May 21, 2013 / 9:26 PM / 6 years ago

U.S. CFTC watchdog faults Gensler for recusal from MF Global probe

WASHINGTON, May 21 (Reuters) - The chairman of the U.S. derivatives regulator made a questionable call when he chose to distance himself from probing the demise of futures broker MF Global, the agency’s internal watchdog said in a report released on Tuesday.

The findings by the inspector general of the Commodity Futures Trading Commission, Roy Lavik, were part of a broader report into whether the agency made any missteps into how it regulated MF Global.

The report questioned whether it was proper for the CFTC chairman Gary Gensler to recuse himself from handling MF Global, which collapsed in 2011, after he played a prominent role leading up to its bankruptcy.

“Seeking ethics advice only when the matter became a public sensation ... was not the most desirable course,” Lavik said in the 72-page report. Gensler’s participation before requesting advice on the matter was “troubling,” it said.

The Republican senator who had requested the investigation said the report only raises more questions about why Gensler chose to step aside even though the CFTC’s ethics counsel had authorized him to participate.

“I ... continue to question whether Chairman Gensler was more concerned with protecting customers’ accounts or protecting himself from accountability,” Richard Shelby, who previously served as ranking member on the Senate Banking Committee, said in a statement.

CFTC spokesman Steve Adamske said the agency was still reviewing the report and had no immediate comment.

MF Global quickly sought Chapter 11 protection on October 31, 2011, after experiencing several frantic days of shuffling around money and seeking a buyer as bets the firm had made on European sovereign debt went sour.

An estimated $1.6 billion in funds went missing during the chaos, shaking confidence in the safety of the long-regulated U.S. futures markets, and raising questions about why regulators failed to detect red flags.

Gensler decided to distance himself from the brokerage only after its collapse, and after Republican Senator Charles Grassley, of Iowa, publicly raised concerns over his prior business relationship with MF Global Chief Executive Jon Corzine.

The two had worked at Goldman Sachs at the same time, but the mere fact that they knew each other was no reason for Gensler to recuse himself, the report said.

Gensler turned over all decision-making to CFTC Republican Commissioner Jill Sommers, potentially putting her at a disadvantage as she had not been as involved in the matter as other staff, the report said.

Gensler’s recusal earned him scorn from other House and Senate Republicans, who accused him of avoiding responsibility for overseeing one of the largest crises in the history of the centuries-old U.S. futures market.

The report also found that the CFTC did not “formally coordinate” with CME Group, the exchange operator that was responsible for the day-to-day oversight of MF Global.

Moreover, it noted that the CFTC had no examination manuals or any other guidance to assist staff in overseeing futures brokerages more generally.

Corzine resigned as head of the firm in the wake of its collapse and was sued last month by the bankruptcy trustee charged with liquidating MF Global Holdings Ltd for negligently pursuing a high-risk business.

The report also faulted Gensler for communicating with his staff for work purposes using his personal e-mail account.

While Lavik noted that there was “nothing that appeared corrupt,” he said the practice was still discouraged by government policy.

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