i don't think it was just a happenstance circumstance. i think there is often a case in many bankruptcies, from enron on out, where a firm is in financial trouble and the normal controls are ignored and people act in desperation to try to avoid these kind of problems. i think the regulators and the reports and things required do serve a valuable purpose. but i think they can be improved. >> thank you. thank you all for your testimony. >> senator moran. >> chairman, thank you. commissioner sommers, i want to focus on cftc. what was the conflict of interest that chairman ginsler

caused to recuse himself five days after the filing of the bankruptcy? >> i'm not familiar with the specifics or what he was thinking when he decided to recuse himself. >> it was not a discussion among the commissioners? >> there was not a discussion. >> then there was a vote i assume that selected you to be the lead on mf global? >> the other three commissioners voted. >> no discussion why chairman ginsler was no longer going to act in that capacity? >> no, sir. >> prior to the bankruptcy of mf global, looking back it seems clear mf global was under financial distress. you can look at stock prices, the new york fed reaction. did the cftc take any action to enhance its surveillance or to encourage others to enhance its surveillance prior to the filing of bankruptcy? >> in the week leading up to the bankruptcy filing, we had people on the ground at mf global, our staff in chicago was there on

the ground. but the numbers and what we look at are whether or not the firm is capitalized and whether they have the money to meet their segregated obligations to their customers. and the data that was provided to us from mf global showed that they were in compliance up until the very last few days. >> when you say you had cftc personnel on the ground, was that an increase in personnel on the ground? did you detect there might be something wrong and reacted or not? >> we actually had people at mf global's offices in chicago and new york and that's not typical. >> and when did that occur? the increase -- >> the week prior. >> the week prior? >> uh-huh.

>> when over 99% of mf global's accounts were commodity accounts, did cftc have an opportunity to prevent sipa from taking over the bankruptcy? and why was mf global's holding, the holding company, why was it allowed to file chapter 11? both of those instances seem to me to have preferred the general creditors over the segregated account holders. did cftc have a role in altering the decisions that were made that allowed those two things to happen? the kind of -- sipa's involvement, in my view to the detriment of the segregated account holders, and the holding company wide bankruptcy filing. both those words to the detriment, it seems to me, to the segregated account holders. did the cftc have a role to play in those decisions? >> although i was not privy to the conversations that led up to

mf global being placed into incipient bankruptcy proceeding, it is my understanding that when that is done and the s.e.c. has the ability to place an entity that they believe is either in financial distress or is approaching financial distress, they have the ability to refer them to cipac. we do not have that same authority if an entity is a standalone versus a broker/dealer. it is my understanding even though the entity was a joint broker/dealer fcm placed into a sipa proceeding, all the commission's regulations, part 190, bankruptcy, rules and regulations, those all apply. just as they would if it were just a standalone fcm and those, you know, were not -- >> commissioner, is what you're

telling me then is that my understanding or my suggestion that those segregated account holders were harmed by that decision is not true? >> my understanding is that it is not true. >> did that discussion occur prior to the filing of bankruptcy? was cftc engaged in the conversation about how this bankruptcy was going to occur? >> the commission was informed that mf global was going to be placed into a sipa liquidation. we were not involved in whether or not that decision should be made. >> who at cftc was handling the decisions related to enhanced supervision and the kind of bankruptcy or the bankruptcy proceedings? who at cftc was handling those decisions prior to the bankruptcy? >> up until november 3rd, chairman ginsler was directing those decisions. >> and since you've told me you

don't know what his conflict of interest was that caused him to recuse himself five days after the bankruptcy, you don't have an opinion as to whether that same conflict of interest would have accrued prior to the filing of bankruptcy? do you know if something happened between the filing of bankruptcy and the five days later when he recused himself that created a conflict of interest? or is it the same conflict of interest that was there prior to bankruptcy and subsequent to bankruptcy? >> i do not know. >> thank you. mr. chairman, thank you. >> senator shelby. >> thank you. i apologize for missing part of your testimony. but i have a conflict, as others do. we had a markup in the appropriations committee. and you shouldn't be absent from that. as you can recall. i hope some of these questions

