall picture, but specifically with people who felt that somehow the law simply would not permit this loss, regardless of what happened to you and the management omf global you're saying essentially all of these records were there the regular quarterly reports and other reports, so that you were not hiding any transparency of the risks involved in these

kind of investments. if i hear you correctly. is that a true assumption? >> assumption is that we were complying with the disclosure requirements, and those are reviewed by outside auditors, and they certainly reviewed, i would presume, by the credit rating agencies. >> so, if i were a broker guiding customers, farmers and what have you, and mf global, i must have been a company that really thought there was going to be some excitement in terms of the european bond market and this was going to be a moneymaker, presumably. certainly not a disaster. i don't know anybody reading through the markets through the last few months that would have that degree of confidence, and the fact you were so heavily involved in it would have led me to a lot of lack of confidence.

the other way around. i'm not sure why you made these investments but likewise how the other people who were managed who were dealing with you and why they continued with you. that's may be beyond your comprehension likewise. you probably valued having these customers and you figure they might stick you because they didn't know any better or they would speculate with you, and turns out that was wrong. at some point does the federal government have sufficient controls, regulations and so forth on mf global and firms like this or anybody else so that the regular farmer, who is trying to hedge and sell and so forth, is not out of pocket, at least has at least some security? or maybe this is unobtainable. i'm hopeful our hearings will lead to a situation where we think of what kind of legislation or what kind of

administrative fixes are required to remedy the situation. thank you, madam chairman. >> thank you very much. just to let the members know, we will hear -- turn to senator klobuchar now, and senator chambliss, and then break until 2:15. >> thank you very much, chairman stabenow. thank you all for being here. thank you to mr. tofteland. i was not hear for your testimony. mr. corzine, it's been widely speculated in the days before mf global declared bankruptcy your firm shifted funds from the segregated accounts to the broker-dealer side of business. in testimony before the house last week and in written testimony for today's hearing, mr. terrence duffy, aasserts at 2:00 a.m. monday, october 31st , mf global informed the cftc and cme that customer money had in fact been

transferred to the firm's broker dealer account. did these details match your recollection of what was conveyed to the cftc and cme that monday morning? >> senator, the general description that mr. duffy talked about on the issues of october 31st are consistent. >> okay. to your knowledge, did mf global shift any funds out of the segregated accounts to the broker-dealer side of your business or to pay any outstanding obligations? >> senator, is a said in written testimony and here again this morning, until the evening -- late evening of october 30th i was not aware of the unsegregated funds.

>> by your own admission these positions played a major role in the loss of market confidence that led to the failure of the firm in exploring the role these trades played in the collapse omf global, many raised concern over the accounting rules that aloud you to treat it as sales rather than financing, removing them from the finance sheet. you said these positions're publicly disclosed but not on your balance sheet. is that correct? >> that's correct, senator. >> do you believe that we should reexamine the accounting treatment of these transactions? >> to the extent that people believe that the disclosures that we made were not adequate, and they believed that more disclosure is better, that

certainly should be considered. i think i'm probably not the one to speak to this. the issue of -- certainly not an accounting expert -- the issues of offbalance sheet questions are very challenging for those who make rules in accounting. the accounting rules. and this is one of those that i think should be reviewed as all. >> it just seems more transparency here would have been a good thing, and we're always hearing about, no, this will hurt, and in this case you had somewhere off in a footnote where i don't believe it could have been found. so i'm trying to figure out how to make this better going forward in addition to finding this money. >> it was in the 10ks, and the disclosure with regard to this -- it was discussed with

analysts, and if my memory serves me correct, in some of the credit writeups from the rating agencies. >> mr. abelow, the responsibility of the coo can vary dramatically between businesses. could you discuss for us your role at mf global and who, to your knowledge to get to the specifics, had the authority at mf global to move funds in segregated accounts? >> my role as chief operating officer and president were to oversee the daily execution of the firm's strategy, to focus on various elements of the firm's strategic plan, and i had oversight responsibilities for a number of operating areas of the firm. and i am sorry, as to the second -- >> who had the authority at the firm to move funds from a

segregated account. we're trying to figure out, where did the money go. no one seems to know. >> again, senator, i am not aware of any conversations about the movement of segregated funds other than for their intended purposes, and a number of people inside the firm, in operations, in treasury, were involved in movement of funds daily. >> on the days leading up to sunday when it was discovered the funds were misching, were you involved in discussions about actions being taken to make sure your fund did not become unsegregated? >> i don't recall specific conversations about acts for it to not become undersegregated. i don't recall a specific conversation about that. >> mr. steenkamp, i'm sure you immediately went looking for

answer. what did you find? >> senator, the first time i found out about the segregation was on the sunday, and we found out pretty late on a sunday night. i was informed there's an issue with the segregation calculation, that the assets are less than the liabilities, and as i mentioned in my statement, following that, we informed the regulators very shortly thereafter. my initial reaction was absolute shock. as far as i'm aware, we never had issues with segregation in the past, and it was something that was completely unexpected. >> and so then what did you do? you went to try to find the money? >> well, it was late sunday evening. and so at that point we were about to execute the deal for an acquisition of part of the firm. my first response was, once we had taken a short while to see

if we could try to reconcile it before our deadlines night, once we knew that we would not find an answer this evening, we notified the regulators. >> uh-huh. very good. did you see the testimony of mr. duffy with cme and what he was saying about the timing? i can read it to you again if you'd like. where he said, at 2:00 a.m., on monday, october 31 they were informed about the transfer of money from the segregated new to the broker dealer accounts. >> it was very early monday morning when we were on the phone with the regulators. that sounds consistent. >> thank you very much. >> thank you. senator chambliss. >> thank you very much. we have his end to your answers very carefully, and i want to make sure i get a direct answer

to this. governor corzine, did you understand that mf global was using customer funds to carry out proprietary transactions on behalf of mf global? >> senator, i was not aware of the misuse of customer funds. i have said that -- didn't authorize it, didn't intend to have it happened, and until that sunday evening, not aware. >> i understand that's what you said earlier. my question is, -- let me frame it differently. would the use of your customers' funds to engage in proprietary trades on behalf of mf global be illegal? >> first of all, it is actually more complicated.

it gets in the rule 125 in regards to repurchase grandmas between entities. as long as the securities on part of that repurchase agreement between the entities, that would be appropriate. it would not be a misuse of customer funds. for instance, if you had treasury bills and did a repo to the fcm from the broker dealer, that would be appropriate. if you did it for euro sovereigns, that wouldn't be. >> okay. and that's a generally accepted practice in the industry, is it not? to -- >> the rule 125, which i think i heard senator harken actually read from, very specific about what can be invested, with

segregated funds, and any of the repurchase agreements that could occur between the entities have to be in 125-eligible securities. they can't be in things that didn't already meet that criteria. >> okay. but you knew customer funds were being used for that type of activity. >> for rule 125-eligible. >> yes. you knew customer funds were being used for what you felt was a correct use. >> correct use. >> of investing customer funds. so, were you aware that margin calls were being made on a regular basis just prior to -- towards the middle of the end of october on the sovereign debt investments? >> the sovereign debt investments are in the broker dealer and were not a part of

the fcm, and the answer to your question is, yes. >> so where did you think the money came from? >> we run -- we run liquidity positions and as i heard mr. abelow say, we also had access at draws against our liquidity lines with the banks. >> mr. steenkamp, you as the cfo, you deal with the financial condition of the company on a regular about and daily basis. >> as cfo of the global holding company i would review the consolidated statement and financial condition, and i think as i mentioned in my statement, we have various regulated sub sid areas -- subsidiaries around the world that have various

rules and regulation under the specific jurisdictions they operate in, and with regards to the financial condition and operations of those entities, i would receive exception reporting, escalation notification, as issues arose from the finance and other offices in those entities. >> were you aware within the, let's say, two weeks leading up to october 31, that regular margin cals were being made against one of the subsidiaries for the foreign debt investments? >> senator, i was aware on occasions that there were margin calls made as various margin, and at times initial margin changes occurred. >> as the chief financial officer of the company, where did you think the money was coming from to meet those margin calls? >> well, senator, as a global

firm, we had some house money that we had raised over time that we could use for liquidity. and in addition, we also drew down, as mr. abelow and corzine mentioned, on the revolving credit, which was available to us to meet liquidity needs that's arose. >> did you not check to see where these significant dollar amount of margin calls was actually coming from, what account? >> senator, i would not have checked the exact account it would be coming from. but with regards to clients -- whether it would be coming from the clients' side, there were controls, for example, back in controls, individual segregation calculations, that never indicated any issue. so some there was no indication it would be coming from client

can'ts. >> governor corzine, if i understand correct in order to reach into a customer's account and to meet the margin calls on the sovereign debt investments, you would have to actually go out of one company into another company? >> well, senator, you wouldn't meet margin calls for our broker-dealer by reaching into the fcm customer funds. >> well, then, my question is, how did that happen? how did the -- how did somebody reach into the segregated accounts and transfer money out of those to do something with it that they should not have done? >> senator, i want to repeat and know that it's frustrating, but it would be speculative on my part to say that. i did lay out some flows of

transactions and kinds of occurrence that need to be established by the facts of looking through all of these records, and that's what i think the trustee and the other investigators are now doing. >> so is that kind of the guts of where we are with mf global right now, trying figure out who transferred the money and who authorized the transfer of that money out of the segregated can'ts? >> i think it is. now, in the fact discovery stage of where the flows of money took place, and when those then are established, then you can follow that back to, i presume, how it was authorized. >> chairman, i'm over my time, but since i'm last, can i ask one more question that i think will generate a quick answer?

