MF Global Holdings Ltd., run by former New Jersey governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, has accounted for all its customer funds, said Kenneth Ziman, a lawyer for MF Global, citing the company’s management.
“To the best knowledge of management, there is no shortfall,” Ziman told U.S. Bankruptcy judge Martin Glenn in Manhattan, who inquired about whether a shortfall in customer accounts would affect the case, citing media reports that hundreds of millions of dollars were missing. Most of MF Global’s U.S. assets are held at its brokerage unit, Ziman said.
The brokerage unit is not part of the main bankruptcy case, in which creditors are trying to recover on their claims against the company. The Securities Investor Protection Corp. has appointed a trustee to liquidate the assets in the brokerage.
SIPC, which has people in New York looking at MF Global’s assets, said it hasn’t verified whether the assets are accounted for, said Stephen Harbeck, SIPC’s president and chief executive officer.
“I certainly hope it’s true, but it’s far too early for me to know one way or the other,” Harbeck said.
Trustee James Giddens’s spokesman Jake Sargent didn’t immediately respond to an e-mail seeking comment on the MF Global lawyer’s assertion.
Shot Out of Cannon
MF Global’s ratings downgrade and earnings report “created a circumstances like a rock rolling down the hill, except for us the rock was shot out of a cannon,” Ziman said yesterday, describing events leading up to the filing.
MF Global filed the eighth-largest U.S. bankruptcy on Oct. 31, after failing to find a buyer over the weekend. The New York-based futures broker suffered a ratings downgrade and loss of customers after revealing it had investments related to $6.3 billion in European sovereign debt, leading to the filing. Regulators are investigating hundreds of millions of dollars that may be missing from its client accounts, two people have told Bloomberg News.
Glenn asked whether the bankrupt units owed other subsidiaries money, or the other way around, and how that would affect the case.
“I don’t know which way the money is running, whether the intercompany balances are positive or negative with respect to MF Global,” Glenn said.
“There is no money flowing,” Ziman answered the judge, saying that most of the company’s U.S. assets are with its broker dealer, and foreign funds are mostly with regulated entities.
MF Global has blocked all outstanding checks and won’t try to pay pre-bankruptcy claims, Ziman said. He told the judge the company is spending $2.7 million to $3 million every ten days.
JPMorgan Chase & Co. was granted a lien on all of MF Global Holding’s available assets and given other protections under an agreement that will let MF Global access $8 million of its cash collateral. The bank said in a court filing that it may have a lien on its operating account balance of $26.6 million.
Glenn approved MF Global’s use of the $8 million cash collateral until Nov. 14, when he’ll consider further requests for funding. At the rate the company is spending, that would keep it operating for about a month. Glenn said he was concerned about whether there will be anything left for other creditors as MF Global has very few liquid assets.
Glenn said his approval is subject to a final order detailing how MF Global will use the cash. He also approved what he called an extraordinary measure that will let MF Global give JPMorgan rights to certain lawsuit recoveries as protection of its collateral. Under bankruptcy law, creditors can seek to recover money transferred out of the estate for 90 days prior to its filing.
Glenn asked Ziman how much was transferred out of the two bankrupt entities in the 90 days prior to the filing. Ziman said he didn’t know.
Ziman told Glenn the company may need to come back to court before Nov. 14, as it’s currently working on getting a so-called debtor-in-possession loan to fund operations as it reorganizes.
Lawsuit proceeds, which could seek to recover money transferred out of the company before its bankruptcy, could be the only assets to provide recoveries to unsecured creditors, Glenn said.
JPMorgan had earlier objected to the decision to use its collateral.
“These are truly extraordinary circumstances,” said Peter Pantaleo, a lawyer representing JPMorgan Chase. “We have businesses that have lost 70 to 80 percent of their asset value, and been seized by regulators.”
“This really is money at risk, it’s one lender being pressed into service as an involuntary debtor-in-possession lender, lending against God knows what,” Pantaleo told Glenn. “This may be the only recovery this creditor has.”
Most companies in bankruptcy receive a new loan from a large lender or outside party, known as debtor-in-possession financing, to fund their Chapter 11 case. MF Global is working on lining up such financing, Ziman told Glenn.
The company needs access to the cash “to essentially live to fight another day at the parent company level,” and to make investments in its non-debtor units to try and bring value to the estate, Ziman said. “This is lifeline cash,” he said.
MF Global, which filed for bankruptcy with assets of $41 billion, has five operating accounts, all with JPMorgan. The bank may have a lien on the entire balance because of so-called setoff rights related to a credit line to MF Global where it acts as agent and lender, the New York-based bank said in a filing.
JPMorgan holds less than $80 million of MF Global’s debt, said Joseph Evangelisti, a spokesman for the biggest U.S. bank. It acts as an agent to lenders for a $1.2 billion credit line to MF Global Holdings and a $300 million credit line to its broker-dealer unit.
MF Global drew almost all of a $1.2 billion credit line that was amended last year to give it more liquidity, and its broker-dealer unit has borrowed about $210 million of a $300 million secured credit line.
The bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).