as far as the fia's recommendations on the sign-offs and similar things they've proposed, yes, cma group is very supportive of the recommendations. >> i note that senator shelby has temporarily left the hearing to attend an appropriations hearing and he will be back. senator corker. >> thank you, mr. chairman. thank all of you for your testimony. i sit through most of these hearings day after day, it almost gives you a hearing to think of all the regulators involved in one entity. we created that, you all did, so i'm not criticizing that. it does seem there's a lot of silos and various areas each of you look at that don't overlap properly. what i'd like to do is ask mr. giddens and judge freeh, what

happened? what happened to the customer accounts? how did the money end up in places that it was not supposed to end up? we've talked about everything but that here today. >> our analysis of what happened and where the money went i think is substantially concluded. that's the first phase of the process. because of the liquidity crisis in the last week, something like $105 billion in cash went out of the firm to banks, depositories, some to commodities customers, some to securities customers, in what on the surface appear to be ordinary commercial transactions. a great deal of this was caused by customers leaving the firm and asking that their assets be transferred out of the firm. also, the firm has to scurry around to find additional collateral.

additional collateral was required with respect to the repo to market transactions which went from something like $200 million to maybe $900 million additional collateral required. in these firms, cash is moved around from various accounts on a daily basis. and it is possible that mistakes are made and you say we have excess in one category, you can use it to move to another, and so much happening in one week and so many volumes of transactions, that's where we think what accounts for the mistakes. so we know -- we can trace where the cash and securities in the firm went. and that we've done. the second, more complex phase, which we're also aggressively pursuing, is to get as much of that back if we have an appropriate legal theory to do that, and we've done that. we've had some success to date and will continue to pursue that

with a goal of getting back as much of the property as we can. >> let me ask you this question. we can't all get the picture of what happened, a lot of money was moving around quickly, the firm was in a desperate state. with all of that occurring, regardless of the umpteen million regulators that look at this, the fact is how do you keep that from -- how do you keep, at the end, money going out of a customer account inappropriately some other place? how can even a regulator at that instant keep that from happening? >> given the fact that so-called operational personnel can move

funds, have the authority to do it, it's almost not possible to build a foolproof system which would -- the checks that you have were the reporting requirements and also the totaling-up on a daily basis of what the segregation requirements should be. if there are substantial mistakes in that, it permits someone to say, theoretically, i have an excess in the commodities funds, therefore i can transfer that to the securities accounts, or vice versa. we had an example shortly after i was appointed. i had a call from mf global itself saying, we have wrongly transferred $220 million from the securities accounts to the commodities accounts and we would like to reverse that.

how that was done or who authorized it or whatever, we can't say. but clearly there were mistakes being made. and part of this -- as i say, the processes that most people don't realize is relatively low-level operational people at any given time have the authority to transfer hundreds of millions of dollars -- >> was there an investment committee? i mean, when you -- is there personal recourse to the executives when these kinds of things happen? i mean, is there a way to deal with them on a personal basis against their personal assets? and secondly, was there any kind of investment committee or internal controls that existed there to keep this kind of thing from happening wind the firm, and if not, are there other firms to your knowledge that have these same problems?

>> on the personal liability, i think there are -- well, personal view and people working with me view is that there are discrepancies so that seniors and higher-ups who do not directly authorize the young vice president to move money are probably -- very difficult to suggest that they are personally liable. that's one of the reasons i suggested that we look at that and begin to consider saying, it's not enough when you're managing the firm, determining the investments and the overall strategy, if you in effect create the liquidity crisis, that you will bear some responsibility if there are shortfalls in customers' property. i think it's certainly -- >> and just -- i know i'm running out of time. i'm actually over. were there internal controls or investment committee, was there any discipline within the firm that kept one person from making a big bet in the company going

haywire? >> there was -- my understanding was there was a -- an investment committee, there were risk officers at the firm. there were examples of where recommendations were not taken by the risk officer and under perfectly legitimate corporate structures, senior officers could choose to ignore that. and our view at mf global, from our analysis of its operations, was that the firm was poorly capitalized and had liquidity crises, highly leveraged before mr. corzine came to the firm, and in fact those problems continued. they certainly went through the motions of having operational supervision and risk supervision and the like. how effective that was i think