so am i to understand -- and i'd like all three of you to answer this -- did any of you know that this money was being transferred out of the segregated can'ts? >> senator, as i said on -- in all of my testimony, until that sunday evening, i was not aware that we were -- that there was a misuse of customer funds. >> mr. abelow. >> senator, i as well was shocked to learn on sunday that we had the potential deficit in our segregated funds. >> mr. steenkamp. >> i had no knowledge that customer funds were transfederal into the broker-dealer until that sunday evening when we were notified. >> thank you. >> thank you very much. we will reconvene at 2:15. i will indicate we are going to do the third panel. we know this is a long day but this is very, very important subject and we appreciate all of

you remaining with us, and with that the committee stands in recess until 2:15. [inaudible conversations] ...

let me introduce our three panelists and then we will ask as you know for an opening statement. of course we want what ever written information would like to ask the wheat could give and then we will ask for verbal testimony and then we will have our questioning. our first panelist is the honorable joe summers, commissioner for the commodities futures trading commission. in 2005 she was a policy director and head affairs for the international swaps and derivatives association. prior to that, she worked in the

governmental affairs office of the chicago exchange where she was instrumental in overseeing regulatory and legislative exchange. welcome. next we have mr. james trustee for the securities investor protection act liquidation. he's also the culture of bankruptcy and corporate organization group. welcome to you as well. finally we have mr. terence duffy for the cme group based on a chicago illinois and has been a member of the board since 1995. he's president of tba trading from 1981 to 2002 and has been a member since 1981. so welcome to all of you. and before giving your testimony, i would ask you to rise and raise your right hand. do you swear that the testimony you're about to present is the truth, the whole truth and

nothing but the truth, so help you god? thank you. commissioner, we would ask to start with your testimony. >> good afternoon, chairman stabenow, ranking member roberts and members of the committee. thank you for inviting me here today to discuss the global bankruptcy. i and a stand the severe hardship the bankruptcy has caused for customers. these customers understood the risks associated with treating futures and options but never anticipated that there segregated accounts were at risk of suffering losses not associated with treating. many customers have reached out to me and my staff treacly and we are doing everything we can to get as much of their money back to them as quickly as possible. i have made this my number one priority. the commission has dozens of staff members in new york, chicago and washington working on these issues. i'm unable to discuss matters that might compromise the

ongoing enforcement investigation or parallel investigations by any other government agency. so i will focus my comments on the bankruptcy case is pending in new york and on the legal requirements around in the segregation of the customer funds held up a futures commission merchants. as i understand the securities investors protection act of 1970 the sec has the authority to be registered as a broker-dealer to the securities investors protection corporation if there is a reason to believe that the entity is in or is approaching financial difficulty. they may initiate proceedings to protect customers of an insolvent broker-dealer when statutory criteria are met. when a broker-dealer is also a registered as ns global was, there is one duly registered entity in the entire entity gets placed in the liquidation. because there is one entity and

it is not possible to initiate a liquidation of the broker-dealer and in a separate bankruptcy proceeding, it is important to note that when a duly registered is placed into the liquidation the relevant provisions and protections of the bankruptcy code, the commodity exchange act and the commission's regulations apply to customer accounts just as they would if the entity or in the non-bankruptcy. the commission is no stranger to the bankruptcy. lehman brothers are two of the most recent. while lehman brothers' bankruptcy was monumental in scale and the bankruptcy involved serious fraud at the parent company, commodity customers did not lose their money at either firm. in both instances commodity customer accounts were wholly intact. that is the contained all of the open position and in supporting

collateral for those positions. that being the case, customer accounts were promptly transferred to help with the commodity customers having no further involvement in the bankruptcy proceeding. unfortunately that is not what happened at mf global because the customer accounts were not in tact. in the bigger sees the commodity customers have an exclusive right to customer property. this includes without limitation segregated property, property that was illegally removed from segregation and is still within the state and property that would be legally be removed from segregation and is no longer within the better's a state but has called back into the estate by the trustee. commission regulations also allow other properties of the state to be classified as customer property to make up any shortfall. within the first week of the global pinker representative see, the trustees with the

encouragement and assistance that the cftc transferred nearly all positions of customers trading on u.s. commodity futures markets and transferred approximately 2 billion of customer property. on december 9th, the bankruptcy court granted the motion to transfer an additional 2.1 billion back to customers. when this additional transfer goes forward, commodity customers should have received approximately 72% of their account values as reflected by the books and records. these transfers demonstrate the commodity customers are receiving the highest priority in claims to the bankruptcy at state. we understand that more must be done. essey and is authorized to invest funds in customer segregated accounts. this authorization is found in section 40 of the c.a. and commission regulation 1.25. the commission finalist changes

to 1.25 just last week. those changes just reinforce the long-held view of the commission that customer segregated funds must be invested in the manner that minimizes their exposure to credit liquidity and market risk to preserve their availability to customers. all regulation 1.25 investment are subject to the general standard which requires that all primitive investments be with the objective of preserving the principle and maintaining liquidity. while our current focus is on returning as much money as possible to customers, we are expanding and the enormous amount of effort to locate the missing customer funds and pursue the enforcement investigation. all of the information that we learned during these aspects of work will be relevant to the commission as we consider the lessons learned in any policy responses or regulatory changes.

obviously the commission has a great deal of work to get customers' funds back where they need to be to determine what went wrong with the segregated funds at mf global and determine whether to prosecute any violations of the act and to determine what needs to be done to prevent a similar circumstance in the future. commission staff is coordinating on these issues for her of with other regulators. we are also working closely with the trustees to provide whatever support he needs to resolve issues with the accounts. i greatly appreciate the continued support of the committee as we move forward with this important work. thank you. >> thank you very much. mr. giddens. >> chairwoman stabenow, roberts and members of the committee, thank you for inviting me to testify today about efforts to identify, preserve and return assets to the former customers

of mf global bank. valium the court-appointed trustee for the securities investor protection act liquidation of the failed broad review were mf global bank. i appreciate the interest of this committee and other members of congress including the direct encouragement of the chairwoman stabenow and cementer roberts to expedite the return to customers as quickly as we can. along with my staff, i have been working closely and continuously with the investment corporation, commissioner jill summers in the commodities futures trading commission, securities and exchange commission in the chicago mercantile exchange. by statute, the trustee is a customers advocate. my stuff includes legal experts come as consultants and forensic accountants. we take a very seriously obligation to protect customers in the brokerage.

our primary mission is to look at for the customer and creditor interest. we are focused on returning assets to customers as quickly as possible in a manner that is fair and consistent with the applicable provisions of the investor protection act the bankruptcy code and the cftc regulations. the redistribution we make must be approved by the bankruptcy court on notice to all customers and parties of interest. we are distributing as much as we can and as soon as we can with in the law. while we were critical get identify, preserve and distribute customer assets, my office has made every effort to keep customers informed. we have a web site, which has had i think more than 10,000 increase information on the status of the proceeding has posted to the website daily.

in addition, my staff is answering calls and e-mails and holding meetings with customer groups and their counsel. a call center and a web site as we indicated or in operation. we also will be mailing to all 36,000 remaining customers statements of the last positions and reflecting as best we can the first to transfers to assist in understanding where we are in the process and completing the forms. i'm very pleased to report the distributions to nearly all 46,000 for retail customers, whether farmers, day traders or institutional investors have been made within weeks of the bankruptcy filing. we are now in the process of implementing a third book distribution that will bring the total amount of customer distribution to more than 4 billion. the order approving that was by the bankruptcy court yesterday. the team worked over the weekend

to put in place the mechanisms with the cooperation of the cftc and the first distributions are expected to begin to be made tomorrow and to be completed within two to four weeks. all of this requires transfers to the new accepting sc m and is a complicated process. this means retial, because stars in the u.s. positions will receive approximately 72% of the property. the customer claims process is also up and running. claim forms have been sent by mail and forms are available on our website. claims are being filed reviewed and as we meet here today some claims that have already been approved and allowed. as part of my stature really mandated duty i'm also investigating the extent the reasons for the shortfall in the customer funds. the investigation is ongoing.

it is led by the department of justice also with the cftc, the sec, and we are cooperating fully in their investigation. it is too early to make or draw definitive conclusions on many of the matters. at this time we do not know with certainty the extent of the potential segregation and compliance shortfalls, but i estimate the figure is not less than $1.2 billion. for the u.s. futures, foreign futures and for securities customers there are three categories of segregated assets and that global link for the customers. first were those with u.s. futures positions which is primarily under the jurisdiction of the cme but there are also u.s. clients with substantial futures positions and also

security's customers who had a segregated fund. the full amount of the shortfall will not be known with certainty until the claims process was completed today i feel obligated to share these preliminary numbers and highlighted the uncertainty that surrounds them it is my hope the shortfall number will come down. we have collected the available assets from the depositories that appear to be on the books. this is not simply a mathematical calculation but is the actual control of the dollar's. we also have estimated the potential claims, and that is how we calculate the shortfall figure. no matter the final amount of the shortfall, it is an appalling situation. it's probable size is going to be significant, and this will

substantially affect our ability to make 100% distribution to the former nfl global customers in the immediate term. exhaustive efforts to collect funds to the depository's continue. assets located in the foreign depositories of customers that have traded in foreign futures or are more complicated matter. they're under the control of the for the bankruptcy trustees or administrators we will pursue these vigorously but recovering the more uncertain and they take more time thinking chairwoman stabenow, ranking member roberts, other members of the committee for the opportunity to testify here today to review can be assured in the and president of the circumstances surrounding the failure of the mf global bank we are moving with speed and diligence to refine the customer properties as quickly as possible in a fair and equitable manner that complies with the law. thank you. >> thank you very much mr. duffy, welcome. >> thank you chairwoman

