available causes of action, including fraud, lack of 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 or not 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 some 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 that 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 that 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 went 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 cme 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 certainly 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 so 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, so 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 have excess. because money is moving in and out daily among, as we have a chart in here 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.

it operates in such a sense that 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 easily 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. >> yes. 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 eighth 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 that 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. >> well, thank you. and the questions asked kind of add some credence to this. you said there's about 15 employees that 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 non-insider 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, and 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 filed for 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 folks 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 assure 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 to ameliorate the situation. 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. >> but 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 that 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 that 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? thnd sipa's involvement, in my view to the detriment of the segregated account holders, and the holding company wide bankruptcy filing. both those were 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 cfm versus a broker/dealer fcm. 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 this 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 crisis? 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 held 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 that of the 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 situation in the past, but if we were ever in a situation where we believed th