is demonstrated by the ultimate failure of the firm. >> mr. chairman, thank you for the time. >> senator menendez. >> thank you, mr. chairman. thank you all for your testimony. mr. giddens, mr. freeh, let me ask you, i heard your response to senator corker's last question, that mf global is poorly capitalized, had a liquidity crisis, that it was highly leveraged. was that in essence the harbinger of its doom? >> that was certainly a large contributing factor, so if they had a crisis there was not much of a cushion to fall back on. i think also would be the nature of their investments in risky european sovereign debt in

countries such as i believe italy, spain and ireland. with a result that since those were purchased on margin, the margin amounts and the collateral put up had to be continually increased. so that toward the end, as i recall, something in the neighborhood of $200 million to $300 million in margin became closer to $900 million in margin that had to be put up. so all of that created much more severe strains on the firm. >> senator, also in addition to that, a critical factor was the -- really the inability of its i.t. and technology system to just keep pace with the trades and even to record them . in the last few days there's many nonrecorded trades. even now to reconstruct what happened there is really difficult. the i.t. system and the technology was not equipped for the frenetic pace of trading in

the last several days. and that combined with the miscalculation, using the most generous term at this point subject to investigation, of what was segregated and what was not segregated and the inability to control and track the trades and the accounts, was just a perfect storm for the disaster that occurred. >> so you clearly had between poor capitalization, liquidity crisis, highly leveraged, and inferior technology ability, a structural problem at mf global. let me ask you this. has it been part of your effort and review to determine what individuals, what level -- i'm trying to think of here structure more than an individual. but what individuals created the set of decisions that created the challenge that we have? >> yes, senator. i mean, that's the subject both

of my investigation and mr. giddens'. we're looking to determine the available causes of action, including fraud, lack fiduciary responsibility -- >> where are you at this point? >> we're just beginning it. >> so you cannot identify at this point the responsible parties? >> i could not do that fairly at this point. >> let me ask you this. mr. giddens, you suggested in response i think in earlier testimony that director liability might be a preventative measure. isn't there director liability here now? >> there well may be and we're looking at that. if there were breaches of fiduciary duty that are actionable, we will pursue them. >> miss sommers, in december 11th, the cftc finalized a rule

prohibiting the investor customer funds in foreign sovereign debt securities. if the rule had been finalized before the collapse of mf global had not been overturned in 2005, does the cftc believe mf global would have avoided collapse? >> no, sir. >> okay. >> the investments under 1.25 are the permissible investments that the fcm can use to invest customer funds that are in segregation, but they cannot be used by the fcm themselves to invest it for the fcm's own gain. >> what is the likelihood of -- my understanding is you've identified where the money is. what is the likelihood of recovering it on behalf of all of those individuals whose money is abroad?

>> with respect to the $700 million that was represented to the u.s. customers as being segregated for them, our position is that under uk law, that money should be treated as segregated customer funds. and i think we are reasonably confident of a positive outcome from the uk courts but there is no guarantee of that. >> one final question, mr. duffy. clearly what a company does in the first instance is the challenge. we would expect them to do the right thing both legally and substantively and ethically. but in the absence of that, is there anything in this experience that says to you

heading cme that there's something structurally that needs to be changed to at least mitigate the extent? my understanding is there was a $700 million odd instance in which they would have -- reporting would have indicated that funds were commingled. that couldn't be stopped because it already was done but might it have mitigated going to $1.6 billion? >> you'd have to ask mr. giddens where that number came from, our number is significantly lower. anything we could have gained by the experience, i think we have done everything, as dsro, have reviewed all our practices going back, looking through the whole forensic analysis of mf global, and we feel very strongly we did all the things that were appropriate. i think mr. gidden said something important just a moment ago, he said the company had a liquidity crisis, and increases from $200 million to $900 million on margin calls. that money had to come from somewhere.

