MFGI trustee doesn't know amount of seg fund shortfall

The trustee for the liquidation of MF Global Inc. laid out his plans for an expedited claims process today that claims will “advance and streamline the review, determination and distribution process, and help to facilitate potential interim distributions to customers.”

The trustee has been facing fierce criticism over the process mainly over questions of how to deal with commodity customer’s segregated funds. The trustee has noted a claims process would commence following the execution of account transfers as mandated by the court. Roughly 17,000 commodity customer accounts have been transferred along with margin of $1.55 billion to partially cover those positions. That leaves roughly $3.85 billion in segregated customer funds with a reported shortfall of roughly $633 million.

In the face of sharp criticism the trustee has moved to the expedited process that would purportedly return money to customers sooner. To expedite that process CME Group pledged a $250 million financial guarantee to the trustee “to assist in making prompt distribution of customer segregated funds and frozen cash balances.”

The argument of groups representing customers, like the Commodity Customer Coalition, is that their money is segregated by law from assets of the firm and while there may be a shortfall in those segregated customer funds, the remainder of those funds should be returned to customers immediately.

But despite widespread reports based on documents from CME Group and the Commodity Futures Trading Commission (CFTC) estimating the shortfall to be approximately $633 million (roughly 11.6% of the segregated funds) the trustee stated today, “The amount of the apparent shortfall is not known at this time.”

Trustee spokesman Kent Jarrell, added, “We don’t know what the shortfall is. The trustee is going to get a full accounting. By law they are required to have a fair and equitable return of customer property to all customers. That is the law. That is what we are doing.”

The expedited process would, “establish separate, parallel, customer claims processes, one for MFGI’s commodity futures customers, and the other for its securities customers, as well as an additional claims process for MFGI’s general creditors.”

The motion went on to say, “The Trustee, with this Court’s approval, will follow the procedures prescribed in SIPA for determining claims and making payments to securities customers, and, to the extent not inconsistent with SIPA, will utilize the procedures prescribed in the Commodity Broker Liquidation Provisions and the Part 190 Regulations for determining claims and making distributions to commodity futures customers, with the goal and full intention of making an interim distribution to customers, if feasible. General creditor claims will be treated in accordance with the Bankruptcy Code and SIPA.”

It is not clear what commodity liquidation provisions may not be consistent with SIPA, but an additional hold-up could have to do with what the trustee described as “the relatively poor state of the Debtor’s books.”

A member of the Commodity Customer Coalition saw the motion to expedite claims as bad news because “the trustee is lumping us together with other claims,” calling it “unacceptable” and saying it would further delay customers getting their money back.

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