stabenow, ranking member roberts. i'm the insipid chairman of the cme group. let me start by saying the actions of mr. clotheslines firm have put market users and a tragic position. our efforts with respect to the unprecedented loss of customer segregated funds caused by mf global have been to assist these customers and minimizing market disruptions. my testimony summarizes efforts from the staff who were on site at mf goebel along with cftc in the days immediately preceding its bankruptcy. it includes some substantial background material. the announced poor earnings and downgraded by several credit-rating firms. sparking rumors it was the broker's business. cme was a self organization for mf global with responsibility for auditing the futures business pittard on thursday october 27th to of our auditors

went to the global chicago officers to review the daily segregation report on october 20 -- 26. the report which was not available until thursday shows the full compliance. our auditors ask for the material necessary to check the numbers on the report against the general ledger and third-party sources and begin the process of tying up the number for wednesday's report. that review process of the segregation report continued on thursday and friday. the segregation report for thursday october 27th which was delivered to see any on friday the 28 also stated that ns will remain in full compliance with segregation requirements. in fact, it showed the firm held 200 million in excess segregated funds. on sunday, the cftc informed us that they were aware of a draft

segregation report for the close of business on friday october 28, which showed more than a 900 million shortfall and required segregation. cftc and the cme staff and auditors return on sunday october 40th and were informed by mf global employees that this is caused by, "and accounting error. our auditors worked with the cftc and to be devoted the rest of the night sunday to five visible error but none was ever found. instead at about 2 a.m. on monday morning october 31st, mf global informed the cftc and c m e at approximately the same time that the shortfall was real and the customer segregated funds had been transferred out of segregation to the firm's broker-dealer accounts. after receiving this information, we remained at mf global while es mf will attempt to identify the funds that could be transferred into the segregation to reduce or eliminate the discrepancies.

the altar also participated in a phone call with senior bolin please wherein one employee he indicated that mr. corzine knew about the loans that had been made to the customer segregated accounts. cme group has provided this information and the names of these individuals to the department of justice and the cftc for investigating these matters. on monday october 31st the data the trustee to go for, mf goebel revised the segregation report for thursday october 27th. indicating that the alleged $200 million in excess segregated funds should have been reported as the deficiency of $200 million. the shortfall on the segregation on thursday october 27th was hit in at the inaccurate report by a telling sign to keep regulators in the dark. it remains to be seen whether

the failure to disclose commit additional funds to be in a properly transferred. throughout this time, the firm and its employees were under the direction and control of ns global management. transfers of customer funds affected by the management of the benefit of mf global constitutes a very serious violations of the rules and of the regulations. we met our obligations to all other firms and their customers. also tall times we held a $1 billion in excess of the required amount of customer segregated funds on behalf of the customers. all of the cme efforts have been directed towards speeding the customer access to the trading accounts, transferring of the positions and providing the trusty with the 550 million-dollar guarantee from the group to encourage and quickly release customer funds that were securely held at the clearing. the federally mandated customer

segregation program has been in place since 1936 and the time required for the mf global failure no customer has lost the funds because of the failure of a member of the cme. moving forward we intend to work with congress, regulators and leaders to strengthen customer safeguards of the firm level. thank you very much for your time and attention and i look forward to your questions. >> thank you very much. let me start, mr. duffy, with your comments that you've just indicated. you raised a serious allegation or statement today regarding what mr. corzine had known about customer accounts. you didn't mention that in your written testimony, and you didn't mention in your testimony last week before the house the agricultural committee. this leaves us wondering why you are sharing it now, when you think it means, and i trust that cme has shared this information in a timely way with appropriate scheduled officials, and i would

urge again everyone to cooperate fully with the investigations going on. because of course anyone that is engaged in wrongdoing must be held accountable. but what you want to respond further to that? >> i would be happy to. madame chair, i did not become -- this information was not made available to me. prior to my testimony last thursday in the house. i received this information this past saturday from an e-mail and a phone call from our lawyers and they informed me of this. what they found out in their investigations but did not share with me prior to thursday's testimony. schenectady you have the names of the specific people involved in terms of -- people were referring to things they heard, but do you have the specific names you've given? of those who were on the call

and were involved in the conversation? >> one of our folks from cme who is the one the reported this back to us was on a call and you have to forgive me i don't know her name. >> i just want to make sure that you are referring to the specific names of people. >> yes. >> in the discussions. >> there's a specific name, yes, ma'am. >> in march of this year you testified before the committee pushing back on the effort to require more of exchanges and clearing houses light cme when it comes to compliance and oversight in fact in march you said there's no evidence that this will be beneficial to the public or showed the functioning of the market's. i'm wondering if you still believe that is true. >> i don't know what issue it was. >> we were moving forward, the cftc -- he pushed back on them and moving away from the

principal based regulations, and i wondered if you still hold that view today. >> principal based regulation has worked flawlessly and we do believe even in this instance the segregation funds still work. what happened is somebody went in, violated the rules of the cme and of the government and transferred customer money into the broker-dealer account. that has nothing to do with the principle based regulation i believe of the firm or the segregation of the firm. someone violated the rules in my opinion. >> and so, do you believe that cme has any responsibility as a front-line regulators? >> if i didn't think what cme has done and i was very much in favor of doing this was to put a guarantee of the $550 million so the trustee could then issue

money much more quickly back to the ranchers and farmers and if you would like i'd be happy to give you the notes of why i did that. i asked that specifically for the farmers and ranchers, not for wall street or hedge funds or other clients. i said the most important constituency is to get the money back quickly to them and that is why the board of the group put forth $550 million guaranteed so he can allocate his revenue. >> owls we go forward and look at the future we all want to make sure that this kind of thing does not happen again in the future. do you think the right kinds of questions are being asked of the future commission? are we getting enough information to keep the market's safe and in order to be able to trade, and are you planning on reviewing your oversight system in light of the mf goebel bankruptcy? >> i would say any time something of this magnitude

happens which has never happened before i think senator roberts pointed out many times throughout the day you want to look at different things. we are working with congress and participants to see if there is any change that needs to be made but i do think it's important that there is $158 billion of customer segregated funds in the united states of america. this potential violation has never happened since this was put in place in 1936, so i don't think the system is broken. i think someone violated the rules. >> let me talk about customer money which brings us all here and is our concern, and i want to thank you and mr. giddens for your efforts and your team's efforts and encourage you to move as quickly as possible to make people whole. i am concerned we are hearing that there may be a shortfall in

customer money even with the latest distribution we know people will not be yet getting 100% of the funds, and with that in mind i think it's important to talk about what happens next. i would like each of you to answer a couple of questions. do you agree that any value left should first go to customers until they are made whole and put another way creditors and investors shouldn't get a single penny until mf goebel customers have been paid in full, and i'm wondering if each of you would agree with that. commissioner sommers? specs before. i think that it becomes a little complicated when you're talking of the bankruptcy holdings the parent company. if we had evidence to show that there is customer money at the holding company level then absolutely, we will do everything we can to make sure that money comes back to

customers and to the estate. we will be working closely with the trustee to make sure that happens. >> would you respond to that? >> yes, i agree both of the commodities exchange act and the securities investor protection act give a priority to customers from securities customers and commodities customers respectively and if there is a shortfall in the provisions on both statutes which say that other assets ought to be reached to cover those shortfalls that may be deemed by some to be something of a conflict and in the positions of the cftc and sec may disagree but both statutes if they are shortfalls and customer property in either category, commodities or securities give a preference and have a mechanism for the trustee to seek to recover for the

estate assets which should have been in the segregated funds. >> i'm not a trustee nor a regulator, but there is insurance on the broker-dealer side. there is what we call the segregated funds on the side. i do believe that the sc m clients should be first in line in front of all other participants with everybody else. >> thank you. anybody else senator roberts. >> thank you. mr. duffy, we spent a lot of time here today. we probably should have had you on first. you have sort of tossed a bomb in the middle of who we are trying to find out is responsible and who has the responsibility and who has the authority. they told one of your auditors you were about ready to give us

the name of that auditor. why don't you supply that if you like i think you were going to turn to one of your attorneys and we will leave it at that unless that jeopardize is any on the investigations we will let you decide that. october 31 if governor corzine was well aware of loans that ms global had me go to other mf global affiliate's, is that correct? >> i am reporting back to you everything that i know was told to me. i wasn't there, but in our interviews with our employees, our employee told us they were on a phone conversation with this particular person that mr. corzine was aware of the loans were being made. >> did that employees indicate which global affiliate's the customer segregated account funds were transferred to? >> not to my knowledge.

