MF Global clients get back 72 cents on the dollar

MF Global Inc.’s customers can get another $2.2 billion distribution, allowing them to recover 72 percent of what they lost when the brokerage failed, a judge ruled.
U.S. Bankruptcy Judge Martin Glenn, overseeing a court hearing today in Manhattan, overruled objections from creditors of the brokerage’s parent company, MF Global Holdings Ltd. He approved a request by James Giddens, the trustee liquidating the brokerage, to make the distribution.
Most of the transfers will go out in the next few days, though some will take two to four weeks, James Kobak, a lawyer for Giddens, told Glenn. Giddens found “suspicious transactions” in the days before the brokerage’s parent filed for bankruptcy, and the shortfall in the brokerage’s segregated customer accounts may still be $1.2 billion, Kobak said.
“At this point we can’t say that the figure is less than $1.2 billion,” Kobak said, adding that Giddens wasn’t sure whether there had been criminal activity involving the shortfall. Giddens believes there was supposed to be $5.8 billion in the accounts, more than a prior estimate of $5.45 billion, Kobak said.
This third bulk transfer will be the last, as the trustee will set aside more than $1 billion to deal with other claims as an investigation continues, Kobak said.
‘Stop, Look’
“Perhaps after this it is time to stop, look and listen,” Kobak said. Results of the probe so far have made Giddens cautious about distributing money when it’s still unknown how big the shortfall is, Kobak said.
Kent Jarrell, a spokesman for Giddens, declined to give more details about the suspicious transfers after the hearing, citing ongoing investigations.
Glenn separately approved the transfer of about 330 of MF Global’s customer securities accounts to Perrin, Holden & Davenport Capital Corp. Kobak said some money from the securities accounts may also be missing and he would elaborate later. MF Global has transferred about 38,000 commodities accounts to other firms.
MF Global Holdings, once run by former New Jersey Governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, filed the eighth-largest U.S. bankruptcy after a wrong-way $6.3 billion trade on its own behalf on bonds of some of Europe’s most indebted nations.
Including funds already distributed, Giddens controlled $4.9 billion in U.S. segregated commodity customer funds, according to CME Group Inc. (CME), the world’s largest future market. It calculated that an additional $900 million in customer funds were traded on foreign exchanges.
Gold Bars
Glenn said he would deal in January with the distribution of physical goods, such as gold and silver bars, after lawyers for some customers said they couldn’t obtain partial ownership of gold bars because the bars can’t be broken into pieces. HSBC Holdings Plc (HSBA) sued Giddens today to establish ownership of five gold bars and 15 silver bars that underlie eight Comex contracts between the brokerage and a client. Both parties have asserted claims to the bars stored by HSBC, the London-based bank said in asking a judge to decide who the rightful owner is.
MF Global Holdings filed for bankruptcy to apportion returns to creditors, including bondholders and lenders such as JPMorgan Chase & Co. (JPM), while Giddens is overseeing distributions to customers at MF Global Inc. under the Securities Investor Protection Act.
Customer Objections
Two previous payouts to commodity customers totaled about $2 billion. Glenn overruled objections to the latest transfer from customers, including MF Global’s U.K. affiliate. MF Global claims the U.K. affiliate owes it $857 million while the affiliate contends the U.S. brokerage owes it $283 million, Kobak told Glenn.
Some customers, including Queen’s Quay Avante Ltd. and Sapere Wealth Management LLC, had objected that they hadn’t received funds through the first two transfers.
Creditors of the holding company also objected, saying the money to be distributed should first be confirmed as property that belongs to customers “to the exclusion of other creditors.” They said that distributions should only occur under certain conditions, including one that would allow the money to be recovered under the bankruptcy code if it was found to be property of creditors, not customers.
Martin Bienenstock, a lawyer for the official committee of creditors in the Chapter 11 case, told Glenn today that Giddens had taken an “extreme position” in saying all customer claims would come ahead of creditor claims.
‘Exclusively for Customers’
“We don’t think they have any right to invade the 4D account,” Kobak said today, referring to the estate of the failed brokerage. “We think it’s exclusively for customers.”
MF Global Holdings creditors don’t have the authority to probe any issues at the brokerage, and interests of the parent’s estate should be represented by Chapter 11 trustee Louis Freeh, the judge said. Glenn told Bienenstock that he could have more time to make arguments about whether creditors have any standing at all in the brokerage’s wind-down.
“The committee’s standing is questionable,” Glenn said.
Kobak told the House Agriculture Committee at a hearing in Washington yesterday that there wasn’t enough money available to distribute 75 percent, as some customers wanted.
Giddens will pursue all “legally available” assets including those from individuals who may have liability for breaking the rules requiring protection of commodity customers’ accounts, he also testified. Corzine testified that he didn’t know where the missing $1.2 billion went.
‘I Was Stunned’
“I was stunned when I was told on Sunday Oct. 30 that MF Global could not account for many hundreds of millions of client money,” Corzine said under oath. “I remain deeply concerned about the impact this has on MF Global customers and others. I simply do not know where the money is.”
Jill E. Sommers, of the U.S. Commodity Futures Trading Commission, said that in the end, regulators will find out where the missing money is.
Glenn will hold a hearing later today to consider the holding company’s request to use cash collateral of its largest lender, New York-based JPMorgan, to pay lawyers and other costs of its bankruptcy.
JPMorgan Lien
JPMorgan, agent to a $1.2 billion loan, agreed at the outset of MF Global Holdings’ bankruptcy to let it use $26 million subject to an agreement that gives the bank a lien on all of the company’s assets.
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.
–Bloomberg News–