Sunday, June 10, 2012

MF Global: Where Proceedings Are And Where They Are Going

Not long after MF Global collapsed, it became clear that a US/UK brawl would break out concerning whether MF Global's U.S. customers could establish entitlement to $700 million in funds in MF Global UK's administration.  That brawl in playing out in the English court system.

It seems another brawl is on the horizon, this time between the fiduciaries handling MF Global's chapter 11 proceedings and MF Global's proceedings under the Securities Investor Protection Act in the US.  Related coverage by Bloomberg is reproduced below.

To be sure, the unwinding of MF Global raises a host of provocative legal issues.  It is alleged that customer funds were not segregated properly and ultimately misappropriated, that management was at least negligent, perhaps complicit.

It seems it will be difficult for the civil justice system to sort out the resulting mess in a manner that get funds into the right hands any time soon.

It also seems that protracted legal proceedings are not in the interests of customers, creditors and other parties affected by MF Global's collapse because they will be expensive.

Presumably, the Department of Justice will monitor fees, having recently questioned the exorbitant tabs of professionals in Mega chapter 11 cases.  Such efforts and parallel efforts overseas may have the salutary effect of leaving more funds available for distribution.

Still, absent a game plan for an equitable allocation of MF Global distributions, is it not inevitable that there will be delays in payment and that the tab for professional fees will be astronomical?  If so, what would be a good way to streamline proceedings?  Cross-border protocols?  Alternative dispute resolution?

I welcome related questions and comments.

MF Global Trustee Sees Claims Of $3 Billion Against Units

MF Global Holdings Ltd. may have more than $3 billion of claims against its affiliates and units, the company’s bankruptcy trustee said in a report detailing the progress of an investigation into its collapse.
The trustee, Louis Freeh, has been unwinding the parent company under Chapter 11 of the U.S. bankruptcy code in an effort to repay creditors. The operating unit, brokerage MF Global Inc., is liquidating under the Securities Investor Protection Act to repay customers. The unit’s trustee, James Giddens, issued his own report on a separate probe into how the company failed in a report yesterday.
Louis Freeh, trustee of MF Global Holdings Ltd. Photographer: Andrew Harrer/Bloomberg
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Freeh was critical of Giddens in his report, saying the SIPA trustee isn’t helping the investigation with information including how much brokerage MFGI borrowed from a $300 million secured revolving line of credit and whether a repurchase agreement in August of 2011 that transferred 2.95 billion euros ($3.7 billion) of Italian bonds from MFGI to reduce its capital requirements was done properly.
The SIPA trustee has indicated that the repurchase agreement was booked “flat”, meaning that the financing was equal to the underlying value of the securities position, Freeh wrote. “The trustee cannot verify that this information is correct,” he said.

Collapse Probe

Freeh said Giddens has yet to turn over documents to verify the transaction’s details.
Freeh’s 119-page report yesterday focused on transactions that support MF Global Holdings’ claim that the company’s creditors are entitled to more than $3 billion from various units and affiliates worldwide, including $2.3 billion from the brokerage.
An investigation into the collapse of MF Global, which has included a review of internal documents and interviews with current and former employees, is also being conducted, Freeh said.
“As soon as practicable, the trustee will file a statement with the findings of his investigation,” according to the report.
In prior progress reports, Freeh and Giddens have disputed whether certain assets belong to customers or creditors. Customers were estimated to be out $1.6 billion as of Giddens’s last report. Distributions by Giddens are predicted to return about 80 percent of what U.S. customers are owed.

Asset Disputes

A lawyer for MF Global Holdings’ estate told U.S. Bankruptcy Judge Martin Glenn on May 18 that Freeh still couldn’t trace where some of the money went when the brokerage collapsed Oct. 31, including $1 billion that “vanished” into the brokerage unit. The lawyer, Brett Miller, said the money left “no trail.”
In some cases, the location of money is known but trustees are disputing which unit it belongs to. Giddens and a trustee for MF Global’s U.K. unit have begun litigating in British courts over whether $700 million belongs to U.S. or U.K. customers.
MF Global Holdings, run by former Goldman Sachs Group Inc. (GS) Co-Chairman Jon Corzineuntil his Nov. 4 resignation, filed the eighth-largest U.S. bankruptcy after a $6.3 billion trade on its own behalf on bonds of some of Europe’s most indebted nations led to margin calls. Its bankruptcy filing listed assets of $41 billion and debt of $39.7 billion.
Giddens said in his report yesterday that Corzine may face claims for breach of fiduciary duty and negligence for his role in the company’s downfall.
“Liquidity had been a cause for concern before and throughout Mr. Corzine’s tenure at MF Global, yet systems and tools that would enable accurate real time monitoring of liquidity were never implemented,” Giddens said in his 275-page report.

