to show you how dramatically out of kilter this is. that's outrageous. furthermore, we went through some of the expenditures on bonuses and payments to some of the gsa employees and who got them. a $50,000 bonus went to the regional commissioner who is under investigation for the las vegas conference. not only were they giving out an incredible amount of bonuses but those who got them, for example, were some of the abusers. he ended up with almost quarter of a million dollars in his pocket. an employee with a base salary

of $84,000 got $150,000 in overtime pay. we saw a quarter of a million dollar distributions to a number of employees that were also investigated. a 79,000 there are for one bonus with compensation went as high as $260,000. there's something wrong in gsa when you have to pay an employee $115,000 in overtime. then we found multiple $50,000 bonuses in this agency. conferences are one thing. multimillion dollar bonuses, outrageous. despite a specific guidance by the administration in 2011 and let me read it that bonuses or this extra compensation would be

awarded in manner that's cost effective for agencies and successfully motivate strong employee performance. this is a little bit long but i want to highlight some of what we found to date. this is only the preliminary results of our investigation. we've got, we're getting this in drips and drabs. this wasn't a coordinated effort. these were independent. all this is sort of come together and uncovered an incredible array of waste, abuse, possible fraudulent activity. we have to be a bit careful today. i respect the work of the inspector general and he will be somewhat limited in some

commentary. his responsibility and our responsibility will be after this investigationing to make criminal referrals to the department of justice for their review. we want to make certain that our investigations comply with proper protocol and we respect him and at any point our at any question we respect your position and ongoing investigation. we will continue to work hand in hand with the inspector general and our investigative staff. to one, uncover balance of this waste, fraud and abuse. two, to tiends out wfind out wh

responsible and hold them accountable. >> we're determined to make certain this is cleaned up. it does not happen again. if we need to change administrative procedures or the law, we will do that. you have my commitment that we will continue to pursue this to this mess is cleaned up. finally, let me say this. i do not have witnesses in any of those other chairs today because what we wanted to do was hear from the inspector general from gsa. i asked other gsa officials to come here. most of the first tier has been removed, resigned or left. the second tier is not as cooperative as i hoped. we had one take a medical leave last week who possibly was involved and others are not coming forward today. additionally, not having gsa here today, i do not have

witnesses which i would like to have from the private sector. there are people who are professionals who have management skills and can handle the it in a fast fashion. the management, sale and better utilization of these incredible assets. we have thousands of federal properties, buildings vacant or under yutilized. all of those potential participants are so intimidated by gsa that they have stayed away and are not with us. each one has backed out of

hearing, participating in this hearing. that's unfortunate. they have so much power and control the rental market. i intend to find another way and other witnesses to come in and guide our committee in trying to reform this whole process. i know this is a very long statement. i appreciate it. with those comments i'd like to yield to ms. norton. >> thank you. this is addressing a conference

that's gone off rails. much like the october 2010 western regions conference, a conference that ran amuck near las vegas, nevada, we now have another conference closer to home that occurred just a month later. this time in crystal, virginia, where there are serious allegations of excessive spending. he's already bearing fruit. administrator tangellina said he would conduct a top to bottom review of the agency when he appeared before us. we will need a careful inspector general report like the one

received concerning the western regions conference. administrator tangelini's action indicate he's trying to get to the root of the issues at gsa. the acting administrator quickly implemented some common sense reforms in the wake of the prior embarrassing gsa scandal. particularly, consolidating conference oversight in the new office of administrative services, which is now responsible for oversight of contracting for conferences, related activities and amenities and for review and approval of proposed conferences for their relation to gsa's mission. i am also pleased that gsa has brought all public buildings service regional budgets under

the direct authority of gsa's chief financial officer centralizing authority over these accounts to ensure there are checks and balances and how gsa prioritizes spending. this change alone might have had the affect of putting a stop to the overspending of the gsa conferences in las vegas and crystal city. i look forward to hearing the testimony this morning about how we can continue to make improve at gsa and going forward. i yield back. >> thank you. mr. denim. >> thank you. certainly it's frustrating to

have yet one more hearing on some of the frauds and waste that's happening in gsa. the agency that is supposed to be tasked with setting an example, setting the standard for every other agency. after the las vegas celebration that they had, you would have thought that things would have changed. yet we see conference after conference and not just conferences, we found out now that rather than call them as conferences, they call them as celebrations so they can get around the executive order of calling it a conference. we see the outrageous bonuses that aren't just performance bonuses which are bad enough which under an executive order were supposed to be stopped and we find out there's not only performances bonuses but tier bonus bonuses. there are special act bonuses. there are huge overtime payments, employees department heads receiving hundreds of

thousands of dollars in additional pay. this was supposed to be hearing focused on yet one more conference dealing with the celebration, the key bridge award ceremony where awards were passed out at $3.7 million at one award ceremony alone. after the president issued his executive order we found there were 77 more conferences around the nation. i think the question the taxpayer wants answered is why? why are these agencies ignoring the president of the united states? now what's most outrageous is the administration feels they can bypass congress breaking three different laws written in statute. i think there are many members of this committee and of congress that will have a lot of

questions about that. if you can get around the prospectus here in this committee and this body of government that does control the pursestrings for the world trade center then you can do it in ms. norton's district and ms. edwards district. there's a $2 billion lease on the fbi building coming up. billions of dollars of taxpayers dollars. if you can't manage conferences and bonuses, how do you expect congress will allow you to handle billions of dollars worth of leases. >> mr. denham would you yield for a second? i want to explain the issue he is raising right now and because we have leadership of the committee here. this is a very important issue and ms. norton, our committee is responsible basically under law and for years any lease that gsa

signs over $2.7 million needs to come back for our approval and then we approve them. we had pending $350 million lease of the world trade center. the administration, gsa signed that lease without approval. how long is the term? 20 years. signed a 20-year, on top of everything else you've heard today with the kvrconferences, bonuses, waste and abuse. now they have just stuck the finger in the eye of the committee. i want to make sure everybody hears what mr. denham is saying. $350 million subverting this committee. we have major crisis. they went ahead and signed that

without approval of this committee. thank you. i yield back. >> thank you, mr. chair. if you can sense my frustration and outrage, it is not partisan. this is about an agency that is ignoring the commander in chief. whether it's republican or democrat, this body has a responsibility to make sure that the law is being upheld. i want to just conclude, at a time when so many american families are struging to make ends meet, i'm committed to making sure they are spending money wisely. i'm committed to ending programs that do not work, streamlining those that do and bringing a new

responsibility for stewardship of tax dollars. we are tightening the belt. as a next step in this effort i suspend cash awards, quality step, bonuses, similar discretionary payments or salary adjustments to any politically appointed federal employee commencing immediately and continuing through the end of the fiscal year 2011. i direct the office of personnel management to issue guidance and consultation with the office of management and budget to assist departments and agencies in implementing this policy. that's the presidential memorandum august 3, 2010 yet 77 more conferences went on after that. executive order deliver an efficient and effective and accountable government.

government operations will be curving uncontrolled growth, terminating poor performing projects, focusing agency leaders on achieving improvements in high quality areas and opening government up. that was june 13th, 2011. september 21st, 2011. the vice president was then tasked with getting every agency head together to deliver an efficient, effective and accountable government which launched the campaign to cut waste. the vice president convened the heads to discuss the campaign to cut waste. the vice president asked department agency head to undertake thorough review of wasteful spending and report

back on the measures. the president has instructed me to review policies and controls related to activities and expenses. approval of conference related activities and expense ls shall be clear through the deputy secretary or equivalent. executive order 13589 on november 2011. i'll go to section seven of that. agencies should limit the purchase of promotional items, plaques, clothing in particular where they are not cost

effective. conference after conference, celebration after celebration, several layers of overtime and now gsa wants to have authority over leases in the hundreds of millions of dollars. it stops here at this committee. i yield back. >> thank you. others seek recognition? >> mr. speaker. i love the title but i settle for chairman. as nice as you were, i'm going to recognize mr. duncan first. >> thank you. i appreciate you calling this hearing. all the publicity that's being given to these conferences and these terrible abuses of the taxpayers have shown once again that the easiest thing in the world is to spend other people's

money and that it's far too easy. in fact, governor randell when he was mayor of philadelphia and having a problem with some of the city unions testified in front of one of our congressional committees many years ago and said the problem with government is there's no incentive for people to work hard so many do not. there's no incentive for people to save money so much of it is squandered. those words were true many years ago and they're true today and maybe even more so as all of the abuses of the taxpayers that we're talking about here today show. i appreciate you having this hearing and looking into these matters. i yield back.

>> thank you for calling this hearing. i have two other hearings so i'll be in and out for most of the morning. it does appear that sound fiscal management has been cast aside and replaced by wasteful, mismanagement, recklessness. we'll hear more about that today. i thank you for having called the hearing. i yield back. >> thank you. >> i'm not going to be able to stay for testimony but i have a couple of questions. it's been brought to my attention that there's a situation in san antonio, texas involving gsa that made headlines. the local social security office is asked to move to a new office. while the new location will provide additional space will also double the cost of the lease. it will be more than one million

per year. i understand the social security administration has spent $1.7 million in renovations. a commission for the new lease total 178,000. this is not taken into account the cost of the actual move. i recognize this is just one lease in one part of the country and i'm interested in understanding why this situation has occurred in light of all the other things that's been happening with gsa. i have a series of questions i'd like to submit and get back in writing. with that i yield back. >> others seek recognition? >> thank you. >> i want to thank you for providing this hearing for us to get this off our chest. i was a mayor of a small town in pennsylvania. the city was broke. it doesn't have money to hire the police that we needed. now i come to congress and the

country is broke. i'm beginning to believe that it's me. i have to ask the simple question. when we deal with so many issues like we don't have money to fix our roads and bridges, but yet we're giving out hundreds of millions of dollars in bonuses, it's hard for me to conceive where the real problem lies. i've come to this conclusion that, yes, there's horrible abuses of gsa but you're not the only agency. this not the only agency i've seen waste and abuse. we can go agency by agency and find it over and over again. i've come to the conclusion that we are the problem. we in congress have failed. it's great to get this off our chest and point out to the american people how you've wasted their tax dollars but who are the enablers?

it's congress. we've allowed these agencies to do this. if anybody understands zero based budgeting we implemented a fundamental practice that most businesses use. rather than allowing agencies to budget by what they spent last year and this is what we're requesting this year, zero based budgeting would eliminate all this. we wouldn't be having this hearing today. every agency would start out with the same amount, zero. you would have to justify every line item. they would never be able to budget millions of dollars for bonuses. this would never happen. this congress can't pass a budget. the senate hasn't voted for a budget in three years. this is like parent who is are going away on vacation and they load their house up and are going to leave their teenage children at home but before they leave they load the house up

with booze and leave the credit card on the table and when they go away they act surprise that there are beer bottles over the house and the house is a wreck and they ask what happened. we've allowed this to happen. we've allowed this to happen. i'm going to ask the american people who are watching these hearings to take this matter into their hands before this next election, ask everyone who is running for this office if they support zero based budgeting. ask everyone who is running for the united states senate if they promise the american people that they will pass a budget. if the answer to those questions are no, then i would suggest they hire new baby sitters. thank you. >> others seek recognition? ms. johnson. >> thank you. i want to ask unanimous consent to place my entire statement in

the record. >> without objection. >> what i'd like to say is we are in dire straits for dollars. we have some excellent federal employees. i know that in this very partisan environment it seems like you're all bad, but that's not the case. it appears to me that that was no attention given to clearing the problems when they were called to your attention. i think that for that reason social security very difficult to try to justify the ill decisions that were made. this makes it very hard for law enforcement officials, air traffic controllers, educators that are all federal employees that work very hard, make a lot less money and get tainted with this kind of behavior with this

agency. i think it's unfortunate and thank you mr. chairman. i yields back. i'll put my entire statement in ro the record. >> thank you. in listening to my colleagues i can't agree with them more. i was mayor of small city. the budget is something we looked over very carefully. that's at a smaller level. i know you have tremendous responsibilities in the oversight is probably a little harder. every single agency is expected to do their best and act prudently. i'm hoping that the american people that are listening will understand that they have a right to be tight government when they hear these stories and worn out by facts that are brought out to the general public's view. i think it's important for us to

support that. we continue to go after any agency that is mismanaging, that is not following the intent of the law, and that the people, the supervisors there, their leadership is understanding that they have a right to be able to carry out the intent of the charge they are giving and understand we will be able to follow through. i hope there will be lots of inquiries and discipline to those that have thought that they could just move ahead without any punitive action or consequences. we are facing the same budgets in our city. even in our staff we don't get bonuses. we can't. we don't have the funds. to have the american public see this outrageous expenses, the taxpayer dollar, it's their

money. i'm totally looking forward to listening and hopefully finding some so i am totally looking forward to listening and hopefully finding some solutions to be effective in dealing with the future of our employees, that is the american public's employees. thank you, mr. chair. i yield back. >> other members seek recognition. >> if no other members seek recognition, when we do have our panel that we'll turn to. and today we have two witnesses. the first witness is the honorable brian miller, who is the inspector general of the general services administration. and then we have miss cynthia metzler. she's chief administration services officer of the general services administration. we will, of course, welcome your testimony. we'll start with five minutes or so. there are only two of you, so we won't hold you to that. if you have additional

information, doum menation that you would like to be made part of the record, we'll be glad to do that. i want to thank him for his willingness to work with us. we have what started out as a small scandal. now it's turning into a massive scandal with a number of people who have been involved. in fact, it's getting hard to find someone who isn't involved who we can get to testify without having them put into some jeopardy because of the judicial process that probably will unfold here. i thank mr. miller for working so diligently with our investigative staff to uncover what's going on and also bring

it to light. so mr. miller, you're recognized. welcome. >> thank you, mr. chairman. >> chairman denham, ranking member norton, members of the committee, thank you for inviting me here to testify this morning. i appreciate this committee's support of inspector general and it's my office's mission to weed out instances of fraud, waste and abuse at the general servicesed a medication. it was with that mission in mind that i wrote my july 19th letter to our committees and jurisdiction, some of which had requested that igs bring matters to their attention earlier in an investigation. in my letter, i had an incident that advised me that gm planned to have similar information in

response to information acts. on november 17, 2010, the federal acquisition services, fas, held with a one-day performance awards ceremony in washington, in the washington, d.c. metropolitan area. the ceremony featured a team building drum band exercise conducted by a third party vendor. and speeches by current and former gsa officials. our findings, though subject to further investigations and change show costs over $34,000 for the venuvenue, $28,000 for picture frames and $148,000 for coordination and logistical transportation. and presentation called mission possible agent "x."

as i have stated in my letter, we began a -- we have begun a preliminary analysis of the information we receive from gsa and have opened an administrative investigation. since our investigation had begun just a few weeks ago, we have already got some changes in cost figures and new facts. this may be a good opportunity to explain how an oig investigation is conducted. oig investigations originate with any number of sources. gsa employees, gsa senior mlgt, other government employees, contractors and concerned citizens a mechanism to report instances of fraud and abuse. my office of investigation receives between 2,000 and 3,000 hot line tips annually and will assess each complaint or tip for credibility and open up an investigation if appropriate. additionally some matters

warranted an investigation are brought to our attention by gsa senior management, as was the case with the fas ceremony. in other scenarios, our auditors may bring a matter discovered during an audit to our investigation or special agents may be tipped off by an informant. no matter what the source, they conduct their investigation with professionalism, objectivity and diligence. they interview witnesses and collect available evidence and documents. our agents compile the evidence in a written report of investigation commonly known as an roi, reportive investigation with relative evidence attached. in the last semiannual reporting period, our office of investigations made 486 referrals for criminal prosecution, civil litigation, and administrative act. court ordered and investigative recories for the same six-month

period. totalled 218 million,$218 milli. because it can have, accuracy is of the utmost importance. inaccurate reports can threaten the integrity of an oig investigation and damage the oig's reputation as a mechanism for dependable oversight. because our investigation to the fas ceremony is on going, the preliminary figures in the confines of my letters to committees are the extent to which i can discuss the incident. those numbers were based on information provided by the agency. information that i understand was going to be released publicly. my office will continue to look into this ceremony and will update the committee when our investigation concludes. thank you for the opportunity to provide testimony. i would be happy to answer any questions. thank you. >> thank you, mr. miller.

