Dec. 8 (Bloomberg) -- The MF Global Inc. brokerage trustee will pursue all “legally available” assets, including those from individuals who may have liability for breaking the rules requiring protection of commodity customers’ accounts, a lawyer for trustee James Giddens told members of Congress.
James Kobak, the lawyer, said to the House Agriculture Committee at a hearing in Washington today that customers now have no assurance of a 100 percent return of assets as money is missing from the segregated accounts. The trustee believes as much as $1.2 billion is missing, and isn’t ready to make “definitive conclusions” about what happened to it, Kobak said.
Jon Corzine, the former chief executive officer of defunct parent company MF Global Holdings Ltd., said he “would never have intended” transfers from segregated accounts and had no knowledge of any such movements of funds before the bankruptcy.
“I was devastated” to learn that money was missing, and “I truly apologize” to all those who have lost money, Corzine told the committee.
Jill E. Sommers, of the U.S. Commodity Futures Trading Commission, said there are civil options for recovering money from anyone found responsible, aside from criminal lawsuits.
“It is my understanding there are a number of different avenues,” including fines of as much as three times the amount of the monetary gain, plus additional fines “we could charge for restitution,” she said. Restitution money would go to customers and fines would go to the U.S. Treasury, she said.
The judge handling the MF Global bankruptcies asked Giddens yesterday if he was “disinterested” enough to sue to recover money if necessary from parties such as JPMorgan Chase & Co., a lender to the parent company.
Joseph Evangelisti, a JPMorgan spokesman, declined to comment.
In the end, regulators will find out where the missing money is, Sommers said. MF Global’s transactions “weren’t too complex to understand,” although tracing the transactions is taking time, she said.
Asked whether the CFTC thought other futures merchants like MF Global could also face bankruptcy, Sommers said there is no “watch list” for potential failures.
“I’m sure there are firms that may be close to the margins,” she said.
Kobak and Sommers were witnesses in the committee’s hearing into the causes and effects of MF Global bankruptcy.
Kobak, asked whether customer funds may have been systematically dipped into to use as collateral for a bank loan, said he couldn’t explain how that would have happened, and his research hasn’t shown that occurred.
The trustee’s website had 222,000 hits by 60,000 people last month, Kobak said in prepared testimony.
Giddens’s third transfer of assets to customers would be $2.1 billion. In the transfer, Giddens would pay out from 80 percent to 85 percent of all assets remaining in his control, keeping $800 million in reserve, according to the trustee’s court filing yesterday. Two previous payouts to commodity customers totaled about $2 billion.
Discussing claims on the brokerage estate in a court filing yesterday, Giddens said all creditors who weren’t customers, including the parent company’s creditors, would have to wait until customers were paid all their money before they got anything. The law allows the trustee to use any estate property to fill “gaps” in customer funds caused by unlawful actions, he said.
Giddens was defending the $2.1 billion “distribution of property to farmers and others in danger in many cases of losing their homes, their businesses, their savings,” after being challenged by creditors of the parent company.
Giddens, whose law firm has done work for JPMorgan, has said he doesn’t believe he has conflicts of interest and can defend customers of the brokerage.
Separately today, a Chapter 11 trustee appointed in the bankruptcy of parent MF Global Holdings said a proposed transfer of some securities-customer accounts shouldn’t give those customers the total net equity in their accounts. Because the brokerage is 100 percent-owned by the holding company, the equity in MF Global units is an asset of the bankrupt estate, wrote lawyers for the trustee, former Federal Bureau of Investigation director Louis Freeh.
Freeh also said he has had only nine days to coordinate administration of the estate and “will not begin to contemplate any distributions for quite some time” to the parent company’s creditors.
CME Group Inc., which runs a futures exchange and has guaranteed some of the trustee’s transfers, said it supports more U.S. customer payouts.
Including funds already distributed, Giddens controlled $4.9 billion in U.S. segregated commodity customer funds, CME said. It calculated that an additional $900 million in customer funds were traded on foreign exchanges, putting the total at about $5.8 billion. Previous estimates put the segregated accounts at around $5.4 billion.
Using Giddens’s estimate of $1.2 billion in missing funds, customers have a shortfall of more than 20 percent in their segregated accounts. If the trustee makes a proposed third distribution of $2.1 billion, it will be enough to repay customers 69 percent to 70 percent of their accounts, Kobak said in testimony today. There isn’t enough to distribute 75 percent, as some customers wanted, he said.
Giddens, who is liquidating the brokerage, has transferred about 38,000 commodity accounts to other firms, and plans to sell 330 securities accounts, he said. Three transfers of collateral made and pending will give commodity customers about $4 billion of their assets, according to court filings.
The parent company’s Oct. 31 bankruptcy filing, the eighth- largest in U.S. history, listed assets of $41 billion.
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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