Customer accounts believed to hold $5.45 billion were frozen Oct. 31, the day after the New York-based company reported a shortfall in funds that are required to be segregated under rules of the U.S. Commodity Futures Trading Commission. A previous estimate of about $600 million in missing funds was raised to $1.2 billion yesterday by James Giddens, the trustee appointed to liquidate the company and distribute refunds to customers.
Judge Martin Glenn, overseeing a hearing today in Manhattan Bankruptcy court, said he will deny commodity customers’ request to form an official committee. He urged the trustee to work closely with commodities customers.
“With 38,000 customers, for them to have an effective voice, there needs to be some agreed organizational structure that will allow them to be heard by the trustee,” Glenn told a lawyer for the trustee. Glenn said there were no legal precedents that would let a bankruptcy court grant the official committee.
Far-Reaching Case
“Nobody in the legislative history of this country thought about a case like this,” Lewis Kruger, a lawyer for a group of customers, argued before Glenn today. “This case may determine whether there is a commodities market in the future. I have great concern about what’s going to happen in this industry. This is a far-reaching case and it needs to have an imaginative resolution.”
Separately, a spokesman for Giddens, Kent Jarrell, said the estate, which had previously run out of money to contribute to the 60 percent it plans to distribute to customers, will receive $1.3 billion from Harris Bank in Chicago. It’s the last large sum that will come into the estate, Jarrell said in an interview after the court hearing. It does not affect the missing funds, he said in an e-mail.
While Giddens is overseeing distributions to customers at MF Global Inc., its parent, MF Global Holdings Inc., once run by former New Jersey Governor and Goldman Sachs Group Inc. (GS) co- chairman Jon Corzine, filed for bankruptcy separately to apportion returns to creditors, including bondholders and lenders such as JPMorgan Chase & Co. (JPM)
Parent Gets Trustee
Glenn agreed today to let the parent company have a court- appointed trustee to oversee its wind-down in Chapter 11 bankruptcy after it failed to find an operating loan.
Kenneth Ziman, a lawyer for MF Global Holdings, said a trustee will be better able to respond to investigations and coordinate amid a lack of funds.
“The trustee would be better able to coordinate where resources are limited -- certainly that’s liquidity here,” Ziman said.
JPMorgan Chase, agent to a $1.2 billion loan, has agreed to allow the company to use $26 million of its cash collateral to fund the liquidation, subject to an agreement involving the trustee.
Glenn also said Giddens can process claims from commodities and securities customers under similar procedures, distributing as much funds as may be recovered. Commodity customers had said a committee was also necessary because Giddens, appointed under the Securities Investor Protection Act, was more familiar with securities rather than commodity accounts.
Faster
Glenn said he would require Giddens to report his progress faster than usual.
“One change I will make is requiring more frequent status reports to the court,” Glenn said of the trustee’s proposed management of claims. Glenn said the usual six-month updates wouldn’t be enough to show the trustee was acting expeditiously.
“Commodities customers believe there has been a series of errors already, giving some inequitable wins and others unnecessary losses,” Kruger said at the hearing. “There’s a lack of understanding of the commodities business, and the parade of letters you’ve seen all say that ability is not present.”
A lawyer for Giddens also said today that the $1.2 billion estimate may be too low.
“It could still go up,” said James Kobak, a lawyer for Giddens. “We hope that it will go down.”
Yesterday, he’d described forensic accountants and investigators working “around the clock,” and noted that the estimate of the broker’s shortfall may change. If the amount is $1.2 billion, that would mean customer accounts are missing about 22 percent of the total of $5.4 billion held in segregated accounts. A shortfall of 11 percent had been previously estimated by a person with knowledge of probes into the firm’s collapse.
Distribution
Distributing 60 percent of what should have been in commodity customers’ accounts, already under way, will take $1.3 billion to $1.6 billion, or almost all of the assets he has within his control, Giddens has said.
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 yesterday.
“Essentially we have no more than 60 percent to give,” Kobak said at the hearing today.
The next motion the trustee will make will deal with “truing up” all customers to make sure everyone gets 60 percent of their collateral, Kobak said. It will also deal with the issue of bounced checks, which are estimated to be worth about $50 million, Kobak said.
Call Center
A lawyer for the trustee said their call center has been getting more than 4,000 calls a week. Glenn said his law clerks are also receiving a large number of calls from former MF Global customers without attorneys.
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 yesterday. He has already distributed $1.5 billion in collateral, and is currently returning $520 million in cash to customers.
An MF Global customer filed a proposed class-action lawsuit today against Corzine and his bankrupt firm. Davide Accomazzo, managing director of Cervino Capital Management LLC, a Topanga, California-based commodity trading adviser, claimed in the suit filed in federal court in Manhattan that his money and other assets belonging to his clients were lost after MF Global commingled them with its own funds.
Accomazzo alleged in the proposed class-action, or group, lawsuit that MF Global perpetrated a fraud and argued it’s a “bedrock principle” that futures commission merchants such as MF Global weren’t allowed to mix funds held in customer accounts with their own funds under any circumstances.
Potential Conflicts
Separately, Glenn directed Giddens and his law firm to disclose all potential conflicts, and describe all its connections with JPMorgan Chase.
“I don’t think there’s any merit to the idea we’re in bed with the bank,” Kobak said, saying his law firm, Hughes Hubbard & Reed, has only done minor work for JPMorgan and isn’t conflicted.
The parent company’s $325 million of 6.25 percent notes rose 0.5 cent to 31.5 cents on the dollar at 9:10 a.m. today 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 and dropped to as low as 28 cents on Nov. 21, Trace data show.
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 moved hundreds of millions of dollars from its futures client accounts to other accounts before its bankruptcy, according to a person familiar with the audit of the company.
It listed debt of $39.7 billion and assets of $41 billion. The firm said it has about $26 million in cash. Corzine 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
Posts
