The MF Global affiliate dance

In its motion, Sapere also requests a Bankruptcy Rule 2004 examination be ordered, which would allow broad discovery of all relevant documents related to MF Global and the trustee’s investigation.

The Commodity Customer Coalition (CCC) wrote the court in support of Sapere’s motion and in response to an objection to the motion by the MFGH trustee Louis Freeh. In it the CCC points out that two and a half months have passed and the trustee’s forensic accountants, government regulators and criminal investigators have failed to identify the cause of the shortfall. It also pointed out that a shortfall in customer funds, by definition, means the law has been violated. But despite this, according to a Wall Street Journal article, Federal prosecutors have not even interviewed the principals of MFGI and MFGH.

On Jan. 17 the SIPA trustee for MFGI submitted a statement on the Sapere motion, which states that if improper transfers of customer funds occurred between MFGI and MFGH the trustee would have a variety of causes of action including avoiding such transactions. The trustee, however, did not address the argument of whether MFGH should be viewed as an FCM, which would make such causes of action unnecessary as CEA priority rules would hold. A point made by Sapere in a follow-up reply on Jan. 18. It notes that a positive ruling on its motion would, "obviate the need for titan law firms representing MFGH and MFGI, respectively, to engage in battles with one another funded by “other people’s money,” i.e., at substantial cost to the estates of MFGH and MFGI."

The trustee also noted, “It must be recognized that MFGH appears to have limited, if any, assets available to compensate for potentially hundreds of millions of dollars of shortfalls in customer property.”
However, as of Oct. 31, the date of the default, MFGH listed debt of $39.7 billion and assets of $41 billion. The Sapere motion would mean that former MFGI customers would have priority over those assets.
The SIPA MFGI trustee noted regarding the discovery motion, “The SIPA trustee has a serious concern that additional and unnecessary discovery efforts by customers such as Sapere may disrupt or delay efforts to complete the statutorily-mandated SIPA trustee’s investigation.”

On this point the CCC stated in its letter, “Months of discovery conducted by the trustee have failed to shine a light on the location of missing customer property…there would be less burden placed on the estate should customers be allowed to take discovery, as customers are more properly incentivized to unearth the truth quickly that the trustee.”

Bankruptcy Judge Martin Glenn did not rule on the motion at a Jan. 19 hearing.

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