Bloomberg News

MF Global Brokerage Trustee to Return Some Customer Money

November 17, 2011

(Updates with CFTC statement in third paragraph.)

Nov. 16 (Bloomberg) -- The trustee liquidating broker- dealer MF Global Inc. asked a judge to let him transfer about $520 million in collateral to commodity customers whose accounts consisted solely of cash on Oct. 31, when the parent company filed for bankruptcy.

The 21,000 customers would receive 60 percent of the $869 million in their accounts, the trustee, James Giddens, said in a court filing yesterday. He said the distribution is possible because CME Group Inc., which runs the world’s largest futures exchange, is providing $250 million in financial guarantees and $50 million in assets to allow the release of more collateral.

“The inability of MF Global customers as a whole to access their funds has affected trading in futures markets, and has shaken public confidence in our customer protection regime,” Scott D. O’Malia, a commissioner of the Commodity Futures Trading Commission, said in comments posted on the CFTC web site today. The move to transfer more collateral should have happened sooner, he said.

Examiners from CME Group found unexplained wire transfers at the brokerage and a $900 million shortfall in client funds during the weekend the failing parent company was talking with possible buyers, a person briefed on the matter said. The Commodity Futures Trading Commission is investigating about $600 million that should have been held in segregated accounts, according to a separate person with knowledge of the regulatory probe.

Living Expenses

MF Global customers have asked Giddens for their money in phone calls and letters filed with the court. Some said they need their collateral to run their businesses; others said they use their commodity accounts to pay living expenses, according to letters received by Bloomberg News.

Kent Jarrell, a Giddens spokesman, didn’t immediately respond to an e-mail seeking comment on when the last of the collateral will be returned to customers.

The trustee is dealing with a different situation from Lehman Brothers Holdings Inc.’s brokerage, where he quickly gave customers access to their accounts by transferring them to Barclays Plc, O’Malia said.

“MF Global is unique because customer funds are missing from the segregated account,” he said. “There was no shortfall in the segregated account” at Lehman Brothers Inc., the brokerage, so that the transfer of customer positions and funds was “a straightforward process.”

Overseas Markets

“The livelihood of market participants has been dangling by a thread for over two weeks,” O’Malia said in his comments on the web site. Markets and customers have been affected in Australia, Canada, Germany, Singapore, the United Kingdom and other countries amid a lapse in confidence, and the CFTC will change the way it regulates similar companies as a result, he said.

The agency should immediately start a review of similar brokerages which serve as intermediaries in commodity trades and should also work with the trustee to speed returns to customers, he said.

Giddens has said he must continue to hold back collateral from the defunct firm’s commodity customers, after distributing almost $1.6 billion. Under bankruptcy law, assets must be shared equally among customers, so he can’t release all the assets while money is missing from some accounts and until he knows the size of claims that will be filed for the collateral, he has said.

Commodity Customer Committee

Yesterday, five commodity customers said they want to form an official committee in the court proceeding to recover the missing money. Giddens, who is liquidating the remnants of Lehman Brothers Holdings Inc.’s brokerage, has experience with securities brokerages, not commodity firms, the group said in papers filed in U.S. Bankruptcy Court in Manhattan.

The probe of MF Global’s cash movements is being conducted by the U.S. Justice Department, the CFTC, the Securities and Exchange Commission and the bankruptcy trustee’s staff in cooperation with the Securities Investor Protection Corp., Giddens said on his website. He has issued a subpoena to the parent company, seeking information.

The CFTC began investigating the missing funds on Oct. 31 and has issued subpoenas, including to PricewaterhouseCoopers LLP, the auditor of parent MF Global Holdings Ltd. The estimated amount of missing funds has fluctuated since Oct. 31.

MF Global Holdings, which was run by former Goldman Sachs Group Inc. co-chief executive officer Jon Corzine, filed for bankruptcy after making bets on sovereign debt and getting margin calls. The New York-based company listed debt of $39.7 billion and assets of $41 billion in Chapter 11 papers filed Oct. 31 in Manhattan. The broker-dealer is being liquidated separately.

The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-cv-7750, 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).

--With assistance from Silla Brush in Washington and Tiffany Kary in New York. Editors: Andrew Dunn, John Pickering

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net


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