zwl we'll now turn to cynthia metzler, chief administrator of the office. >> good morning -- >> i would pull that up as close as you can. thank you. >> is that better? my name is cynthia metzler. i am the chief administrative services officer of the general services administration. in that capacity i coordinate internal management and support services to promote efficiency twn agency, covering a wide variety of issues, including travel and conferences. as you were aware our acting administrate member was not able to appear. we reached out to request this hearing be scheduled at a mutually convenient date so that he could personally appear, but informed that the chee was electing to proceed with today's hearing with the awareness that he was unavailable. he looks forward to continuing

to work with the committee to improve the efficiency of gsa and refocus the agency on the core mission, of streamlining the administrative work of the government to save money for the american taxpayer. given that the genesis of this hearing was the acting administrator's recent referral to the inspector general of a 2010 awards ceremony for the federal acquisition service. i have come here today to outline the steps we have taken to prevent waste from happening again. as of april of 2012, all travel for events, including internal gsa meetings, training conferences, seminars and leadership or management events, among others, was suspended we have consolidated oversight of travel and conference expenses into the office of administrative services, which i lead.

my office now reviews each and every planned future conference to make sure these events and any related travel are justified. for example, a conference requires a business justification, submission of a budget, and must be approved by the head of the office pursuing a conference and myself. conference with anticipated costs over $100,000 require approval by the administrator. any travel must be approved by the agency. any travel for a routine internal meeting at gsa requires a waiver from the administrator or deputy administrator. we have canceled 37 previously scheduled conferences. these are a few of the many reforms the acting administrator has taken to improve oversight, strengthen controls and help refocus the agency on its core mission.

i know he looks forward to discussing these with you in the future. in 2010, fas awards ceremony is another example of what the acting administrator has already recognized. a pattern of misjudgment, which spans several years in administration. new policies on spending to put an end to waste. the new leader is committed to stopping any misuse of taxpayer dollars. wen we find questionable occurrences we refer them to the office of the inspector general, as we did in this case. gsa has already taken a number of important steps. as part of the acting administrator's top to bottom review, more steps will be taken to improve efficiency and save the taxpayer dollars. i appreciate the opportunity to

come before you today to discuss thises a set reform at gsa and awelcome any questions you may hav have. >> well, thank you. and i appreciate your coming. we requested mr. tangerlini and he had a family issue. we requested the administrator and she was involved in the question that's under investigation. so she is not coming. we invited the chief of staff. he's not coming. then we invited -- what's his last name? federal acquisitions services. i guess he was pretty heavily involved in this, the virginia conference, and i believe he took a leave of absence from the event. did he take a leave of absence

last week? >> i believe he's on medical leave. >> okay. >> and then we got further down the public building's administrator couldn't come. so we got down to you. and we appreciate your being here. but it's getting difficult to find anyone who hasn't been involved in these scandals to now come and testify. and i know, mr. miller, you have ongoing investigations now we identified 77 conferences with at least 25 attendees and $10,000 cost. is that correct? are you aware of this? >> that's correct, mr. chairman. >> many of them are smaller amounts. but we have some smaller amounts with very significant expenditures.

i see some almost the $2,200 a person. some raise some questions. i think we should give particular attention to the national congressional support conference in henderson, nevada. were we able to find out if that was the same hotel mr. neily was in? but that 44 congressional -- ma'am, is that your ledge office? your legislative office? 44 persons? >> it's the office of congressional affairs. >> and i'm not sure if they were at the same resort with the same hot tub that mr. kneely was in,

but they were there for five days for a government relations conference. and that's september of 2011. but i would like particular attention, if you can get back to the committee. the initial inquiries were on that. but we have particular interest in that. so again, the committee and you have some work to do, and appreciate your work. i won't get into specifics because i don't want to tie the individuals with your ongoing investigation. is the agency cooperating with you now, mr. miller? >> yes, it is cooperating. we are getting a lot of information from the agency, and we work with them. we obviously get information in waves sometimes. we don't get complete

information all the time. and so we go back and get additional information. i think the committee understands the process. >> and further, i don't think we have a referral on the bonuses. were you doing anything on the bow nugss? >> we have an audit of executive compensation under way. well on its way. >> well, we will turn over to you what we have been provided with. i'm not an attorney, mr. miller. but the way you ask the question and the response you get from the agency is when they ask how much in bonuses. we were told 10 million.

now it appears it could be up to 44 million, another 30 million. do you know anything about the total number of bonuses? dollars that were expended? >> chairman mica, unfortunately i do not. i'm not in charge of the human capital part. >> could you -- >> but we can get it. again, when you have 1% of the employees and 13,000 gsa employees and you get 10% of all the bonuses, it seems something is not right. are you familiar with the issue that's brought up on signing the gsa contracts. in particular at the world trade

center? it was a $350 million contract, which was signed before it was authorized by the committee. >> any responsibles have to do with the internal operations of gsa. and that with the public building services. >> can you also request that the agency provide us that information? we are expecting some sort of a reply. we already requested it. we do not have it. when the law states anything over $2.7 million needs approval in this committee we -- i might say, too, you have 13,000 employees. i chaired the civil service sub committee. and there are thousands of federal employees who go to work every day in this city and around the nation who do an absolutely outstanding job. they help people. they're wonderful. and i have nothing against going

to conferences. i come from central florida. we welcome people to central florida. unfortunately the heavy spending visits were to central florida. many of these may be legitimate expenses. but obviously some of them are over the top. ma'am, are are you aware the agencies are not to give big gifts, recognition items in a presidential or a standing order. you're familiar with that requirement sf. >> i'm familiar with the presidential directives. my office only took on responsible for approving conferences and awards ceremonies and related expenses in april of 2012.

so we've been reviewing conferences from april 2012. >> and we can't get the people who were responsible before us. but now you would not approve $20,000 in drumstick, $35,000 in picture frames. would those expenditures comply? >> we would not approve those now. >> the inspector general cited $40,000 in cost for organizing the conference. i wen back and looked at the figures, and i think there was transportation and other things included in that. i saw the consulting fee of $140,000. i took 140 and then subtracted from expenses. is $104,000 the typical fee for a one day conference?

>> chairman, we looked at the organizing fee. >> $104,000 for one-day conference. there are a lot of people in the wrong business out there. >> we would not have approved that conference under today's standards. >> these things just pop out. i've got people in my district losing their homes, their jobs. we have an agency spending money like there's no tomorrow. it's got to be brought to a halt. and we couldn't get the responsible party in here. would you convey also to mr. tangerlini that i have tried for three times to convene the

hearing. and one of the reasons that we're not waving further delay in holding this hearing is because of that. so we will have him back in for discussions. and i hope to have the missing people involved in this the committee, too. >> thank you, mr. chairman. mr. miller, you say in your testimony in page three that the administrator began a top to bottom review of the agency. are you satisfied with the steps the administration is take iing

prevent what came before us in las vegas? now we find we're in crystal city. >> representative norton, it is encouraging that gsa is taping steps to correct abuses and putting controls in. they strengthened the financial accountability. in terms of whether they're effective or whether or not it's enough, i think it's too early to tell. >> thank you. now, could i ask a question about the crystal city matter of the chairman. because i look at that, even 140,000 plus, miss meltzer, can be -- you take out some of it.

you're still left with 140,000. and it's by far the largest expenditure. can i can you if there are agency personnel that could perform the function that is called coordination and logistical management? or should this be contracted out? i see almost all the conferences are contracted out to some private event planner. and they have their property margin and all that goes with it. so is there no agency that can do conferences? >> congresswoman, yes, there are people in the agency, and under the new standards of the acting administrator, we have a new requirement that before one of the third-party event planners can be used in the future that the head of the service has to approve it. it has to come through my

office. >> you do have event planners and people who do event planning in the agency. >> it's not the mission of gsa, but there are people. >> conferences aren't the mission either. >> yes. >> if everything that isn't the mission had to be contracted out, and work in the profit margin, and the real question, and i would ask mr. miller this, wouldn't it be less expensive to have a few people knowledgeable at conference planning in the agency, rather than contract out to some private event planner every time you want to do a conference? >> they have event planners on staff. >> i would strongly recommend you hiring out. event planners do very good. my hat is off to them. i don't think they try to do the

fanciest job they can. i think shall be who worked for the federal government would have a better understanding of what the agency wants, and i very much recommend it. that these matters not be contracted out. but the federal employees be given the task of designing and developing conferences for employees. mr. miller, i have to ask you about this. it's strange, and i would want to look blind this. the federal governments come from gsa, which has 1% of the employees. that will catch anybody. do you think that figure is a figure, and i don't know what the word bonus means, that fairly represents the proportion of bonuses at gsa relative to

other federal employees? or agencies. >> representative norton, i heard the figure this morning from the chairman. i have not had a chance to evaluate it. >> mr. miller, i would ask among your priorities you look at that matter. i don't know what the karkization is. frankly i find it difficult to believe. it's very difficult for me to believe that agencies which have hundreds of thousands of employees don't have a larger percentage. so i don't accept that at face value until you have the opportunity to look into it. the president has essentially asked that certainly his appointees lead by example. i would not begrudge federal

employees bonuses, but i would say on a moderation basis, when you consider that for most americans, a salary would be considered a bonus. so, i don't, without knowing more about bonuses. i certainly don't want to deprive bonuses. but during a recession and a recovery. it seems they ought to be given, and i can only say on a ration-basis. some people who otherwise might deserve them won't get them. i ask you to do is look at bonuses now so that we can see what that was about. i am very curious about page two of your testimony. you say in the last semiannual, that would mean for six mons reporting period, your office

made 486 referrals for federal prosecution, civil litigation and administration action. would you break that down that sounds like a large number. would you compare that to what happened in the past? >> and i would ask you to break that down quickly. >> okay. well, we make referrals obviously for criminal prosecution, for civil action. >> what portion of each? i know you may not have all the figures before you. >> i can get the figures and send them up to you. i would be happy to do that. they should be in our semiannual report as well, broken down. >> can you characterize them to say civil litigation orred administrative action, it would be helpful to know that as well? >> that's usually a civil fraud case. so when a vendor or contractor

has inflated billings to the gsa. >> so it may not be federal employees? >> correct. and again, if a contractor is gibing a bribe, it may be a criminal referral against the contractor. and depending on the circumstances and not against the government employees. >> mr. miller, if you could provide full details to this committee, we would appreciate it. >> i would be happy to. >> mr. miller, are you familiar with the august 3rd, 2010 memo from the president the presidential memorandum to freeze doe nuss? >> only in a general way. zblf let me ask you. since 2010 have all the discretionary awards been frozen? >> i understand the president has kept -- >> are there awards that you

know of to date between august of 2010 to today? discretionary awards, bonuses or similar payment? >> i believe they are either capped or frozen or actually, miss metzler may be in a better position to answer that. >> you sent a report to the committee there have been a number of bonuses that have gone out in the last three years. >> yes are you familiar with the memorandum to the heads of the executive department and agencies that says approval of conference related activities and expenses shall be cleared through deputy secretary or equivalent? >> yes, in a general way. >> have all the conferences, the 77 in the last year and a half, have the 77 conferences been cleared by deputy secretary or equivalent? >> i do not believe they have.

>> you do not believe they have. >> correct. >> are you familiar with the presidential document, the executive order, promoting efficient spending, where in section seven it says extraneous promotional items, agency should limit the purchase of those items rchlt you familiar with that? >> yes, in a general way. >> have there been any commemorative items, plaques or clothing given out? >> well, mr. chairman, we are conducting an ongoing investigation. >> were the drumsticks at the crystal palace given out? >> they were given out in connection with the celebration. >> were there kem rative frames? >> they were given out in connection with the celebration. >> would you consider those commemorative items that should be covered under the executive ord sner. >> i think we're getting very close to our ongoing investigation. with that matter.

so i would decline to answer that. in you report, $28,364.45 for picture frames. i would consider those picture frames commemorative items. $700,000 for shadow frames. i would consider that commemorative items. $20,578 for 4,000 drumsticks given to attendees. i would consider that in the same category. so my question to you is if you have a memorandum from the president. if you have a memorandum from the department heads saying that deputy secretary or equivalent will approve all conferences, and if you have two executive orders by the president, how

could this go on for the last two years? >> mr. chairman, we are looking into that. our investigation is ongoing. >> mr. miller, you've been doing these investigations for quite some time now. have you ever seen a period of time where executive orders are just flat out ignored? >> when the commander in chief issues an executive order, do you ever find that agencieses just ignore it? as the ceo of a company, if i had a department head ignore my order, they would be fired. so the question is, why aren't these people being fired if they're ignoring the commander in chief? >> i understand that, and we have an ongoing investigation. >> thank you. miss metzler, i understand that mr. -- couldn't be here today. i appreciate that. this committee had the responsibility to continue on the investigation and make sure

the law is being upheld. but we would like to continue to offer an -- i assume he doesn't have avacation planned on august 6th when we have our hearing. i hope he doesn't have a family vacation planned august 17 thd. i understand how important family vacations are. we're going to give him two more opportunities in the next few weeks to testify before this committee. we hope that he doesn't have previous engagements. let me ask you. in your testimony you say as of april 2012 all travel for events including internal gsa meetings, trainings, conference seminars and leadership or management among others were suspended. were they suspended? >> they were suspended. and any event subsequent to april had to go through the new approval process. >> conferences and celebrations? >> yes. >> awards ceremonies? >> yes. >> awards ceremonies with food, yes. >> all gsa travel went through

you on these conferences, celebrations or award ceremonies? >> after april. >> you con stop dated oversight of traffic expenses in administrative services which you lead. >> that's correct. >> why is there a conference going on today in nashville. >> that conference was subject to the smart pay conference. it was previously scheduled, before the acting administrator. those responsible came in with their proposals for the conference, why it was being held. who was going to be attending it, what the purpose was. >> my time is brief here. over 6,000 rooms at the gaylord in nashville. i understand the presidential suite is occupied today. is there a gsa employee in the presidential suite? >> i do not know. >> it's over p 3$,000 a night. >> i don't know. >> you don't know? >> i don't know. i would hope not. >> how about the junior suite? those were all booked up today,

too. >> under our policies, those rooms are not be occupied by gsa employees. >> and since you oversee the oversig and travel expense of these, what is the travel necessity of the general jackson lee steamboat that is taking a party out tonight? are they going to a destination? is that the reason for the travel expense? >> there is no such travel associated with anything that the general services administration is involved in. that may be some other third party. >> so there is no expense to the federal government for the general jackson lee steamboat that is having a party tonight. >> that is correct to the best of my knowledge. >> we look forward to looking into that further. >> i apologize for my delay. i had a judiciary hearing. good to have you all with us by

the way. mr. miller who brought your -- strike that. who brought this conference to your attention? >> acting administrator brought it to my personal attention. there was a -- we did receive a hot line complaint in may of this year it was an anonymous complaint of about five single-spaced pages with about four lines of general information about this conference. >> were you familiar with it prior to having seen the notice? >> no, i was not. >> it appears, and i hope i'm not being duplicative. but it seemed the conference took place in two cities. a reception that costed over

$7,000 at the tea bridge marriott. the reception, i'm furthermore told was complete with a violinist and guitarist, for a music variety. and it appears a bus was hired at more than $5,000 presumably to shuttle between the different hotels. i guess my question is why were two locations needed for one day conference "a", and who was invited to the reception? >> those are questions that we're looking for the answer to as well. we have an ongoing investigation into this matter. >> you want to weigh in on this? >> when the acting administrator found out about this conference, we referred the matter to the inspector general for inquiry. so we're waiting for results of his survey. or his investigation.

