MF Global Holdings Inc. won court permission to use about $21 million in cash collateral of its largest lender, JPMorgan Chase & Co. (JPM), as a judge suggested a probe to find out whether some of the funds may belong to customers.
U.S. Bankruptcy Judge Martin Glenn in Manhattan today overruled objections from customers who said the money could be part of the $1.2 billion missing from their segregated accounts. MF Global had reached an agreement with the New York-based bank about how it would use the cash.
“Proof, not speculation. I understand this is a fluid situation but you have to acknowledge at this point that there is no proof the money in the account is customer property,” Glenn said. He said he would issue a written order and elaborate whether the company’s Chapter 11 trustee, Louis Freeh, should investigate the source of the funds.
JPMorgan, agent to a $1.2 billion loan, agreed at the outset of MF Global’s bankruptcy to let it use $26 million subject to an agreement that gives the bank a lien on all of MF Global’s assets. Freeh said in court papers that the money, exactly $25.3 million, is presumed to be that of the company, not that of customers. About $4 million is set aside to cover fees.
MF Global Holdings, once run by former New Jersey Governor and Goldman Sachs Group Inc. (GS) 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. About $1.2 billion may be missing from segregated customer accounts, according to James Giddens, the trustee liquidating the company’s brokerage.
Customers of the failed brokerage objected to the proposed use of cash in court papers, citing news reports that $200 million of the missing funds may have been transferred to JPMorgan accounts and that there had been commingling of customer segregated funds. In light of that, MF Global shouldn’t be allowed to commit more of its collateral, which is the property of customers, not JPMorgan, said James Koutoulas, a lawyer for the Commodity Customer Coalition, a group formed out of the brokerage’s liquidation.
Koutoulas, the remaining objector, said at today’s hearing that the order allowing MF Global to use the cash has no provision that will allow it to be returned to customers if it’s found to be part of their missing $1.2 billion.
“If the money’s spent, you can’t unspend it, I don’t see the Trustee giving customers a refund,” Koutoulas told Glenn.
Koutoulas cited testimony at yesterday’s hearing before the Senate from CME Group Inc. chairman Terrence Duffy that at least $175 million was transferred from customer accounts to house accounts, and said JPMorgan could gain an advantage by letting MF Global use the funds.
“Why should this bank get another bailout on customers’ backs?” Koutoulas said to Glenn.
Glenn said customer property would be protected if it was found to be in the parent company’s accounts.
MF Global Holdings filed for bankruptcy to apportion returns to creditors, including bondholders and lenders such as JPMorgan, while Giddens is overseeing distributions to customers at MF Global Inc. Giddens has set in motion distributions that will return around 72 percent to customers.
MF Global Holdings’ Oct. 31 bankruptcy filing listed assets of $41 billion and debt of $39.7 billion. Corzine quit as 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 email@example.com