Bloomberg News

MF Global Trustee Targets Distributions Beyond $520 Million

November 17, 2011

(Updates with bouncing checks in sixth paragraph.)

Nov. 16 (Bloomberg) -- The trustee liquidating broker- dealer MF Global Inc. said he aims to make “one or more additional interim distributions” of customer collateral beyond the $520 million announced yesterday.

The trustee, James Giddens, who asked a judge to let him release 60 percent of the collateral in commodity customers’ “cash-only” accounts, would make the next transfers as he processes claims for collateral by brokerage clients, he said in a court filing. 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 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 website today. The move to transfer more collateral should have happened sooner, he said.

U.S. Bankruptcy Judge Martin Glenn in Manhattan will hold a hearing tomorrow on whether Giddens can 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.

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. 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, Giddens said in the filing.

Bounced Checks

Giddens’s plan doesn’t help customers who withdrew money before the bankruptcy and were sent checks that bounced afterward, said Dave Fogel of Advance Trading Inc., who describes himself as a broker to farmers who have been “badly hurt” by the bankruptcy.

“Why return some funds to the excess cash accounts and not to the individual who just happened to pick a bad time to try and have some monies sent home?” he said in an e-mail to Bloomberg.

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.

Roberts Request

U.S. Senator Pat Roberts, a Kansas Republican, today told the CFTC, the exchanges and Giddens, who are working together, to release frozen MF Global margin account funds to customers as soon as possible.

In a letter to the CFTC earlier this week, he said, “I write on behalf of the large numbers of Kansas producers, grain elevators, cattle feeding operations and commodity risk management firms who, through no fault of their own, are experiencing severe financial losses and hardship due to the MF Global Inc. bankruptcy.”

Giddens has said he can’t release all the collateral while money is missing from some accounts and until he knows the size of claims that will be filed for the collateral. Investigators are seeking about $600 million of missing money.

Fair Share

When handling claims by customers, the trustee will determine their fair share of the customer assets before making additional distributions, he said. The goal is to ensure equal treatment of all the broker-dealer’s customers “in advance of the final determination of the pro rata share to which they are entitled,” he said. Under bankruptcy law, assets must be equitably distributed.

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 CFTC is investigating about $600 million that should have been held in segregated accounts, according to a separate person with knowledge of the regulatory probe.

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

Markets and customers have been affected in Australia, Canada, Germany, Singapore, the U.K. and other countries amid a lapse in confidence, and the CFTC will change the way it regulates similar companies as a result, O’Malia 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.

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’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.

Auditor Subpoena

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. 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).

--Editors: Andrew Dunn, Stephen Farr

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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