Trustee to increase distribution; questions persist

Former MF Global customers got a bit of good news Tuesday as the liquidation trustee announced it would increase the size of the customer funds it would return as part of a third bulk distribution to $2.1 billion.

However, confusion over the size of the segregated fund shortfall and what assets have been secured persist. The trustee calculates that the distribution, once complete, would bring the amount of customer funds returned to 66%. The Commodity Customer Coalition (CCC) applauded the move but stated that customer would receive 75% of their funds.

The motion provided hints as to the anomaly between what the trustee claims to have secured and the size of the shortfall, and it may not be good news for former MFGI customers.

Two classes of customers could partially explain the anomaly. Many customers sought to liquidate their accounts as MFGI was nearing the edge received checks that subsequently bounced. Their account had reflected a transfer so they did not receive a distribution in the cash only bulk transfer.

The timing of this seems highly inefficient, but worse if the MFGI records—notoriously poor—reflected money was transferred, then the denominator (the size of funds that should have been segregated on Oct. 31) is low and the shortfall could be as large as the trustee has suggested.

Another class of former MF Global customer held warehouse receipts and precious metal certificates of physical holdings, which have been frozen. One such customer, Paul Schneider, argues that the trustee has no right to this. “It is my unique property held by a third party,” he says.

Trace Schmeltz, partner at Barnes & Thornburg and an attorney for the CCC, indicated that because such physical holdings constitute customer property, it is being held in lieu of distribution and cannot be returned to its owners in total as long as there is a shortfall because the law calls for a pro rata distribution. Schmeltz suggested that one solution for those former customers holding physical assets is that they be made a separate class.

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