Bloomberg News

MF Global Commodity Traders Fault Cash-Only Payment Plan

November 17, 2011

(Updates with hearing in third paragraph.)

Nov. 17 (Bloomberg) -- A group of commodity traders faulted a plan by the liquidator of broker-dealer MF Global Inc. to distribute 60 percent of the collateral in so-called cash-only accounts to customers, saying it was unfair to traders who had a small futures position in addition to a large cash MF holding.

Trustee James Giddens also was being too conservative in paying out only 60 percent of the collateral and should raise Com the amount to 85 percent, they said in a court filing yesterday.

U.S. Bankruptcy judge Martin Glenn in Manhattan will hold a hearing today on Giddens’s plan to 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 judge said at a hearing yesterday he’s “sympathetic” to customers who are suffering as cash is withheld, and held up a folder of filings faxed to his court by MF Global clients.

Royce Corp., which said it trades metals with clearing houses solely to hedge its business, said in a filing its accounts at MF Global now consisted only of cash, as it liquidated copper contracts after the Oct. 31 bankruptcy of the broker-dealer’s parent company. Under Giddens’s plan, Royce wouldn’t get 60 percent of its collateral as its account had open positions as of Oct. 31 to maintain its hedges.

Court Filing

Royce and other companies hedging their exposure in commodities would be “without relief and without access to any of their cash,” Royce said in a court filing yesterday, asking the judge to make a change.

About 15,000 futures customers would receive 60 percent of the $869 million in their accounts, and 6,000 other customers with small accounts may also get collateral, the trustee said. He aims to make one or more additional distributions later, he said in a filing.

Examiners from CME Group Inc. 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 now is investigating about $600 million that should have been held in segregated accounts, according to a separate person with knowledge of the regulatory probe.

CME Group, the world’s largest futures exchange that’s fallen 8.5 percent this week, may face liability related to concerns it misled regulators over what it knew about MF Global Holdings Ltd., according to a note to clients written yesterday by Goldman Sachs Group Inc. analyst Daniel Harris.

U.S. Probe

U.S. Attorney Patrick Fitzgerald in Chicago issued subpoenas in a probe of MF Global Holdings Ltd., the broker- dealer parent, a person familiar with the matter said.

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. 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 Tiffany Kary, Matthew Leising and Patricia Hurtado in New York and Silla Brush in Washington. Editors: 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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