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.
The motion states, “The Trustee envisions including the distribution of physical assets (warehouse receipts, precious metal certificates and the like) with this third bulk transfer; however, the books and records of MFGI related to the physical assets are not yet in a position to guarantee that the pro rata distribution of physical assets will take place at the same time as liquid assets.”
It is hard to know how the trustee would distribute two thirds of a certificate, let alone a gold bar. It is unclear whether the value of those physical holdings have been included in the trustee’s calculation. If it is, it could explain the anomaly and why the trustee estimates the shortfall to be larger than first reported. However, the certificates according to Schneider, are simply an entry on a statement with a listed value of zero.
The bulk transfer would “true-up” the distribution to all customers according to the trustee. The first transfer moved positions and roughly 60% of the customer margin capital. The second transfer provided “cash only” customers who had no positions on Oct. 31, and thus received none of their cash, a 60% distribution.
Left out were customers who had only marginal positions and were mostly in cash. It also left out so called “Trade to Zero Accounts,” which were accounts that liquidated positions after the filing when MFGI was placed on liquidation only. Also receiving funds would be customers that attempted to liquidate their accounts in the days preceding the bankruptcy only to have MFGI check bounced.