have not been asked, and if they have, i was not here to do it. in the area -- i'll first go to you, commissioner sommers. during the week leading up to the bankruptcy, picking up on some of senator rand's questions, during the week leading up to bankruptcy of mf global, did chairman ginsler ever, ever indicate to you that he was concerned about customer assets at mf global? >> my recollection, senator, is that chairman ginsler had concerns regarding the financial condition of the company, and that's why staff were sent. >> okay. how many times do you recall or do you have a record of it you could furnish to the committee if you don't recall yourself at the moment, did chairman ginsler brief you and other commissioners at the cftc's meetings on the management of the prices? because that had to be a concern for the cftc. because this was not business as

usual. >> right. over the weekend prior to the filing of the bankruptcy, i recall receiving two e-mails from the chairman. and then we health a closed meeting -- >> what was the substance of those e-mails? >> just informing us that he was -- >> there was a problem? >> no. informing us that he had been on conference calls with domestic and foreign regulators regarding the potential sale of mf global to another financial institution. >> did he indicate great concern at that time? >> not at that time, no. >> okay. mr. duffy, i'll direct this question to you and also to commissioner sommers. what authorities does the chicago mercantile exchange, cme, have to protect customer

segregated accounts at a futures commission in emergency -- during emergency situation? and commissioner sommers, following up on that question, mr. duffy, what authorities does the cftc have to protect customer segregated accounts at a futures commission merchant during an emergency situation? mr. duffy, you first. >> first and foremost, we make sure they're in segregated compliance. and these are reports we were getting -- >> that will be answered again for the record -- >> sorry? >> what did you say? they should be segregated? >> we get segregated reports from mf global, as we were getting them all along on a daily basis since they were acquired. they were on a daily seg report voluntarily anyway. we were getting these reports on a daily basis through a day lag and you've got to time them over several day periods.

these are some of the things we do to have authorities to make sure they're in compliance. if they go out of compliance of segregation it's a violation of cme's rules and cftc's rules. >> were some of those reports you were getting, as you look back, were they misleading or were they a little more than that? or what? >> the latter, sir. they were a little more than that. we were told on one report given to us on a thursday that they had $200 million in excess seg, after they had announced that the money was missing on sunday evening. >> was that true? >> it was then true, that they gave us the right report saying there was 200 deficit. they gave it to us the following monday. from the prior thursday. so the reports were definitely inaccurate. >> so that's misleading you, right? >> it was very misleading to us, yes, sir. >> commissioner sommers, a question to you. same thing. >> although -- >> go ahead. >> -- we have never had this type of swalituation in the pas,

but if we were ever in a situation where we believed that a company was in a situation where they could not meet their obligations, the commission could seek legal action to have a receiver appointed in an emergency situation. >> i'll direct the same question to both of you. in the area of protection of customer segregated accounts, commissioner sommers and mr. duffy, both of your organizations as i understand it had staff on-site at mf global chicago offices the weekend before the firm's bankruptcy filing. what steps did your agency, i'll start with you, commissioner sommers, take to protect customer assets prior to learning that customer assets were missing? and what date and time did staff in your agencies first learn that there was a possible or probable shortfall in the customer segregated accounts?

and after you learned of the missing customer assets, what specific steps did each of your agencies take to ensure that customer funds were not improperly transferred over the weekend? that seems when there was more than a little mischief done. commissioner sommers, you first. >> so the first question with regard to what our staff was doing, although the commission and the dsro receives daily segregation reports, those reports only list the amount of money that the fcm owes to customers. what their obligation would be there. our staff was in the process of trying to get supporting documentation from mf global to be able to make sure they actually had that money in the bank. >> you had that conversation you testified to earlier, either personally or some communication

by e-mail, from chairman ginsler.

that we could receive the supporting documentation to make sure to do the tie-back of the segregated accounts -- >> because there was certain at your agency about mf global. >> right. >> where the money was coming from and what money they had and so forth. >> right. >> is that correct? >> that's true. and the documentation and the data that they provided to us showed us that they were in compliance. so over the weekend -- >> but that was not true, was it? >> it was not true. >> did you have suspicion at that time. >> i do not believe that staff had suspicion they were not in compliance. over the weekend the staff was in the process of filing all of the documents that we would need to file in order to make a transfer possible. so customers from mf global, if there was a financial institution that would purchase the fcm, that those customer accounts could be transferred with our approval. so we were drafting those documents in order to make that transfer of customer positions possible. we were not informed -- the commission was not informed until monday morning of october 31st that there was a shortfall in customer segregation. >> but were you ever concerned that there might be some things wrong at mf global? obviously, something had to come up on your radar.

