The futures regulator has the power to go after top executives who "aid and abet" violations by their companies, said Jill Sommers, who is heading up the Commodity Futures Trading Commission's probe into bankrupt brokerage MF Global.
Sommers, a Republican CFTC commissioner, was careful to say in congressional testimony prepared for delivery on Tuesday that her comments did not mean the CFTC had reached any conclusions as it probes why more than an estimated $1 billion dollars of customer money is missing.
But she laid out potential enforcement action scenarios for the CFTC to pursue.
"Staff is speaking with witnesses and reviewing documents and other information," said Sommers. "They are proceeding as expeditiously as they can."
She will testify before the Senate Banking Committee along with CME Group Inc Chairman Terrence Duffy, securities regulators, and bankruptcy trustees for the broker-dealer and the parent company.
Congressional investigators and enforcement authorities are probing how much top-level and second-tier executives knew about potentially improper money transfers as MF Global suffered a liquidity crisis more than five months ago.
Former MF Global Chief Executive Officer Jon Corzine has told lawmakers he "never intended" to break any rules and did not give instructions to misuse customer funds.
Corzine, a former U.S. senator and a governor of New Jersey, did say, though, that others could have misinterpreted directions to "fix" a fund shortfall.
Last month Lawmakers released a report that cited an October 28 email from MF Global Assistant Treasurer Edith O'Brien discussing a $200 million transfer to cover an overdraft. That transfer, which may have included customer funds, was "Per JC's (Jon Corzine's) direct instructions," O'Brien's email was quoted as saying.
CFTC regulations require firms to protect customers' money by keeping it separate from their own proprietary funds.
MF Global filed for bankruptcy on October 31 after investors and customers became rattled over its $6.3 billion bet on European sovereign debt and its credit-rating downgrades.
MF Global scrambled in the final days to find a buyer, but the deal never came to fruition after the billion-dollar gap in customer funds was discovered at the 11th hour.
Neither MF Global nor its officials have been formally charged with wrongdoing.
In her testimony, Sommers said that, in general, a shortfall in customer money could amount to a violation of rules that govern segregated funds, that prevent the theft of customer money, that call for proper account supervision, that ban false statements, and those that prohibit deceptive schemes.
Actions could be brought against the companies or individuals who violated the law, she said, as well as "control persons," or people in a managerial role.
In addition, she said, the CFTC can also take action against accountants who audit futures brokerages or banks that hold customer money.
She did not name specific entities. CME Group was the designated self-regulator in charge of auditing MF Global's futures business, and JPMorgan has been the main custodial bank at the center of the MF Global controversy.
CME has maintained that MF Global lied to regulators and broke the rules governing segregated funds.
CME is facing a regulatory probe into whether it did enough to safeguard MF Global customers' money, sources have told Reuters.
Among the self-regulator's legal obligations is to verify whether daily segregation reports by a futures brokerage match up with bank statements.
On Tuesday, CME's Duffy plans to defend the current regulatory system in place, saying MF Global's "misconduct" should not be a reason to undermine it.
Meanwhile, James Giddens, the trustee for MF Global's brokerage arm, has been investigating JPMorgan's actions in connection with MF Global.
In prepared testimony, he said the bank had been cooperating and was "engaged in substantive discussion regarding the resolution of the claims."
He also said it "may be appropriate to impose civil fines in the event of a regulatory shortfall on the officers and directors who are responsible for signing the firm's financial statements."
(Reporting By Sarah N. Lynch; Additional reporting by Dave Clarke and Alexandra Alper; Editing by Lisa Von Ahn)
By Sarah N. Lynch