The regulator overseeing the investigation of collapsed securities firm MF Global built close ties to Jon Corzine as they rose through the ranks of Goldman Sachs. Later, they collaborated on Capitol Hill to pass an anti-corporate fraud law.
When Corzine ran for New Jersey governor, Gary Gensler gave $10,000 to the state Democratic Party, which was trying to get Corzine elected.
Now, Gensler, head of the Commodity Futures Trading Commission, is leading an inquiry into how hundreds of millions vanished last week from client accounts at Corzine's firm, MF Global.
At a Senate hearing Thursday, Gensler had harsh words for Corzine's company.
"You don't put your hand in the cash register; you just don't," Gensler said.
MF Global filed for bankruptcy protection on Monday after a disastrous bet on European debt. It was the eighth-biggest U.S. bankruptcy and the largest collapse on Wall Street since Lehman Bros. It also was the first major U.S. firm to fall because of bets on European debt.
Gensler said MF Global's failure to separate clients' money from its own assets violated "the core foundation" of investor protection.
But Gensler's long and deep ties to Corzine pose an apparent conflict of interest that could taint the probe's findings, experts say. Some say he should remove himself from the case.
"The appearance of a conflict is there, there's no question," said Jay Lorsch, a professor at Harvard Business School. "It might be wise for Mr. Gensler to recuse himself from this particular investigation."
A similar appeal came from Sen. Charles Grassley of the Senate Agriculture Committee, which oversees Gensler's agency.
"It's hard to see how the chairman could be completely objective in looking out for wronged investors when he has such strong ties to the principal of the failed firm," Grassley said in a statement Thursday night. "It seems recusal would be the best outcome for investors."
Gensler gave $10,000 to the New Jersey Democratic Party in August 2005 as Corzine ran for governor, election records show. Corzine was elected later that year.
The donation followed years of collaboration between the two men on both Wall Street and Capitol Hill. Gensler and Corzine had worked alongside each other on Goldman's trading floor after they joined the firm in the 1970s.
Gensler rose to become Goldman's co-head of finance before leaving in 1997. Corzine left Goldman in 1999, after serving as chairman and CEO.
The two worked together again when Corzine was a senator and Gensler worked on Capitol Hill. As an advisor to Sen. Paul Sarbanes, Gensler helped Sarbanes craft the accounting law that bears his name. At the time, Corzine was a senator from New Jersey.
Speaking at a Princeton University conference last year on the day before Corzine's wedding, Gensler described working with Corzine as a "privilege."
Representatives for Gensler and Corzine declined to comment on their relationship or to say whether Gensler should recuse himself.
Gensler and other regulators forced MF Global to file after it acknowledged that hundreds of millions in clients' money was missing. The FBI is examining whether the company broke criminal laws.
Securities companies are required to keep clients' money separate from their own assets. That way, clients don't have to worry about their cash if the company fails.
Examiners from the Securities and Exchange Commission have been reviewing the company's operations since last week, Chairman Mary Schapiro said Thursday.
SEC examiners have been reviewing MF Global's finances and the events leading up to its bankruptcy filing, officials say. And staffers from the agency's trading and markets division have been monitoring the liquidation proceeding.
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