MF Global Customer Shortfall of $633 Million May Be Recouped Through Court

MF Global Inc.’s commodity customer funds have a shortfall of $633 million, or about 11.6 percent, out of a segregated fund requirement of about $5.4 billion, the Commodity Futures Trading Commission said.

The shortfall may be recovered by James W. Giddens, the trustee for the bankrupt broker-dealer, lawyers for the CFTC said at a hearing yesterday in U.S. Bankruptcy Court in Manhattan

MF Global’s trustee won permission to transfer 50,000 accounts in which customers of the failed brokerage have 3 million positions and a notional value of more than $100 billion at stake, saying the move will help avoid liquidations.

The accounts, which are at CME Group Inc., will be transferred with 60 percent collateral, leaving 40 percent with the clearing organization, said James Kobak, a lawyer for Giddens. Asking for the transfer of segregated customer positions, he said he was acting on the advice of the CFTC.

“MF Global will have rights to that 40 percent, and there may be rights the exchange itself will assert,” Kobak said. He said the trustee is also seeking other exchanges like CME to transfer customer accounts. David Neier, a lawyer for IntercontinentalExchange Inc., said his client also has MF Global accounts at stake.

Accounts that aren’t transferred will be liquidated in an orderly fashion beginning Monday, Kobak said. If MF Global customers’ accounts are transferred, they’ll be notified by the following day, and can transfer again if they’re not happy with their assignment, Kobak said.

Frozen Accounts

Giddens froze 150,000 customer accounts, including 50,000 commodities accounts, on Oct. 31 at the broker-dealer once run by former Goldman Sachs Group Inc. (GS) co-chief executive and New Jersey governor Jon Corzine.

MF Global Holdings Ltd., the brokerage’s parent, filed for bankruptcy protection in Manhattan on Oct. 31 after making bets on European sovereign debt. Giddens is in charge of liquidating MF’s broker-dealer unit for the Securities Investor Protection Corp. to protect customer assets.

More than one firm would have to be found to take over the accounts, as none of the existing 125 futures commission merchants “would be willing and able to handle the variety of accounts” at MF Global, Giddens said, citing advice from CME, which operates a derivatives exchange. The trustee is still looking for takers to accept all the accounts, his lawyer said in court yesterday.

A commodity fund run by EMC Capital Management Inc. asked a judge to let it transfer an account from bankrupt MF Global Inc. to Peregrine Financial Group Inc., saying “swift judicial action” is needed or the fund “will likely suffer increased harm and damage,” according to a court filing.

‘Over-Collateralized’

Separately, CME said MF Global’s customer accounts on the group’s exchanges are “substantially over-collateralized” at CME Clearing. The funds CME wanted transferred to futures merchants are segregated funds held by MF Global, it said in a statement.

MF Global’s deposits of segregated customer funds at the CME totaled $2.5 billion, the trustee said. Collateral for customer segregated funds at the “clearing level” is about $1.5 billion, or about 60 percent, he said.

Referring to an “apparent shortfall” in segregated customer funds at the broker-dealer, CME said the funds may have been transferred after a CME audit of the funds, in violation of regulatory rules.

“It now appears that the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection,” as the transactions weren’t reported to regulators until Oct. 31, it said.

Lehman Brothers

Stephen Harbeck, president of the Securities Investor Protection Corp., said transferring the accounts is a priority. He compared the situation with the liquidation of Lehman Brothers Holdings Inc.’s brokerage.

Barclays Plc, based in London, took over accounts from Lehman, giving 72,000 brokerage customers access to $40 billion in frozen assets. With MF Global, discrepancies in funds used to back futures trades sent Interactive Brokers Group Inc. fleeing from a potential acquisition, according to a board member at the Greenwich, Connecticut, firm.

“With Lehman, the day SIPC filed the liquidation proceeding, we executed a transfer agreement with Barclays,” Harbeck said. “This time it won’t be that fast.”

MF Global’s $325 million of 6.25 percent senior unsecured notes due August 2016, the most actively traded junk bond the past three days, climbed to 48.4 cents yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. While the New York-based firm’s shares are almost wiped out, its loans are at 62 cents on the dollar.

The bonds may reach 90 cents to 100 cents on the dollar if the customer money is located, while it may dip to the “low 60s” if it’s missing, said Scott Colyer, chief executive officer at Advisors Asset Management Inc. in Boerne, Texas, whose firm oversees $7.2 billion and which bought some of MF Global’s unsecured debt on Nov. 1.

“This is more of an art than it is a science,” Colyer said.

Updates on Giddens’s progress will appear on a website set up for the purpose, mfglobaltrustee.com, the trustee said.

The case is In re MF Global Inc., 11-ap-2790, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

-- With assistance from Matthew Leising, Sapna Maheshwari and Zeke Faux in New York. Editors: Andrew Dunn, John Pickering

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net. 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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