(Updates with Oct. 31 cut-off date in third paragraph.)
Nov. 17 (Bloomberg) -- Some of MF Global Inc.’s commodity customers can get an immediate distribution of $520 million, or about 60 percent of their cash collateral, a judge ruled.
U.S. Bankruptcy Judge Martin Glenn today approved a request to transfer the funds from James Giddens, the trustee overseeing the liquidation of the brokerage. The distributions may begin by Nov. 24, said Kent Jarrell, a spokesman for Giddens. The parent, MF Global Holdings Inc., filed for bankruptcy to apportion returns to creditors. Nov. 24 is Thanksgiving Day in the U.S.
At least 22,000 customers who only had cash in their MF Global accounts as of the time of its bankruptcy on Oct. 31 will get 60 percent of their $869 million on deposit. The transfers will now include investments considered “cash equivalents,” such as Treasury bills. Glenn urged the trustee to seek a similar solution for customers who have a mix of cash and open positions in their accounts.
“I support trying to get as much money to as many people as soon as possible,” Glenn said.
Customers had complained the distribution wouldn’t be fair to those who had large amounts of cash and a small number of open positions in their accounts.
Third Transfer Mulled
The trustee is considering a third transfer of funds for that category of customer, and will “true-up” accounts so all customers get similar treatment, James Kobak, a lawyer for the trustee, told Glenn. The cash distribution approved today follows a first transfer of around $1.5 billion in 14,500 customer accounts to other commodities futures merchants, and the total number of commodity customer accounts is around 38,000, according to Jarrell.
About $593 million of MF Global customer funds, or 11 percent, are unaccounted for, according to a person with knowledge of probes of the firm’s collapse. Some customers had objected to today’s motion, saying they should get closer to 80 percent distributions given the alleged 11 percent shortfall.
“If we can make further bulk transfers we will endeavor to do that, and intend to start the claims process quickly,” Kobak said. He said yesterday that the trustee still needs to verify what the exact shortfall is, and only has access to $5 million in cash.
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, Giddens said in his request.
Some customers had objected to today’s motion, saying it wouldn’t be fair to customers who had some open positions but mostly cash. The distribution “is going to cause great inequity amongst account holders at MFG,” wrote Anthony Garner, 56, of London, England in a Nov. 16 e-mail. Garner said he has only two open positions, and has received only 5 percent of the net equity in his account, as opposed to the 60 percent that an all- cash customer will get.
At a hearing yesterday, Glenn said he was “sympathetic” to customers, including a farmer in Tennessee, who had written into the court, holding up a thick folder of faxes of messages his staff had reviewed.
Customer accounts with $5.45 billion were frozen Oct. 31, the day after a unit of the New York-based brokerage reported a “material shortfall” in customer funds that are required to be segregated under rules of the U.S. Commodity Futures Trading Commission.
Scott D. O’Malia, a CFTC commissioner, said MF Global’s frozen funds have affected confidence in the markets and customers in Australia, Canada, Germany, Singapore, the U.K. and other countries. Although the trustee has been working to return funds faster, it still hasn’t happened quickly enough, he said.
“The livelihood of market participants has been dangling by a thread for over two weeks,” O’Malia said, according to a speech posted on the CFTC’s website.
Five customers have asked to steer an ad-hoc group of 66 commodity customers and have the committee’s fees reimbursed by the estate, saying the trustee assigned to oversee the brokerage’s liquidation has experience with securities broker liquidations, not commodity liquidations, the group said.
Thomas A. Butler and three other customers also 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.
In its Oct. 31 bankruptcy filing, parent company 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 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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