i believe what they were trying if i recall the e-mail it was something of 175 million-dollar loan that was made to ray european affiliate of mf global if i'm understanding correctly. >> did indicate when those were made? >> i don't recall when they were made. i believe was in the last couple of days prior to bankruptcy. >> did this individual indicate when he became aware of those or did he order them to occur? >> all that i was told is that mr. corzine was aware of the loans were made. >> did you prepare this information to the appropriate authorities, the answer to that of course is yes. is their anything else about the conversation you believe important for the committee to know? >> i would ask to raise my right hand to the truth so i'm telling you what i know. >> commissioner sommers, it is my understanding the cftc can create the advisory boards

created of officials is that correct? >> yes, senator. >> as the cftc consider setting up an advisory committee like this to focus on what happened with l.f. global or to help make recommendations to ensure that it does not happen again? >> we've had a number of different conversations of what an appropriate forum would be moving forward so that we can hear from the industry participants and get their feedback on lessons learned. >> has anybody stop your recommended otherwise? >> no. i don't think we have had discussions that have taken it to the chairman's level. it's just been internally with my office and participants. >> not participating is that correct? >> that is correct. >> i would strongly encourage you to set that up and encourage you to make a recommendation to the commission and to pursue it and sense german dinsmoor has not participated and stated he

does not for the committee last week noted suckling what happened with mf global the those recommendations should be given to you as the investigator and that you and the other commissioners should make the determination on whether or not those recommendations should be pursued. let me say that -- let me get organized here. beginning on monday october 24, the day of the moody's downgrade you have said that they begin heightened scrutiny of the global. what does this entail very briefly? >> we were in there to make certain that the segregated reports were accurate as i said in my oral testimony. we were -- they were on the

daily reporting i believe since they were caught since it went away and they took them over and so we were in their just making certain that the money was talking out as i said and we got about 85 or 90% done through friday talking of the customer funds. >> commissioner sommers to the cftc participate or assets in this intensive review? >> the cftc staff went into mf global i think that 26 was a wednesday under the same sort of review to make sure that the daily reports were accurate. >> under the heading of what you were looking for, was in the primary purpose of your intention of you to make sure that the segregated customer accounts were not dissipated or otherwise misused? >> that's correct. >> we received daily segregated

reports, mf global but on the normal course of business we don't tie it goes back to the bank records. so that is what we were in the process of doing. schenectady suspect that they may go missing? >> no, sir. stomach understand you are not in charge of the investigation at the time, but you had since learned whether or not the cftc participated in this review or otherwise confirmed the conclusion that all of the money was safe at the close of business on wednesday october october 26th; is the correct? >> that's correct. >> it's my understanding chittenden scholar would have been deleted that time on all of the global related issues because he didn't become nonparticipating until eight days later. is this correct as your understanding? >> i took over on november 9th. >> i think i'm down to 37

seconds and we have the senator to my right waiting patiently so i may ask a couple questions, madam chair but i think i will yield back. >> let me talk a little bit more about customer funds and ask each of you another issue that i think is as we'll get going forward we are going to be asking a lot of questions about additional authority from congress in terms of putting customer funds first in the process is, and it is possible during the days and perhaps even the weeks and months that led up to the firm's collapse that there were third parties who saw this coming and perhaps they were well within their legal rights to do so but if the third party is held back money to keep them out of a lengthy and on

certain bankruptcy proceeding should the court be able to reclaim that money for the global customers? >> my understanding is the way that money belonged to customers or belonged in the account then absolutely that would be able to come back to the estate. i'm not aware of money with third parties or aware of whether or not that was money that belonged in the account. >> we are looking at all the transfers over the several months of the firm and if there is a legal basis for recovering but we'll make a demand and if we have a sound basis for that we are in the process of collecting from counterparties in mf global eink who

principally closed all open transactions after the bankruptcy for an accounting of whether they lost money or made money and if they owed money to the stage we would pursue that. there's nothing to indicate, unfortunately, that the amount based on our analysis over the books and records is going to be astronomical or anywhere near sufficient to meet. but part of my duty is to pursue causes of actions to recover assets of customers and we intend to do that. thank you. mr. duffield? >> i have nothing more to add than what the commissioner said. >> some have suggested that they should be called the customers of mf global customer is right now and take over the claim. would you consider that a kind of idea?

>> as i said, we put up money to encourage the trustee to pay back. there's also $150 billion of customer segregated funds in the united states. nobody can guarantee $150 billion. that's why there's rules on the books and that's why we have disclaimers that make certain scm is going to do business ref because there is a risk. madame chair, that is something the would be an extreme hazard to try to make up $150 billion of the customer segregated money. >> you mentioned earlier on on the security side there is an insurance system, and it's a little early i think probably to have spent too much time and we are not sure where all of the recommendations are going to go, but one question that we have been asked a number of times is

should there be an insurance system like that that is on the commodity side for the commodity customers you have any thoughts on that? >> you're trying to have an insurance system devotee in the hundreds of trillions of dollars in the notional value to ensure the premiums would be so astronomical they would never need to pay out. so i don't know if that was something that would be beneficial. there may be something you want to look at and preliminary at best farmers, ranchers, hedgers of the product you may want to look at different types of accounts that could be managed differently. i don't know. >> okay. thank you. commissioner, the chairman testified in the last hearing that they did not examine a single futures commission merchant referencing the duty of the front-line regulators. can you confirm that information and should the commission of it

or examine every future commission merchant and if we were to go down that path do they have enough resources to do that? i think you will probably know the answer to that one, that is that a half that the cftc is looking at or would look at? >> currently the way that it works, we have authority over and they are registered with us. they are the front line auditors. we do periodic reviews and look at the refusal of the audits. so we may go in and do spot audit checks that they've already reviewed to see what our own results would be of that type of audit to make sure that they are doing their job.

if we find any inadequacy in the jobs then we make recommendations to improve the systems. >> after this investigation is done or you open to recommending new authorities or current protection to prevent a similar situation? >> there is no doubt that after the investigation is concluded and we look back to know exactly what happened there will be a number of lessons learned and different recommendations we can bring to you for your consideration. >> is it true that if a firm invests customer money right now that those investments and the investments decrease in value the firm is responsible for the loss, not the customer? >> that's right. if it is investing under the regulation 1.25 and there is a loss and value of those instruments they have to make up the loss of the customer money. >> thank you very much.

senator roberts. >> [inaudible conversations] >> in the last few days the transactions did not follow a straight path would do you mean by that? >> i'm not aware of that exact quote. it may be in my written testimony, but i'm assuming it's not in my written testimony i didn't think it was. i don't recall hearing anything about the straight path. >> i wonder where that came from. >> the only thing i can say is they did give us a report that showed the 200 million-dollar to

the good and then they gave us the same report four days later date it from the week before at the 200 million-dollar deficiency. maybe that's where the language came from. >> use of several transactions that followed a rocky path. november he said it appears the firm made subsequent transfers of the customer segregated funds to the matter that may have been designated to avoid detection in so far as the global did not disclose or transfer to the cftc or cme until monday morning october 31st. how was this information disclosed to you? >> to go back to what i said a moment ago, the press statement that we put out, a lot of it was based on the false reports that we've received and were not aware of. >> what exactly did they tell you?

>> i was not there. this was 2:00 in the morning so i found out about it 8:00 the following morning. i was only told that they came to us and said stop looking for the so-called accounting error. it was $950 million transferred out of the segregation to the broker-dealer account. that is what i was told from our reports. >> was this before or after the company -- >> this was before the bankruptcy the following day or the same day. >> for the entire panel -- >> it was up in the middle of the night. >> it seems to figure out where the money went why don't you go back to the time to ensure that the money was there to try to go back it could be done and that would take quite a number of people i understand the

department of justice is involved in the investigation locating the money to the offices of the two u.s. attorneys they have the owner of the terse and are directly involved. as the trustee you have your own team it seems to me there's a lot of cooks in the kitchen. who is in charge of this that we have arranged here are there too many members of the policy that you haven't been able to find the money or are you satisfied that they are talking with one another and it is a pretty smooth operation? >> i think it is a very cooperative operation. the potential will enforce that of the investigation as for the justice and the u.s. attorneys in new york and chicago and they are taking a lead on that. my principal investigation is

really to look at transfers and try to buy potential sources of recoveries to bring back the money for the customers. i don't have a role in the law enforcement aspect of this. there are frequent meetings and cooperations, full cooperation from us. no one is asserting privilege of holding any kind of information. they're also interested in this because there were transfers and transactions relating to the segregated securities accounts and the like and all of the i think all of the independent regulators i don't think assembling over bodies or to many people here. i think in terms of the conclusion of what happened it is a complicated analysis and i

think it's fair to say it's more than just looking at transactions in the last few days. i think it's looking whether it's relevant or not for transactions and transfers that went over several months of for hundreds of thousands of reconstruction lists of things to do. there is no magic source of for the money is. there's no depository or counterpart or anyone sitting with $600 million that we have identified. i don't think that is going to happen to really think that we have collected the available assets and we've already distributed nearly 80% of that within our -- we have other constituencies in the last transfer motion there were more than 25 objections including objections from the u.k. administrator including from the creditors' committee, the holding company opposed to the

distribution on the ground we may be distributing assets which belong to other creditors or other parties. so as i say i think the analysis of the business practices of the firm and whether they were sold in four insolvent is going to take some time but i don't think it is going to magically come to a pot of gold at the end of the rainbow immediately. >> i appreciate your candor and i think mr. duffy has something to add. >> it's clear the cme is cooperating with the authority but also has been instructed by both the cftc and the department of justice not to conduct its own information. all the information i've given you is by interviews that we have conducted internally of our own employees so i went to make sure that is clear for the

record. i yield back. >> senator klobuchar. -- thank you very much madame chair and to all of you. mr. duffy i was out actually asking mr. corzine and the mf global witnesses about the statements that you have made and your understanding of what had happened and in your testimony what is considered the most detailed account life heard to date as to when and how they were missing from your testimony do i correctly understand that is your belief that the customer funds were illegally transferred out of the segregation on october 27th of the first day and friday october 28? >> we were told that customer funds were transferred from customer segregation to the broker-dealer and that is a violation of the rules so yes that is correct. >> the new information we got today i want to go over that. is that one of those transfers or is that just another

