MF Global $1 Billion Vanished Into Brokerage, Court Told

MF Global Holdings Ltd. (MFGLQ) still can’t trace where some of the money went when its brokerage collapsed, including $1 billion that “vanished” into the brokerage unit MF Global Inc., an attorney told a bankruptcy court.

Brett Miller, a lawyer for MF Global Holdings’ Chapter 11 estate, told U.S. Bankruptcy Judge Martin Glenn in Manhattan today that court papers detailing the assets and debts of five of its six bankrupt units are likely to be filed today. Details on the sixth, MF Global USA, which filed for bankruptcy in March, will take about another week, he added.

A report is due June 4 from Chapter 11 trustee Louis Freeh on the results of a probe into how the brokerage failed last October. Miller said key information is still unknown.

“Whereas we can trace certain moneys, the shocking amount of money funneled from Holdings to Inc.” in the months before its bankruptcy left “no trail,” Miller said.

As MF Global Holdings unwinds in bankruptcy to repay creditors, its former operating unit, MF Global Inc., is liquidating under the Securities Investor Protection Act to repay customers who are estimated to be out $1.6 billion.

The holding company and brokerage each has its own trustee, and the two have disagreed on whether certain assets belong to customers or creditors. The SIPA trustee is James Giddens.

Two Trustees

It will become clearer in coming weeks how the company can meet its obligations to lawyers and other professionals working on its case, Miller told the judge.

“Some people have started to joke that they’re working for both F-r-e-e-h and f-r-e-e,” the lawyer said.

The law firm Dewey & LeBoeuf LLP on May 11 filed a request for $4 million for its work over six months representing the creditors’ committee. The collapsed law firm said it knows the estate doesn’t have enough money to pay all professionals.

The company’s total unpaid professional fees so far are $24.8 million, including $7 million for professionals working with the creditors’ committee, and $11.1 million for Freeh and his staff. Another $6.7 million is related to professional fees incurred before Freeh was appointed, according to an operating report for April.

Insufficient Funds

The case is “unique in that there is currently insufficient cash available in the debtors’ estates to compensate professionals, there is no guaranty there will ever be cash available to compensate professionals, and there is no clear timeline before it becomes apparent whether there will be cash to compensate professionals,” Dewey & LeBoeuf lawyers wrote.

The law firm agreed to the work at the outset of the case “knowing it will accrue fees and disbursements aggregating millions of dollars without knowing when and if it will be paid.”

Miller said money will come into the estate from the liquidation of securities positions and other assets, making it clearer how professionals will be paid.

Dewey, once the 11th-largest law firm, is collecting bills to pay lenders owed $200 million amid departures of lawyers and dismissals of nonunion workers.

Partners’ Departures

The firm has lost more than two-thirds of its 300 partners, according to the American Lawyer, a trade magazine.

Proskauer Rose LLP, which hired Dewey lawyers including Martin Bienenstock, a former bankruptcy partner and managing chairman, has proposed itself as new counsel to the MF Global Holdings creditors committee.

Separately, Glenn gave MF Global Holdings until June 18 to detail the assets and debts of its remaining unit.

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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