>> as i said in my opening statement, it does appear that sound fiscal practicing have been cast aside, if not abandoned. for mismanagement and waste and recklessness. and i'm hoping that this hearing will at least expose the wrong doing, and i think it has been wrong doing. again, thank you for being here. any of you have anything before i yield back? >> no maung. >> thank you, mr. chairman. i yield back. >> mr. chairman, i yield back. >> thank you. miss napolitano? >> thank you, mr. chair. just a couple questions. how many conferences a year do you normally have scheduled? roughly. i don't need an exact number. >> the numbers that were scheduled prior to april 11th,

2012, we have been trying to uncover for the last several months. right now for this year in 2012, we have only five conferences scheduled. >> the conferences were -- pre-april you were attending the conferences. is there any calls go to whoever is in charge to find out whether they're meeting the requirement to uphold the budget to be transparent and to be able to have information? >> before that? >> before that we did not have central control of conferences, how many there were or who wept or the nature of them. >> but apparently you still have conferences preapproved prior to april. >> actually not. any conference that was scheduled after april --

>> no, i'm talking pre-april. >> even if it was scheduled before april, it was deemed to be canceled. and they had to come back through my office. through the administrator to hold the conference. >> so you do have oversight over anything, regardless of preor post. >> yeah, that is correct. and the concern that now races inside my head is the cost is going to be on the taxpayer, if you will, for the investigation of the 77 conferences. am i correct, sir? >> we are currently investigating those. yes. it comes out of our appropriations. >> right, but again, that's money that should not have to be spent, in other words. >> yes. >> but you have them go back and review to ensure that compliance has been made. >> yes.

is there any way to quantify how much time you're going to spend on these? i'm talking in terms of dollars. >> that would be difficult. we're trying to do this in the most efficient way possible. we have strict parameters. >> understood. i'm trying to get to the point that it's going to cost the taxpayer a lot of money because of the decades of doing twhavr it is that they did without any oversight or any control over the conference with the expenditures, the bonuses, et cetera. and you say you've cut all bonuses, ma'am. >> bonuses are not within my lane of responsibility. i am aware that the acting administrator has issued a serious curtailment on expected bonuses, and other bonuses are being looked at as part of the

top to bottom review. >> that's curtailment, but not necessarily ending bonuses until clarification is made of whether they've been earned. >> certainly. the senior management gets bonuses. the american public doesn't get bonuses. how can we justify that with such a tight budget? we're looking for money. you're paid to do a job, for goodness sake. >> i'll be happy to get back to what the information from the right officials at gsa regarding. >> i don't sit on the committee of jurisdiction, so i'm wondering about the questions that kind of fall through the cracks for me. you talk about misjudgment from several administrations.

but why has it took me so long that it took me, the whistle blower, to raise the question tw the inspector general's office? >> the acting administrator came to gsa on april 15th and 16th. he issued a series of new policies regarding conferences and training. so it didn't take him but a minute or less than a week to issue the policies that we have now that provide oversight central control. and put fiscal responsible back into the spending. >> and what brought that to head? >> well, him coming to gsa, prompted by the resignation of the previous administrator. >> thank you, mr. chairman. >> thank you, mr. chairman. mr. miller, i had intended to

ask ab these 486 referrals that miss norton got into. i'm still curious about those. that does seem like an awfully high number. over a six-month period, that comes to over 80 referrals a month. is that much higher than has been done in the past and i know you said, many of these or most of these were not referrals of that gsa employees. but more front panls to the gsa contractors or something. would you tell me a little bit more about that? >> it's a mix of referrals. my point was that a referral can either be against someone doing business with gsa, or it can be about a gsa official. so i wouldn't want to quantify it off the top of my head as to which one is more, rather there are more referrals regarding

contracts or more referrals regarding gsa employees. i would be happy to furnish the committee with the precise breakdown of the referral. we do a lot of referrals with credit cards to go with the leased vehicles. gsa leases vehicles called the fleet to other agencies. any time another agency uses one of these cards a credit card goes along with it. unfortunately they misuse the credit card and charge gas for friends and family. and that's a crime. so it's not a large case. but it's a referral, and we do have it prosecuted by u u.s. attorneys when we can, or by state prosecutors, when we can. so we do have a number of those, which may contribute to the higher numberle of referrals.

i don't know if that explains it. >> do you know if that was a much higher figure than the proceeding annual -- >> i think we've been increasing our referrals over the years. and i take that as the accomplishment of the office. >> i would like to see a preview and also if one of the gsa contractors was a repeat violater. there's a small number of companies that are just repeat violators, something needs to be done about that also. >> we recovered $200 million from oracle recently under the settlement oaf a civil fraud case. so that's an example of one of the cases. so it can range from $200

million to swub misusing a credit card or leased car for gas in the amount of 100 to $500. so it's a large range of damages. >> on another topic, i'm told by staff that cbs had a report that said over 13,000 gsa employees receive bonuses or extra pay, incentive pay, whatever you want to call it. different types of bonuses are extra pay. it says the number of gsa employees is 12,635. have you looked into that? was it just a common accepted practice that every gsa got a bonus? >> we have an audit on its way of executive compensation. it's an audit we started some

time ago. we suspected multiple awards to gsa officials. multimilliple awards for the sa work that they've done. >> miss metzler, on this conference where it says $10,000 was paid for a presentation by somebody called mission possible agent "x", do you know what that -- what they got for that $10,000 or what the presentation was about? >> congressman, i do not. that conference was in 2010. it created our current review processes, and indicated we would not be approving conferences at this time. >> rt. i'll close by saying this. i'll repeat what i said in the opening statement. it unfortunately is far too easy to spend other people's money,

and the problem with government is it's not coming out of your own pocket. we have too in people at the federal level just abusing the taxpayer taxpayers. >> thank you, mr. chairman. we have hard deds line of 11:00. any questions you feel comfortable providing the chair would help to move the committee along better. with that, mr. wallace? >> thank you, mr. chairman for holding the committee. mr. miller, thank you for being back again and for the work that you've done. there are a couple things my colleague has said. it's hard not to feel the frustration here. at some point in time expressngn frustrations is not good enough. mr. duncan pointed out the

issue. i would argue there is an incentive other than pay, it's called ethics. and i would like to think as i taug school starting out for $17,000 a year i worked just as hard as i did when i reached the top at 47,000. that i was working just as hard in that classroom and trying to save money for the taxpayers. but when we get a situation like this it absolutely, as miss johnson said, too, it destroys all credible and my friend is very thorough. we both know there's not going to be good news out of that conference. swb is staying in that damn suite tonight. i would almost guarantee you. i understand you don't have that. i think you know that, though. so my question next is what happens when you come back and the questions getting asked today, i don't have any answers for these. and i'm as frustrated as anybody else. how do we make sure this stops?

it appears to me there was clear cut directives put out. mr. miller has been to the committee and testified. many of us sit here appalled at $45 breakfast and everything else. and here we are again. so are you confident the changes implemented in place are going to stay, for example, to make sure none of the things forbidden are going to happen in nashville. are you comfortable with that as an administrator. >> i am confident that we reviewed that with all the others that have been held. we looked at the expenses in the budget. we made very clear ethical responsibles and the ethical responsibilities on the companies also attending. so i am comfortable that we have conducted a thorough review of this conference.

>> for the american public then, and i am speculating, but erg everything -- my spidey sense tells me something very bad is going to come out of that. if it does, can you give dpi me a buck stops here. if there's an employee at the $3,000 a night suite, what is going to happen? i think it is. i don't want to put words in his mouth. who going to be accountable if that happens? we'll find out. this is going to come out. so in a week or so there's going to be a story. no there was not. i'll say, goodness they put good checks in place. if it comes out someone is in there, what will happen then? >> as all things with actinge a administrator, once we discover something has violated the policy or the law, we've been referring those matters to the inspector general. if we find anything about the conference does not comport with what was proposed to be to the

acting administrator and to me, then we will be referring to the matter to the inspector general. >> when you leave this room, is somebody going to be on a cell phone calling nashville? >> i think somebody is probably on a cell phone already, while we're in the hearing, because we were very clear about the limitations on any pre existing conference that received approval that there were not to be questions of riverboats. there were not to be questions of presidential suites sochlt that was the guidance that was given, the direction was given, and the conditions under which this conference was approved. >> i appreciate that. >> i'm hopeful by the time i leave here we will have answers. >> and i do appreciate that. i want to be clear. i know you're in an uncomfortable position. that's what comes with leadership. but i can't stress the corrosive factor that happens to so many dedicated, hard working ethical employees across the country.

and whatever you say about is unfair with gross generalizations, i certainly know it here that we are painted by our colleagues in this body. and we seech get associated with one another. and it's all of our responsibility, especially leadership to fix that. >> thank you. i would remind committee members we have about ten minutes. i'm going to ask each of you to keep it to two minutes to make sure we finish it on time and get to everybody. miss metzler, i want to clarify. mr. wallace was very clear, and you said we consolidated the expenses in the office of administration services. which you lead. you lead, you sign off on, and you said, there probably are people on cell phones right now, just contacting the gaylord opri land who confirm they have present rented out the general jackson for a private event this evening. did you authorize gsa to rent

out the general jackson for a private evening tonight? the steam boat? >> we did not. this conference -- i just might add -- >> i need to yield to next member. mr. barletta. >> miss metzler, i asked if i could see gsa budget. the response i got is the answer is complicated. they budget a top line for building operations, but they have not budgeted down to line item like conferences and meetings. now, i know you talked about the reforms in place. could you tell me what they have budged right now for conferences, meetings, travel, bonus bonuses. >> congressman, the budgeting of the agency is within the view of

the chief financial officer. and the entire budgeting, along with every other aspect of gsa is part of the -- >> i'm asking if they have line items specifically for conferences, for bonuses. is it itemized like that? i couldn't even get a budget. i couldn't get a copy of the budget. i'm a member of congress. is it down to line items? >> the proposals for conferences after april are very much line item by line item. so that we saw, for example, for the smart pay conference -- >> if i could. i want to get to the point. could you then send me a list of how much money is budgeted for conferences, bonuses, travel. and also what gsa's budget is. and how do we fix the problem? we could go on and on and on. this is not the only agency. so this is my takeaway from this meeting.

number one, we need to force the senate, and congress should act and the president should sign a budget with the american people. two, congress should require that every department utilize zero base budgeting. every department require. three, we should not ask to take more hard working taxpayers' money so that washington can spend it, and four, we should not let this government run our health care system. thank you. >> thank you, miss metzler, if you could provide that back to the committee. we will be anxious to see how many conferences you approved as well as the expenses and line items moving forward. >> i'm sorry. mr. edwards for two minutes. >> thank you, mr. chairman. thank you to the witnesses. just a couple of questions that we could just run down because time is short. how many employees are at gsa? >> over 12,000.

>> and what's your estimate of the number of them that have participated in these conferences in the last year? >> congresswoman, i would have to get back to you about the numbers of people that have participated in conferences. >> but it would be fair to say it's probably not 80% of the agency participating in these conferences or 90% of the agency. >> it would be fair to say it's less than half. and much less than that, i would estimate. >> now over the last three years the regular general service workers at gsa haven't received a pay raise at all. is that right? >> i have just rejoined the government in august of 2011, so i'm not familiar with what the pay situation was before that period. >> pretty much guaranteeing that federal workers haven't received a pay raise in three years, and

what's the percentage of employees at gsa who have received have to have someone get back to you with that information. i don't have it since it's not part of my responsibility. >> would you also get back to me about the numbers of those employees in the gs-3, 5 and 7 range who weren't the recipients of those bonuses at the senior executive level? employees who haven't received a pay raise over the last three years? >> we will get that information to you. >> and how many annual conferences have there been that aren't related to boosting moral, but are serving the core mission of the agency? >> the vast majority of the conferences of gsa are serving the core mission of the gsa. the conference we're holding right now is called the smart pay conference. it's to provide credit cardholders with required training so that they know how to manage their credit cards. the last conference we had was to provide conferences on contracting and --

>> we're out of time, soy can't -- and i appreciate that, but i can't run through all of these. let me say in closing, that i think in addition to strengthening the account ability of the conference arena, it's important for the i.g. to look at questions i've had, longstanding about the transparency accountability, fairness and parody in every area of the general services administration. and this is not about the good employees of gsa, a lot of them live in my congressional district. but when i walk up to a woman who works at gsa who works hard every day, who hasn't got a raise, who shows up and does her job, and she's in tears because this agency is in the newspaper every single day, it is disgusting, it's not worthy of the taxpayers, it's not worth think of the citizens of this country and gsa needs to get its house in order. and the acting administratoadmi i'm glad he routed out the problem, he needs to be in front of this committee. here you have somebody who is a

friend of the administration totally disgusted with the administration. totally disgusted with the gsa and its operation at every single level, every single time that we have a hearing in front of this committee. and it just -- we just can't take it any more. you know, let us defend the employees who are good and hard workers at the general services administration, but not to defend this kind of garbage that's a waste of taxpayer money and makes all of us not have any confidence at all, that the good workers of gsa can do their job, and with that i yield. >> thank you, miss edwards. this committee would request the analysis of the training per individual as miss edwards said. there's a lot of money going into this. we want to make sure the good training their receiving is a benefit to those that are getting trained. if they're spending a million dollars at a conference, we want

to see the benefit of those that are trained and receiving out of that, i'd like to see the cost benefit behind that. i recognize mr. ribble, the final two minutes. >> thank you, mr. chairman. >> mr. miller, the current heads of fas and pbs at the virginia conference? >> the current head of fas was at the conference, i'm not sure about pbs, i'd have too look into that. >> do you know if the head of pbs was at the virginia conference? >> i do not. >> could you get back to me with that information please zm. >> >> in your testimony, you said, he looks forward to continuing to work at the committee to refocus to save money for the american taxpayer. what were they doing before? >> the acting administrator has committed to conducting a

thorough top to bottom review of this agency, so that every single aspect of the agency is being looked at right now, so that we can ensure it's carrying on its mission in the most cost effective way. >> you say in you're testimony on page 2 that your office reviews each and every planned future conference to make sure these events and any related travel are justified. and then you say, for example, conferences require a business justification, and a submission of a budget. that wasn't going on before? this is pretty basic. >> there was no central oversight of conferences to require that the proposal for what the conference was about, how it was related back to the agency's mission. that may have happened but it wasn't done at a centralized fashion. >> this is unbelievable. the american people watching this must be stunned by this, that they weren't required to submit a budget to have a conference approved?

