By Tiffany Kary and Linda Sandler - Nov 22, 2011 4:47 AM GMT+0700
MF Global Inc.’s shortfall in U.S. segregated customer accounts may exceed $1.2 billion, more than double what was previously expected, said the trustee overseeing a liquidation of the failed brokerage run by former New Jersey Governor Jon Corzine.
That would mean customer accounts are missing about 22 percent of their total of $5.4 billion. A shortfall of 11 percent had been previously estimated by a person with knowledge of probes into the firm’s collapse. James Giddens, the trustee, said today that forensic accountants and investigators are working “around the clock,” and the estimate may change.
“Our goal is still a 100 percent return, and right now we’re very close to 60 percent,” said Kent Jarrell, a spokesman for the trustee. “If we continue to recover more, that will determine how much more we can distribute.”
Jarrell said the $1.2 billion estimate came from the team of accountants and investigators, who met with the trustee last night, prompting him to publish the revised figure. The spokesman declined to comment on whether there was news as to who was responsible for the funds or how they were withdrawn or used, citing ongoing investigations from the Department of Justice and other agencies.
Assets Under Control
Giddens said today that distributing 60 percent of what should have been in commodity customers’ accounts, already underway, will take $1.3 billion to $1.6 billion, or almost all of the assets he has within his control. While he expects the transfer will occur in early December, he doesn’t have access to funds beyond $1.6 billion, he said in a statement.
The shortfall is primarily in commodity accounts. Money frozen in securities accounts, of which there are only 400, will be refunded through a separate segregated account, Jarrell said. MF Global Inc. had 38,000 commodity clients.
“He is very close to exhausting the funds under his control,” according to the statement, which noted that the amount of assets the trustee can access is different than the amount of the shortfall. Recovering funds from foreign depositories may take more time, Giddens said.
Giddens will coordinate with trustees overseeing the liquidation of MF Global’s overseas brokerage units, and U.S. customers who made foreign investments will get distributions from a separate account than those with just U.S. activity, Jarrell said.
Accounts Frozen
Customer accounts with $5.45 billion were frozen Oct. 31, the day after a unit of the New York-based brokerage reported a “material shortfall” in customer funds that are required to be segregated under rules of the U.S. Commodity Futures Trading Commission. The parent, MF Global Holdings Inc., filed for bankruptcy to apportion returns to creditors.
Giddens has so far brought $3.7 billion under his control, all of which has come from the former U.S. depositories of MF Global Inc., according to his statement. He has already distributed $1.5 billion in collateral, and is currently returning $520 million in cash to customers.
Giddens faces requests at a 3:00 hearing in Manhattan bankruptcy court tomorrow from customers who’d said they wanted an immediate return of some funds. One customer, Thomas A. Butler, said that with an 11 percent shortfall, customers should be able get at least 85 percent back right away.
Giddens answered critics of his procedures in a court filing today. Many former customers of the defunct broker-dealer asked for all or a percentage of their assets without acknowledging “the apparent shortfall,” he said in the filing.
Once the trustee has distributed 60 percent of the shortfall, there will only be an 18 percent margin left to distribute if the shortfall is $1.2 billion. The costs of the trustee and forensic investigators will also need to come out of the available funds.
Bonds Fall
The parent company’s bonds to a record low after the trustee raised the estimate of the shortfall. Its $325 million of 6.25 percent notes fell 8.75 cents to 28 cents on the dollar at 11:46 a.m. in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The debt, issued at par in August, has declined from 50 cents on the dollar since the company’s Oct. 31 bankruptcy filing.
The company 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. MF Global Holdings Ltd. moved hundreds of millions of dollars from its futures client accounts to other accounts before its Oct. 31 bankruptcy, according to a person familiar with the audit of the company.
Probes
The CFTC and the Securities and Exchange Commission are also investigating cash movements at the firm before the bankruptcy filing. Regulators haven’t located the money.
The estimated amount of the shortfall has fluctuated. Examiners from CME Group Inc., the world’s largest futures exchange, found unexplained wire transfers at MF Global Inc. and a $900 million shortfall in client funds during the weekend the failing broker was talking with possible buyers, a person briefed on the matter said.
CME, which was the overseer of MF Global, noticed the shortfall by Oct. 30 -- about a day before U.S. regulators said they were told of the missing funds and the broker filed for bankruptcy protection, according to the person, who spoke on condition of anonymity because the review isn’t public.
The CME said in a Nov. 17 statement that it was advised in the early hours of Oct. 31 that there was an actual shortfall in segregated funds.
Customer Committee
Separately, the brokerage’s commodity customers shouldn’t be allowed to form their own committee to press for recoveries, lawyers for Giddens wrote in court papers filed today. An official committee of commodity broker customers wouldn’t represent all parties who have claims against the broker, and would waste assets of the bankrupt estate, Giddens said.
Creditors of the brokerage’s parent, MF Global Holdings Inc., also objected, saying Congress did not intend for such committees under SIPA, and that customers’ interests are adequately protected by the trustee.
The U.S. Trustee, an arm of the Justice Department that oversees bankruptcies, also said that a committee for customers would be problematic as it could allow them to seek priority over other creditors. The approval of a customer committee in MF Global’s case could also encourage creditors in other cases to try and form committees and get compensated by the bankrupt estate, the U.S. Trustee said.
In its Oct. 31 bankruptcy filing, parent company MF Global Holdings listed debt of $39.7 billion and assets of $41 billion. The firm said it has about $26 million in cash. Corzine, the former co-chief executive officer of Goldman Sachs Group Inc. (GS), 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).
To contact the reporter on this story: Tiffany Kary in New York at tkary@bloomberg.net
To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net
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