JPMorgan Overdraft

Corzine also instructed MF Global’s former assistant treasurer, Edith O’Brien, to make a $175 million transfer on Oct. 28 to pay down an overdraft balance with JPMorgan Chase & Co. (JPM)in London, even though there was a lack of information that day about the firm’s liquidity, Giddens said.
Also facing claims are O’Brien and Henri Steenkamp, the firm’s chief financial officer. O’Brien invoked her constitutional right against self-incrimination at a congressional hearing in March, disappointing lawmakers seeking answers to questions about frantic money transfers during the company’s final days in October.
Giddens didn’t make specific recommendations on potential criminal liability, saying those are beyond the scope of the report. Corzine told lawmakers in December that he “never gave any instruction to misuse customer funds.”

Claims Pursuit

Giddens said he will pursue claims through litigation and negotiation, starting to sue within 60 days. One potential lawsuit may be against JPMorgan Chase, MF Global’s largest lender and the repository of its customer accounts. Giddens said he’s currently in talks with the bank about money transfers that may be “voidable or otherwise recoverable.” In the days leading up to MF Global’s collapse, the bank increased margin requirements, reduced intraday and overnight loans to the company and took other steps to limit its exposure to the company’s troubles.
Giddens said JPMorgan has returned about $89.2 million in customer property and $518.4 million in non-segregated unallocated MF Global Inc. assets. He may sue the New York-based bank if he can’t reach an agreement on further returns of money, he said.

‘Safe Harbor’

Giddens found that any lawsuits against JPMorgan and other counterparties to transfers made in the bank’s final weeks may be complicated by the “safe harbor” provision of the bankruptcy code, which protects parties who claim they had no knowledge of fraud. JPMorgan may argue that it simply acted as a custodial bank for some intercompany transfers, Giddens said.
Other companies that received MF Global customer funds in its final days may also qualify for safe harbor protections, his report found.
The same “safe harbor” rules probably apply to customers, the trustee said. That means that customers who took money out of their accounts before the collapse probably can’t be sued to recover money for distribution to all creditors, the trustee said.
Mary Sedarat, a JPMorgan spokeswoman, and Reid Weingarten, a lawyer for O’Brien, declined to comment on Giddens’s report.
“Mr. Corzine continues to feel great sadness for the difficulties MF Global’s bankruptcy has caused the firm’s customers, employees and others,” said Steven Goldberg, a Corzine spokesman, in an e-mail. “We note that the Trustee’s report is consistent with Mr. Corzine’s Congressional testimony that he did not direct or intend to direct the misuse of customer funds. We simply do not agree with the Trustee’s suggestion that Mr. Corzine was negligent or there is any other basis to sue him.”

MFGI Shortfall

Giddens found that “contrary to some public reports, the shortfall of customer property at MFGI was not caused by direct investment of customer funds in sovereign debt or even by losses on proprietary investments such as the sovereign debt,” but rather “the actions of management and other employees, along with lack of sufficient monitoring and systems,” which led to customer property being used to fund margin calls on the European sovereign debt investments.
In MF Global’s final days, several large transfers led to the shortfall in customer funds, Giddens said. On Oct. 26, $615 million was moved from customer accounts to fund proprietary trading. The money wasn’t returned by the end of the business day, throwing the company out of regulatory compliance, he said.
A $175 million transfer to clear an overdraft balance at JPMorgan Chase in London on Oct. 28 made matters worse, Giddens found.

Future Disasters

In his conclusion, Giddens proposes measures that could prevent future disasters like MF Global, such as abolishing the alternative calculation method for foreign accounts and requiring that more than 100 percent of the value of customer funds be segregated as a “cushion” for customer funds.
He also suggests a rule by Congress that would make directors and officers of a company personally and civilly liable for any shortfall in customer funds without allowing them to defend themselves on the basis that they delegated essential duties.
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), 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Joe Schneider in Sydney at; Tiffany Kary in New York at
To contact the editor responsible for this story: John Pickering at

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