175 million to the european affiliate's? >> i am unaware of what it was other than what i was told over the weekend by our lawyers by an e-mail in a conversation after words that mr. corzine was aware because they heard us talking to another -- was on the phone with the european affiliate's coming european affiliate's to 175 million the woman said mr. corzine is aware of the loans. >> and this is a woman at mf global and who is she? >> i don't have heard exact name. i will give it to the committee afterwards. >> so she told an auditor. >> the altar was in the room on -- while she was on the phone. estimate and it was 175 million loan to what foley it? >> i have no idea. >> and then i know senator roberts asked about in your

testimony you said the transfer of the segregated funds is, quote, the transfer of segregated funds out of the account disguised from all regulators and actually engaged a little in the previous panel about disguising what they were required to do with the disclosures. why did you choose disguise? >> because as i said in my testimony and senator roberts, we were talking out which means we were validating the funds from the statement to thursday and friday we had 80 to 90% of the tie out done to show the funds were basically intact. this was on friday but it's based off wednesday's report. then they gave us another report. first the report showed $200 million in excess and then they gave another report four days later after the bankruptcy with the same day prior that

showed the 200 million-dollar deficit. so it is clearly the to different reports from the same day with a $400 million wing and we tied out 80 to 90% of the funds being there on friday. on wednesday's report. >> this was different than the issue of the reporting about where the funds went to read this list in this weekend. >> i'm talking about this work was being done on thursday or friday of wednesday's report and the report they gave was revised on monday. speaking your testimony you stated that according to the information you believe that there might be a shortfall in the segregated funds between 13% and 19%. has that changed at all or is there more defined? >> i'm going of dollars. >> i wonder where that rested with the 1.2 billion figure. >> we are estimating the shortfall between the 700 million to $900 million. >> so that's less.

>> $550 million is 10 cents so you can do the math from their. >> what is the difference between -- >> there are three segregated funds. i think mr. duffy is referring only to the u.s. futures when he gives the figure of up to 900 million. i am also referring to the segregated accounts with the foreign future and also segregated securities accounts. >> i am referring to the u.s.. >> and then mr. giddens i know this is incredibly complicated and the report and thence to the records in the last few days are you confident that the end of the day we are going to be able to account for all of the transactions in and out of segregation from start to finish? >> will that is what we are trolleying to do for several months period and have several

folks working for me who are trying to reconstruct this. >> from what i've understood all reading your previous testimony something like 72% of the money will go back to people that are victims of this colossal collapse. >> yes, the commodities exchange act requires me to give the same program distribution to every customer and after this distribution each customer should have received 72% of the value in their account. >> and then how about above that under what circumstances could the customers who had their fun this in the accounts not be made whole? >> if we continued in the shortfall in the total assets it's my intention to make further distributions for the

claims process as promptly as possible and it depends on the total recovery of assets that we have. if we have only the assets we had at the present, there will be a shortfall. and it's my goal or respiration to litigation or otherwise if possible to make up that shortfall. s make a call back or finding ways to find this money? >> yes. >> and so what do you see as the timetable? you've got the distribution of the 72%. you determine what the shortfall is so what should we tell -- >> welcome of the time for filing claims expires on january 31st. and by that time, we should have a picture of all of the claims. we had just an estimate. for example, u.k. and the minister had an account in the global u.s. of several hundred

million dollars in omnibus accounts. we had not distributed anything on that. there were also of your subsidiaries around the world and other potential creditors to read until the claims process is completed, we will not know with assurance with the claims are. what we have and we are very grateful for the guarantee because that is given some assurance we could proceed with a fairly substantial distributions without knowing in reality with the total assets are and what the total claims will be allowed that our intention is to do that as quickly as possible and make further distributions as quickly as it appears comfortable to us to the cftc, and of course eventually be have to persuade the bankruptcy court to approve these transfers in the interest of all of the parties in the bankruptcy. >> thank you free much. i know i talked with you before and if we have anymore questions

especially about that timetable we will follow up in writing. i appreciate it. thank you. >> thank you. senator boozman. >> thank you, madame chair. mr. duffy, did you get a chance to hear the testimony of governor corzine and his associates? >> i did. >> was the testimony that you heard, was consistent with the facts that you've uncovered in your investigation? >> i'm not a lawyer, sir. the only thing i can tell you is that the transferred money from the customer segregated accounts to the broker-dealer for the accounting error. icahn also only tell you 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 on the segregated accounts. >> ms. sommers, again it's remarkable that you mentioned lehman brothers and things like this. this, is this unique, this sort of thing happening?

certainly to this extent but is it unique in itself? >> yes it is, sir, for the customer funds. >> you mentioned customers. how we differentiate between what is and what is not customer dollars? >> the customer funds on this side would be put in a segregated account, and those accounts would be tagged as for desegregated accounts. >> end of the money that they've discovered outside? >> vara can be money in a lot of other accounts outside of 4-d. the to the broker-dealer accounts, future accounts we tag as 40.7. >> very good. >> mr. giddens, the 550 million-dollar guarantee, is that money going to be used to

make customers whole if we can't find the shortfall? >> that's not the nature of the guarantee. .. and if you end up with only having 60 cents or 65 cents, he'll make up to 10 cents. we don't go above the 75-cent number. it's basically cme -- if he pays

up to 75 cents, finds out he doesn't have 75 cents, has 70, then we pay 250 million to him. if he has 6 5 we pay another 250 million. if he has 60, he is on his own after that. >> i see. thank you, madam chair. >> thank you. senator hoeven. >> thank you, madam chair. i'd like to start with mr. duffy. would you feel it's fair to say that either customer money was moved from segregated can'ts to the company accounts for use by the company or there's an accounting error here, or we're going to find the dollars. would you say it's fair one of those scenarios will be the case? >> i can only tell you what i have been told. we are told there is no accounting error.

i was told there was money moved from customer segregated funds to the broker-dealer account. >> you indicated 2 been million? >> s no. $250 million was moved out of the segregated funds to the broker-dealer. i was referring to a customer segregation report from a week prior that showed them having excess of customer moneys, 200 million of their open ms.~in the segregated pool. then that was revised down to be $200 million deficit five days late are. >> your odd "against all odds: my life of hardship, fast breaks, and second auditorrors - >> our auditors were told by mf global, that's what they did to stop looking for the accounting error. >> what authority did they have to make those transfers. >> i don't know if they were the one making the transfer.

alls i'm telling you, they told our auditors to stop looking for an accounting air row, the moved the money. >> what date. >> 2:00 a.m. in the morning. >> so it would be your information that the investigation in tab dem with the doj, and the trustee and everyone involved here, they would be able to determine the amount that was transferred, when it was transferred, who authorized the transfer? >> we have given them all the information we have. we're not part of the investigation. we've been asked to be both by the cftr and the department of justice. >> you felt this was not a system failure but, rather, that somebody violated the system. >> there's somewhere between 700 million and 1.2 to giddens recollections. six or seven weeks later, the

money isn't there yet. so the money appears to be missing. >> commissioner summers, would you give me your thoughts on the same issue? system failure versus somebody violating the rules, and then also your sense of how soon we'll be able, through the investigative process to determine what happened, who is accountable? >> the first part of the question, i think it's a little bit premature for us to make determinations about whether the system failed until we know exactly what happened. after we have a chance to go over all of the facts and circumstances of the case, obviously we can decide whether or not there were any parts of the system that failed in this instance. the second part of your question, how long it may take to follow the trail, just to assure the committee, we will

follow every single lead in this investigation, both the law enforcement side of the investigation as well as tracing where every penny of the money went. but it is complicated. and while you may know a certain amount of money could have been transferred out of the fcm at one time, that money being transferred could have splintered into thousands of different accounts after it was transferred out of the fcm. and we have to trace to make sure which one of those transfers were legitimate versus illegitimate transfers. if a customer on the fcm side had money they asked be transferred to the broker-dealer, that would be a legitimate transfer and we would have to follow any supporting documentation that's with mf global, to know which one of those transfers are legitimate versus illegitimate, so. while we have a very good idea

at this point about what has happened, it is painstakingly difficult and complex to follow every single transfer of this money. so, we're working closely with the trustee and the forensic accountants to make sure we get every single detail unveiled. >> mr. duffy. >> you know, senator, maybe i didn't answer your question properly. i believe i'm the only one in two hearings that's giving a timeline of the sequence of events. i don't believe it's a system failure because of the timeline we with hocked through. when the question wassed a today to the earlier panel, was i paying attention to the other panel, when the senator from minnesota asked, was my statement -- she said my name -- was my statement correct that they were told that moneys were transferred out of customer segregated into the broker-dealer account. nobody refuted that of the three participants i saw. so we're the only ones that has

shown a timeline -- i don't believe there's a system failure here. maybe i didn't answer your question properly. i think it was a violation of rules. i'm not a judge or jury or lawyer. but we gave a chronological indication of events. >> i understand you don't think it's a system failure, which means either transfers were made inappropriately or there's an accounting error. you indicated you were told it wasn't an accounting error; that transfers were made. >> that's exactly what i said, sir. >> mr. duffy, in terms of the ability to recover -- because some of the earlier testimony was, this may be an accounting error, and certainly should should be controls in place so you don't have an accounting error, which is part of the system. about whether it's accounting error or there were unauthorized

transfers-will that effect the ability to get full recovery for the customers of mf global? >> if it were simply an accounting error, then presumably it could be corrected and have the funds. we're basing our analysis on what actual dollars are there against estimated claims, and there is a substantial shortfall. i should say, while the technical investigation by the department of justice will be thorough, and by the regulators, it may take months, that is not going to deter us if we see a source of funds that we think should come back into the estate from pursuing that. in fact we have already made demands of counterparts who closed out transactions for

accountings and to -- in fact we have recovered some small amount of money. so, what i'm saying is we'll be pro-active immediately, and even though the investigation may take many months before anybody can unravel the thousands, if not hundreds of thousands of transactions, and we will be doing all we can, as the members of this committee have encouraged us to do, to pursue dollars to make people whole. i'm certain the distribution will be more ultimately than 72 cents. how much, i can't really say at this point. >> thank you. >> i can wait or i do have -- i would like to have a followup question. >> we do need to bring the hearing to a close. you can do that quickly or put it in writing. >> just one more followup. >> very quickly. >> for mr. giddens.

