MF Global customers lose another round

January 31, 2012 06:00 PM

Today, U.S. Bankruptcy JudgeMartin Glenn ruled against the “Sapere Motion” in the MF Global Holdings Ltd. (MFGH) bankruptcy proceeding, which would have administered the case pursuant to Commodity Exchange Act bankruptcy rules and given MF Global Inc. (MFGI) customer segregated accounts first priority over the Chapter 11 (MFGH) creditors.

The judge also ruled against the alternative relief Sapere sought under Rule 2004 of the Federal Rules of Bankruptcy Procedure, which would have granted broad discovery rights to conduct examinations of any party-in-interest relating to the relevant facts.

The ruling strikes a blow against MFGI customers as it would have treated the Chapter 11 debtors(MFGH) as a future commission merchant and follow futures industry priority rules.

John Roe, co-founder of the Commodity Customer Coalition (CCC), that supported the Sapere motion, was not surprised by the ruling but still holds out hope that the judge will support their request that “Customers’ first-priority right must follow customer funds to each and every entity to or through which customer funds flowed.”

While the MFGI trustee has indicated that they could pursue funds transferred out of customer segregation at MFGH and other entities, Roe says the trustee has fallen short of actively pursuing this. “Our motion says the judge should order the trustee to go after any funds that can be tracked. [It says] priority rights follow customer funds wherever they were transferred,” Roe says, adding, that wherever those customer funds go, the entity holding them becomes a custodian of customer funds and “that protection goes with it.”

Roe expects the CCC’s motion to be delayed but believes the judge will eventually rule in their favor . “The whole process seems to be designed to strip people of their will to pursue their money.”

While Judge Glenn ruled against Sapere, the opinion holds out hope that MFGI customers can pursue recovery of funds in the Chapter 11 debtors estate (MFGH) . “It is important to emphasize that the denial of Sapere’s Motion does not determine the rules that apply to distributions from the Chapter 11 Debtors’ estates to MFGI customers. Notably, the CFTC has argued that, ‘property that should have been segregated, but was not, or as to which segregation was not maintained, remains customer property subject to priority distribution.’”

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.