MF Global trustee can distribute 100% of customer funds

MF Global Inc.’s trustee will get court approval to complete distributions to former customers of the failed brokerage, allowing all missing funds to be returned by the end of the year.

U.S. Bankruptcy Judge Martin Glenn said today he’s prepared to approve a plan to make the final determination of what 26,000 former customers are owed and distribute the money to them. The motion will ensure customers are paid by Dec. 31, satisfying all claims more than two years after the brokerage failed.

‘That’s quite an accomplishment,’’ Glenn said at a hearing in Manhattan. At the outset of the case, nobody thought that customers would recover everything they lost, he said.

MF Global Holdings Ltd., the brokerage’s parent company, filed for bankruptcy on Oct. 31, 2011, after a wrong-way $6.3 billion bet on bonds of some of Europe’s most indebted nations. The company listed assets of $41 billion and debts of $39.7 billion. More than $1.6 billion in customer funds that should have been segregated were missing.

The trustee, James Giddens, marshaled more than $5.3 billion in assets from MF Global’s former exchanges and depositaries, which he said were clearly customer property. He has already made interim distributions to customers. The final distributions will require him to advance funds from the company’s general bankruptcy estate.

General Creditors

Determining what customers are owed will establish the size of the estate for general creditors, allowing them to be repaid as well, Giddens told Glenn, adding that $3 billion in customer claims have yet to be resolved.

James Kobak, a lawyer for Giddens, said there is only $837 million in the general estate, and he hopes the amount will be “fortified” by further recoveries. The only potential source of more recoveries is a lawsuit brought by customers that claims mismanagement led to its downfall.

Giddens’s request to distribute 100% of what customers are owed had support from the U.S. Commodity Futures Trading Commission and representatives of the ex-customers who sued MF Global’s former managers.

The defendants in that case, including former auditor PricewaterhouseCoopers LLP, ex-New Jersey Governor and onetime Goldman Sachs Group Inc. Co-Chairman Jon Corzine, and senior executives Bradley Abelow and Henri Steenkamp, objected to the distributions.

Shortfall Finding

The distributions will improperly allow Giddens to assign funds that could be part of general creditors’ estate and require the court to find that there is a shortfall in the customers’ estate of at least $632 million, lawyers for PwC and the defendants said in court papers.

Glenn said Corzine and others can make what arguments they want before a district court judge, and he didn’t want to delay customer distributions.

The CFTC has said that PwC, Corzine and the other defendants shouldn’t be able to use money that would flow to creditors to cover the damages they caused to former customers. The defendants ’ objection relies on a misinterpretation of CFTC rules that would allow them to indemnify themselves against such damages using assets that belong to general creditors, the CFTC said in court papers.

The holding company’s Chapter 11 case is In re MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The liquidation of the broker is In re MF Global Inc., 11-bk-02790, in the same court.

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