MF Global Holding Ltd.’s U.K. customers demanded their money back at a London creditors’ meeting as administrators KPMG LLP said they racked up 17.5 million pounds ($27 million) in fees since the broker’s collapse without returning anything to clients.
Customers asked KPMG, which was appointed to wind up MF Global’s U.K. unit on Oct. 31, why the process was taking so long and what would happen to money that wasn’t in protected, or segregated, accounts.
The quick return of money in customer accounts is a “matter of life and death” for some clients, said Dimitry Nedvetsky, who identified himself as an employee of MF Global. Others expressed surprise when KPMG said clients with unsegregated accounts, which weren’t held separately from the broker’s own money, would be treated as unsecured claims alongside other creditors.
All client money, segregated or not, is “sacrosanct” and should be “paid in full,” Erico Tavares, of investment fund Sinclair Limited, told administrators. “The irony is that we picked the U.K. exactly for that investor protection, which has now proved illusory,” he said in an e-mailed statement after the meeting.
The issue of unsegregated customer funds sparked contention at the first meeting between KPMG and the broker’s U.K. clients and creditors yesterday, unlike in the U.S., where attention is focused on locating some $1.2 billion missing from customer accounts. Bankruptcy trustees for New York-based MF Global Holdings Ltd. have scheduled a creditors meeting for Jan. 26.
No Special Protection
While segregated funds are held separately and not supposed to be used by financial firms, unsegregated accounts have no special protection under U.K. law and no priority over other unsecured creditor claims, KPMG partner Richard Heis said at the meeting. He wouldn’t confirm exactly how much was in the unsegregated accounts but said it was more than 1 billion pounds ($1.5 billion).
MF Global’s clients had to specifically ask for their accounts to be protected as segregated funds, said Sean Donovan-Smith, an attorney at London firm Speechly Bircham LLP. Some thought they had protection but didn’t, or didn’t know they had to make a special request.
“We know from experience that clients of MF Global may not have fully read the terms and conditions of business carefully,” he said.
KPMG administrator Richard Faulkner said at the meeting there were disputes with clients about the status of accounts and while the firm would try to resolve them amicably, some “may be decided in the U.K. courts.” Some clients tried to change the status of accounts to gain protection just before the broker collapsed, administrators said.
Tavares has made an official complaint to the Financial Services Authority over the treatment of unsegregated accounts. Chris Hamilton, a spokesman for the U.K. financial regulator, wouldn’t confirm how many complaints the regulator had received.
“The FSA takes complaints seriously, we have a process to deal with those complaints and will respond in due course,” he said in an e-mailed statement today.
KPMG said the 17.5 million pounds in fees included 14 million pounds for the administrators and legal fees of 3.5 million pounds. The administrators won’t be paid anything until a creditors committee has approved the figures, Heis said.
There will be an initial payment to segregated account holders after a London court hearing scheduled for Feb. 3, Heis said at the meeting.
“There is no delay,” he said. “We are doing it as quickly as we can. I do sympathize with a number of people who were badly affected by the lack of money.”
About 1 billion pounds of segregated funds was frozen in MF Global UK Ltd. accounts when its parent collapsed. Administrators say they have identified all the money, and haven’t discovered any shortfall of the kind seen in the U.S.
The confusion over segregated and unsegregated accounts is damaging to the U.K.’s image as a trading destination, said Clive Roberts, a fund manager at broker Alecto Financial Ltd., who attended the meeting.
Why should “a customer depositing funds with a broker to maintain open market positions consider themselves alongside a telecoms provider, vending machine company or landlord?” Roberts said in an e-mail yesterday. Client funds should be returned ahead of unsecured creditors, he said, while KPMG’s fees had caused “consternation”.
New York-based MF Global Holdings Ltd. was the fifth-largest financial company to file for bankruptcy when it sought protection on Oct. 31 after making losing bets on European sovereign debt.
KPMG asked those attending yesterday’s meeting to vote on whether to support its proposals for the administration. At the end of the event, Heis said creditors and clients had voted “overwhelmingly” in favor of its plan, though votes on who should make up the creditors’ committee hadn’t yet been counted.
The administrators had won “cautious approval, but with more questions than answers,” Roberts said.