>> after april 11th, 2012, we have been requiring much more diligence in what the justification for the conference is. and i'm sure there were budgets beforehand but we have been looking at these in a different fashion to ensure that the american taxpayer dollars are well utilized. >> again, i just say this -- mr. chairman, as i yield back. my son's a professional drummer in nashville. however, he pays about $7 a pair for drum sticks. the gsa who's core mission is to save money for the american taxpayer bought 20,000 drum sticks and paid $10 a pair. they paid 25 to 30% more. i wonder how they're saving money for the american taxpayer. >> thank you.

>> i'd just like to associate myself with a colleague. and let's talk a little bit about leasing. the gsa signed a lease with the war and trade center? >> yes. >> why would you go to the world trade center? besides the fact that the lease was approved by this committee, and it was never brought before this committee? that's the reason i'm -- >> i was not involved in that in anyway. >> it comes before the committee and we approved it. why the world trade center? i would think you'd get something cheaper. can you tell me why the world

trade center? >> my responsibilities include the internal operation of the agency, not leases like the world trade center, i'm sure we'll be happy to provide that information to the committee. >> why wasn't it brought before the committee. it's usually the history that the leases are brought before the committee for approval. >> i understand that, i cannot answer that question. certainly that's something that acting administrator tangrilini or someone at gsa who controls the functions of gsa could answer and should answer. >> i don't have much time. but it's just outrageous, really is. here we are trying to defend the good workers and then we have the situation with the bonuses. who sets the standard for the bonuses. how do they arrive? is that a committee? a person that says, mr. miller, you can have a bonus?

>> i believe there are policies and performance criteria involved. but again, that's a function within gsa. we have an audit ongoing of exactly -- executive compensation. so we are looking at that and looking at how awards are being given out and how bonuses are given out. >> all right, i yield back. thank you very much. >> thank you so much. if other members have questions or additional inquiries that they would like to submit to our witnesses, i welcome them. and i ask unanimous consent that today's record be kept open for a period of 15 days for the witnesses to respond or for members to provide additional commentary to the record without any further business. i want to thank the two witnesses for coming today,

particularly mr. miller for your cooperation as the inspector general we're expecting additional answers and commentary. i'm sorry you got the short straw today and you're down the totem pole and fairly new. the others have hidden or dukd for cover. we will convene additional hearings when we come back in september. i would urge everyone to participate. there being no further business on this particular hearing, i excuse and thank again the witnesses. and this will conclude the gsa portion of our lost.

this is two hours and 30 minutes. >> we appreciate very much witnesses this morning on a very, very important topic and appreciate members attendance this morning. about eight months ago, farmers and ranchers all across america woke up to some shocking news. mnf global, one of the nation's largest futures commission merchants have filed for bankruptcy, and at minimum, hundreds of millions of dollars

of customer money had gone missing. a loss of customer on the of this magnitude had never happened before. it was something that shouldn't have been able to happen. it's been an article since the early days of the futures markets that customer money is to be kept separate and safe. but on october 31st, 2011, that was broken. questions were raised about how the segregated funds were being used or if the system worked. questions were raised about how repeated audits and reviews had missed problems that contributed to the failure. we were assured that mf global was a immelt lawyer and then on july 10th, 2012, it happened again. the circumstances were certainly different and in some ways more dramatic. for the second time in eight months, customers were left holding the bag when their segregated money was misused.

our farmers and ranchers and other businesses need these markets to work. they need to have faith that they can use the markets to manage their risk. it certainly seems this year but the risks are many. but one of those risks should not be that their futures broker's firm will go out of business and their money will disappear. we've heard from farmers and businesses who after mf global had collapsed opened accounts. for these folks, lightning really does strike twice. and they rightfully want to know why. i want to know why. the members of the committee want to know why. and millions of farmers, ranchers and business owners across the country who need these markets to function properly are demanding to know why. i have three goals in the hearing and they are the same that we had last december when we brought the mf global executives before the committee.

first of all, or charges to make sure customers get their money back. it's critical for the integrity of these markets that customers are first in line to get the money. we also want to make sure that individuals who engage in wrongdoing are held accountable. and we want to determine what changes need to be made to prevent something like this from happening again. with that change will look like is a question that we need to resolve. i asked for recommendations after mf global that the ranking member and i have asked for input, and the committee today will hear from some of those that have given us their input. we also asked where the investigations were after mf global and all these months later there still ongoing. i am eager to hear where things stand with the investigations now. we need to know answers, and

hold people accountable. if customers don't have faith in the markets the markets failed. simple as that. i hope the hearing can start to rebuild that faith for the millions of people that need these markets to work and i will now turn to my friend and ranking member senator roberts. >> thank you madame chairwoman for the excellent statement and thank you for scheduling this hearing on an important issue regarding our oversight responsibilities for the cftc. today's hearing is certainly of concern to our constituents we must also work with you and the rest of our colleagues to consider how we can help farmers and ranchers who are suffering from the most serious drought in memory. we cannot ignore the response of devotees to oversee an equally important part of the american economy that is the futures and to the evidence industry. so today we have a two-part hearing first we will hear from the cftc and the bankruptcy

trustees to continue to investigate the details of mf global's situation and the collapse and bankruptcy. second we will hear from industry groups with regard to the recommendations to strengthen and secure the futures and derivatives industry. mf global and pierre adriano normal bankruptcy celeste time the customers of the future commission merchants segregated funds were absconded. in what was unthinkable actually happened again with the news from iowa regarding the peregrine financial group. i would like to hear from trustees at the groups to return all of the segregated account funds to the customers of these firms to the i appreciate the mf global trustee and the new peregrine trusty be here to update us on their effort. the trusty judge louis freeh couldn't be here but i think him for his submitted testimony.

i am also looking for to hearing from key stakeholders in the futures industry and in the second panel here today. he's put a tremendous amount of thought into your recommendations to make the system stronger. i am eager to hear those recommendations. this input is critical and important to the committee as we consider the fundamental question of whether the self regulatory structure that has existed for decades is capable of regulating the industry or whether it is all grown it's time and means to be replaced by a massive transfer of authority and money for that matter to washington and the cftc. it should be noted that while chairman dinsmoor doesn't advocate this approach, some do. i also thank commissioner summers who is leading the investigation of the mf global failure for being here this morning. now, today's topic are serious matters and i know there are folks out there that believe the cftc is moving too slowly.

they are asking why aren't certain people in federal court already. on the understand those frustrations. i also no investigations are ongoing and we must be sensitive of how much information is actually disclosed to jeopardize or arrest and conviction. today we will learn as much as possible about what took place during the final chaotic days at mf global. i also look forward to hearing the recommendations before fun to a second panel. again, to see if we can work with the futures industry to prevent anything like this from happening again. our futures markets are an absolutely critical part of what allows this nation to provide citizens with the least expensive and most reliable food supply in the world. for decades our regulatory model has assured us that our futures markets have property but in light of recent events, it certainly can and should be

improved. madame chairwoman i look forward to hearing the recommendations brought forth by this morning regarding any possible improvements and thank you again for holding this hearing. >> thank you very much. and i certainly we want any member the would like to submit an opening statement for the record we would welcome that and we would turn to our panelists now. we have an excellent group of panelists. we appreciate you joining us today. one of our witnesses today, judge louis freeh serving for the parent company mf global holdings was unable to attend. judge freeh has submitted a written testimony and will be responding to members' questions for the official record. i am pleased to introduce our first panelist, chairman gary gensler, certainly no stranger to the committee. and we welcome you back. prior to the service on the cftc, chairman gensler served in several positions and the treasury department and before that had a very successful career in the private sector triet so we appreciate you being here and our second panelist is

joseph summers is a member of the commodities futures trading commission and as well no stranger to the committee and has been selected by her colleagues to serve as the senior commissioner in charge of mf global related matters. previously served as head of government affairs for the international swaps and derivatives association and worked in the governmental affairs for the chicago mercantile exchange. we welcome you back and look forward to hearing about the progress of your efforts. and, certainly james giddens, and we welcome you back to the committee and appreciate your efforts serving as a trustee for the securities investment protection act liquidation of mf global. in an that role, you have charged in part with the task of retrieving lost funds for customers. and we know mr. giddens covered internationally recognized leading expert on brokerage firm liquid nations. welcome back to the committee.

the final panelist is ira bodenstein. mr. bodenstein is serving as the chapter 7 trustee for the financial group and we welcome you to the committee and to the position. mr. ira is also a member of the law firm based in chicago coming and previously u.s. attorney general janet reno selected mr. ira to serve as the united states trustee for the northern district of illinois and the state of wisconsin. we appreciate you joining us on the short notice and we look forward to working with you. so, we will now turn and ask german gensler for his opening remarks and a understand you are asking for five minutes of testimony and we certainly welcome any written testimony as well and then we will open it to questions. chairman gensler. >> good morning chairwoman stabenow, a ranking member roberts and members of the committee.

i am pleased to be with you and particularly honored to be here with commissioner summers on these important matters. the commission and i take very seriously the losses of customer funds that should have been segregated at all times. customers should have been able to rely on a system of protection that protect them it's not just about those that lost money but it's of farmers and ranchers and other end users that need to have confidence in the markets. it's with these critical markets of futures markets and ultimately in the swaps markets out of the customers need the hedge risk locking in the price of corn or wheat or an interest rate producing food and fiber and other essential products. the recent events remind me of saying my grandfather had handed down in my family and repeated

quite often as immigrant from russia used to say figures don't lie, but lawyers sure can figure. and simply put, the evidence points to the owner taking the funds of customers right out of the bank and of lying about it for years. the national futures association self-regulatory organization responsible for frontline oversight is required to conduct periodic audits of peregrine funds and in addition an independent audit and annual financial statement and putting all the way to december 31st 2011. and just like the local police cannot prevent against all bank robberies, market regulators cannot prevent against all financial fraud. but having said that, i believe the system fails to predict peregrine's customers and we all must do better including the cftc. the commission has been actively working to improve protection of

customer funds. we finalize for separate rules strengthening protection for investment funds. customers called gross margin, segregation of customer funds in the new world of swaps, and also working at the selfridge of the reorganizations have specific requirements for their financial surveillance. we will suppose the with the futures industry association, the nsa, the cme and others on minerals finalized just last month concerning new controls over customer segregated accounts and i think that those working and relationships served well the they will be tested for the netz meeting through changes post-peregrine. the cftc also implemented a st structure of the intermediaries also hiring new leadership over the last nine months both full partner of an accounting firm and part from a wall from two helpless died this effort.

looking toward the white you think it is critical that we further update will giving regulators direct electronic offset to offset bank and custodial accounts. we should incorporate the nsa rules those that were finalized and put them in default. i think there is a consensus to do that. but also i think we should get futures customers access to information about how the assets are held. where is the money held? i think we have to enhance internal control of the futures commission merchants regarding how customers' accounts are handled and i also think we need to carefully consider additional roles played out how they conduct their exams and all bets and as the ranking member said, i think it's been embedded in the system for decades for self regulation and then we examined the examiners but we need to look at how we examine the examiner and set their rules in place. we will conduct a full role on the examination and audit oversight looking openly for

improvements in putting getting advice from the public company accounting oversight board that's been gracious enough to tell how do they do with the do and how can we learn from what they do. and based on those conduct san oversight i think we must do everything in our authorities and resources to strengthen our oversight programs and protection of customer funds and as i think back to my grandfather saying keep his values and from that mission in mind so i think you. >> thank you very much. commissioner summers. >> ranking member roberts and members of the committee, thank you for inviting me here today to testify about mf global. over the last nine months the futures trading commission has conducted a thorough analysis. in the bankruptcy proceeding to recover customer funds.

we have a comprehensive and on going in for some of the negotiations. it's imperative that the commission industry and the congress identify and assess the congress for the shortfall in customer funds and take corrective action where possible. at german gensler's request the commission staff developed recommendations for enhancing commissions and designated a self-regulatory organization programs related to the protection of customer funds which includes changes to the commission rules governing futures commission merchants enhanced commission oversight of the csrl and possible statutory changes among other things. we must do everything in our power to restore confidence in that you futures markets so producers, processors and other end users of commodities can once again hedge the price risk without fear of the funds being frozen or lost.

november 9th 2011 the commission voted to make me the senior commissioner with respect to the global matters. this authorizes me to exercise the executive and administrative functions of the commission solely with respect to the pending enforcement investigation, the bankruptcy proceedings and other action to lowercase recover customer funds or determine the reason for the shortfall. while i am unable to discuss the specifics of our ongoing enforcement investigation, i will provide a brief overview. our division of enforcement is actively engaged in the investigation concerning the shortfall of customer funds. we have a dedicated team working everyday on this case. they are interviewing witnesses and reviewing documents as well as other information and are proceeding as expeditiously as we can. as the committee will understand i cannot disclose any specific

details of the investigation because they are on public and because i do not want to prejudice any enforcement action. however depending on the specific facts and circumstances, a shortfall customer segregated fund could amount to a violation of the c.a. and commission regulations including those that govern segregated funds, prevent theft of customer money, required our registrars to provide the accounts, prevent making false statements and prohibits the schemes. depending on the specific facts and circumstances the commission could file an enforcement action against corporate entities and/or individuals who have violated the cea or regulation. depending on the specific facts and circumstances, individuals could also be liable if they are controlled persons of a company who has violated the law.

a controlled person generally refers to management. depending on the specific facts and circumstances and an enforcement action can be filed against individuals who a day and edit the violations by company. finally the commission regulations impose obligations on accountants who audit and on the banks who hold customer segregated funds. generally the commission has b-frp to do other things among the monetary penalties in putting to disgorge ill-gotten gain, obtain restitution for customers and obtain other injunctive relief. in terms of a civil monetary penalty the commission can seek a greater of three times the defendant's game or set amount which is currently at $100,000 per violation. civil monetary penalties are forced it to the u.s. treasury will restitution would be paid to the victims who suffer

losses. the commission is a civil and force the agency so we cannot seek imprisonment or a sanction an enforcement action as a sanction, excuse me, and imports of action. however, a willful violation of the c.a. or our regulation is a federal crime which can be prosecuted by the u.s. attorney. we do not have a say in whether or not the criminal authority prosecutes coming in by a understand that they have a higher burden of proof. there's no doubt that mf global bankruptcy has caused severe hardship for thousands of customers who trusted the system and trusted their sc m. i believe the commission can make improvements to our regulatory oversight of sc m and the sro to install confidence in the futures markets and i will work with the commission and congress to implement the rules necessary to enhance our ability to protect market users.