i think that's a very important point in this hearing today. that's one of the things i've learned. as far as going forward i think the cmo is, without a doubt, that is the biggest part of what we do as dsro is protect the integrity of our markets and our clients. >> so there's nothing structurally -- >> i don't believe there's anything structurally wrong with the process, sir. >> thank you, mr. chairman. >> senator johanns. >> let me just say, thank you for being here. mr. giddens or judge freeh, either one of you may be equipped to answer this. i'm trying to get a perspective here just in terms of time. you said when i think mr. giddens, that when former senator corzine came on board, there were problems with this firm. they had liquidity problems and that sort of thing. and as i understand it, that would have been in the scope of $200 million at that point in time? is that what you found? >> no. no, senator. just alluding to the fact that the evidence we see is from 2008 on. mf global was either losing money in an operating sense or

was highly leveraged. it was a firm which had financial difficulties when mr. corzine came in. that's simply to say the liquidity crisis was not as severe as it was in the final weeks of october 2011. >> that's what i was trying to get at here. that everything i've heard through hearings like this and reading testimony, et cetera, was that in the final weeks of mf global, the sky fell in. now, my understanding -- to me it seems to basic -- even having been a lawyer where you maintain a trust account, somebody gives you money, you put it in a trust account, you're not authorized to say, gosh, kind of a rough month this month, clients aren't paying their bills or whatever,

i'll just borrow money out of the trust account. but that's in effect what they did here, right? >> the analogy is good. but what they can do through accounting and fancy footwork each day is look at funds that are theoretically in a so-called trust account and say, we now have excess. because money is moving in and out daily among, as we have a chart to indicate, between the broker/dealer, the fcm accounts, the segregated accounts, to european subsidiaries, to banks, depositories. so it's all very fluid. so the concept that there's a frozen trust account that you can't touch is not the way it operates in the real world.

if you do a calculation and somebody in chicago says, we've calculated, we have $200 million excess, we can now use that as collateral and transfer that to the broker/dealer account equally, as in the example i gave, a transfer was made from the broker/dealer segregated fund on the last day of $220 million, maybe on the assumption that they had excess. but the rules of the regulators and the way this works, and maybe the way it has to work, is that the money is really not frozen and can be moved around. there could be much stricter safeguards, things mr. duffy was talking about, in terms of making people responsible at the top which i was talking about and others, so it's not so easy

for some $85,000 a year vice president to say, i've seen the calculations and therefore i'll move $200 million one way or the other. >> did you come across any indication that the firm was actually using that approach in a way that you personally would regard or you would offer an opinion that that was deceptive, it was done in a way to deceive people who were supposed to be paying attention to this, regulating this? >> i really have no personal opinion about that. >> let me ask a question then about that. you're going into this time of a personal investigation i think is what you said, judge freeh. and you're going to start trying

to uncover who did what and when and that sort of thing. so what are your options? if you see evidence that that practice was done in a deceptive way, just describe for the committee the three or four things that could happen to the principals here. >> in addition to the regulators and the criminal investigators conducting simultaneous and in some ways very similar investigations, and that's why we are cooperating with them to the ultimate extent possible, making available records, witnesses, waiving privileges where we can do so. but in our own investigation and our own mandate, myself as a chapter 11 trustee and mr. giddens as a sipa trustee, is to look for causes of action. and at this point, nothing is off the table. we not only look at employees and directors of the holding company as well as the subsidiary that mr. giddens is the trustee for, but third parties, including financial

institutions who had different collateral requirements, which changed, particularly in the last several days. so at this point, literally everything is on the table, both individual persons as well as institutions. and what we will do maybe separately but maybe simultaneously is make legal determinations with our lawyers about whether a viable cause of action exists and whether it's efficient to pursue that cause of action. and my own case, representing the debtors, we may have a cause of action that would cost $10 million, but the institution or the individual has no assets. so we'd have to -- i'd have to weigh that in terms of wasting assets in the estate. >> thank you, mr. chairman. >> senator tesser. >> thank you, mr. chairman. i appreciate you holding this hearing. it's not a surprise to

especially mr. giddens, i mean, we saw funds hedge wiped away because of lack of mf global to segregate funds and keep them segregated. i think this is the eight largest bankruptcy in u.s. history. correct me if i'm wrong, the first time segregated funds have been violated, so to speak. i'll probably get back around to corker's question because i think it's a good one and i'm not sure there's an answer to it but we'll probably do it anyway. mr. freeh -- first of all, thank you all for testifying, i very much appreciate your time today. mr. freeh, you've got an incredible resume, one i'm sure you're proud of, one that is very, very good. and going back to the question the chairman asked, the very first question, where he did talk about bonuses, i just want to clarify. because in your statement today, you said bonuses are not part of consideration now or in the past.

