Business

MF Global ‘assured’ JP Morgan overdrafts would be covered, JP Morgan’s attorney says

MF Global Holdings Ltd. Chairman and CEO Jon S. Corzine was in direct contact with JP 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 JP Morgan lawyer for a House subcommittee hearing Wednesday.

The testimony by Diane Genova, deputy general counsel for JP Morgan, provides additional details about a transfer of $175 million in MF Global customer funds to a JP 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 Wednesday morning, is expected take place late Wednesday. The hearing, scheduled to begin at 2:00pm ET, will be the House subcommittee’s third hearing on MF Global.

Genova told the subcommittee in her prepared testimony that JP Morgan discovered on Oct. 28 overdrafts in foreign-exchange clearing accounts managed by MF Global’s UK affiliates. Corzine and other officials at MF Global were notified about the overdrafts, she added.

MF Global assured JP Morgan the overdrafts would be covered, according to Genova’s testimony.

The overdraft threatened JP 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 Mr. 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 11:00am ET that Friday, MF Global had transferred enough funds to cover the overdraft in the UK.

But JP Morgan noticed that the transfer was tied to shifting $200 million from a customer-segregated account to an MF Global account in the US. 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.

To read more, go to The Wall Street Journal