>> thank you very much. >> giddens, welcome. >> thank you. >> chairwoman stabenow, a ranking member roberts and committee members -- >> weddington need to push a button. >> thank you. chairwoman stabenow coloring the member roberts and committee members, it's been nine months since the bankruptcy of mf global where irresponsible actions of company management caused an unprecedented invasion of customer funds. i know this has been a long frustrating period for formal request to the customer is waiting for the return of property rightfully belonging to them. however, sycophant progress has been made for the benefit of customers and putting it returning 80% of customer property to the commodities customers who traded on u.s. exchanges. completing an extensive investigation and issuing a public report on its findings

and identifying and pursuing the recoveries of additional assets for customers on eighth and more importantly the customers have appreciated this committee's support for these efforts. mine consistent goal remains to return as much property as possible and as quickly as possible and a fair and lawful manner, and that is what i have done. it's important to understand that i have no role in the bankruptcy and the holdings which was the holding company of the broker-dealer and is now represented by a separate trustee. as a liquidation trustee, i do not have law enforcement for the regulatory authority the white continue to cooperate with and have shared my report and its findings with all the relevant agencies. currently my office is completing a fourth distribution to the former commodities

customers bringing total distributions to 4.7 billion. 80% of the property for the u.s. exchange rate and 5% for the foreign exchange trades for substantially all non-affiliated accounts for transferred, and approximately 80% received nearly all of their account balances because of the securities investor protection corporation advances have also conducted the claims process that involves more than 44,000 claims. claims have been made and most have been agreed to by the claimants. we have claimed a speech absent litigation. the approximately $1.6 billion shortfall in segregated property available for the return to customers remains we're looking

to eliminate the shortfall by determining the size of customer plane pulls and recovering funds through negotiation and litigation if necessary we may request of the bankruptcy court approval for the allocation of them on segregated property to customers. significant agreements have been reached with the group with mf global global canada which will also support my ability to distribute additional funds to customers. there are very substantial disputed claims from mf global affiliate's including the holding company which required me under the law to hold appropriate reserves until those disputes are resolved, and until they are resolved by the bankruptcy court, they stand at a very significant impediment to further distributions to customers. in the united kingdom litigation continues to resolve my claim against the joint special let -

traders for 700 million in customer property. extensive and thorough investigation into the failure of mf global led to my conclusion that there may be valid claims against directors and officers including john karzai in. i am prosecuting these claims with plaintiffs in pending lawsuits against those parties jpmorgan chase concerning transfers i believes. i have made recommendations about how to avert a similar future catastrophe and protect customers coming and i support reforms recently approved by regulators. thank you very much for the opportunity to testify here today. >> thank you very much, mr. bodenstein, welcome. >> thank you.

good morning german stabenow, ranking member roberts and members of the committee. i thank you for this opportunity to appear before you today. i have submitted my full written testimony. my name is ira bodenstein, and i and the appointed interim chapter 7 trustee of peregrine financial group incorporated. i was appointed as a successor trustee by the office of the united states trustee which is a component of the department of justice on july 11th, 2012. over a planned and was preceded by the filing of a complaint by the u.s. commodity futures trading commission which sought injunctive relief against peregrine and russell watson, sr. on july 10th, 2012. in the filing of the voluntary chapter 7 bankruptcy petition by mf peregrine within hours after the entry of a temporary restraining order and the appointment of a receiver in the cftc proceeding at since the date of my appointment as a peregrine

trustees i've been working diligently to comply with my fiduciary duties under the bankruptcy code. i've taken steps to secure peregrine assets and protect customer accounts and information. to prevent the loss of institutional knowledge and to assist in the taking control of the assets and information i obtained bankruptcy court allowing me to operate the business of peregrine on a limited basis through september 13th, 2012 but as a certain employees at peregrine. i've also selected acre of professionals which i feel are necessary to assist me in this liquidation effort to revive the working cooperative with the cftc, the nsa, the fbi and the u.s. attorney's office in coordinating the liquidation of peregrine and providing access to all information under my control three years in the

pending civil and criminal investigations on the other hand i've been getting cooperation from the other side in getting information that they already have control of and allowing me to see that information. i've also been working cooperative me with the receiver who was appointed in the cftc action. initially there was some concern over competing orders and who had jurisdiction over what has been straightened out in the receivership matter and an amended receivership order and an amended statutory restraining order have been entered making it clear that all assets of peregrine are under control of the bankruptcy trustee. in conclusion, with the destin sense of the team i have put in place i intend to confirm the validity of the information on the books and records of peregrine and disseminate such information to its households which also delivers its speed. one customer balances are calculated, i intend to seek

court authority to make an initial distribution to the customers as soon as i can. i think you for the opportunity to appear before this committee. >> thank you very much. we realize you are new to the position you're in and we thank you for your willingness to come before the committee as you begin this very important process. for the committee members we will do to rounds of five minute questions this morning, and let me start with tremendous flair. how quickly can the cftc move to improve the protection of customer accounts? you talked about various things you are looking at how quickly can you do that? do you need more legal authority to protect futures markets or do you feel you have the authority right now that you need to be given to move? >> i think we have strong legal authority and i keep an open mind to work with this committee and others to work on their

suggestions for changes whether it is about the civil penalties that we can impose on people or maybe possibly with regard to the bankruptcy code itself. but in terms of legal authority it's quite strong. in terms of timing, we've moved i think very effectively with the national futures association and the industry on those changes we would like to incorporate those into our rule book as well. but i would be hopeful that what is in front of the commissioners now and draft is only in the draft form that we can try to get it out to the public comment in the months of september is my hope, but a lot of feedback will come. we have a public roundtable as well towards the end of next week we are going to hear more from the public on these matters. >> thank you. obviously the public is watching here and certainly from my perspective i'm going to escalate to many times now whether or not people should be investing and using the futures markets and that is not a good

thing. so we do need to make the right decisions, but we do need to move. let me ask the commissioner how much time on average has the cftc needed to bring charges in the case like this. i know you can't speak of this particular case, but when we look at the kinds of cases the cftc has brought, what would be given the size and complexity, the normal time frame? >> i think in my time at the cftc the past five years we haven't had a case like this. this is unprecedented for the commission to have a case of this complexity of this size, 38,000 commodity customers and with customer money missing which is in a bankruptcy case

before we've never had that happen. so this is unprecedented for us and i want to assure the committee that we are moving as expeditiously as we can. >> do you believe you have the resources to do this in the quickest way possible? >> we have a dedicated team on ns global -- mf global with a number of people with our division of enforcement in our new york office as well as assistance from chicago and here in washington working on this. >> is that a yes? >> yes. >> thank you. any funds collected as a result of successful cases that you would bring go directly to make customers whole. >> seeking restitution would allow us to give that money back to customers. civil monetary penalties would of course the back to the u.s. treasury. >> thank you very much. we've heard from the judge in the written testimony that he believes there is enough money

to make customers hole and there should be significant excess funds for creditors. how would you respond to that? >> based on our claims analysis, we estimate that u.s. customers have valid claims for approximately 6 million the estate is approximately $5.2 billion in assets. customers who traded on foreign exchanges the so-called 40.7 funds have pending claims with approximately 1 billion. 30.7 in the present has assets of 90 million. that is the shortfall. as i indicated, we very much would like to say every customer 100%, however, it will be a time-consuming, difficult an uphill battle to be successful in marshalling substantial additional assets needed to pay commodities customers 100%. we appreciate mr. freeh's apparent support and confidence

in our ability to allocate additional substantial assets. and certainly that remains our singular focus. but, for example, 700 million of what should have been segregated funds are at issue in the litigation in the united kingdom. we are very hopeful about our success in that litigation but when no means is that assured. that is a matter that will be decided by the english courts under the english law. >> obviously a top priority for our committee i believe i can speak for everyone is to make sure that people were made whole coming and we appreciate your aggressiveness in doing that can't support you in doing whatever is necessary to do that. given the time the time is expired i would now turn to the ranking member, the distinguished senator from kansas. >> thank you madam chair. mr. giddens or vindictive the report indicates that new in october 26 the firm was out of compliance on october 26 you

have on october 28 she was still wiring out another 175 million to the united kingdom for mr. karzai's instructions. is this correct? >> yes, sir. >> did mf global have internal controls regarding how and why money could be moved that would prevent this from happening? >> the have controls that they were obviously in effect ignored. >> is mr. gore's lines and the overruling the internal controls? is this your incompetence or did someone somewhere within mf global know what they were doing and willfully move the money out of the segregated accounts? >> i believe the report which deals with these subjects in which hundred 75 pages mick squier our conclusion that there was knowledge that segregated

customer funds were being improperly moved. >> did the tbb to a cftc change after the fact to the rule of 1.5 regarding the international rule or 30.7 investments really matter in terms of what mf global was doing with its customer segregated funds? >> the subsequent change in terms of how much would be segregated we think would have been had a rule been changed one have been very important. i think we indicated something like a billion dollars that would have required to be segregated for the 4.7 customers was not segregated so that certainly would have been a material. >> at the end of today what is your best estimate of the percentage of customers money they will finally get back out of this? >> again, certainly it is my goal that they recover 100%.

we are up to 80% on 4d or 5% on the 40 plaine seven. we've had other collections of non-segregated funds as to which we have to go through the bankruptcy court and have the bankruptcy court finally allocate. it will be our position that is a substantial part of the funds should be allocated to the customers coming and with the amount of funds that we have under control, and if we are successful in the pending litigation, i think we are comfortable saying that the additional distributions should certainly be in the 90% range. this is granted be an uphill fight as i indicated to get to 100%. >> i appreciate your dedication. sherman, welcome back. today, right now, can the cftc

tell if an fc m is shuffling customers' money intraday in and out of the segregated account? >> i think that we would be hard-pressed to be able to do that. i think that the rules forbid it. that somebody even has to be fully segregated but we don't have access and we are not in those accounts. but it's absolutely against the rules to take money intraday. it has to be in segregation all day long. >> welcome following that, have you done anything to quickly resolve the situation somebody can look at the end of the day we have to do the intraday can we do it at the end of today? >> yes, and i think even these recent rules that were adopted by the nfa was a positive step as you see for each day and then at the management wants to tap into what is called the access

fund, sometimes the their own fund, the company fund. they can't take out more than a limited amount, 25% without having senior management signing it and noting the regulators as well. we also recommended that they get a direct view only online bob to see the bank accounts and custodial accounts that will take some further changes and technologies changes. some get a rating agency had been downgraded mf global, how much longer would this use of customer funds have gone by mf global without any regulator? >> s to the specifics of the one institution i would leave it to those that know more about the company now than i do. but i think that the obligation of the self regulatory organizations and the cftc to ensure that all institutions comply with blah, blah.

>> i appreciate that and i will have further questions in the second round madame chairwoman. >> thank you. >> senator harkin. specs before madame chair. according to information i received in the national futures association, the nfa has taken five enforce that actions against peregrine in 1996, 2004, 2008, 2012, and again on july 9th, 2012 to aid in 2004, according to a story that was in "the new york times," peregrine clients said a national to the national futures association and the cftc asking it to intervene to prevent the firm from misusing its customers' money. a copy of the letter was obtained by "the new york times." five years later in 2009 again a tipster wrote nfa asking it to

review peregrine's bank account information for accuracy. in 1996 the action involved separate incidents in which peregrine failed to maintain aggregate to the racket funds. again in 2011 in the course of an audit they were informed that peregrine was under segregated by to enter the million. there's two letters one on friday and one on monday that sort of changed those figures. my questions are will delete was the cftc aware of the 2011 incident in which there were two letters one on friday and one on monday? if so, what did you do and should the cftc have been made aware of it? >> to the best of my knowledge we were not but we were going to learn more facts looking at our own cftc. but the work papers of the nfa may have that. but we don't necessarily review the audits. there's an outside auditor and a self-regulatory organization.

but we have moved in the last two and a half years as weak quarterly now look at nfa and the cme review but just on a sample basis. we sample some and it happens to the peregrine wasn't a part of our sample in the last two years. >> is it typical for a term like peregrine to have that many efforts that actions taken against it in a similar time period? that's one come to come three, four, five, six going back to 1996. >> i would have to get back to you because there are especially in the large financial institutions, and this was small and often disciplinary actions for sales practice issues. but i would say looking back at the record and even looking at a the 2000 action that the cftc brought and there was a settlement that they had about accounting records. i think the system failed to protect the public when you look

at those various incidents over the years and there was 12 years ago. >> i guess i just -- my question is one red flag ought to be enough if you get two or three, pretty soon somebody has to start paying attention. >> that is why we are looking very closely at how we can enhance the standards of the audit itself. that's why we've reached out in the public accounting oversight board. something similar. it's not identical with a look at the audit and we have the responsibility to sort of look at how they do their job. we want to learn from that and see how we can be a better examiner. >> that raises the question do they have enough power and authority and personnel to ensure that the industry's self-regulatory organizations fulfill the responsibilities. >> we will continue to look at the statute but my initial thought is we probably do have the authorities. i think we need to upgrade some

of our roles and how they have to comply with generally accepted auditing standards and with the outside auditors have to do to allow electronic confirmation direct electronic access. founding malae said before from the committee i think we are underfunded to see the futures industry that's grown fivefold since the 90's and then we have the slot industry as well. it's my it's my understanding of commodities merchant doesn't to compared to beat could protect customers from losses such as fraud or malfeasance. again, i question whether or not there shouldn't be -- there have been some suggestions there should be an insurance fund, there is for securities, there is for the federal deposit insurance, but there isn't for the futures commission merchants. do you have any thoughts on that? >> the commission is currently focused on doing everything we can under the current law to protect customers and i think there is more than we need to

do. i certainly have an open mind as to this dialogue and i think it is really the weighing of costs and benefits and it is an age-old issue of insurance does take a cost. i think we need to focus in on our rules and ensure the customers to better and the self regulatory function works better to be a disconnect my time is up. you do it for securities and deposits but not for futures i wonder if we shouldn't be looking at something like that. >> senator lugar. >> thank you madam chairman. let me follow the line of questioning in duralast testimony you mentioned the struggle of getting to the rulemaking to 30 some rules and headed towards 50 and you mentioned in september there may be more adequate hearings but other parties of the business

might have you. i'm just curious in terms of the dynamics in your own members of the commission quite apart from the testimony of those to you are regulating this sets attention with the private community or within the board that brings about this delay it will be about two years from the time the bill was passed and earlier on i know you gave more optimistic predictions about the rule making. but delays the rulemaking? what is the dilemma that you have? >> the complexity of the topic and the task the congress gave is we want to get this right and a balanced. this is a true paradigm shift to this market. we are in a sense now in the back half for the back nine if i can use -- i'm not a golfer, but

we have completed 36 final rules with all of the foundational rules. i think the commission serves the public well. commissioner summers can speak to it. we've largely done this with consensus, but occasionally we break the ranks but we do want to find consensus where we can among the five others to get us done i think it is more sustainable for the public if we do and then as you say we have 35,000 comment letters to deal with every one of those and do cost-benefit analysis and the like. >> what letters come in and how do you characterize who are writing of these letters? >> market participants. they are weighted towards the financial community. i think that we if adequately and appropriately addressed the end user issues on what is the definition of the swap dealer and the like and the end user exception. but we are going to continue to get the comments from end users who don't want to get caught up

in this and try to work with fat. >> is there a sense that with the industry involved the degree in terms of public understanding we've had these incidents but they may be lurking out there some more. this isn't parallel to the cybersecurity we are debating on the floor right now but we may have a 9/11 situation the market system everything else is shut down. that may not be as dire to what we are talking about today but nonetheless lacking the confidence in the markets but the resistance obviously by the private companies to do their thing in their way. i'm just curious about this tension and what our rule ought to be legislatively by the department of oversight. >> i think we've made tremendous progress but four years since the crisis and 8 million people losing their jobs i do think we

need to get on and try to complete the market reform to read as it relates more darkly to the customer protection issues there's been a tremendous interaction and support from the futures industry and a self-regulatory organization to enhance the system because the system did fail to protect the public in these matters in the last nine months to the estimate that he made any recommendations for legislative reform amendments the we ought to be offering here as legislators to be helpful to you? >> we have not but have remained open to it. i think whether it is in the area of civil penalties may be some possible issues in the bankruptcy code. we have pretty strong legislative authority to i think enhance the rules for the customer protection area and enhance the rules for the auditing futures commission merchants. >> thank you very much.