i thought you told the chairman, nor in the future. is that correct? >> i did, sir. >> thank you. and the questions asked kind of add some credence to this. you said there's about 15 employees you have hired, plus correct me if i'm wrong, plus three senior execs, is that correct? >> yes, the 15 employees remain. they were pre-petitioned operators. they run as i mentioned tax remedies. they were the worker bees so to speak. >> yeah. not folks so to speak that would be part of the problem. >> well, we don't know at this point, but of course we're not considering them insiders, we're considering them employees. >> how about the three senior execs? would they be considered insiders? >> yes, they are insiders. >> okay. so in the previous question that senator johanns asked, that you're looking about who did what, when, and a potential cause of action.

when you negotiate their salaries, how are you going to do it, when in fact you're look at them being part of the problem, part of the so-called crooks? >> well, we haven't made any determinations, of course, in that regard. the salaries are set, senator, we're not negotiating salaries. >> who sets them? >> well, they were set at the time of the petition reverting back to their base salaries. so each employee, including the three insiders, had base salaries which have been continued. >> okay. all right. so i mean, so the point i'm trying to get at here, and i think i heard the answer, i mean, i don't really want to give any benefits whatsoever to anybody who caused this debacle, and debacle is not a tough enough word. are you confident that's the case? >> i'm confident that's the case. what i did say to the chairman, with respect to the 15 non-insiders, for instance, the

group that is working now to get a very important and valuable tax refund back to the estate, you know, i need to maintain them or else the alternative would be to go out and hire an accounting firm at three or four times the cost. so that's the balance that i'm conducting. but it's on that noninsider level, and there's only, as i said, 15 critical people that i have to balance a fair and competitive salary for. >> okay. mr. duffy, in your testimony, you describe the futures market as mostly professional, yet mr. giddens suggests in his testimony 78% of mf global claimants would be seeking a return of less than $100,000. and this really is the question. why should farmers and ranchers trust cme in the future to regulate and be able to protect their money?

>> i think there's several reasons, sir. but first and foremost and important is the $5.5 billion to $6 billion roughly of segregated funds that mf global is holding. cme held $2.5 billion of those funds. when mf global collapsed and fell from bankruptcy, cme held $2.5 billion of those customers' funds. our customers were made whole at the clearinghouse level. there were monies transferred out at the farm level, not the clearinghouse level. with respect to what mr. giddens said about the $100,000 clients, there are many clients who have significant higher balances than that. one of the reasons why we came up with the rancher and farmer protection program is there is roughly 36,000 accounts of mf global of which 20,000 odd have $25,000 or $50,000 or so. a lot smaller. a lot of those are farmers and ranchers. if it happened today, under our program, every farmer or rancher would be made 100% whole. >> but it wasn't, so what about

those who were not made whole, the little guys? >> we cannot do things looking back, it would be considered a moral hazard. there's $158 billion of segregated funds in the futures industry and that would be a detriment to cme or anybody else to try to guarantee that number. >> mr. giddens if i might for a second, mr. chairman. mr. giddens there's been a lot of questions here today, maybe half a dozen regulators, maybe more, about what happened, what transpired, things been talked about, poorly capitalized, liquidity problems, when mr. corzine came on board. and we see something happen in the eighth largest bankruptcy that's ever happened where segregated funds were compromised. does this kind of stuff just happen? as a policymaker, you always look to say, what went wrong, what could we have done better, who screwed up?

are you to a point where you can say that? i don't want you throwing anybody under the bus, just be honest. are you at a point where you can say, this is where the system failed? this was a regulator that either didn't do their job or did do their job, or if you've got a cagey enough accountant, you can juggle the books good enough, you can get away with just about everything? because it appears to me that, unless there's something else out there, and tell me what it is. >> i think that the evidence indicates that in most of the cases, the individuals complied with -- speaking of fcms generally, complied with the regulations. regulators looked at the materials. materials were filed. but all of the failures of either broker/dealers or fcms are for the most part caused either by fraud or by financial

mismanagement. and in those percentages where this occurs, as i think was the case here, you can by hindsight look at it and say, there are some things that could have been done. more frequent reporting. also i think the imposition on seniors in the firm, such as the ceo and the cfo, to say, if there is a shortfall in customer funds, you may be liable. personally liable. and therefore, that should incentivize you to have internal systems which ensure you have enough funds and perhaps one of the ways to do that, as is done with any kind of normal repo, you have excess collateral. why not have a requirement that there be excess segregation? so i think there are specific things that can be done