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MF Global Trustee Conflicts Delay Investigation, Freeh Says

MF Global Holdings Ltd. Former Chief Executive Officer Jon S. Co
MF Global Holdings Ltd. former Chief Executive Officer Jon S. Corzine. Photographer: Andrew Harrer/Bloomberg

The trustees and foreign authorities overseeing the bankruptcy of MF Global Holdings Ltd. face competing and conflicting duties that are delaying the return of customer and creditor funds, one of the company’s trustees said in testimony prepared for a U.S. Senate hearing today.

Louis Freeh, the New York-based firm’s trustee, said in testimony prepared for the Senate Banking Committee that he’s still trying to uncover what led to the company’s collapse, and seeking funds that can go to repay creditors. Those funds, according to his testimony, may include $1 billion transferred in October to the broker-dealer subsidiary, MF Global Inc.

“It is clear even at this early stage that the competing, and perhaps at times conflicting, obligations and duties of the two trustees and various foreign administrators has and will continue to have the effect of extending” the time needed to “make distributions to customers and/or creditors,” Freeh said in the prepared remarks.

MF Global filed the eighth-largest U.S. bankruptcy on Oct. 31, with debt of almost $40 billion, after making $6.3 billion in bets on sovereign debt. Freeh said in his testimony that his efforts to arrange repayment to MF Global creditors are complicated because their interests can be at odds with the customer claims at the company’s broker-dealer subsidiary, MF Global Inc., whose trustee is James W. Giddens.

Corzine’s Role

U.S. lawmakers, the Department of Justice and federal regulators are probing the collapse of the firm and the role of its former Chief Executive Officer Jon S. Corzine, a Democrat who served as New Jersey’s governor and U.S. senator. The Banking Committee today becomes the fourth congressional panel to hold a hearing on the bankruptcy of the firm that has left a customer funds shortfall estimated at $1.6 billion.

“As investigators seek to recover MF Global customer funds and hold accountable those responsible for any wrongdoing, this committee will focus our attention on preventing future abuses and the other critical public policy issues raised by the collapse of MF Global,” Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, said in an opening statement prepared for the hearing.

Lawmakers should consider setting up an insurance fund for smaller futures customers including farmers and ranchers, Giddens, the MF Global Inc. trustee, said in testimony prepared for the hearing. More than three-quarters of MF Global claims seek a return of less than $100,000, he said in the statement.

‘Farmers and Ranchers’

“A fund limited to protecting these smaller accounts -- representing many farmers and ranchers -- could be of relatively modest size but would suffice to make these customers whole very quickly even in a case with a shortfall the size of MF Global’s,” Giddens said in the testimony. Giddens said a fund could be replenished by industry assessments when needed.

Congress should also consider making chief executives and other senior officers of futures brokers personally and civilly liable for their statements about segregation of customer funds. Officers and directors should be liable “without any requirement of proving intent and without permitting them to defend on the basis that they delegated these essential duties and responsibilities to others,” Giddens said.

Freeh said his duties as Chapter 11 trustee involve trying to recoup funds for creditors including money routed to the broker-dealer unit, MF Global Inc. In October, before the company failed, more than $1 billion in cash was moved from MF Global Holdings and its MF Global Finance unit to MF Global Inc., Freeh said.

$650 Million Transfer

The proceeds of $650 million of MF Global bonds sold in 2011 by MF Global Holdings were also transferred to MF Global Inc., Freeh said.

Freeh also addressed criticism of a plan that would have given bonuses to executives who oversaw the company before it failed last year. In March, compensation packages that would apply to Chief Operating Officer Bradley Abelow, General Counsel Laurie Ferber and Chief Financial Officer Henri J. Steenkamp were being prepared, according to advisers to Freeh. Senators objected.

Freeh’s team employs 15 non-executives, most of whom were former MF Global employees, he said in his statement. Freeh said he has considered “a retention program” for them and added that “no formal program was ever created for senior executives, nor was any motion ever filed with the court for approval in connection with any retention program for senior executives.”

Freeh will submit a report by June 4 about his findings and seeks authority to subpoena witnesses in connection with his investigation, he said.

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).

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