Double trouble for former MFGI customers

Three weeks after the MF Global bankruptcy was announced, James W. Giddens, Securities Investor Protection Corporation (SIPC)appointed trustee for the MFGI liquidation, dropped a bomb on MF Global customers, announcing that the apparent shortfall in customer segregated funds could be double or more than what has been widely reported since the bankruptcy filing three weeks prior. He pegged the figure at $1.2 billion or more.

In today’s shocking announcement the trustee stated that “his current plan to distribute 60% of what should have been segregated in U.S. depositories for all former customers with U.S. futures positions will total nearly all of the assets currently under his control.”

Yesterday the trustee announced plans for a third disbursement of customer funds that would bring the total of funds returned to customers to 60%. The first transfer included customer positions and 60% of the margin used to hold those positions. Late last week the trustee announced that he would disburse 60% of capital help in so called “cash only” accounts of former MFGI customers.

Today’s announcement led U.S. Senator Pat Roberts (Rep-Kan.) to reiterate his call for a special hearing of the Senate Ag committee to examine the MF Global bankruptcy. “Given the startling announcement today that even more client funds are unaccounted for, it is even more important that we have a hearing focusing solely on MF Global in order to learn what went wrong,” Roberts said in a release. “Investors, farmers, ranchers and agribusinesses all over the country, including many Kansans, want their money back and they want answers.”

Senator Roberts also said former MF Global Chairman and CEO Jon Corzine, the Commodities Futures Trading Commission (CFTC) and CME Group should testify before the Committee.

A spokesman for CME Group provided the following statement on today’s news, “We can’t comment on the specifics but we are working with the CFTC, the bankruptcy trustee and other regulatory authorities in their investigations to determine the facts concerning any shortfall in customer funds at MF Global.”

Last week as the process dragged on and the trustee came under increased pressure by organized groups of former MF Global customers, the trustee announced an expedited claims process and was ordered by bankruptcy judge Martin Glenn to meet with customer groups. Prior to this the trustee was planning one large claims process for the funds not returned in the initial bulk transfer completed earlier this month.

Many groups chose to communicate directly with the judge Glenn, bypassing trustee Giddens, in their demands that all segregated money not missing — estimated to be approximately 88% of total customer funds — be returned immediately to customers. In response, the trustee stressed that it did not know the size of the shortfall despite being more than two weeks in the process. In a report on Nov. 15, the trustee wrote, “While former management of MF Global Inc. reported a shortfall of approximately $600 million to regulators on Oct. 31, 2011… The amount of the apparent shortfall is not known at this time.”

The trustee has also raised the ire of former MF Global customers by filing a motion seeking authority to charge a service fee for returning so called “misdirected transfers.” The motion stated “The Trustee seeks authorization to charge a service fee for effectuating all returns, equal to 1% of the return amount up to a maximum surcharge of $5,000 per return. The Trustee seeks authority, in his discretion, to waive such surcharge in appropriate situations.”

Many customers saw this as a form of double dipping as the trustee is already charging a hefty fee for his services. The trustee has also faced claims it has a potential conflict of interest as his firm, Hughes Hubbard & Reed LLP, lists substantial business dealings on its website with JP Morgan, which is on the creditors committee of the bankruptcy and has filed a lien on the estate. Early in the process it was reported that missing funds were discovered at JP Morgan but that was later refuted. The trustee noted in a statement that it “will closely examine accounts at JPMorgan Chase & Co.”

Trace Schmeltz, partner with Barnes & Thornburg and co-counsel for the Commodity Customer Coalition (CCC) says there is no question that numerous banks dealing with MF Global were getting cash transferred from MF Global. “The banks were getting cash, the question is why and under what circumstances did the funds get moved and what did banks understand when the funds were moved.”

He expects things to get more complicated after consulting with counsel for the trustee. Schmeltz says a big problem is massive redemptions from customers just prior to the bankruptcy but attributes a lot of the problem to the trustee’s lack of knowledge regarding the futures industry. He says, “If they had [understood futures better] they wouldn’t have taken live positions sent them out to new FCMs and then transferred only 60% of the margin required for those accounts.”

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