MF Global debacle grows more outrageous

We have pointed out on several occasions how the original sin in the MF Global debacle is how the firm was allowed to be split — the futures commission merchant/broker dealer (FCM/BD) MF Global Inc. (MFGI) into a SIPC liquidation and the parent MF Global Holdings Ltd. (MFGH) into a Chapter 11 proceeding — with a shortfall in customer segregated accounts.

It has been pointed out that this was aided by an attorney for MFGH telling a whopper to Bankruptcy Judge Martin Glenn at the initial hearing on Nov. 1.  Attorney Kenneth Ziman of Skadden Arps when asked about press reports of a shortfall told the judge, “I think, to the best knowledge of management, there are no shortfalls, Your Honor. All funds are accounted for, and I’m talking about the broker-dealer. That’s to the best knowledge. All funds can be accounted for.”

No one seemed to jump in to correct the record even though attorneys for the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) attended that hearing and Laurie Ferber, General Counsel for MF Global, acknowledged the day before that indeed there was a shortfall in customer funds.

The Judge asked about this specifically so there is a chance he may have acted differently if he was given an honest answer.

Several interested parties have stated that the appropriate action — one perhaps more likely to have occurred had the facts of the situation been clearly presented — was for a judge to place the entire entity in receivership. A receiver would have more power to pursue leads and claw back money and perhaps more importantly, a company that operated as one entity would not have been able to divorce itself from its responsibility of having to segregate customer funds and the priority of those customers’ property over general creditors would have been maintained. That is what happened in this case with MFGH and its main creditor JP Morgan attempted to jump in front of customers.

Why is this important now? Tyler Durden of connected some interesting dots in a blog post today titled: Four Bullet Points Explaining How JPMorgan Doubled Its Money from MF Global's Corpse in Seven Months.

In it he points out how JP Morgan purchased a stake in the London Metals Exchange (LME) from MF Global’s UK affiliate, on Nov. 23, several weeks after the parent filed Chapter 11. KPMG, the administrator for MF Global UK, executed the sale. This is the unit currently being sued by MFGI Trustee James Giddens for approximately $700 million in customer part 30.7 secured funds believed to be held in the UK.

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