MF Global Holdings Ltd. Chairman and Chief Executive Jon S. Corzine was in direct contact with J.P. Morgan Chase & Co. officials about a large transfer of customer funds to the bank shortly before the securities firm collapsed, according to prepared testimony from a J.P. Morgan lawyer for a House subcommittee hearing Wednesday.
The testimony by Diane Genova, deputy general counsel for J.P. Morgan, provides additional details about a transfer of $175 million in MF Global customer funds to a J.P. Morgan account on Oct. 28. That move is the subject of scrutiny as investigators hunt for clues about how MF Global firm lost about $1.6 billion in customer funds.
Genova's testimony, which hadn't been publicly released as of this morning, is expected take place late this afternoon. The hearing, scheduled to begin at 2 p.m. Eastern, will be the House subcommittee's third hearing on MF Global.
Genova told the subcommittee in her prepared testimony that J.P. Morgan discovered on Oct. 28 overdrafts in foreign-exchange clearing accounts managed by MF Global's U.K. affiliates. Corzine and other officials at MF Global were notified about the overdrafts, she added.
MF Global assured J.P. Morgan that the overdrafts would be covered, according to Genova's testimony.
The overdraft threatened J.P. Morgan's ability to help fund an auction of about $4.9 billion in government and corporate debt, Genova is expected to tell lawmakers at Wednesday's hearing. Without that funding, MF Global's finances would have been in severe jeopardy.
"Thus, when this was raised with Corzine on Friday morning, he readily agreed that it was important for MF Global to cover the overdrafts, and he assured J.P. Morgan executives that MF Global had ample funds to cover the overdrafts," Genova wrote in her prepared remarks.
By 11 a.m. Eastern that Friday, MF Global had transferred enough funds to cover the overdraft in the U.K.
But J.P. Morgan noticed that the transfer was tied to shifting $200 million from a customer-segregated account to an MF Global account in the U.S. In response, the New York bank determined that due to "the financial stress facing MF Global…it would be prudent and appropriate to ask MF Global to confirm that these transfers had been made in compliance" with Commodity Futures Trading Commission rules governing customer accounts, according to Genova's testimony.
On Friday afternoon, J.P. Morgan "reached out to Corzine to explain J.P. Morgan's understanding of how the London overdrafts had been covered by a series of transfers originating with a withdrawal of funds from a customer segregated account" and to ask for a confirmation in writing that the transfer came from MF Global's own funds.
MF Global didn't return a letter asking for such confirmation, she added. So J.P. Morgan contacted MF Global's deputy general counsel, Dennis Klejna. Klejna, former head of the enforcement division of the CFTC, assured J.P. Morgan that the transfer represented excess funds in the customer accounts. The only concern, Klejna explained, was that the letter was too broad, according to Genova's testimony.
On Saturday, J.P. Morgan sent a more specific letter seeking reassurances about the fund transfer, but the bank never received the signed letter back.
A person familiar with the matter said Klejna disagrees with Genova's characterization of his conversations because he was in no position to provide the assurances that J.P. Morgan requested as to whether the transfer was proper. Klejna has been contacted by federal investigators and plans to cooperate, this person added.
The statement also said J.P. Morgan officials were "assured" by an MF Global executive in a conference call Saturday afternoon "in substance ... that the transfers on Friday Oct. 28, that we had inquired about represented a withdrawal of MF Global's own funds held in a customer segregated account, and that we therefore did not need to be concerned."
Genova's statement doesn't mention Edith O'Brien, the assistant treasurer who spoke with Corzine about correcting the overdraft and ultimately helped direct the movement of money to fix the problem.
Earlier this week, a memo released by the House Financial Services subcommittee holding Wednesday's hearing on MF Global cited an email from O'Brien noting that the transfer was "Per JC's [Jon Corzine's] instructions."
O'Brien is also expected to appear before the subcommittee Wednesday, though she is expected to invoke her constitutional rights against self-incrimination and decline to answer questions, according to people familiar with the matter.
Corzine has said he never told anyone which account should be used to fix overdrafts, directed the use of customer funds for that purpose or was told that customer funds had been steered to overdrafts.Aaron Lucchetti and Julie Steinberg contributed to this article.
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