Reading the recently released report “First Report of Louis J. Freeh, Chapter 11 Trustee of MF Global Holdings Ltd. , et al” you can see a battle brewing between the two MF Global trustees. Freeh was appointed trustee for the Chapter 11 proceeding on Nov. 21 while James Giddens was appointed trustee of MF Global Inc. immediately following the Oct. 31 bankruptcy filing to liquidate (chapter 7) the Futures commission merchant (FCM)/broker dealer.
That Giddens’ mandate is to secure and return as much of the missing customer funds as possible and Freeh’s mandate is to “reorganize and/or liquidate the debtors’ assets for the benefit of the debtor’ estate, their creditors and other stakeholders,” creates a natural conflict (one borne from huge errors in how the bankruptcy was allowed to be structured) but you can also see something odd in the way the different units are being decoupled. To read the Freeh report you would think that MF Global Holdings and HF Global Inc. were separate entities in more than just a legal sense. That somehow MFGI made poor decisions that has cost MFGH and consequently its creditors a lot of money, which they want back.
It is the height of dishonesty in that there was one Chairman and CEO, one person directing the trading activities that put the entire entity at risk, one person’s activities that had to be justified through convoluted accounting practices and a confusing array of money transfers in the closing days. The person is the former Chairman and CEO Jon Corzine. He is the one who built up the $6.3 billion foreign sovereign debt position and had a chief risk officer removed for questioning those positions.
There have been a lot of recommendations made regarding the MF Global debacle but going through this report as well as the Giddens report, another comes to mind. That is there has to be some restrictions on the creation of so many “so called” legal entities, some regulated some unregulated, being created inside what to the world is one company. It appears from this—and, by the way, several other fraud cases— that these multiple separate entities are created to allow the movement of monies to take advantage of dubious legal distinctions and create loopholes and perhaps avert regulations.
This becomes comical in this case where trustees are tossing around accusations against various entities that while a going concern, worked as one business with one leader.
This highlights the original sin of the MF Global saga, which is the fact that the parent was allowed to go into Chapter 11 with a hole in customer funds and continue to operate while the business end was put in liquidation.
As the legal claims fly, it is important to make a few things clear. MF Global acted as one entity whose main line of business was as an FCM and broker dealer. As such it held customer funds to back those customers’ trading positions. Those funds were required to be segregated from firm assets. The firm is allowed to earn interest on those funds through certain investments but must back it with equivalent collateral 100% of the time. MF Global was also a public company with shareholders, bondholders and other creditors. A customer with funds protected under segregation rules is very different from a creditor who loaned money or purchased a stake in a public company.
The violation of segregation of customer funds violated the Commodity Exchange Act and can arguably be classified as a crime. You don’t allow those responsible to carry on with a Chapter 11 reorganization when the vast majority of their customers have been cut off from their own money that was legally required to be segregated from firm assets.
Shame on the Judge that allowed this. From the start the Commodity Futures Trading Commission (CFTC), Securities and Exchange Commmission (SEC), CME Group and yes Justice Department should have been there to say this is one company that needs to be put in receivership to find out what happened to customer money. It was a mistake for the court to allow it and a breach of responsibility, chiefly by the CFTC, to not aggressively fight it.