In the summer of 2011, former Chief Risk Officer Michael Stockman recommended that MF Global stop investing in the European debt and start hedging its exposure, according to the report. Management ignored the advice and searched for additional sources of liquidity to support the trading strategy, even debating how aggressively brokers could borrow on an intraday basis customer funds that were required to be kept in segregated accounts, Freeh said.
By the week leading up to its collapse, MF Global needed to rely on its Operations, Risk and Treasury Department systems, which were fatally flawed, Freeh found. The failure of Corzine and other members of his management team, including Abelow and Steenkamp, to address the deficiencies contributed to the company’s demise, Freeh found.
“In the end, the scale of the company’s trading put pressure on the company’s deficient controls without producing any significantly improved revenues,” Freeh said in the report.
Freeh estimates the losses to MF Global and its finance subsidiary from $1.5 billion to $2.1 billion. Giddens, the brokerage trustee, estimated a shortfall of $1.6 billion in customer funds.
The SEC didn’t include the CFTC in several meetings in 2011 about the brokerage’s capital and business strategy that would have been helpful for oversight, according to the Republicans’ report. The CFTC didn’t inform the SEC that the broker was using an alternative method of calculating customer funds, the report showed.
Freeh’s report didn’t focus on the causes for the shortfall in customer funds because recovery of those funds is outside the scope of his authority, lawyers for the trustee said in the court filing.
The holding company’s Chapter 11 case is In re MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The liquidation of the broker is In re MF Global Inc., 11-bk-02790, in the same court.