>> senator klobuchar is next. >> thank you madam chair and to the witnesses and thanks for holding this hearing. i know when it was originally scheduled it was at the focus on mf global and the steps that had been taken since then. yet today we find ourselves trying to understand how something like this happened again this time with peregrine financial group where something went undetected for many years. i have one farmer who had been invested in the disaster happened, puts his money in peregrine and loses twice. so clearly the system hasn't protected the people that it should and there have been people left holding the bag that shouldn't be holding the bag. i would like to get credit for the important steps that have been taken so far to strengthen consumer protections but as we all know, of rules are only as good as to the extent that they are enforced the that is something i certainly used as a prosecutor you can have all of the books with all of the law if

you don't enforce them sometimes it is worse than having them at all. so i wanted to first ask about some of the major revelations in the report released by the trustee giddens, chairman dams were coming and that was if there was an incredible mismatch between the increasingly complex liquidity needs of mf global and the treasury unit that managed the company's cash flow and compliance. the report found that in an electronic age, mf global was managing its liquidity using the entries on spreadsheets and oral reports. i guess first chairman dennis where is this finding concerning to you as this to me and going forward what is being done to ensure they not only have adequate capital but also the systems, procedures and technology is in place to monitor the rest. >> i am concerned about the internal control of the futures commission merchant and ultimately of the swap dealers as well. we are looking at and half in

the draft form in front of the commissioners rules to ensure the future trading manager and become merchants have procedures for better internal controls and the staff has built those recommendations on dhaka full public record including trustee giddens report. >> about the expertise you stated in your testimony that as a part of the oversight you reviewed the training and you went on to say that the recent examinations included recommendations for enhanced training and supervisory review procedures. how do you think that's going and what is the experience of the front line audit staff and what should change? >> i think it still needs to be enhanced. i think that there's a great deal not just out of the peregrine situation, but just in the growth of the futures model and these two circumstances in the last nine months. and i know that they are

committed to doing that. but we are also looking to put in some rules about how the final the general the accepted standards and how the joint audit program works between the sro which i think will inevitably raise some of the standards of the sulfur devotee organizations. >> one of the things that struck me according to "the wall street journal" article i wonder if an employee actually called and found out that they showed the account was dramatically underfunded and then even though they had that information over the phone than believed the facts that said everything was fine. my question is why wasn't it taken more seriously and is that something that should be considered as you go forward? >> i think it is very concerning and i share the public view and senator harkin in your view that should have been looked at and pursued with a phone call to the

back directly to the things that is what a risk-based auditor what do. >> i will end with this what has been the greatest frustration to recover customer funds? i know some of my colleagues asked about the money but what was your frustration getting the money from mf global and what is the one lesson that you think should be taken from your investigation in terms of how we move forward with a better system. >> on the recommendations, that we need on the basis of our experience or study was really which would have been very beneficial and eliminated a lot of problems here would be the study of an insurance fund from the commodities customers for the protection provided to the security's customers and also by the fdic for the bank depositors

most of the accounts, and as understand in many there were under $100,000 come so they are small farmers, ranchers and others, so that the amount of protection to provide $100,000 of that hadn't existed that would have permitted us to have paid i think and i'm talking up the top of my head something like 98% of all claimants almost immediately that would have been sufficient to cover costs. how feasible that would be and how funded that would be to the industry is a subject for study but that limited amount of coverage as i say in our case would have permitted us to quickly move and cover most of the deficiencies in the case and

a security customers because of the existence of sipa and the sipa protections. in terms of the collection of assets even the moneys and the banks and other depositories throughout the world it's a process of saying the segregated funds because these institutions in many cases all were reluctant to release funds and in some cases said we have counterclaims and so is a cumbersome process to the funds that demonstrably belong to customers because they are held a third parties there were some exceptions to that and some of the institutions show some concern with the public interest and also for the customers. but nothing works quite as is

prescribed when you are in the bankruptcy. >> senator johanns. 64, madame chair. if i could start with you as you were looking through the facts surrounding mf global i would like to know if the facts illustrate that mr. corvine knew that segregated funds were being moved. >> i think we deal with that very important 64,000-dollar question and the report with the nuances and the like to read as i say i think that issue is also being looked at by by the

enforcement hour own view is the preponderance of the evidence indicates. estimate they were aware of the liquidity crisis and was aware that customer funds towards the end were being utilized to cover other costs and firms. as i say the principal for my report under sipa is to explain why the firm failed to the point of view when we were coming up with the causes of action that we could pursue to bring in additional asset. >> i appreciate that. but you must also appreciate that we have constituents who are not only interested in

getting the money back that they lost but they are interested in making sure it something was done wrong those who didn't were brought to account in some form or fashion the other senior officers we are the plaintiffs' counsel and we're working together all those cases are consolidated but judge pereiro from new york there in the hundreds of millions and those are part of the efforts we are making and the lawyers are making in concert to hold those people and we are responsible for some of the losses. >> when you answer my question you referred to the senior

management, and i guess it can't get more senior than being the top guy, so taking your answer to me that you are often referencing mr. karzai. >> yes, sir. >> again, going back to your report, the facts indicate that mr. corvine in fact authorized the movement of customer segregated funds. >> i can't say that the total analysis of that proves that. >> is part of your responsibility and of cooperation with the u.s. attorney's office and that investigation is ongoing. >> as well as the cftc regulatory investigation.

>> commissioner or chairman gensler come anyone of you can attempt to address this let me express a concern i have and i would like your reaction to get by becoming even more of a skeptic that i was at the time of the passage of dodd-frank we filled books with rules and regulations and statutes and on and on. but the reality of the world is that you can write and write and pass law but at the end of the day there are two things very difficult to protect yourself from. number one, stupidity and we see plenty of fat in the financial crisis among the very powerful people. ..

as we write these new rules, implementing dodd-frank, we need to keep the goals of that legislation in mind and keep sure that it works for market participants. >> thank you very much.

senator baucus. >> thank you, madam chairman. i have two questions basically for the cftc. first, chairman favoretta and mr. sommers, are you familiar with the private room called applebee's? >> now, i don't believe so. >> well, at least radians put together information, fnc's subsequent to the mf global collapse. they seek the information that others acquire a and they put together composite score of various mcms. and this is a copy of it here. and they go through, my gosh,

the top score is 83 daneyko also lay down through the others. and they rate according to all kinds of data. transparency, that clearing, net capital ratios, tread, market valuations. they concluded that may of the theater that is third or fourth from the bottom. well, it is fourth from the bottom when you counted all the way up. and my question is in all this data to reach a conclusion in a rural, red state here, why can't

your agency know if that company is doing the rating is probably last based upon the data at least of one company. i don't know what other system or information with respect to the financial status, but there's one aspect. it's on the bottom and no agency knew anything about it. >> there may be others at the agency, but i think we usually benefit from the public input. whether its analysts as does his research at know who the other three or four at bottom bar. >> here they are right now.

outside you who they are. the very thought of this pioneer futures. second from the bottom is present all college group. dirt from the bottom as parkland forest is. a. and there's a button shared. >> i think that we need to move the self-regulatory organizations of the cftc at the bar to risk based approach and not just the auditors might call taking and flicking, just checking the boxes off the page, whether it is the risk of getting a fact on a friday different from monday, or the risk that this alice could be mentioned hazlet data. i think it is part of why congress ultimately put a whistleblower peace into our statute finale of the whistleblowers can come forward

and yet if there has been penalties paid, they get a part of that. we are helped out by that because we are ultimately the minds of the public to self-regulatory organizations and the like as well as our own work. >> will anyway, i asked the manager that is the included in the record. that's information that needs to be public. the regulator to do much about it. and it's wrong. second, this question that i think has been touched on, basically i went to commissioner summers announced three sets again to the mf global collapse, you follow up and looking out of their and make sure we don't have another hamas global and they say you were doing that, we

are doing that, but it seems to me that the commission's information is just based upon this. are you doing? were doing fine. without an audit taking and behind that veil. what exactly is some of this? i'm just a concern here asking and of course that's information. you've got to get in deeper to find out whether that's true. it just seems to me a follow-up subsequent subsequent to my request, verbal or written as professional, very direct. not deep. my impression is you just don't take deep enough. because you're allowing yourself

. >> the follow-up, senator that i believe you're referring to are the added factor and not global. and you are correct that those were not full, complete audit of the fcm. those were done by not only the cftc for the top 10 or 12 firms, but they were also dead by this cme for the clearing firms for the remainder of the mcms and the searchers bought. >> well, my time is that. you're the responsible agency. you've got to find a solution. you're the cop on the beat. if you got to do your job. thank you. >> thank you very much. mr. grassley. senator grassley. >> mr. gensler, it's been

reported that the cft conducted examinations in 2006 and seven. to the cftc conducts these examinations? and if so, why didn't they find out their bank statements were matching up with what was exactly in the bank account? and if? and could be independently account balances with peregrine's bank? >> senator, we have looked at. we have done a number of views, some in the late 90s and the two you have mentioned in the past decade as well. these are not obvious. we rely on the front-line regulators, the nsa and also the a cpa. so it is correct that we could not verify bank statements. sometimes we look at anti-money laundering things like in 2010 was another review. sometimes we end up with an

enforcement action, like in 2000 we ended up with an enforcement action against peregrine that was settled back then 12 years ago. looking back on it workpapers i wonder if after that flags of what as better caught in 1999 and 2000 so forth. so at the same question you have a better roadwork and are looking to see how they can do better as well. >> okay, in other question for you. the national features organization is safe is organization has been reported in "the wall street journal" that the ceo of an assay express his opinion at a congressional staff briefing that auditors are looking for fraud, end of quote when conducting regular audit confirms. would you agree with mr. ross that are auditors who are auditing these brokerage for are

looking for signs of fraud or not? >> no, i am not myself an auditor. i've heard there's a distinction between fraud audit and a financial audit and it may be that mr. roth was referring to. they don't do full scale fraud artists. having said that, the records are supposed to be confirmed. but the banks into studios and mr. wasendorf admitted in a statement when he was taking his eyes. these are auditors including the nsa. >> i don't know whether a statement that senator klobuchar made about a phone call that was made with that would fall in the whistleblowers category to see them interest checking whistleblowers. i had this question for you, chairman gensler. since the collapse of mf global

hysteria fingering question on a lot of people's minds come to something like this. are there any of their friends out there that are going to go bust? .think -- dodd-frank regulation required a whistleblower access and this is officially put in place last year nearly. so my question since the opening of the whistleblowers office at cftc, have complaints been made about inappropriate activities are going on at any future firms? if so, how many active cases does the whistleblower office that are looking into claims of impropriety? do you think that the cuts are not mapped to raise awareness in the futures industry that the whistleblower office exists and what the function in the office is supposed to be to encourage people to come forth? >> i thank you for your support because it's an import in

office. it has been set at. there's a fund set aside with money. with this settlement and libel are case with barclays, the fund will be up to the full maximum congress made of $100 million. i think we could do more to educate the public. we have it to my office now set up, but i think it's just two people. we are a small agency, and yes we have had whistleblowers come forward. if you want a fuller report on how to work to get you choose the details. i can't remember the untrue claims, but there are a number of whistleblower have come forward in general matters. i don't know if they've been about customer funds so. >> and 11 seconds i have laughed because i have to go, not chairman, i want to raise an issue that is going to raise with mr. ross and will take her to seconds to read this and that he can answer for the record.

it is similar to what senator harkin asked of mr. gansler. one thing that continues to trouble me reports of the red flags raised about financial when those red flags for joy. for since it's reported that in march 2011 a confirmation or was faxed directly from your thing to national features this is the nation, showing it was less $7 million in the bank account is at needed for segregated customer money and shortly thereafter come either that they are the following business day after fighting a u.s. bank had sent the confirmation, mr. wasendorf senior sent another confirmation showing there was approximately $220 million in the account for customers. question, is this factual account accurate? and u.s. banks and a confirmation only seven and dollars of customer money?

and why did ms say to and following up on the contrasting confirmation report quirks did anyone have an assay call u.s. bank to verify how much was in the account? and if not, why not? >> senator grassley, that is for the record i understand? >> yes. >> thank you very much. senator hoban. >> thank you, madam chairman. chairman gensler, if you explain to me, how do you ensure funds are customer segregated account are not used by commodity firms? just lay it out given what has happened, after a mass global, how do you protect customers? >> i think we will never protect

it won't be somebody trying to steal or lie or cheat asked my grandfather sort of laid out. what i do think that getting rules in place at the regulators can directly, on a daily basis see the account balance now with type ologies help is a big plus. i think also filling the hole that trustees giddens and these foreign accounts was a gap in our regulations that just listening to the numbers is nearly a billion dollars or maybe i misunderstood the numbers he said from the public record. so i think there are always going to be folks are of most people are good people, but some people will be bad and we have to close out the avenues for they can defraud the public. the favorite 100 forced inaction to your and unfortunately there are going to be some folks that are trying to defraud the public. >> so you feel you have better

track of the segregated accounts. do you agree with trustee giddens that there should be some insurance fund like fdi in insurance for depositors and banks for smaller customers? if so, at what threshold and how should it be funded? >> i am certainly open to it, but it's an issue of cost and benefit then i think that certainly i stand ready at a commission to hear more from the public, from farmers and ranchers and others to use these products on how to move forward on not insert a would-be congress congress to take a. we have to focus on everything within the laws and rules that we have now to ensure the best protect the public and not necessarily provide another swear that their import policy debate. >> commissioner sommers, your response to the same two questions. >> protecting segregated

accounts and should there be some type of fund to protect small customers? >> senator, i believe there've been a number of enhancements identified, not only by the nsa, but by industry, the cftc staff, trustees and we are moving forward to implement all of those enhanced men's. with regard to the insurance fund, i think the issue as we always say, the devil is in the details. who is paying premiums? is the sem, farmers and ranchers? i've had a number of conversations with producers with regard to whether they would be willing to pay additional cost for premiums if they knew their accounts were protect to. some are and some are skeptical. it is something we need to continue to review and study to understand that there is some in the industry would want.

