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(Updates with customer issues in 14th paragraph.)
Nov. 16 (Bloomberg) -- MF Global Holdings Ltd. is optimistic about the company’s stakeholders reaching consensus even as the parent company faces hurdles in collecting information from its operating subsidiaries, a lawyer for the company said in Manhattan bankruptcy court.
The lawyer, Kenneth Ziman, said today that as the brokerage units have begun to wind down, as MF Global Inc. has under the trustee appointed by the Securities Investor Protection Corp., there have been fences created between the debtors.
“Sometimes these are like chain-link fences and information can pass through,” Ziman said. “At other times these fences are more akin to brick walls.”
MF Global filed its bankruptcy, the eighth-largest in U.S. history, on Oct. 31 amid credit-rating downgrades tied to the company’s $6.3 billion investment in European sovereign debt. About $593 million, or 11 percent, of customer funds at the brokerage unit are unaccounted for, according to a person with knowledge of the regulatory probes into the firm’s collapse.
At a hearing today, Ziman told U.S. Bankruptcy judge Martin Glenn that he didn’t believe there was a shortfall in collateral at foreign affiliates. He declined to comment further, saying the company was working with regulators on the shortfall issue.
MF Global is still marketing assets in Asia, Ziman said.
The company has only used $2 million in cash collateral, out of the $8 million it was granted permission to use by JPMorgan Chase & Co. at the outset of its Chapter 11 case, Ziman said. Glenn said MF Global can use JPMorgan’s cash until Nov. 30.
He said the company has had income since its bankruptcy from “shared services” and that there are potentially other sources of income, from the unwinding of trades where there is excess margin posted in unregulated businesses, or from tax refunds.
A lawyer for the creditors’ committee, Martin Bienenstock, also said there is money to be recovered for creditors.
“We think there is potentially quite an estate to be amassed here for creditors, but can give no assurances” Bienenstock said, noting that the company had traded its riskier investments such as foreign sovereign debt and derivatives for more stable, domestic assets over the summer, and the company had marked its investments to market fairly recently.
Bienenstock told the judge he couldn’t give details or elaborate with any numbers, and that the creditors’ committee hopes to bring more “sunshine” to the issue.
Glenn adjourned a motion by James Giddens, the trustee liquidating the brokerage unit, to establish a parallel process to deal with commodities and securities accounts, citing letters that had poured into his office, including some from people who said they couldn’t pay their mortgages. The request, scheduled for today, will now be heard Nov. 22, Glenn said.
“These are serious issues,” Glenn said, noting that people with commodities accounts are suffering because cash positions are being withheld. He ordered lawyers for the trustee to confer with lawyers for commodities customers, and reach a new protocol to deal with customer claims.
Glenn said he’s “sympathetic” to customer issues, and held up a thick pink folder bursting with papers, saying these are the filings that have been faxed to his court from former MF Global clients.
“We will continue to accept faxes from individuals who are customers,” Glenn said, saying his court wants to be accessible for all parties of interest. Any company that is seeking relief must have papers filed by an attorney, however, he said.
James Kobak, a lawyer for the trustee, said that he isn’t authorized to return customer funds until the full extent of the company’s shortfall is understood, citing reports that the SEC is looking into a potential shortfall in security customer accounts. So far, the shortfall of almost $600 million has been in commodity accounts.
In response to Glenn’s question about whether accounts simply weren’t segregated, Kobak said the investigation is ongoing, but he does know that some accounts maintained to be segregated had money missing from them. He also said money was transferred among segregated and non-segregated accounts. He added that there were still various theories about how the money went missing.
“I don’t think anyone knows the answer yet,” Kobak said.
The trustee only has access to $5 million in cash, though he hopes more money will come in from banks later in the week, Kobak said. “Any belief that there’s some huge amount of cash out there that could easily be substituted for the missing funds, on the security or commodity side -- that is a basic misconception,” Kobak said.
Separately, Glenn said today that the company could erect a “wall” to allow trading in its debt. Bank of America Corp. had said in court papers that it might lose a “beneficial investment opportunity” if it isn’t allowed to trade during the case.
That might breach its duties to clients, Bank of America said. If the bank opted to resign from the committee because of a trading ban, its duties to creditors might be compromised, lawyers for Bank of America wrote. Glenn said Bank of America’s request had been adjourned.
Bank of America was chosen to serve on the committee to represent unsecured creditors alongside JPMorgan, Elliott Management Corp., Wilmington Trust Co. and Caplin Systems Ltd.
Glenn approved a request by Elliott to establish such a wall, saying the market for claims -- including notes, stocks, or derivatives -- “may be very volatile” and it has a fiduciary duty to clients to make beneficial investment decisions.
Such walls are designed to prevent trading and investment advisers at a committee member, such as Elliott, from gaining non-public information gleaned from participation in the committee. They also prevent Elliott personnel on the committee from getting information in advance of any trades the fund makes, lawyers for New York-based hedge fund manager wrote.
Glenn also approved MF Global’s request to enter into a $90 settlement of a 2008 shareholder lawsuit. Investors claimed $1.1 billion in losses on company stock after an employee lost $141.5 million making bad wheat futures trades.
The bankruptcy case is MF Global Holdings Ltd., 11-bk- 15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan).
--Editors: Stephen Farr, John Pickering
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