Bloomberg News

MF Global Holdings Objects to Cooperation on Class Claims

August 29, 2012

MF Global Holdings Ltd.’s trustee, Louis Freeh, said the rights to any winnings from lawsuits against the failed brokerage’s officers and directors including Jon Corzine shouldn’t be given to customers, and should go to the general estate instead.

Representatives for customers have already started class- action, or group, lawsuits against former directors and officers of the company, and a trustee for customers has said he plans to cooperate, sharing documents in exchange for any recoveries.

Because the agreement calls for general estate creditors to be paid only if the customers are paid in full first, the customers “are clearly not properly incentivized to litigate fully,” Freeh said in an objection filed in Manhattan bankruptcy court today.

He said that while some lawsuit proceeds may belong to customers, it is up to the general estate to manage them. Freeh has been unwinding the parent company under Chapter 11 of the U.S. Bankruptcy Code to repay creditors.

A separate trustee, James Giddens, is overseeing the brokerage unit, MF Global Inc., which is liquidating under the Securities Investor Protection Act to repay customers. Both trustees have made their own probes into how the company failed and have been at odds over whether certain sums belong to creditors or customers.

‘Not Incentivized’

“To assign general estate causes of action to a party other than the Chapter 11 Trustee -- and worse yet to customer representatives that are not incentivized to look out for the interests of general estate creditors -- would appear not only to be a poor exercise of business judgment but also could jeopardize the Chapter 11 Trustee’s own causes of action,” lawyers for Freeh wrote.

MF Global Holdings, run by former Goldman Sachs Group Inc. (GS:US) Co-Chairman Corzine until his Nov. 4 resignation, filed the eighth-largest U.S. bankruptcy in October after a $6.3 billion trade on its own behalf on bonds of some of Europe’s most indebted nations led to margin calls.

Separately, Corzine and other officers, a group of lenders and a group of creditors also objected in court papers filed today. Corzine and 23 other individuals at the company said that as potential defendants, they object to Giddens’ plan to give the plaintiffs whatever materials he wants.

Limit Rights

Giddens’ agreement with the class-action lawsuits would also limit their right to get information and make them pay for some of it, they added.

Creditors called Giddens’ attempt to manage the class- action recoveries “simply another back-handed attempt” to “allocate general estate assets to customers.” The lenders, who say they are an ad-hoc group owning more than $1.4 billion in customer claims, said there are no provisions that assure the claims will be “fully prosecuted or fairly settled for the benefit” of all creditors.

“We disagree with the objections” said Kent Jarrell, a spokesman for Giddens. Jarrell said in a statement that Freeh has “some inherent conflicts in opposing this motion because individuals currently employed” by him are defendants in the litigation.

Giddens’ cooperation with the class-action plaintiffs is the best way to recover assets and is “free from any possible conflicts with employees or creditors,” Jarrell said, noting that Freeh is tasked with returning funds to large banks such as JPMorgan Chase & Co. (JPM:US), and hedge funds.

Hearing Set

A hearing on Giddens’ request to cooperate with class- action plaintiffs is scheduled for Sept. 5, according to court records.

Freeh has predicted that MF Global’s customers, facing a $1.6 billion gap in funds, will eventually recoup all of their money, while Giddens has said distributions should be “in the 90 percent range.”

Giddens may also sue former Chief Financial Officer Henri Steenkamp and former assistant treasurer Edith O’Brien, among others, as a way to recover more money, he has said.

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. (MFGLQ:US), 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Tiffany Kary in New York at tkary@bloomberg.net

To contact the editor responsible for this story: Stephen Farr at sfarr@bloomberg.net


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