MF Global Creditors Say Brokerage Trustee Isn’t Helping
A trustee for MF Global Inc., the failed brokerage, may sue individuals over breach of fiduciary duty and other issues related to the loss of customer funds, the trustee said today in a statement.
“There are possible civil liabilities faced by officers, directors and other employees,” Kent Jarrell, a spokesman for the trustee, James Giddens, said in a phone interview. He declined to single out any individuals.
“Violations of the segregation requirements of the Commodity Exchange Act” may also result in claims against “certain individuals,” Giddens said in his written statement.
Jon Corzine, a former New Jersey governor and once a co- chairman of Goldman Sachs Group Inc., who ran MF Global before its Oct. 31 collapse, has already been named in several lawsuits by customers, and may face liability if investigations show that he knew customer money might be used when transfers were ordered to cover an overdraft with the company’s biggest lender, JPMorgan Chase & Co. (JPM)
Corzine testified before Congress that he asked for overdrafts with JPMorgan to be corrected, and that he never gave any instruction to misuse customer funds. He also said he didn’t believe anything he said could reasonably have been interpreted as an instruction to misuse customer funds.
Giddens’ statement elaborated on an announcement in Manhattan bankruptcy court earlier today, where he said that he’s still in discussions with JPMorgan Chase & Co. about the bank’s activities in connection with MF Global, and sees claims against it and other parties to recover funds for customers.
Giddens sees “more than colorable claims against some parties,” Kobak told U.S. Bankruptcy Judge Martin Glenn, adding that aside from JPMorgan Chase, which the trustee has been holding talks with, the trustee “believes he may have claims against other parties.”
Separately in court today, creditors of MF Global Holdings Ltd. (MFGLQ) are questioning a $1.6 billion estimate of how much more is required to repay customers of the failed brokerage.
Glenn said more information should be made available on June 4, when a six-month report on progress of probes into missing funds is due. Creditors had filed a status update on their own investigations last week, identifying assets they believed could be part of the bankruptcy estate, and saying a trustee for the company’s brokerage unit isn’t helping with a global analysis of books and records.
Unwinding in Bankruptcy
While MF Global Holdings is unwinding in bankruptcy to repay creditors, its former operating unit, brokerage 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 have their own trustee, and the two have disputed whether certain assets belong to customers or creditors.
“We think the SIPA trustee is saying he doesn’t have them, not necessarily that people don’t know where they are,” the creditors’ lawyer, Martin Bienenstock, told Glenn today, adding that the issue needs clarification if creditors are to know whether they may get some recovery from assets of the brokerage.
James Kobak, a lawyer for SIPA trustee James Giddens, told Glenn today that his estimate hasn’t changed, and is based on the total of claims filed, and the property that the trustee has on hand.
“The different between those numbers, at present, is still $1.6 billion,” Kobak said, noting that in some instances, such as $700 million held in the U.K., the trustee does know where the money is, but is unsure of whether he can get access. Giddens had also disputed creditors’ status report last week, and called its representations “incorrect.”
Glenn urged the two trustees to work together, and cooperate on the information to be reported June 4. Louis Freeh is the trustee for the holding company.
Glenn deferred ruling today on whether MF Global can distribute $685 million to customers of the failed brokerage, bringing them from 72 percent to about 80 percent of what they’re owed. He said he will rule later in court papers.
Under the proposed distribution, commodity customers who traded futures on foreign exchanges will get their first payments of about $50 million, while about $600 million will go to customers who traded on U.S. exchanges. Holders of physical assets such as precious metals are in line to get about $35 million.
Some customers had objected, questioning releases that they would be required to make to receive the money. A group calling itself the “Commodities Customers” also objected, saying the conditions could force them to give up claims against third parties.
By requiring a release, Giddens would “coerce futures account customers of MFGI to assign to him their claims against third parties as a condition to receive disbursements of their own money,” lawyers for the group wrote.
Glenn said that if customers hand over their rights to sue parties to Giddens, it will result in “the most equitable distribution” of proceeds from lawsuits to all customers. He questioned whether Giddens has the authority to demand those releases, however.
Glenn also rejected a request from customer Sapere CTA Fund to force Giddens to repay customers $120 million out of the proceeds of insurance policies for professional liability. Glenn had ruled earlier this week that Corzine and other executives can use insurance proceeds to pay for their defense.
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