The MF Global affiliate dance

With the MF Global debacle dragging on near three months and customers still not close to being made whole, some customers are demanding to lift the legal veil separating the so called Futures Commission Merchant (FCM), MF Global Inc. (MFGI), from its parent (and other legal entities), MF Global Holdings Ltd. (MFGH).

On Jan. 5 Sapere Wealth Management LLC, Granite Asset Management and Sapere CTA Fund L.P. filed an expedited motion with the bankruptcy court to, in essence, put all MF Global entities into one bucket for the purpose of the liquidation. They are asking for the bankruptcy trustee to administer the debtors’ estate pursuant to 11 U.S.C. §§ 761-767 and 17 C.F.R. § 190.

John J. Witmeyer III of Ford Marrin Esposito Witmeyer & Gleser, attorney for Sapere noted, “ if the motion were to be granted, the CFTC’s customer-priority rules— that give commodities customers’ segregated accounts priority over all other creditors – would apply to the assets of MF Global Holdings, Ltd., in addition to the assets of MF Global, Inc.”

While lawyers for the Securities Investors Protection Corporation (SIPC) liquidating trustee hinted that they could go after assets in the holding company to try and recover the missing segregated funds of the FCM in response to a motion by the MFGH Creditors Committee to delay the third bulk distribution to customers, this motion would basically say that MFGH is also part of the FCM and Commodity Exchange Act bankruptcy priority rules hold.

“This would place the return of funds to commodities customers ahead of repayment to banks and financial institutions that dealt with MF Global Holdings, Ltd.,” Witmeyer says.

The Sapere motion argues that the “debtor (MFGH) exercised dominion and control over MFGI, doing so for the parent’s benefit and over the segregated-account funds of commodities customers who dealt with the business unit…” It adds that by accessing funds of the commodity customers segregated accounts, the parent became a de facto FCM.

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