MF Global Holdings Ltd. customers may have to wait years to get their money back if the futures broker is sued, according to Frederick Grede, the liquidation trustee overseeing the bankruptcy of Sentinel Management Group Inc.
“People should expect that the money on deposit with MF Global will be tied up for some time,” Grede said in a telephone interview today. A former chief executive officer of the Hong Kong Futures Exchange, he has sought to recover about $600 million of customer money from Sentinel, the futures broker that filed for bankruptcy in 2007. “If litigation is involved it well could be years” for MF Global customers, he said.
The day it filed the eighth-largest U.S. bankruptcy, New York-based MF Global disclosed a shortfall in customer accounts that people with knowledge of the matter said may be about $700 million. CME Group Inc., which has the authority to audit those accounts, said yesterday it didn’t know how much client money was missing. Lawyers for MF Global told a federal judge yesterday that all the funds have been accounted for.
MF Global CEO Jon Corzine, 64, increased risk-taking at the firm as part of his strategy to re-make the futures broker into an investment bank, including $6.3 billion in European sovereign debt positions that roiled markets. Discrepancies over the missing funds that were used to back futures trades doomed a potential acquisition by Interactive Brokers Group Inc., according to a board member at the Greenwich, Connecticut, firm. The deal may have averted the Oct. 31 bankruptcy filing.
“The board certainly considered that purchase and stepped away from it at a point where it became clear there were lots of uncertainties about the accounts and segregated funds,” Hans Stoll, an Interactive Brokers director and a professor of finance at Vanderbilt University in Nashville, Tennessee, said yesterday in a telephone interview.
The Securities Investor Protection Corp., the government-created entity that is overseeing the liquidation of MF Global’s brokerage, hasn’t verified whether MF Global’s customer assets are accounted for, Stephen Harbeck, president and CEO, said. James Giddens, the trustee handling the liquidation, has said that he has a team on the New York-based company’s premises to protect customers’ accounts.
“To move the money out of MF Global, they have to get the trustee to agree, and I believe the trustee will want the court to agree as well,” Grede said.
With over $17 billion in repurchase agreements to be unwound at MF Global, and only $26 million in cash, bondholders of the bankrupt broker-dealer may be focusing on lawsuits as a way to recover money, analysts said.
MF Global’s largest creditor, JPMorgan Chase & Co., agent to a $1.2 billion unsecured loan and a $300 million secured loan to its brokerage, was granted a lien on all of MF Global Holdings’ 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.
U.S. Bankruptcy Judge Martin 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.
Unsecured Bond Debt
Bondholders, trading in the $1.02 billion in unsecured bond debt outstanding, may resort to litigation, said Kevin Starke, an analyst with CRT Capital Group LLC. Starke said he’s seeing a preference for notes that MF Global issued in August. Its $325 million in notes due August 2016 are trading at 49 cents on the dollar, according to Trace.
Both money that customers had with MF Global to back futures trades as margin, and any free cash they had in the account, has now been snared in the bankruptcy proceedings, Grede said.
Jim Mindling, a former seat-owner on the New York Mercantile Exchange and an MF Global customer, said he has been unable to get his money from the firm, which told him Oct. 31 that his account was frozen and that it didn’t know when the funds would be freed up.
Sentinel, based in Northbrook, Illinois, filed for bankruptcy in August 2007, four days after it froze client accounts citing credit market instability. Three days later, the U.S. Securities and Exchange Commission sued the firm for allegedly comingling client funds. That case is still pending, Grede said.
“I still have extensive litigation with regard to the customers” of Sentinel, he said. “It’s been four years.”
The liquidation case is In re MF Global Inc., 11-02790; The bankruptcy case is MF Global Holdings Ltd., 11-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).