MF Global Brokerage’s Wind-Down Fees May Hit $100 Million a Year
November 28, 2011, 2:17 PM ESTBy Linda Sandler
Nov. 24 (Bloomberg) -- Fees for liquidating the MF Global Inc. broker-dealer may reach $100 million in a year, based on lawyers’ estimates and costs to wind down two other brokerages, Lehman Brothers Inc. and Bernard Madoff’s firm.
MF Global trustee James Giddens, whose official rate in the Lehman case is $891 an hour, and his law firm are supervising 100 Deloitte LLP consultants, 60 Ernst & Young LLP forensic accountants and consultants, and 190 former MF Global employees, according to a Nov. 20 statement. They’re working with the U.S. Justice Department, securities and commodities regulators, exchanges and clearing houses to transfer accounts and investigate missing customer money.
Lehman Brothers Holdings Inc.’s brokerage liquidation, larger than MF Global’s, absorbed $544 million of professional and consulting fees through September during Giddens’s three- year tenure as trustee, or about $181 million a year. At Madoff’s former firm, under trustee Irving Picard, 33 months of fees and expenses totaled $404 million since the con man’s December 2008 arrest, or about $147 million a year.
“For MF Global, $100 million is a good number, unless the missing funds investigation becomes very complex,” said Chip Bowles, a bankruptcy lawyer at Greenebaum Doll & McDonald PLLC in Louisville, Kentucky. “If this is another Madoff, then fees will rapidly increase.”
MF Global’s shortfall in U.S. segregated customer accounts may exceed $1.2 billion, more than double the previous estimate, Giddens said this week. That would mean customer accounts are missing about 22 percent of their total of $5.4 billion.
CFTC Probe
The Commodity Futures Trading Commission had been probing the disappearance of about $600 million in futures client funds that went missing as MF Global prepared for bankruptcy, or about 11 percent. Forensic accountants and investigators are working “around the clock,” and the latest estimate of missing funds may change, Giddens said.
Size and complexity help determine the cost of a liquidation, according to Bowles and court records. MF Global is several times smaller than Lehman’s brokerage and so far less complicated than Madoff’s, so it should cost a bit less to liquidate, Bowles said in an e-mail.
The Securities Investor Protection Corp. pays the fees in brokerage liquidations. Giddens has told U.S. Bankruptcy Judge Martin Glenn in Manhattan that he will work on MF Global at a 10 percent discount from his standard rates, as in other bankruptcy cases, and won’t charge for overtime meals, internal copies or after-hours travel services. The trustee doesn’t have an estimate of total fees for the liquidation, Giddens spokesman Kent Jarrell said in an e-mail.
Customer Letters
On one proposal for dealing with claims, Giddens dealt with as many as 165 letters from MF Global clients demanding their money, according to a court filing. The trustee has transferred about 38,000 customer accounts to futures brokers, and is seeking a home for about 400 securities accounts.
Almost $1.6 billion in collateral has followed the accounts. Giddens has permission to move another $520 million and is planning a third distribution as available assets run out. The brokerage’s New York-based parent company, MF Global Holdings Ltd., listed assets of $41 billion in Chapter 11 papers on Oct. 31.
CME Group Inc., the world’s largest futures exchange, increased its guarantees for Giddens’s payouts Nov. 22 to $550 million from $250 million, saying that would allow him to raise returns of customers’ collateral to 75 percent from 60 percent. CME is “confident” that the trustee’s doubled estimate of missing customer money is wrong, the Chicago-based company said in an e-mailed statement.
“We all hope the number will go down, but it could go up,” said Kent Jarrell, a spokesman for the trustee, in an e- mail. “The process of cleaning up after a company like MF Global fails is very complex and not easy and requires a disciplined plan, consistent with the law. That is exactly what we are doing.”
Lehman Transfers
At the Lehman brokerage, Giddens transferred 110,000 customer accounts and assets of $92 billion to other firms, from an estate of more than $117 billion, according to filings in U.S. Bankruptcy Court in Manhattan. Giddens and his law firm, Hughes Hubbard & Reed LLP, have earned about $169 million since the Lehman brokerage’s parent filed the biggest bankruptcy in U.S. history in 2008, according to court filings.
Deloitte collected almost twice as much in the Lehman case, or $328 million. Total fees of $544 million are in addition to the $1.5 billion spent by the Lehman parent on its own separate liquidation.
Picard, the Madoff trustee, has estimated that investors lost about $19 billion of principal in the Ponzi scheme. The firm’s final statements, reflecting phony profits based on trades Madoff never made, showed about $65 billion in customer accounts.
‘Wouldn’t Be Shocked’
Picard and his law firm, Baker & Hostetler LLP, have made more than $200 million from the Madoff case since the brokerage’s 2008 failure, according to filings in U.S. Bankruptcy Court in Manhattan. Consultants’ fees exceeded $172 million through September, according to a court filing.
“I wouldn’t be shocked with fees running that high for MF Global,” said Nancy Rapoport, a bankruptcy law professor at the University of Nevada, Las Vegas.
The MF Global parent, 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 brokerage 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 and Matthew Leising in New York. Editors: Stephen Farr, 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
