MF Global Inc. has distributed about $3.8 billion so far and has about $1.5 billion under its control, while there’s still $1.2 billion missing, said the trustee for the failed brokerage.
About 100 customers gathered at the New York Marriott Downtown hotel to hear James Giddens, the trustee appointed to liquidate the brokerage, describe his investigation. A lawyer for the trustee said the probe has involved imaging more than 800 computer drives and maintaining over 100 terabytes of data — enough that if printed would be more than 950 miles high and exceed the information held in the Library of Congress.
“We’re looking at a wide variety of institutions, individuals, the holding company” and other parties to try to claw back property for distribution to customers, said the lawyer, James Kobak.
Giddens said assets are divided into four categories: for U.S. commodity customers, U.S. security customers, foreign units, and general estate property.
In the largest pool, the trustee has control of about $1.4 billion and has already distributed $3.8 billion, or 72 percent of what is owed to commodity customers.
For securities customers, the trustee has $418 million to satisfy claims worth an estimated $488 million. In foreign units, it has $849 million, subject to various disputes. In the general estate property there is $290 million, which Giddens said probably isn’t enough to satisfy claims.
“At this point the trustee does not know with certainty the extent of the shortfall,” Giddens said, noting that $1.2 billion remains his best estimate. That sum covers all four pools: customer, foreign, commodity and securities accounts.
“It’s clear that under anyone’s estimate, the potential shortfall is significant and may affect the trustee’s ability to make a 100 percent distribution,” Giddens said. “I can tell you we’re distributing as much as we can as soon as we can.”
Giddens said that of the $849 million held in foreign accounts, it has a dispute with the U.K. unit over $744 million of the amount, and may have a dispute with its Canadian units, MF Global Canada Co. and MF Global Canada Ltd. over the rest of the money. Only $63 million of the money is in MF Global Inc.’s hands, and that amount is subject to a dispute with JPMorgan Chase & Co., he said.
MF Global Holdings Ltd., once run by former New Jersey Governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, filed the eighth-largest U.S. bankruptcy on Oct. 31 after a wrong-way $6.3 billion trade on its own behalf on bonds of some of Europe’s most indebted nations. While the parent company is unwinding in Chapter 11 to repay creditors and lenders such as JPMorgan Chase & Co., the former operating unit, MF Global Inc., is being unwound under authority of Giddens.
Giddens has so far repaid former customers through three bulk distributions, and said remaining distributions will be made on an individual basis, according to claims, which need to be filed before Jan. 31.
Including funds already distributed, Giddens controlled $4.9 billion in U.S. segregated commodity customer funds, CME Group Inc., the world’s largest futures market and MF Global’s regulator, has said.
Next will be a fight over what is and what isn’t customer property, based on transactions that may have made commingled customer with general property, said Richard Epling, a senior bankruptcy partner at the New York office of Pillsbury Winthrop Shaw Pittman LLP. Epling, who isn’t involved in the MF Global case, said it will probably take a long time to unwind how the money from customer accounts was lost because it appears to have been systemic and involve complex repurchase agreements.
Eventually, Giddens may bring lawsuits to “claw back” money from counterparties who got it in the days before MF Global’s bankruptcy on the argument that the company was already insolvent, and those parties are likely to say they don’t have to give it back because it was used to cover margin on a legitimate trade, Epling said.
Such disputes shouldn’t hold up the bankruptcy from determining what priority creditors and customers have for being repaid, he said.
“You can figure out who gets paid out of what bucket of assets even if you don’t know what’s in what bucket right now, Epling said.”
Customers and creditors are already arguing about who has priority to be repaid, even as regulators are investigating. While the brokerage has been in the hands of regulators for over 70 days, parties including the Securities and Exchange Commission have yet to reach conclusions about how the money that should have been in segregated accounts went missing and Giddens said the final amount missing could change.
Nick Kaltneckar, 68, of New Jersey, said he came to the meeting seeking more transparency about what was going on.
“No one other than the CME is willing to state that customer money may not be reimbursed,” Kaltneckar said, referring to the Chicago Mercantile Exchange, MF Global’s main exchange and regulator.
Paul Hamann, 52, of Chicago, who said he’s traded commodities for 32 years, said he couldn’t understand how he wasn’t getting repaid considering his statements from MF Global Inc. had the imprimatur of SIPC, and his accounts were said to be “customer owned no liens.” Hamann said he’s only gotten 3 percent of what was in his accounts back.
Christopher LaRosa, a representative from SIPC, confirmed in the question and answer session that the agency, which has a strict definition of qualifying securities customers, does not cover losses for investors in commodities.
“Whether or not there should be SIPC protection for commodities customers is an issue for Congress,” LaRosa told customers.
Company officials including Corzine, chief financial officer Henri Steenkamp and chief operating officer Bradley Abelow have testified to the U.S. Senate that they don’t know where the missing funds are.
Meanwhile, customers and creditors are already filing court papers debating who is first in line to be repaid, some resting on theories about how the money went missing.
Former customer Sapere Wealth Management LLC said it and other commodities customers should get first priority to be repaid because news coverage and testimony in Congress indicate funds were transferred from the futures commission merchant side of its business to the broker-dealer side, which disbursed the money to cover obligations of the parent company. That pits commodities customers against securities customers to be repaid, and the conflict should be resolved by putting commodity customers first, Sapere said.
Sapere said that the funds were transferred from the futures commission merchant side of its business to the broker- dealer side, “in a perhaps-undocumented or form-over-substance ‘internal repo’ of the broker-dealer business” as part of the company’s bets on sovereign debt of European countries.
Louis Freeh, the Chapter 11 trustee overseeing the wind- down of the parent company, has also argued for priority of creditors to be repaid, citing intercompany loans made between the failed parent and the operating unit. Recoveries of money the parent loaned to the brokerage shouldn’t be “diverted” to customers, Freeh said in court papers filed Jan. 9.
Giddens said today that there are “differences of opinion” with Freeh.
Causes of Action
“We may have causes of action we may well pursue against them,” Giddens said. “We’ve had a difference of opinion about attorney client privilege; we’ve waived the privilege though he has not.”
Perrin, Holden & Davenport Capital Corp., the brokerage that agreed to buy almost all of the company’s securities accounts in late November, said that the transfer is still only half complete. A spokesman for Giddens said Jan. 10 that the other accounts will be transferred in the next few weeks and that the transfer of 318 accounts was still only half complete due to “complexity” in the process.
Separately, MF Global Holding Ltd.’s U.K. customers have also been asking why it is taking so long for them to be repaid. At a London creditors’ meeting earlier this week, they demanded their money back as administrators KPMG LLP said they racked up 17.5 million pounds ($27 million) in fees since the broker’s collapse without returning anything to clients.
While segregated customer funds are held separately and not supposed to be used by financial firms, unsegregated accounts have no special protection under U.K. law and no priority over other unsecured creditor claims, KPMG partner Richard Heis said at the meeting. He wouldn’t confirm exactly how much was in the unsegregated accounts but said it was more than 1 billion pounds ($1.5 billion).
The parent company’s Oct. 31 bankruptcy filing listed assets of $41 billion and debt of $39.7 billion. Corzine quit as MF Global’s CEO on Nov. 4.
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