>> trusty giddens, customers are concerned about how much they're going to get paid back a segregated funds come in their and when. also i senator johanns said, the senior executives who did wrong are held to account. gives me her time i. so customers, how much would they get back in what time frame, simple terms and why have the church has been fully brought in a most global given occurred hungry go to their good case. >> to take second question first, the timing on when any criminal or worse than actions will come is really up to the u.s. attorney into the cftc enforcement. actions we have hesitated

already convinced i'm working with plaintiffs counsel, some of whom i believe are in a subsequent panel to bring litigation action against senior management of mf global in order to collect additional funds for customers that were successful negation of who we are moving ahead on that. the second question is we are and i am determined to return to customers quickly as i can. i cannot now return money until dispute over a large claims the result by the bankruptcy court. we are moving quickly to dissolve those to speak to students as disputes are resolved, that frees up additional money for distributions. how long a process may take, and may take three months, six months or longer depending on complexities of the claims. the holding company itself has

filed claims against us as $2.2 billion of which has served securities claims. some of them have served commodities claims. those kind of issues have to be resolved and i have to keep reserved so i don't discriminate if it turns out those claims are that come away sufficient money do that. so that is the biggest problem at present. as we collect additional fun, segregated funds or whatever, would move as quickly as we can with the court. we will distribute additional funds they collect it from the cme and will make distributions as quickly as we can. so i see this is going on a sort of a serial process. the litigation with the u.k. administrators over 700 million come in that case is being published before the courts. they're put in their initial

position on not. the u.k. administrators position is that these funds are not segregated under u.k. law and they are unsecure general assets for his restoration. these are 30.7 funds that the firm on the u.k. part of the firm agreed and so should be segregated. our position -- are responding position on that case will be filed in september. there will be discovery depositions in the case should go to trial early in 2013, but that's an issue involving $701, which literally i can't control the time table. the u.k. courts do. again, i'll i'm trying to point out is to do everything we can as quickly as possible to get unstuck to customers. >> thank you very much. thank you. senator thin. >> thank you, madam chair appeared to try to personalize this to the people i represent,

the biggest question were faced with this one needs to be done to ensure farmers, ranchers, investors and others utilize commodities and futures can be protected from losing money through misuse of customer funds as has occurred with of global and i would care financial group, even though laws and regulations is in place to prevent these losses from occurring. i think anytime we talk about making changes to any regulatory structure, that we as lawmakers need to ensure reemerge from these bankruptcies with what we've learned and able to provide adequate, legislative and regulatory modifications to make sure this don't occur again. we also need to make certain that what we do doesn't create overly cumbersome compliance requirements and overtake normal oversight operations.

so that said, the potential for bankruptcy and the misuse of customer funds that occurred there, given the fact ms global occurred nine months earlier as shuttling. the cftc has made some changes since that time, including implementing some reforms, 125, which is known as the ms global rules, but it's not clear these rules have enabled the cftc to more effectively oversee the futures industry. that point aside an rss question to chairman gensler commissioner sommers, would you agree the structure along with proposed reforms would regulate you the modern futures industry? >> i think this system can work. a destiny of enhancements and i think even that were also going to ask the nsa to register swap

dealers. reaction at our first register with them last friday. but as they take on this examination functions, they'll have to step up their resources, which they plan to do, they will be challenged and firms will fail in the future. firm should be allowed to fail in our system, i believe a lot in our system, but when they fail, the customer money has to be fully protected and that is what we see say, lessons are. the system. but it can work with enhancements. >> senator, i agree. the self regulatory system has worked for the history of the futures and street and with the enhancements that have been identified, unfortunately paracrine happened before we were able as a commission to implement any further enhancements to our own rules. but we plan to do that i'm hopeful we'll get to that as soon as we can.

>> when he asked, since the passage of dodd-frank, do you think the cftc is implementing new rules and regulations that hasn't had time to adequately enforce existing ones like segregation of customer accounts? >> i think we are stretched, but very much focused on the futures market to be very structured a group that oversees intermediaries. refold 21.350 before summer full text schools and even palaver kay's is an example that i'm so proud of the division of enforcement to bring this case they've started working on april april 2008 is something that 70% of the futures industry is related. we are very much focused on the futures market in farmers and ranchers, but we are stretched

thin and now we have these new obligations in the swaps market as well. >> what do you think? spending too much time i'm dodd-frank to keep up with what should you do already? >> i believe we've identified enhancements we could've made to the futures industry six months ago. so the changes before us now are changes we could've implemented months months ago. >> thank you. let me ask trustee kids. you provided recommendations for regulatory and other reforms that night over the future. what would you say is the single most important legislative change that should take place based upon your experience with ms global? >> i think the one that had the most material effect would have been consideration of the creation of a modest investor protection fund. something that they come at the

number questions rediscovered, unlike securities customers, average account here was less than $100,000, so it's a modest amount of money, up to $100 would have been the shortfalls would've been $20,000 per account would have permitted saturday seamless restitution to these customers early on. whether the cost of that or so on, but i think that recommendation are some family that would be the most important. >> thank you. my time has expired, madam chair. tanks. >> thank you very much. excuse me. >> chairman gensler coming to mention saying that your grandfather used -- and i'm reminded of another russian saying by president reagan. trust but verify. how often are filings by scs

received but not verified? >> want fact, they make a failing every month under the new rules will make violence every day, but the verification to outside third parties have historically been done by paper and only done annually by the outside auditors for the under 3915 and. we want to change rules to say daily that you can see those account balance is directly from the bank. and if you see it electronically that is a form of verification that will significantly enhance this audit function. >> thank you. we've heard from many of in device i'd like to see the option of being able to fully segregate their assets for both futures and swaps. would you wear the commission support customers having the option of complete segregation?

what are the costs and benefits to that approach in your name? >> we adopted earlier this role this year for swaps, some day and i walked in that direction come is something called legal segregation, but operation cominco. some pension funds have asked maybe step further. please roundtables on it. i think there is something very interesting to pursue, but as i understand it, it might be changes to the bankruptcy law as well to fully facilitate them what we would like to do. we encourage the dialog because it's very hopeful dialogue. >> speaking the bankruptcy code, bodenstein, they have different views on priority, which you agree that customers should have a special status in these preceding a hundred general

creditors? idea my >> if you might speak more than night. >> i believe under the special provisions under the quotations in the bankruptcy code, there is a separate customer property that would have priority under the following general creditors. >> would you support making it clear that customers go ahead of general creditors? >> excuse me? >> writenow bankruptcy law conflicts with other laws as to who comes first. >> i'm sorry. my understanding of the bankruptcy code and we'll see how the special provisions for commodity broker litigations play out liquidations play out in this case. my understanding at present is in fact they do have a priority

over the claims that the general creditors. >> that's correct. there's other laws like the bankruptcy provisions in the commodity exchange act that have a different view. sabato said guess what i was acting. do you support having the status in proceedings of general creditors? we will do that at that. >> i guess the answer is -- i am not an advocate for any one particular group as a trustee, but i will study the different privations and ensure that i apply them with the consent of the court on all the actions as appropriately as possible.mate at this point in time. we are working diligently right now to verify customer balances

on customers segregated funds about that sort of calculation in determination can be made in the near future. >> along outlines, how many ms global accounts were transferred to peregrine financial? >> approximately 590 accounts in something like 197 million unassociated cash collateral was transferred. not transferred directly, but it was transferred to cme and other exchanges. >> i have a slightly different take on not. >> i believe that approximately 627 accounts were transferred an approximate 197 million. but of that amount, only

3.7 million stayed at peregrine financial and the account value then now, those account for slightly in excess of the 3.7 million. so by and large, within days or months after the accounts were transferred, those customers were removed to their account out of peregrine. >> just to be clear, could you get the number of accounts that she believed the 600? >> based on deployment or information i requested from the employees at ms global and peregrine, 627 accounts are transferred to >> is getting different numbers here. >> the number we have from our

records is not significantly different. we said 590 accounts. i don't know what the accounts did when they were transferred, but i'm pleased to hear that a large number of them transferred to another firm. but we agree on the figure that i have 590 and approximately 197 billion of assets that were transferred nsa say, i think were glad to hear a significant number of those moved on nsa understand, only claims in excess of 3 million remain. >> okay, thank you very much. >> madam chairman, i don't want to beat up on a horse that 30 out of the barn and in another pasture. but there's a lot of angst, frustration and farm country about this. and when i asked mr. giddens

this question, did someone, somewhere within ms global know exactly what they were doing and if so, will they move out of the segregated accounts, the answer was yes. they later questioned by one of the other senators that this was also obviously involved. senator johanns indicated that he is guilty of that movement of the money. i understand that, but certainly it seems to me he was at least complicit and culpable. i know that you can't answer the question that farmers and ranchers are asked and probably asking you as well. my question to you, is the

department of justice working with you on this investigation to your satisfaction to bring forward criminal charges to those who should be held accountable. >> senator, we've been working with other authority since the beginning. just to point out again that a willful violation of the commodity exchange act is a federal crime. so if there is evidence to indicate that, that would be some pain the u.s. attorney would be able to pursue. from our side of this investigation, i think we would never want to risk a successful outcome until we are able to review all of the facts and circumstances of this case should be able to bring a possible case against an entity or a person who may have violated the commodity exchange. >> and are you satisfied with the justice? >> yes, sir.

>> well, there is one instance. >> mr. bodenstein, can you extend the difference between ms global and chapter seven bankruptcy? >> senator, i am not an expert. i would certainly defer to mr. mr. giddens with respect to that. with respect to the bankruptcy code as it expands, my duty as i forth in section 704 of the general trustee and now we have this overlay of the commodity broker beginning in 761 through 767 and i have not had previous experience working with those particular provisions in very few people have had that honor for daunting task of deciphering

the meaning of those provisions of the bankruptcy code, but i look forward to that challenge and i will faithfully -- i expect to learn quite a bit and form opinions about how those provisions were in tandem with the other provisions of the bankruptcy code and book recommendations i might have is to go through this liquidation of peregrine on how those can be improved in future days. i'm sure i'll be happy to share my thoughts on that with you. >> what you think of cme's new proposal and where should be held will start with the chairman. >> we have had a very fruitful discussion with the cme come with terry tessier think on your next panel. i do think that, as i understand that, might raise some issues back to the bankruptcy code again at the funds are specifically the future

commission, just how it goes into these various provisions that the trustee bodenstein referred to. >> this sommers. >> senator, i would applaud all the efforts to the last nine months and the different actions on the table and when he taken any to review all of these because i think they could offer some good alternatives to what we currently have. >> i think it is a promising proposal. >> thank you for your brevity. >> i'm not familiar with that proposal, seminary. >> well, get familiar. i appreciate that very much. my time is that. >> thank you very much. let me just say as we dismiss you that there really are three goals we have a safe bet in the beginning, making sure people get their money back in the

unfortunate 500 or 600 accounts which have been hit twice, certainly i don't blame them for being very angry and very concerned about the system as well as everybody else. we also want to make sure people are held accountable for wrongdoing and we want to make sure that the system improves the ties for first time i heard it was an outlier and then it happened again and i can assure you. people will be extremely upset if we are not able to make changes and they certainly support you doing now. do you represent all three of those goalsetting before s. we want to be able to answer the question yes and someone assess whether they can trust the futures markets and participate and not put their money under the mattress. we look

[inaudible conversations] >> well, good morning and we welcome you to a very, very important second panel. we appreciate your participation and input today. then introduce each of our witnesses. as you are aware, we ask for five minutes of opening comments and anything further for the record we certainly welcome. please introduce waltz luke said they come the futures industry

association. mr. lukken, formerly served as acting chairman of the cftc, the more night, mr. lukken of alumnus. so discount fell under then chairman richard lugar. we welcome you back to the committee. our next panelist is terry daffy, no stranger to the committee. mr. daffy as executive chairman and president of cme group. prior to work with cme group, mr. daffy was president at tmb trading. president bush confirmed by the u.s. senate in two or a member of federal retirement thrift investment board. welcome back. dan ross is the president and ceo of the national futures association. good to see you. since joining an essay in 1983, mr. ross has served that organization is cheap operating officer and executive vice president and assistant general counsel.

welcome. our next panelist is diane klemme. do i have that right. ms. klemme is here on behalf of the national grain and feed association, vice president of the cream provision services corporation. ms. klemme develop merchandising and risk management programs and is a well-known author of articles on agricultural risk management. we look forward to hearing your perspective this morning. our final panelist is john roe, commodity customer coalition served as vice president. also president of roe capital management. in addition to these roles, principal and co-venture of bp peer training group and prior to that ran the division of ms global, which they left in june june 2010. and we welcome you this morning. so, let us start first with

mr. lukken. >> good morning chairwoman stabenow, ranking member robert. while we are not a regulatory authority like the nsa or the cftc, sia is wrenched mission since its inception has been to protect the public interest. here in to high standards of professional conduct and financial integrity. with that money back to address the recent failures of ms global in paragraph mutual group. three weeks can we learn that more than 200 million customer funds is missing from peregrine on the fraud is back 20 years. this is appalling and absolutely devastating news, especially for our customers come in many of them farmers and ranchers. members of the futures industry remain outraged we strongly encourage that psg trustee as well as the mass global quickly returned as much money as

possible to customers. the futures industry took several tries i come into the financial crisis with relatively few problems. tragically we can no longer make that claim. these events are a stark reminder that we must never lose sight of the most fundamental and basic purpose of a regulatory system, protecting customer funds. sia is pleased they have implemented many global recommendations, post-mf global formed a special expert committee to evaluate necessary changes to the customer protection remark. in february released her initial initial report which called to ensure that industry standards for protect in customer funds. we have recommended they report daily segregated balances and customer funds invested under permitted rules. annually certified there no material week this is in their controls and policies.

they maintain an appropriate separation among individuals responsible for customer fun protections and four we developed a certified training program for chief financial officers and other public employees. in addition to support to the changes to improve customer protection, the fia generally supports the mf global trustees recommendations,, which are consistent with many industry proposals and include studying the feasibility of a targeted insurance fund. even with all that's done, more is needed and fia is working on such improvements. first, fia strongly supports a neatly out the recent regulators with ability to review and confirm customer segregated balances electronically across every scm at any time. they support an automated confirmation system for customer segregated funds. they provide regulators with timely regulation that funds are

secured. fia participated in the cftc advisory committee meetings to discuss such technology solutions under several viable type ologies systems worthy of near-term can the duration. third, fia supports creation of an information portal double essentially affirm specific initial information regarding fcm to customers to more readily access material information in evaluating mcms. and forth, the publicly certified as soon as practical that they are in compliance with fia's initial recommendations in these controls are independently reviewed and audited. i was also encouraged by chairman dems are his remarks at the commission adopting sensible recommendations i've discussed today. the basic blocking and tackling of regulation depends on ensuring that firms have proper risk controls and systems in place with independent auditing

of verification by regulators at a time of great regulatory change we can't lose sight of these oversight fundamentals. in conclusion embezzlement at peregrine dismissed by a generation of regulators at the federal regulatory levels. this along with mf global is unacceptable by any measure. there is the easy solution, no magic what that will bring back the lost trust for these incidents and instead will take time and hard work across the industry to implement these improvements to earn back public stress. customers deserve better and fia is wholly committed to ensure the highest degrees of protections going toward. thank you command chairman. >> thank you very much. mr. david. >> the stabenow, ranking member duffy, we are appalled by the segregated funds. this fraud amendment has shaken the very core of our industry i'm in a breach of trust related

to customer funds is absolutely unacceptable weather at psg, msg or any other firm. the failure of mf global, cme and others have committed to strengthen protections piccard customer property. the industry has recently understated measures, which was the new electronic confirm tool that undercover mr. wasendorf's forgery at outcome of the more needs to be done. the national association has adopted measures to deter, detect and prevent misuse of customer funds. three of the been implemented and the fourth will be connected next month. we've been conducting reviews of the account since last december. we've implemented segregation statements by all and now we require bimonthly reporting to ensure segregated funds are properly invested and held at the approved depositories. also mid-july, cme began using

confirmation.com and electronic method of statements directly from third-party depositories to verify investment reports. we began using confirmation.com is a tool and regulatory added simply to require banks to confirm segregated funds using this tool. in direct response to mf global disaster, we'll implement the coursing rule on september 1st the role requires the scm ceo or cfo signoff at any withdraw of customer segregated funds that exceeds 25% of the excess segregated funds. they must also inform the cme at the same time. as i said more can be done at the same time, cme police regulators and industry must be careful weighing of costs and benefits of all proposals to enhance protection of the clients. the program covering fraud and failure losses. possibly supplemented.

such a fund would lose confidence in these to be balanced against no negatives. the negatives are the obvious they been cost prohibitive and ineffective due to the amount of help in the segregation of the $150 billion. we need to develop rules, procedures and systems that give direct real-time access to segregated account balances and we work with regulators to do so. in the meantime while conducting audits. we have the ability to call on and access online account balances for on-site review. and while it will be controversial and perhaps have destructors plant species nonetheless be hauled by clearing houses or other custodians and limit the ability of fcm's transfer such property except to the recipients.