1.2 billion is the shortfall you anticipate -- just take me through the math so we can communicate with folks who are out the money. the senator from minnesota talked with you about the timeline, but just take me through the number. 1.2 billion, you estimate 72% row. how much -- 72% recovery, and are we talking about the difference of roughly 300 million what you expect the shortfall to be? not. he the bankruptcy court entered the order on monday, and with the cme and the cftc we put in place distributions and the first distribution should shoo go out tomorrow. that process should take two to four weeks before all of the

money is out. when that is completed, that distribution should give every person 72% of their claim. if their claim were for a million dollars, they should geoff 720,000. the shortfall, the 1.2 million, is an estimate based on what we see as estimated claims against three segregated pots. one for securities customers. one for the u.s. folks who transacted in foreign futures, such as on the london metals exchange, and ten the largest pot of that, under the cme jurisdiction, or u.s. futures. and the combination of those three pots of assets, what we actually have and what we have collected, is what leads us to the approximately 1.2 billion. >> thank you. >> thank you very much. we thank all of you for coming

today. this has been a very, very important hearing, and we have answers and i have questions. we have three goals as we continue to look into this situation, getting the customers' money back, and mr. did giddens, we hope you will stay on top of that. and i will just reiterate that any policy changes will come through this committee and we'll continue to examine the class -- collapse of mf global, and we heard today from customer who are worried about using the futures markets and that's not acceptable to our community and all of you, the regulators to ensure that the markets are safe and sound and there's in fact confidence in the system. so, we look forward to working

with you to make sure that that happens. thank you very much. the meeting is adjourned. >> thank you, senator. [inaudible conversations] [inaudible conversations] up next, a former nhl hockey player who was abused as a child, tells a senate panel more education is needed to combat

sex abuse of children. then a senate debate on a republican balanced budget amendment to the constitution. >> now, senate panel examines u.s. child abuse reporting laws. we'll hear from a former national hockey league player, sheldon kennedy, who was sexually abused by a junior coach in canada, starting when

he was 12 years old. this is the first hearing since penn state jerry sandusky story broke. maryland senator barbara mull caskey chairs. >> the subcommittee on children and families will now come to order. today we have a very powerful and poignant hearing. we'll be addressing one of the most difficult issues one needs to raise in child welfare policy. that is how do we protect the children in our communities and in our country if they are victims of child abuse? particularly if they're the victims of child busey their within their own home or when they're in somewhere where the children have been placed in the care of a trusted adult.

the focus on this hearing is to -- the topic will be "breaking the silence on child abuse." how we can protect children when they're being abused, how we can intervene and protect them and then what policy should we put in place to achieve deterrence of this vial and repugnant act against children. it's sad we have to have this hearing, but the reality is just in our society. it's -- this hearing will not we one of sensationalism and will not be sensationa. our hearings focus not only the sensational but on solutions, again, rooted in prevention, intervention, and deterrence. this hearing is a result of a letter from senator bob casey who had a tragic, tragic

incident in pennsylvania. this hearing will not focus on pennsylvania. it will focus on the broad issues because it goes on in every state, and regretably in every community. i also want to thank my ranking member, senator burr of north carolina, for his active participation in developing the framework and the witnesses for this. senator burs hat a long-standing and persistent reputation for standing up for vulnerable populations, and we have worked together on a variety of these issues, including the protection of children in day-care centers. we also want to note the long-standing advocacy of senator barbara boxer for her role and her open ideas. i want to give a brief opening statement here but i want to welcome all of you who are here and all of you watching in your

home and in the locker room and in the dugout and all over our country. we've got to dedicate ourselves now to the right policy, the right legislation, to really protect our children. while many have been shocked by the recent child sexual abuse, unfortunately i'm not surprised. many, many years ago i work as a child neglect social worker in baltimore. i saw the danger to children up close and person. i was with them in the er, in the courtroom, with them when i had to remove them from their own homes and i was with them is a tried to put them on the road to recovery and rehabilitation. from what had been done to them. because i saw the permanent and indelible scars this leaves on a child for all of their lives. for me, that experience as a young social worker, so many years ago, was a searing, searing experience.

i learned from it. i grew up while i was working in it. and now, as a senator, i continue to devote my life to being able to work on this. this is why i'm so determined we're going to take what we hear today and turn it into an action plan, and we have been putting in programs with the center for missing and exploited children, working with the fbi, the marshal services and others. again, our focus is really on prevention -- protection, prevention, and deterrence. there's nothing more troubling than a child who has been physically, sexually or emotional abused. then abused again because of the failure for adults they turn to, who either don't listen and rebuff and reject them, or who do listen but in order to protect the brand of an institution, where the

reputation of a team, don't report it. they abide by a coverup of silence. a conspiracy of silence so the child is doubly victimized. those who abuse them, and then the system that turns their back on them. we're going to hear about some of this today. one from mr. sheldon kennedy. a former professional hockey player, who stated for -- skated for the united states of america. abused by a minor league hockey coach, and someone with -- by a coach, his parents had come to trust. what was additionally troubling about mr. kennedy and his experience, is that the abuse was allowed to continue despite the red flags. so, we want to talk about that because we want to break that code of silence for preventing not only the first abuse, but the second abuse. >> mr. kennedy's story is not the first. there have been many examples in

our history where children have been subjected to this second abuse. victimized a second time, where they have been overlooked, ignored, or covered up. well, this senator takes the position that no institution should ever be too big to report or too famous to report, and no adult should ever feel that they're protected because of the brand they represent. my hope is this hearing will point out what we need to do to help our children. our job is to ensure we have the right legislative scram the -- legislative program and the right prevention. there's currently laws on the books passed on a bipartisan basis, the child abuse treatment act, in 1974, to provide funds to states for prevention and investigation and prosecution. we need to examine that is sufficient or whether it needs

to be amended. my own view is that in recent years, whether congress should look at reform, and it's my belief that every adult has a responsibility for a child. it takes a village to raise a child and it takes a village to protect a child. and i believe, regardless of who you are, if you see something, if you know something, then report it. if you see something, do something. so, we're going to listen to that. and now i want to turn to my colleague, senator burr, my ranking member, who has done such a great job, and then senator casey, who questioned this hearing, staunch advocate of children, then senator boxer and her own advocacy. >> madam charge is thank you for holding this hearing and i want to thank you for your passion for children. that clearly comes across in

your openings statement and actions in congress. nothing is more important than the safety and the well-being of our nation's children. no child should ever have to suffer the pain or shame of abuse at the hands of an adult, be it that a parent, teacher, coach, or a stranger met in the park or on the internet. i also want to thank all of our witnesses for their time and dedication to our shared goal of ensuring that children are free from abuse and neglect. and in those horrific instances where a child is abused, i thank today's witnesses for their commitment to ensuring we intervene quickly and provide those children with the support and the treatment that they need to heal and recover. over the years, senator mikulski and i have worked together on legislation that would require

criminal background checks for individuals working in child care or volunteering with vulnerable populations like kids, the disabled and the elderly. when parents leave their children with an adult, in an entrusted organization, day car, schools, sports activity, after-school care, summer camp, they shouldn't have to worry they might be dropping their child off to be cared by someone who has been convicted of a violent crime, especially a crime against children. the use of criminal background checks for keeping criminals and violent offenders away from children is but one important piece for keeping children safe. criminal background check will only weed out the offenders known in the criminal justice system or another government agency such as the child protective services. today we'll be hearing a lot about the offenders known to children and often known to be suspected by adults within a

community, who remain unknown to the judicial authorities due to the silence of their victims and the silence of the adult bystanders. to truly ensure our children are safe, both children and the adults must break the silence of abuse. however, since children who are being abused live a life of fear and shame and are thus least able and likely to come forward, it is adults with whom the greatest responsibility for breaking the silence of abuse rest. as one of our witnesses said in her testimony today, child abuse is a grownup problem. although crimes against children through such means as sex trafficking or internet, often tend to gain the greatest air time on able news, it's important for us to remember that most instances of abuse against kid, sexual and physical, are occurring not

across the statelines or on the internet but in our own neighborhood communities and by folks we know. sense the vast majority of abuse is occurring so close to home, it's critical we train and empower adults to know the signs of abuse and to know what to do when they see or suspect it. there's no quick fix. there's no single piece of legislation that will make the problem of child abuse magically go away. however, the adults returning to a collective sense of responsibility for all the children of their community, can, from the grassroots level, begin to break the silence for benefits for all kids. i look forward to working with chairman mikulski and all of my senate colleagues to better understand and respond the issues of child abuse in this nation today. we often hear that children are our nation's future.