>> absolutely. we were concerned, but never -- i don't believe i ever thought that one of the concerns should be that there would be a shortfall in customer segregation. >> mr. duffy, you have any comments on that? >> i will echo commissioner sommers for the most part. my recollection of what happened is we also had people on the ground tying out, validating the reports against bank records and everything else, and we got through friday. into saturday we still had people on the ground. then we were told there was an accounting error as we referenced in my earlier testimony of last year of $900 million. so everybody was trying to put the company -- >> an accounting error of $900 -- >> i found that pretty staggering myself, $900 million, yeah. some people felt it was too big, it had to be an accounting error. others thought it was too big and it could not be an accounting are error. i was in the latter camp.

>> did that send a lot of anxiety through your organization? >> it sent a lot of anxiety, but i think people felt fairly confident that there was no way that it wasn't an accounting error, and the company was going to be whole -- >> were the people wrong that felt that? >> the people were dead wrong, sir. >> dead wrong? >> dead wrong. >> mr. giddens, you're the mf global trustee, right? >> yes, sir. >> and what is your -- as trustee, just for the record, what is your portfolio? what are you supposed to do as a trustee for mf global, inc.? >> well, i am appointed the equivalent of a chapter 7 trustee, i have the equivalent powers, also as the broker/dealer. my job is to marshall the assets of the broker/dealer estate and to pay them out as required by law. there are sacrosanct property

which is really not part of the estate, which belongs to customers. the commodities customer funds and also the securities customers' funds. and there are very detailed provisions of both the cftc right act and also the sipa act, which governs how you calculate those claims and pay them out. the big distinction and the big difference and the reason that, as mr. cook of the s.e.c. has pointed out, some of the securities customers have been paid in full, is the existence of the resources of the sipa fund which provides up to an additional $500,000 to cover losses in an account. >> is that $500,000 per account? >> yes, sir. yes, sir.

$250,000 -- >> what is the average account? >> the average securities account -- >> at mf global. >> at mf global -- probably -- probably -- i'm just doing the calculation in my head was probably $1 million or more. >> okay. >> the commodities accounts i think we as indicated, 75% were less than $100,000. and probably 93% of the commodities accounts were less than $1 million. now, in both cases, there were significant numbers of commodities customers and securities customers who in the last weeks transferred their accounts from mf global to other solvent firms. >> why did they do this? was there concern in the marketplace about mf global at that time? >> yes, absolutely. credit had been downgraded -- >> do you know of your own account, of your own knowledge that that concern in

the marketplace extended to chicago, to the commodity futures trading or to the s.e.c. or to the cme? >> certainly it was in the major newspapers, that the firm was experiencing trouble. >> everywhere. >> whether anyone suspected there was a shortfall in segregation, i don't know that. but i do know that because of downgrading and rating and losses, many of the large -- >> people were leaving the ship? weren't they? >> absolutely. >> okay. your written testimony, mr. giddens, provides an overview of large cash movements at mf global during october 2011. were there any large transfers -- you talked about some others, alluded to them -- from mf global's customer segregated accounts to the

firm's own accounts while multiple regulators were on-site at mf global starting on october the 27th? >> the answer is yes, there were billions of transfers in and out of the firm and from the various accounts. >> and the regulators were on-site there? >> yes, sir. >> okay. were there any subsequent large transfers out of mf global's own accounts to pay counter parties? >> certainly during the period of october 27 through october 31st, yes. >> okay. mr. giddens, you recently announced that you would pursue litigation in the united kingdom to recover approximately $700 million of customer funds. what's your best guess or your judgment for how long it will

take for mf global customers to recover, if they do, the $700 million that is trapped in the uk, and will it take weeks, months or years and so forth? just your judgment. >> the petition to commence the case is due to be filed shortly how quickly and how the court determines how the litigation is held, what discovery is required and the like, is unknown at this time. we will try to expeditiously get a decision from the court. we had a similar situation in the lehman case in which our position was that funds that were with the lehman uk broker/dealer were segregated customer funds. these happened to be securities funds. and that was opposed by the english regulators.