congress amend the bankruptcy code to permit clearinghouse is for sufficient collateral to support customer positions of a feel clearing the retransfer in those positions in those positions of all not defaulting customers to another stable clearing member. while we expect that the misconduct of mf global mpg eliminate the role of clearinghouse is a members, we do not believe a legitimate case be made to transfer responsibilities to a government agency. the cme is committed to working with congress and the cftc, nia and market participants are prevailing rate and find solutions to further protect customer funds at the fm level. we are committed to restoring confidence in the market for so many rely up for risk management needs. i thank you for the opportunity to testify and look forward to any questions you may have. >> thank you very much. >> thank you, not in chair.

as you noted in your opening comments, this is the second time in just eight months that we are here discussing a misuse of customer funds, this time involving train nine of approximately $200 million. this fraud is perpetrated through a sea of forged bank documents. peregrine was required to report on a daily basis in a customer funds hold a number of those funds were being held. those reports were false. and they were supported by forged daily bank activity statements, fortunate restatements, porch confirmation levels, disposed checks and big confirmation notice. we began our most recent exam in mid-june. as part of that process, we early on in the examination of

one's affirm that we were switching our big confirmation process that is past we had used a traditional big confirmation process in which peregrine would sign a document, authorizing the banks to release certain information to nsa. we would then take documents coming up into the bank. the banquet meal responds mail response directly to nsa and we would care what the bank was telling us what the firm is telling us. we told peregrine were switching to the confirmation process we began using a january. it is a web based confirmation process. we told the firm to firm would have to authorize this participation in the east confirmation process. mr. wasendorf senior executed that authorization on sunday, july 8 in the following day he attend and suicide. leaving a note describing the bank fortress. as soon as we were notified of that event, where there was an immediate phone call, conference

between cftc, nsa and peregrine personnel. as of friday, peregrine was holding customer funds with over half of that, but 200 million he held at u.s. bank, the office in cedar falls. during a teleconference on that monday morning, we immediately instructed the personnel to go and get the bank manager in the phone and when they had them on the phone, he told us the actual balance in the account as of the previous friday was approximately $5 million. we then told him we'd written confirmation from the bank from the two previous audit somebody please confirm balances from those from the two previous years, 2011 and 2010. for each of those two dates he again told us that the confirmation we had were false and they had been similarly inflated. popery trough from all of this

are the same painful lessons that we learned in mf global. the facts undeniable our customers have to note that their funds are safe. number two, it's up to the regulators at the governmental level and self-regulatory level to provide the highest assurance we can. number three, we followed standard audit procedures that are examinations of peregrine including the big confirmation process in the standard audit procedures just work out. he beat us. he fooled us. he pulled us for too long. we have to do better. we have to find a better way of monitoring moderate members with all the requirements that especially segregated funds. we began the process immediately after mf global point of the special committee of public directors at nsa any committee of self-regulatory organizations with the cme. he began developing sets of rules mr. duffy describes sun,

mr. gansler describes some of the dordrecht yours, but also began working on rules to make better use of technology to monitor that compliance. our august board reading, our board will consider whether berger required the regulation to direct view only a online access to a customer's bank account so we can go on a check or balance at the bank anytime we want for any bank would want for any fcm without contacting either the firm or the bank. beyond that, we hope to hold the system and build a system that takes the confirmation process and essentially turned it into a daily event. we need to get reports on a daily basis from all the segregated funds. tanks, mcms, money market funds, wherever permissible investments are, wherever depositories are committed to filter reports with

regulators in which regulators can then on an automated basis compared with reporters to receive from firms to generate alerts regarding any suspicious discrepancies. we look forward to working with congress, commission, industry and all stakeholders to ensure that we type systems. we know we can't eliminate fraud, but will continue to strive to do that. and senator if i could ask your indulgence for one second. on the first panel, senator grassley raised a question about a comment, he quotes come the story in "the wall street journal" that said -- that i have said that it was not nsa's role to detect fraud. senator, i've been at nsa for 20 years and i guarantee you a battle they never said that, i'd never thought that. detection of fraud, combating fraud in the futures industry of the central for the last 30 years and it remains so today. secondly, with respect to the red flag senator harkin and others have said it would be

helpful, i could samiti britain statement outlining a response to each of the instances noted in the press were here today. >> that would be helpful. we would appreciate that. ..

and taken into bankruptcy. the unprecedented loss of customer funds and the mf global debacle has led obviously to the loss of come customer confidence in the futures market in the system itself. i hear this all the time from our own customers. and so to consider what changes might be workable in the aftermath of mf global we ask whether the failures justify systemic chains and with the discovery long-term fraud and misappropriation in the psg debacle, it does write hunkering not just for regulatory change that rapid change to fully protect customer funds. in the meantime the customers are still waiting. to such failures in nine months especially the failure of psg when regulators presumably run heightened alert is just incomprehensible and unconscionable to customers. i get these questions all the time. let me illustrate why by taking one customer from my own client base.

this is a typical grain elevator and i won't even tell you the stacum doesn't matter. they provide a vital service to agriculture. they buy when farmers want to sell and they subgrain to end-users end-users when the buyer gets a commodity. elevators provide the service of buying from commerce you may want to sell future crops which then gives the farmer confidence to go out and buy land or by input. but this elevator then has to hold and maintain short future hedges for a year or more and the financially able to meet any margin calls that might occur in with a drought this year what -- we know that is involved. this one particular customer that i am speaking of was holding 4.2 million bushels worth of short futures of corn, beans and wheat on july 20. the combined margin requirements for those positions on that day were $9.4 million which is a fairly small business.

they have met every margin call immediately which is a huge act of faith given they just went through mf global and they are still waiting for 20% of their funds. and importantly all hedging, my customers know they rely on vendors to provide much of the financing for these margins of this is not just about farmers, ranchers, elevators etc.. it's about the added vendors that are the backbone of this. this is just one example. it's not even a large company. just a typical elevator. multiplied by their excise of u.s. agriculture and you can envision the scope of the financial demands in exposure these businesses are participating in right now they find on faith. the cftc traders report from last friday shows the hedger producer merchant category is holding a combined long and short futures and just corn, beans and wheat of 9.7 billion bushels which is having to be margined every day

with lenders providing these funds. the hedger has to know these funds are safe. the lenders have to know these funds are safe in brokers want to know those funds are safe. you might ask why vendors are continuing to fund the system. partly because we have all assured customers and gfa members and lenders that after mf global, changes coming. i have been assuring people at that. they keep asking when. finally it's not the answer. it's not enough. audits are an important part of the process. it's going to take real change with protection of funds and one way or another and much like safety deposit content and get this done after regulatory banks. we have to get it done quickly especially in the face of the markets we face right now. our recommendations are outlined

in my written testimony which include the pilot program to assess the full segregation system with held separately and includes a number that changes to the way bankruptcy laws and bankruptcy code handles failure. we recognize the segregation structure would include additional cost and may not be workable or preferable for all customers but neither is losing their money. for that reason and gfa recommends insurance protection for customers. such a fund is not be large enough certainly at the beginning to fund the entire futures industry. we have bigger issues to worry about but we might need and certainly would need something that is large enough to protect customers caught in the occasional failure while perhaps longer-term systems are being evaluated and implemented. thank you for the opportunity to share their views and the association. >> thank you very much.

mr. roe. >> good morning chairman seven i, ranking member roberts thank you for the invitation to appear before you today to discuss the commodity customer coalition's recommendations for the poly-response to the mf global and tfg insolvencies. seems to have become a very risky proposition to tender your property to a commodity broker. an industry which just year ago prided itself with that no customer had lost a penny as a result of clearing member default now hopes to broker insolvencies will be limited to the hundreds of millions of dollars instead of the billions of dollars. a system of commodity regulation is clearly broken. in fact heart of that system is so broken that the regulator in charge of auditing pfg best financial could not tell they levied against pfg or were being paid to them with money that belonged to customers. $700,000 this year alone. before this committee, chairman gensler testified that it's unreasonable to expect the least to stop all bank robbers.

you and customers don't live in fear that their deposits will be robbed by the bank. moreover in the event that a bank that is so large that it causes the bank to become insolvent whose customers have insurance to cover those deposits. is chairman gensler and roberts were to rob a securities are they too have customer account insurance. commodity customers really protected by their regulators. there is no mechanism in place outside of the bankruptcy process to deal with shortfalls to customer founding. once customer accounts are attached to bankruptcy the losses to customers have only just begun. in addition to whatever assets with which the broker has subscribed the customers face losses stemming from their inability to manage frozen trading ability and customers and/or an arduous process far in excess of their comparable services. these bankruptcies will drag on for years and the administrative fees which may be paid from customer property will run into the hundreds of millions of

dollars. participants in american financial markets deserve better. the strongest most official legal protections available that has a safety net when regulators fail. it to stop expecting regulators to do this job and start offering customers protections when they do not. wrister gensler's robbers cannot be stopped -- if they cannot be stopped at a minimum they must be insured. month of policy recommendations we tended to this committee the most important is an account insurance mechanism. we propose congress authorized liquidity facility which focuses on providing liquidity to plug shortfalls in customer property and ensure customer accounts are quickly transferred to new brokers within their position. this fund would step into the shoes of customers who would have prevented bankruptcy and reserve property against claims made against customer property. is liquidity facility would not seek government funded or manage, and access could be raised transashley's will is

through member firm assessment. there's a working model of this type of fund known as the canadian investor protection fund and can that. mf global conceived canadian subsidiary some 700 counts were transferred with 100% of their property to a new broker within two weeks. and i feel recent to two weeks is accidentally the stressed the move canadian properties which belong to canadian customers and berkeley burgling had to be moved that to be transferred. they rebel to make customers hold with the facilitation of guarantee from the protection fund covering the 20% shortfall in excess. as a result, canada's customers can now say as we used to, that no customer has ever lost a penny as a result of a default. like all types of insurance any such insurance would have to have coverage limits but if the fdic can in insure $4.3 trillion in bank deposits, surely we can insure $190 million in customer segregation cost. congress must also consider

enacting new criminal -- why the pfg investigation will result in criminal conviction of probability for a criminal conviction in mf global case is less certain. the lesson of mf global should not be that there are no criminal consequences for swiping customer funds. commerce must consider measures to counteract the risks to customers resulting from the combination of broker-dealer in a single corporate entity perp or great percent of customer segregated property in the annie resides in 10 of these firms. broker-dealers and sickle entities have exposed over $35 billion in commodity cluster property involved in the financial crisis perkovich hungers commerce to consider forcing broker-dealers to split their operation to separate legal entities. at a minimum the unencumbered collateral should have specific insurance coverage. lastly congress must make more reforms of bankruptcy code in and of that is outside the purview of this committee but an

important part of an appropriate and complete policy response. a complete over your bar recommendations for reform can be found in the recommendations we tendered with the committee. some of the industry will argue substantive changes of art in may 2 commodity regulations. they will argue these changes are sufficient to diminish the likelihood of future shortfall and they will say we need to enforce what is on the books. however this logic assumes that thieves lack ingenuity and assumes the same technological advances adopted by the regulators will also help the thieves themselves. regulators are the last to adopt new technologies. no more poignant evidence of this than in 2012 regulators were still relying on paper statements requested from a p.o. box in cedar rapids iowa. tepler to protect herself from chairman gensler's thieves we will have to do better than that. cleared congress to act to protect commodity customers when and where the industry does not. >> thank you ray. mr. lukken thank you -- first of

all we have heard from peregrine customers and i heard from one person who is basing the possibility of losing his life savings and said he would rather put his money under a pillow that invest in the futures market and i'm sure that is shared by many people. should features commission merchants be allowed to hold customer money or do we need to seriously look at an alternative custodial arrangement and would you support the call for funds to be held outside of firms but to have any interest earned returns to the firm? >> we are certainly we are certainly looking at all ideas to help restore customer confidence in this area. as you know, the futures model as customers get money to their brokerage, but along with that, there is also a guaranteed. the fc of this guaranteeing those customers so they sems get in the game as well to make sure that the customer sponsor

properly invested and there is due diligence there as well. if we think the fcm is moving customer money to the clearinghouse and don't allow the fc have to do there on risk management because of this guarantee they simply become insurance companies passing that money through. i think if you look at the totality of the system where we are siphoning the internal controls that we have recommended, the things that have been recommended and implemented at the cftc, the nsa and the cma, those are all strengthening things that are going to help the system. i do think we have to look at more things. we have to look at the idf targeted insurance funds. >> can you talk more about that because mr. roe talked about having an insurance type mechanism and how do you feel about that? >> this is something we are actively considering and as mr. giddens in his report said 78% of his customers,

100,000-dollar insurance funds may have covered that so that is something i think we have to look at but as has been noted there are serious costs in the programs that we have to consider. coverage, actuarial soundness and also potentially a lot of these insurance programs for the government guarantee behind them so at a time when people are nervous about too big to fail, putting government guarantees and something we have been seriously considered so certainly will be looking at the insurance options. we think there may be something we can look up that we have will come back to this committee with our findings. >> thank you very much, and mr. duffy on the same note, in december you testified the cost of insurance fund would be cost prohibitive but you had fact have put in place something on a limited basis for farmers, ranchers and co-ops so do you believe this kind of fund is feasible on a larger scale? wouldn't this expand -- this

expanded fund -- >> as i said madam chairwoman when i testified before your committee if our family farmer rancher fund was not placed during mf global all of the people who put food on the table for the people in america would have been made whole. the 100 million-dollar fund would have paid $33 million after those farmers in pure bona fide hedgers. not speculators not people -- the people processing the. as far as an insurance fund goes it's important to note in order to get the $2 billion of insurance they charge 5 cents aside to trade for three years to get to $1 billion. we are charging clients seven to 10 cents to trade day so now we are going to double their cost to add to this fun. when you look at something like the securities and everybody wants to refer to civic and how is it great bailout. asked the folks who were invested with mr. madoff when he put $15 million in civic gave

them $5.2 million in return. also in sipc, the clients do not pay for that insurance. the dealers pay for that insurance. why? because it's it payment for overflow in the securities world a completely different structural model. we did not have a payment for the model in the futures industry. we have an open transparent book for all of them and it's a huge difference when you talk about who is going to fund these types of insurance programs. i'm not opposed to insurance. i am all for if people want to pay for it they should have the ability to do it and we will be happy to facilitate some form for them to do so but they need to understand their huge differences when people are trying to draw the line between sipc and what happens in our industry today, completely different models, who pays for it and why they pay pay for it. >> thank you very much it i think i'm going to take an extra question and let you do the

same. mr. roth i want to ask you with mf global and peregrine, there have been, there were certainly red flags. and with peregrine there was a long history of violations and enforced reactions. they were receiving additional scrutiny compared to other firms because of the violations? >> senator, the peregrine customer base was overwhelmingly retail speculator type customers and they did receive a good deal of regulatory scrutiny and there were a number of enforcement actions but frankly firms that do retail speculator type business tend to encounter more regulatory problems particularly in the area of sales practices, promotional material, the way they trade customer accounts in some cases. peregrine was subject to cftc and fma and repeated enforcement actions. none of those examinations and none of those enforcement

reacts -- actions involve allegations of fraud regarding customer segregated funds. there was not an indication of that. >> he was the sole person in the company receiving tank statements and a chief compliance officer took his word for the fact that the documents were real, at least according to a report. so when we look at this, with this consolidation of functions have violated any standard of internal controls that would have been identified in audits or other reviews or should they have? >> our examination certainly would have covered internal controls as with the examinations by the outside cpa. we tried to make sure there was segregation of duty with the people comparing the computations on a daily basis have the expertise to do that function.