how we as adults treat and how we respond to the ill treatment of our nation's children will determine what that future looks like. i thank my colleagues. i thank the chair. >> i'd like to turn now to senator bob casey, who requested this hearing and this committee was already contemplating it, but who has been such a long-standing advocate. we know he has legislation. we're going to be focusing on the broad policy. senator casey, let's hear from you and proceed. >> madam chair, thank you very much. i want to commend you and senator burr for bringing us together today, and i'm grateful for that. not only on behalf of the people of the commonwealth of pennsylvania but the whole country. we're grateful. and i want to say to senator mikulski that your work, if i can use an old phrase, laboring in the vineyard, goes back long

before you remember -- a member of the united states house of representatives and the united states senate, helping children as an advocate. so we're grateful you spent so many years working hard to protect our kids. child abuse is the ultimate betrayal, isn't it? the ultimate betrayal of a child, and what every child should have a -- has and should have a reasonable expectation of safety and security. it's almost hard to begin to comprehend the horror that a child must feel when they're the victim of abuse, but maybe especially when they're the victim of abuse by someone they know or trust or maybe even someone they love. i can't even begin -- i can think of it for years and can't even begin to comprehend how horrific that it is. so it happens because adults

fail, not because children do anything wrong. we can't just blame it upon systems. we're all adults and we all have to take some measure of responsibility. and what has to come from a hearing like this, maybe not today, maybe not in the next few days, but when we come to a consensus about what to do, it's as basic as we could imagine. at it about protecting children no matter what the cost, no matter what the impediment, no matter what the obstacle. so that what we're here to today, and i think it's about holding adults accountable. ...

several in the last couple of months but again it's getting back to the basic obligation that every public official has to protect our kids and do everything we can to fight against and pushed back and deal with that the trail we all know in our hearts is at the root of this and also no longer statement for the record butch chairwoman, we appreciate your work on this, you and senator byrd have made service to the country today. >> i want to say to my colleague i would like to turn to senator boxer whose done incredible due diligence in child protection. to others i would hope he would

leave your opening statement part of that in your question period. after senator boxer we are going to move to an excellent panel. senator boxer, we want to welcome you. you have over the years really been remarkable in your advocacy for children and to do diligence you've put in in recommending several pieces of legislation, some with us, some with judiciary but it doesn't matter. we need to be in it together and for the kids. please proceed. >> thank you. gloor also eloquent. what i think you privately for this. were you were doing today. i want to 4-d new publicly. not enough kennedys are doing in my opinion the diligence that should be done and i am so appreciative of you and of course senator kec for requesting this hearing. i speak to you today as a mother and grandmother and senator from the largest state in the union believing their must be

tolerance for crimes against kids. zero tolerance. i think's senator byrd referred to that and we get it from the heart, soul in our own community. so we need a new ethic in this country, and as much as we need to strengthen fell all. now if this ethic were in place, the zero tolerance, this sensibility about the fact we need to protect kids we are in place. many crimes against children would be committed and those that commit such acts would be called before the crimes are repeated and repeated and repeated, and the innocence were damaged for life. so i'm going to give you the facts because sometimes weeklies over this issue because there's so many numbers thrown at us so i'm going to give you two of them that we have. several hundred thousand cases reported every year. think about it. several hundred thousand.

some of the states have fewer than several hundred thousand people living in them. several hundred thousand reported cases of child abuse every year and reported in that, 80,000 reported cases of child sexual abuse every year and the other percentage of want to give you is that 71% of all sex crimes, sex crimes victims are children. 71% are the victims are children. i don't believe congress has done enough to prevent these atrocities and i want to do my own involvement. i've worked closely with all of you on so many issues. senator isaacson and i worked together to prevent violence in the peace corps and all of you support us in that endeavor. so a lot of our involvement stems from something. he had a constituent and he took

that issue to heart. in may of 1997, a california 7-year-old from los angeles was molested and killed in a nevada casino bathroom. the assailant's friend witnessed the molestation and learned of the murder. he didn't do one thing to stop it and he never reported it. so that moved me in 98 to introduce legislation that deals with reporting requirements. nothing happened. in the meantime, unreported cases of child abuse occurred at educational institutions, religious institutions, day care centers, and interestingly on federal land and property. the worst part of the failure to report these horrific crimes is allowed the serial killers to go on and on and on to pray on more and more defenseless children. so it is time to protect children nationwide.

in '94 we can together to pass the violence against children act. sorry. slip. i want that to happen next. the violence against women act. it's worked successful. we work across party lines. it's time to pass the violence against children act which would be an all encompassing way to bring about this new ethic of this evil tolerance. but today because i've been told by the chairman and the ranking member don't talk about a specific bill. i won't do that. i am for so many bills and i've written some of them. ibm for all of them. but i do want to make one point. i don't think anyone is aware of and this is critical. today on federal property if there is a crime in this building or in a national park or in a military base, we do not have reporting requirements other benefit is a professional that sees the person after the

fact. so in our own house so to speak we have work to do. we are going to want to tell the states will to do but we better look at our own of law. so i'm going to close now with a final thought. after 9/11, our nation reached a consensus. that consensus was no one would ever sit passively on an airplane as a terrorist tried to take it over. i don't care if you were under 5 feet tall as i am. we will get up out of our seat and we will do what it takes, all of us. now our nation needs to reach a consensus that we will never, ever turn a blind eye towards the crime of an innocent child. we have to defend our kids otherwise we are failing as human beings. and we are failing as legislators. thank you.

i know you share this passion and i am so grateful to all of you. thank you para >> thank you, senator boxer. we look forward to working with you on your legislation. we would like to now call our panel mr. sheldon kennedy, former hockey player, michele collins, vice president of the center for exploited and missing children, and frank from pennsylvania who heads up the support center for the child of the kids. while they are coming to the witness stand i will also like to acknowledge as we get ready to turn to mr. kennedy someone else who was a victim of terrible sexual abuse at the hands of her nanny brought to elbra attention by a colleague and we want to welcome you.

we thank you for taking your personal tragedy and turning it into an organization called lawrence kids. we look forward to your advice and counsel on moving this bill. >> we had such enormous outpouring from the people who wanted to testify to come forward to bring to the national attention the def and breakfast of this horrific problem. we could not accommodate everybody at the table. what we want to company is the legislative table and we look forward to your benefitting from your experience not only what happened to you but your thoughtful work and prevention. >> i would like to turn now -- i'm going to comment on everybody. mr. sheldon kennedy. mr. sheldon kennedy was a professional hockey player.

he skated for the united states of america. during his career, he was terribly abused and then he was abused a second time because people were more at protecting the coach and the brand. mr. kennedy we want to hear not only your story but all of your recommendations about that. then we also want to turn to michele collins, who represents the group established by congress, the national center for missing and exploited children. she comes to us with a tremendous background and experience. she oversees the cyberattack line. i say to my colleagues we already have a congressionally authorized recipient report with child sexual exploitation. she has and then also the child victim identification program. so we need to know again from a policy level.

and then a senator casey, did you want to introduce your representative from pennsylvania? >> yes. i will be brief. we can go on for awhile. i've known frank along time and i'm grateful he's with us. frank is the executive director of the support center for child advocates which is a pro bono program that provides legal counsel to the abused and neglected children. he's also share of the pennsylvania children's trust fund which funds programs to prevent child abuse and neglect. frank has a distinguished record of working to protect kids in pennsylvania. a few people i know, if any, have their record and the commitment frank house and he's a graduate of the university of pennsylvania and the school of law and he has a master's degree in theology and ministry. we are grateful you are here as well. thank you.

>> mr. kennedy, we want to welcome you coming and we so appreciate this. ps2 then to proceed with your testimony any thoughts or recommendations were in sight you would like to provide the united states senate. >> thank you. good morning, senator mikulski, ranking member and members of the subcommittee. thank you for inviting me as a witness today. for many canadians, hockey is everything. it's our passion, our culture, our national pride. like most boys growing up on the prairie i joined of playing in the national hockey league. unfortunately for me, the dream came true. i played for the detroit red wings, the boston, the calgary flames but it's not my dream i'm known for. it's my nightmare is a junior hockey player i suffered years of abuse and harassment at the

hands of my coach, gramm james. despite the nature of the abuse, the hurt i experienced and the fact i knew what was being done to me was wrong it took me over ten years to come forward to the authorities. why i didn't say anything. this is a question i asked myself again and again and again. it's the question i know everyone else was asking, and it's the question that plagues the millions of sexually abused victims around the world. even though i wrote a whole book on the subject, the answer is quite simple colin coke because i didn't think anyone would believe me. in my case, my abuser was in international hockey man of the year. in canada that gave him almost godlike status. sound familiar? the man who preyed on the took advantage of his position as a coach to look for children who were especially vulnerable. single-parent households, families with drinking problems, boys who needed a father figure,

etc.. these kids and often their parents, too, looked up to him as a hero. this was someone who could make their dreams come true and they used that trust to hurt them. the imbalance of power and authority creates a deeper problem and it's the one i think that this subcommittee has to deal with if you truly want to prevent child abuse. in every case of child abuse, certainly in my own, there are people who had a gut feeling something was wrong but they didn't do anything about it. their attitude was i don't want to get involved. it's not my problem. he couldn't possibly be doing that. the authorities will take care of it and that's what pedophiles are counting on. counting on public ignorance or worse yet, there in difference. that's what keeps child abusers and business and that is what we have to address. from my experience a child who has been abused has to tell an

average of seven people before the story is taken seriously. seven. that is completely unacceptable. when my story became public in 1997, there were people who refuse to believe it. many were angry that i exposed an ugly side of their beloved sport. fortunately, hockey canada responded seriously to my situation and made abuse prevention education mandatory for the 70,000 coaches and this is the positive message and want to leave you with this morning. seven years ago i co-founded respect group and in partnership with the canadian red cross internationally recognized experts in the prevention of child abuse. together we want launched the program for sports leaders called respect in sport. it focuses on educating all adult leaders on of use, bullying and harassment prevention including a sound understanding of the legal and moral responsibilities.

