(Updates with trustee’s opposition to customer requests in fifth paragraph.)
Nov. 15 (Bloomberg) -- MF Global Inc.’s commodity customers seek to form an official committee in the liquidation of the failed brokerage to recover more than $600 million missing from the $5.4 billion in their accounts.
Five customers said in papers filed today in U.S. Bankruptcy Court in Manhattan that they want to steer an ad-hoc group of 66 commodity customers and have the committee’s fees reimbursed by the estate. The trustee assigned to oversee the brokerage’s liquidation has experience with securities broker liquidations, not commodity liquidations, the group said.
“The commodity broker customers have enormous amounts of collateral frozen at MFGI,” Stroock & Stroock & Lavan LLP lawyers, representing the customers, said in the filing. “Those funds are the lifeblood of their businesses and must be returned to their rightful owners in a prompt and fair manner.”
While the brokerage’s parent, MF Global Holdings Inc., filed for bankruptcy to apportion returns to creditors, a trustee, James W. Giddens, took over to liquidate the brokerage under the Securities Investor Protection Corp., or SIPC. About $593 million of MF Global customer funds, or 11 percent of the total, are unaccounted for, according to a person with knowledge of regulatory probes of the firm’s collapse.
The request comes as the trustee opposed an earlier request from customers to access cash collateral that has been tied up since Oct. 31 when more than 150,000 accounts were frozen. Thomas A. Butler and three other customers asked Nov. 8 to have their cash collateral returned or transferred to a new broker, saying the 11 percent shortfall should let the trustee return at least 85 percent of customer accounts immediately.
“The magnitude of customer loss is unknown and still the subject of investigation,” lawyers for Giddens wrote in court papers filed today asking U.S. Bankruptcy Court Judge Martin Glenn to deny the motion.
Separately, a new group of customers also asked the court today for permission to withdraw or transfer their frozen funds. The group, represented by Stutzman, Bromberg, Esserman & Plifka PC, said MF Global should have at least 90 percent of their funds and be able to return them.
In its Oct. 31 bankruptcy filing, MF Global Holdings listed debt of $39.7 billion and assets of $41 billion. The firm said it has about $26 million in cash. Jon Corzine, the former co- chief executive officer of Goldman Sachs Group Inc., quit as MF Global’s CEO on Nov. 4.
The commodity customer group was formed after a Nov. 7 meeting organized by David Rosen, a member of the New York Mercantile Exchange. Rosen, Daniel Shak, Gary Parziale, Michael Caponiti and David Kotz seek to serve as a steering committee to protect the interests of all commodity customers, the group said.
MF Global Inc.’s legal proceeding is both the liquidation of a stockbroker, done under authority of SIPC, and the liquidation of a commodity broker, which falls under Chapter 7 of the bankruptcy code, the group said. The bankruptcy code and the Securities Investor Protection Act don’t detail how such liquidations of a “joint broker,” should proceed, and how customer property held by such a broker can be distributed separately to both groups, lawyers for the group wrote.
The group said it will help the trustee by identifying customer property, and potentially bring more money into the estate by recovering transfers made prior to the bankruptcy. If margins of commodity customer accounts were mixed with those of securities customers, customers with general accounts would be behind those with only commodity contracts to be repaid, the group’s lawyers wrote.
The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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