and that process, because of appeals to three courts, took almost in excess of two years until there was a final decision. i hope that will not be the case here. >> what's your best judgment on how long it will take to recover the remaining $900 million in customer funds? >> we have recovered, from closeout, some portion of that already. >> how much have you recovered of the $900 million? roughly. you can correct the record but just give your judgment. >> i believe about -- in excess of $500 million, but i'm not sure. >> you will furnish -- >> we'll have supplemental information on that. >> commissioner sommers, i'd like to come back to you. in an attempt to justify his mf global recusal, mr. ginsler stated he did not want his rip with mf global ceo jon corzine

"to be a distraction." did mr. ginsler, chairman ginsler, ever express any concern that his relationship with mr. corzine would be a distraction from any previous matter involving mf global, including matters related to cftc rule 125 dealing with investment of customer-segregated funds? >> not that i'm aware of. >> you don't recall? >> no. >> have you researched your records and your e-mails and everything else? >> we have. >> okay. mr. ginsler also stated that, and i'll quote him, he will not participate in any enforcement-related matters involving mf global and any matter directly related thereto. those are his words. this language appears, from reading it, to prohibit him from

participating in any of the cftc's efforts to develop recommendations based on lessons learned from the collapse of the mf global. do you agree or disagree? >> senator, we -- my staff -- >> in other words, he can't have it both ways. he's either in the game or out of the game, he's saying here he's out of the game as chairman. is that correct? is that the way you read the language? >> we have sought direction from the general counsel at the agency on my delegation, and we're told that my delegation does not go towards the policy recommendations that the chairman would be handling them. >> i know my time's moving on but i've got another question i need to ask mr. giddens, as trustee. on april the 4th, mr. giddens, you provided an update on your investigation of jpmorgan chase which is mf global's largest

creditor, regarding the mf global funds in its possession, you stated that you and jpmorgan, these are your words, are "presently engaged in substantive discussions regarding the resolution of claims." is it your expectation that some of these funds will be returned from jpmorgan chase to mf global customers, and when can mf global customers expect a resolution of claims against jpmorgan, if they can? >> i believe that we have a solid basis for seeking recovery of some of the funds that were transferred to jpmorgan. as to how that decision ultimately will be made, if we do not reach a consensual conclusion, it will probably have to be resolved by

bankruptcy judge john glenn, and how long that will take is difficult to predict. difficult to predict. but we would not be exchanging information and engaging in really confidential discussions about legal arguments unless we thought we had a good prospect of recovering something from them. >> mr. chairman, can i ask mr. freeh one quick question, if i could. mr. freeh, you're the trustee of mf global holdings, is that correct? >> yes, sir. >> so is it your responsibility to protect the corpus or assets of what's left of mf global only? >> yes, mf global and the other debtors that are in chapter 11 of which i'm the trustee, exactly. to get the assets and get them

back to the creditors if possible. >> okay. thank you, mr. chairman. >> i would like to thank our witnesses for their testimony today. it is important that congress continues to evaluate lessons learned from the collapse of mf global and discuss the important issues raised at today's hearing. i look forward to working with my colleagues to help ensure that we can better protect customer accounts and improve future regulatory coordination. this hearing is adjourned. >> to learn more about the senate banking committee and who serves on it, consider the 2012

congressional directory, a complete guide to the 112th congress with committee assi assignments in the house and senate, lists of subcommittees and more. pick up a copy for $12.95 online at cspan.org/shop. the supreme court heard oral argue amount on arizona's immigration law on wednesday. the two main lawyers in the health care law, solicitor general donald varilli and attorney paul clement argued the case arguing whether arizona has the authority to enforce its regulation law or not. you can watch the hearings tonight on c-span. reporter christopher matthews discussed the foreign corrupt practices act on "washington journal" today. the act bars american companies from bribing officials overseas to obtain business. the law was invoked after investigation into bribery by walmart and its business dealings in mexico in 2005.

the discussion is about half an hour. >> and meet christopher matthews. chris matthews is a reporter at "dow jones news wire." we asked him to take us behind the headlines to tell us about the law getting a lot of press coverage this week, the foreign corrupt bras aktd because walmart is involved in an investigation about violations of it. thank you for joining us. >> thank you. >> let me show two headlines from the morning papers before we get into the who, what, when, where and why on this. from mexico an attorney general in mexico will investigate walmart. filed in "the new york times." the mexican government stepped up its response to the bribery allegations tied to walmart's breakneck growth there, announcing the federal attorney general of mexico would begin an investigation into the company's actions. president felipe calderon also made his first public comment on