our belief and respected group is that we may never fully eliminate child abuse but by and powering the 99% of the attention adults working with you if we can greatly reduce it. i'm proud to say that the respected support we've certified for 150,000 youth leaders that represents a high percentage of coaches. denise sports organizations have mandated the program and the list continues to grow. hockey canada, gymnastics canada, the entire province of manitoba, school boards and some early adopters. the united states including usa, triathlon, in addition organizations like hockey canada and gymnastics canada have implemented their respective sports programs designed specifically for parents. we're also seeking productive initiatives by the canadian government to combat child pretreatment not just tougher legislation and minimum

sentences for perpetrators but a federal approach headed by the minister ron lambros to introduce prevention education that spans the multiple ministries that touch the most vulnerable canadian youth. we've learned the social change takes time and has to occur at the grass-roots level and from the government down. i'm pleased to say that is exactly what's happening in canada and i hope it is what will happen here, too. over the years through my work at respect group, i've learned that educating people 99% of the population is the best defense to prevent abuse. training must be mandatory to ensure full compliance and reduced liability. the education has to be simple and consistent. all forms of abuse lead the same emotional scars some training has to be comprehensive. education is best deliver online to ensure consistency, safety of the learned, convenience and the greatest reach. finally, training must be

ongoing. it's not a one time thing. too often society's response to child abuse is to focus on punishing the criminal. the teacher caprice or coaches sent to jail for a long time we feel we've done our job was as citizens or politicians punishing the bad guy makes us feel good but it doesn't fully solve the problem. senators coming in to get all adults working with youth and parents the tools to recognize and respond to abuse when it first arises. i am under no illusion such an approach will eliminate child abuse but i do know mandatory education creates a platform with and all organizations, the conversation to happen. empowered by standards and you will be taking an important first step for breaking the silence on child abuse thank you and i would be happy to take any questions. ms. collins, to get the perspective for the missing and exploited children. >> madame chairwoman and members of the committee i welcome the

opportunity to appear before you talk about the important issue of child sexual abuse. senator mikulski, the first and experience working in these types of cases gives you an valuable insight and we appreciate your leadership on these issues. with your permission i will urge my testimony in the interest of time. as you know, the national center for missing and exploited children is a not-for-profit corporation organized by congress and working in partnership with the purpose of justice we are a private public partnerships and for 27 years we'll serve as the national resource center and clearing house on missing and exploited children. one of our programs is the cyber to point of a national clearing house for crimes against children on the internet and operated a partnership with federal, state and local law enforcement agencies. we've received reports in eight categories of crimes against children including possession, manufacturing and distribution of child pornography child sexual molestation. the reports are made by the public as well as by electronic

service providers required by law to report a parent or child pornography to law enforcement by the cyberattack line. reviewed by analysts and then referred to the appropriate agency to read as we all know recent events highlighted the problem of child sexual abuse but what are the facts? we've come a long way since 1974 when congress passed the act states made significant progress in the reporting investigation and treatment of the cases. all 50 states have laws requiring mandatory reporting of child abuse. lester the 506 credit child advocacy centers in the united states served more than 270,000 abused children but despite the progress the problem persists. according to the department of health and human services in 2009 state child protective agencies reported 543,000 substantiated incidence of neglect, 123 goals and substantiated incidents of

physical abuse and 66,000 substantiated incidence of child sexual abuse. however the data comes from the state child protective agencies and is generally limited to the abuse committed by caretakers. the dod data indicates there are more incidents of child sexual abuse than assault each year. a doj study estimated to wonder 85,400 children were victims of a sexual assault in that year. what are we learning about child sexual abuse? we don't hear about it from the child victim. in fact they found only one-third of these incidents were reported to the law enforcement. we hear about abuse from those were designated as mandatory reporters under the state law and other concerned adults to report allegations of abuse. the mandatory reporters are specified by professionals in most states including health care professionals call law enforcement officers, educators and child care providers. in addition, 18 states require all adults to report abuse.

we also learn what child sexual abuse for the investigation for child pornography on the internet. law enforcement investigation for crimes against children in the online world often lead to the discovery victims and the offline world. individuals who possess and distribute child pornography may be sexually abusing a child or they may be communicating in treating images of somebody else who is sexually abusing a child and because very few child victims tell anyone about their abuse, it's only through the great work of the federal, state and local law enforcement of these abusers are caught and the children get the help they desperately need. who are abusing these children? the majority of child victims are victimized by somebody that they know and somebody they should be able to trust. according to the survey, 81% of child sexual assaults were committed when somebody with legitimate access to the child to read of the child pornography victims' identified by law enforcement, 70% or abused by a parent or guardian, relatives, neighbors, family friend, baby

sitter, coach or guardian park near. the good news is regardless of the abuses reported many of the victims today are getting the help they need. however, there is room for improvement in the system. mandatory reporters should also be required to report sexual abuse directly to law enforcement and although they may be required to report to their supervisors within an organization, child sexual abuse is a crime in all states and will enforcement must be involved at the outset. once the report is made, law enforcement will involve the appropriate child protection authority. another recommendation is to require training of mandatory reporters and how to better recognize the sexual abuse said they will be better equipped to respond to the warning signs. the most important change we can make is to encourage all adults to speak up for the victims of sexual abuse. we should teach people what to look for and to build momentum for combating sexual abuse. i recognize people are afraid of getting involved or of making a

mistake and allocation based on suspicion that we are the only ones who can act on the suspicions and help stop the abuse. i'm confident we can work together to better protect children. thank you. >> thank you, ms. collins. mr. servone. >> thank you chairwoman mikulski and senator casey and other members of the committee for this opportunity to testify today and thank you, senator casey, in particular for calling for this hearing, for continued leadership in this area. we know that you are a great friend for children and health care in early education and health care and all the ways we know we can turn to you. thank you very much. the support center for child advocates is still a volunteer lawyer program for abused and neglected children. we are a big shot for kids and represent about 850 children each year in court in various times of the victimization

cases. i insisted today in this presentation by the work of kathleen and our colleagues in the protect our children committee which has spent the statewide coalition about tickets and physicians and service providers. i'd like to put some of the events of the recent days and weeks into context reflecting the reality that many more children are physically and sexually abused but garner no attention from the policy makers or from the people who should be caring for them. sadly, it seems, this is not just a penn state or syracuse, but sadly, we need the scandals. we've needed even these bad actors to bring this discussion forward. we welcome to speak up to protect every abused child act introduced by senator casey. the legislation helps shift child protection strategies from where the children are required to protect themselves. from abuse and victimization and highlights and transfers to

adults the responsibility to step up for kids and for the mandated reporters it calls for better knowledge and dador informed policies. it represents a solid starting point to a critical discussion. we know that families sometimes keep secrets. last week in our office we opened to cases representing child victims and the prosecution of their alleged abusers. it's a very important aspect of the work to be in the criminal courts on behalf of the child victims. one was an 11-year-old girl sexually as abused by her father for years, and her mother was not be leaving her. she knew, apparently knew, but failed to believe her. the other come a boy of ten and used by his mother's boyfriend and now the mother is failing to bring the child to court for interviews and for prosecution of the abuser to read for these cases, like the more notable ones we're hearing about, we should ask where were the adults in the lives of for all of the

years that they were carrying this out secrets? this is what is difficult that for many left wondering what was missing in their lives and wholesome adults whom they might have trusted, knowledgeable adults who might have noticed the warning signs. while it's hard to know the extent of the reporting we know that many cases come forward with the long history of secrecy and nondisclosure. the days were years that passed suggest someone new and should have known and there is another theme in that encase state law that shouldn't go unnoticed the children were protected because a couple of mom's listened to that and believe their children and now they are standing with them. it would be a gut wrenching court process there could be no better child protection tools than ensuring every child is connected to the adults who've pledged to nurture and listen to them and speak up for the child.

witold victims and the abuse come forward? violations of trust are the hardest to endure. the abusers are trusted parents and and or an uncle or pastore parent or coach and the violation of the trust are tremendously confusing to read the defenses are compromised. in the beginning with a blooming behavior's and in the end by threats of embarrassment at harped. in our work we hear all the time that the child or adult sought reluctance to disclose and then suffered the pain of keeping the secret. why don't people intervene? this is the question we are all asking gaining all this attention but again the story, the understanding of it belongs to us. why are we adults reluctant to report? undoubtably we've all experienced the feelings of indifference of isolation about the opportunity. we say things like it's not my job. someone else will respond. or if i stand here it will be worse for the child, to which i say how can it get worse?

we fool ourselves if we think stopping a crime is not the west solution. i can tell you i've heard from the kids, they want the abuse to stop. feelings of loyalty to the institution did in the way. aversion to scandal, the survival of the institution is what becomes parallel. people respond to cultures of power in the families and small towns and big institutions. there's often a heavy price to pay for speaking out. we must help the victims to reporters coming. everyone has a statute literally taught at my whole career. people are confused of their duty to report. a remarkably large number of mandated reporters i'm betting a lot of people in this room, people who come into contact with children and their work have never been trained on the duty to report or would sell wall is in their state.

the speegap legislation would require states to mandate the reporting of the known or suspected incidents. the standard articulates the duty that we should all know and feel. we know that the mechanics of the mechanism have to be worked out. what we have is a laboratory because the states are doing it both ways and we should be studying those. a word about capacity, increasing the numbers of reports of suspected abuse without increasing the resources of the system's capacity to respond may be noble but may be dangerous to kids who are meeting the system's attention. kids get removed an abundance of caution. that's what we do. we pull them out of the fire or so we think. but the removal of the foster care is not always beneficial or even the mind. a child can be traumatized. school can be interrupted. the investigation can get it wrong. the findings of becoming a child abuser have all sorts of implications for the future employment of that child's