CFTC Backs MF Global Trustee’s $2.1 Billion Customer Payout

December 09, 2011, 12:25 PM EST By Linda Sandler and Tiffany Kary

(Updates with Freeh filing in eighth paragraph.)

Dec. 9 (Bloomberg) -- The Commodity Futures Trading Commission defended a planned $2.2 billion payout to U.S. commodity customers by the trustee liquidating the MF Global Inc. brokerage, saying customer claims take priority over all other claims.

The third transfer by trustee James Giddens, which a judge is considering in Manhattan bankruptcy court today, would give commodity customers about 72 percent of their assets, a lawyer for Giddens told the judge. Judge Martin Glenn received at least 18 formal objections and 43 letters questioning the move, including one from creditors of the parent company and one from the parent’s trustee, who said they also have claims on the brokerage.

“The claims of commodity customers must be satisfied in full before any portion of the MFGI estate may be used to satisfy the claims of general creditors,” the CFTC said in a court filing yesterday.

CME Group Inc., owner of the world’s largest futures exchange, will guarantee $550 million of the payment in case any customer gets more than a fair share of the brokerage’s assets, which by law must be split equally among customers, the CFTC said.

In the transfer, Giddens would pay out from 80 percent to 85 percent of all assets remaining in his control, keeping $800 million in reserve, according to court papers. Two previous payouts to commodity customers totaled about $2 billion.

CFTC Restrictions

CFTC regulators approved restrictions on how brokers can invest customer funds, after as much as $1.2 billion went missing before MF Global Holdings Ltd. filed for bankruptcy on Oct. 31. Jon Corzine, the defunct parent company’s former chief executive officer, said he “would never have intended” transfers from segregated accounts and had no knowledge of any such movements of funds until a day before the bankruptcy.

Giddens has transferred about 38,000 commodity accounts to other firms, and struck a deal to sell 330 securities accounts. Three transfers of collateral made and pending will give commodity customers about $4 billion of their assets, while the sale of securities accounts would give most smaller customers access to all their funds, according to court filings.

The trustee for the bankrupt parent faulted Giddens’s plan for the securities customers, saying they shouldn’t get the total net equity in their accounts. Because the brokerage is 100 percent-owned by the holding company, the equity in MF Global units is an asset of the bankrupt estate, wrote lawyers for the trustee, former Federal Bureau of Investigation director Louis Freeh.

‘Language Changes’

To deal with objections by commodity customers who haven’t yet received any money, Giddens said he “made some language changes” in a proposed order he will ask the judge to sign approving the transfer.

To satisfy administrators of MF Global’s U.K. and other foreign affiliates, who objected that the transfer might deplete funds available to pay them, Giddens would make future transfers based on available assets and not ask the judge to let him use his own discretion, he said in a filing this week.

“The trustee believes it would be more prudent, relieve uncertainty, and better inform the expectations of customers to make further bulk transfers, if any, only upon further motion and order of the court based on facts and circumstances and availability of property,” he said.

British Unit

MF Global UK Ltd. said Dec. 6 it has $250 million remaining in accounts at the MF Global brokerage, of which $230 million is in segregated commodity accounts for customers. The U.K. company hasn’t received any money from the trustee of the U.S. brokerage and isn’t in line to get any in the planned payout of $2.2 billion, the administrators of the bankrupt company said in a court filing.

The judge handling the MF Global brokerage liquidation in New York “must adequately protect” all former customers in any order he signs approving Giddens’s next transfer, they said.

Some customers faulted the transfer because it covered only U.S. customers. The brokerage trustee treats foreign futures customers “differently,” favoring U.S. clients, said RWA Raiffeisen Ware Austria AG, a cooperative agricultural group.

In the filing, Giddens said he excluded customers whose assets are held in foreign accounts “because virtually all of it is not under the trustee’s control, but rather under the control of MFGI’s foreign former affiliates,” which are being liquidated in their home countries.

What and When

RWA has asked Giddens what he is doing to recover the funds from administrators of the U.K. affiliate, and when he might return assets to these customers.

“We are urgently working on responses to all our objectors,” Kent Jarrell, a Giddens spokesman, said in an e- mail.

Creditors of the MF Global parent said Giddens is planning the distribution without explaining why he thinks the funds are customer property or verifying that the customers are entitled to receive the funds.

Paying the wrong people or paying out too much will hurt the bankrupt parent company’s estate, which has claims against the brokerage and owns its equity, MF Global Holdings creditors’ lawyer Martin Bienenstock said in a Dec. 5 court filing.

Segregated Funds

Including funds already distributed, Giddens controlled $4.9 billion in U.S. segregated commodity customer funds, CME said. It calculated that an additional $900 million in customer funds were traded on foreign exchanges, putting the total at about $5.8 billion. Previous estimates put the segregated accounts at about $5.4 billion.

A $1.2 billion shortfall would mean more than 20 percent of commodity customers’ segregated assets are missing.

CME said the creditors committee in the holding company’s bankruptcy doesn’t have the legal right to object to the trustee’s distributions.

The parent company’s Oct. 31 bankruptcy filing, the eighth- largest in U.S. history, listed assets of $41 billion. Corzine, the former co-chief executive officer of Goldman Sachs Group Inc., quit as MF Global’s CEO on Nov. 4.

The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--With assistance from Tiffany Kary in New York. Editors: Stephen Farr, Andrew Dunn

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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