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MF Global: Where’s the money?

The MF Global debacle has many interesting angles and has taken on a variety of conspiracy theories, though none really are necessary. At the end of the day, what we are talking about is theft, as National Futures Association President and CEO Dan Roth simply put it.

That leaves us with “who did it, how much was taken, where did it go, will it be returned and when?” And considering we are a full year into this, how much is the bankruptcy process with two separate and competing trustees costing, and who will pay? 

When MF Global failed to sell its brokerage unit, it was thrust into bankruptcy on All Hallows Eve, Oct. 31, 2011. No surprise because we learned in the week preceding that the firm was under great monetary stress and those more intimately in the know had been pulling money out in the preceding months (see “Is there a problem?”). 

The surprise was the “why,” because it was reported that an approximate $700 million shortfall in MF Global customer segregated funds is what killed a potential sale to Interactive Brokers. This brought the specter of possible fraud into the mix and complicated what had been, in the past, a relatively routine procedure of transferring accounts and customer money from a failing firm to a healthy one. 

Adding to the complexity was the structure in which MF Global Holdings Ltd. (Holdings) filed Chapter 11 and MF Global Inc. (Brokerage) was placed in a Securities Investor Protection Corp. (SIPC) liquidation with James Giddens appointed as trustee. 

Many interested industry parties have argued that this is where the entire mess broke down because MF Global had operated as one entity and should not have been allowed to be separated (see “MF Global’s original sin,” page 26). Attorneys for Sapere Wealth Management had filed a suit with the bankruptcy court to force Holdings and the brokerage into one Chapter 7 liquidation with Commodity Exchange Act futures customer priority rules unequivocally enforced. The Commodity Customer Coalition (CCC) also had argued for this. Alas, Sapere was defeated and the CCC did not pursue further legal action in this regard. 

On Nov. 2,  CME Group further defined the shortfall as $633 million or 11.6% of MF Global segregated funds. Giddens, with the help of CME Group, moved to transfer positions and margin money held at CME Clearing to futures commission merchants. This began immediately after his appointment, and within a week approximately 14,500 accounts were transferred along with $1.55 billion in margin, representing 60% of the customer margin held by the CME Group clearinghouse (see “Customer money ebbs back,” below).

Click to enlarge.

CCC steps in

Once the initial transfers occurred, Giddens indicated a formal claims process would follow. Former customers became concerned that they would not see their money for months. 

John Roe, co-founder of the CCC, says, “We had a long chat [with an attorney for the trustee] and he said ‘we are probably going to start to make distributions by June 2012’ and that is when this whole thing started for us and caused enough noise and got enough people whipped up.”

Customers who thought their funds were segregated and safe were indeed upset and the CCC, which unsuccessfully attempted to be named to the creditors’ committee to represent customer interest, did manage to get a seat at the table and urged the trustee to make more timely distributions. 

Customers who had all their money in cash got nothing and were angry. The trustee, realizing this was a new ball game, pledged to make several interim bulk distributions. The first would go to those customers all in cash and CME Group initially pledged $300 million, later bumped up to $550 million, to help expedite those distributions. On Nov. 17, MF Global Bankruptcy Judge Martin Glenn approved the bulk transfer of approximately $520 million to those 23,300 customer accounts all in cash

While a large step, it also angered many customers with large accounts that had minimal positions. Jason Skole fully funded a commodity trading advisor investment to the tune of $200,000 and had only a few grain positions on. He received 4% of his money when his positions transferred and nothing in the cash account bulk distribution. Lee Lowell had one cotton call with a value of $5 that was about to expire worthless in a $19,000 account; he would receive nothing. 

Pressure was mounting from the CCC, who wanted all available money released, and Giddens pledged another bulk distribution that would true up all futures customers to 60%. However, as he was making this announcement, he also revealed that the shortfall was much larger than the reported $633 million — $1.2 billion or more. Despite this he later was able to expand this distribution so that customers who had segregated accounts (known as 4d) would receive 72% of their money. 

Roe says, “We can’t take all the credit for this, but we were part of a process that helped move that needle from starting to make distributions in June 2012 to 72% for 4d [U.S. seg funds] by Christmas.” 

But there was an added complication as shortly after Giddens announced the third bulk distribution, a trustee for MF Global Holdings, Louis Freeh, was appointed who would challenge this distribution as well assumptions of customer priority. 

This would end the relatively speedy recovery of customer money and enter the more formal claims process.

In the meantime Giddens would find more assets and acknowledge that customer assets held in the United Kingdom (Part 30.7 secured funds) would not be so easy to secure. As we moved into 2012, Giddens officially placed the $700 million in customer funds held at the MF Global U.K. affiliate in the shortfall column, upping it to $1.6 billion, and would pursue litigation. 

Giddens has been in discussions with JPMorgan, the largest creditor of MF Global, since the start and managed to get some funds returned but is still pursuing the matter. In August testimony before the Senate Ag committee, Giddens noted that to date JPMorgan has returned $89.2 million in customer property, $518.4 million in non-segregated unallocated MF Global Inc. assets subject to reservations, which include the $168.1 million in proceeds of excess collateral JPMorgan held when the brokerage went into liquidation. 

In addition, Giddens is having discussions with JPMorgan regarding other transfers that could be returned to the broker. Trustee spokesman Kent Jarrell notes, “The Trustee is engaged in active discussions with JPMorgan with respect to those transfers described in the trustee’s investigation report, some of which the trustee believes potentially may be voidable or otherwise recoverable. The negotiations are active, encouraging and continuing.”

The money in question, including the $175 million transfer to London that JPMorgan asked to be given assurance was lawful, totals $475 million. 

The trial in the U.K. litigation has been set for April 2013, but Giddens still is working on a settlement according to Jarrell. “The Trustee continues to engage in productive discussions with the Joint Special Administrators for MF Global UK Ltd. Litigation is progressing to resolve the dispute as to whether the customer property that is the subject of the Trustee’s approximately $700 million client claim was or should have been segregated under English law.”

In March 2012 an agreement was reached for the first interim distribution of approximately $650 million that brought 4d customers up to 80% and provided a 5% distribution to customers with overseas (30.7 secured) funds. 

This brings us back to the August Senate hearings. Giddens reported that 4d customers had received $4.7 billion, 80%, of their assets and that he has more than $1 billion on hand, though that is not segregated assets. Freeh offered that commodity customers soon would be made whole, but may not be helping the matter by filing $2.3 billion in claims against the brokerage. Giddens only would commit to customers getting 90% of their assets. 

“There is enough money that has been marshaled by Giddens to get the U.S. customers back to 100%, and it looks like there are going to be some favorable decisions in the (U.K.) case so we are talking about money for general creditors of [Brokerage],” Roe says. “The unallocated funds that Giddens has that he is reserving are against claims that Freeh has made against the estate. The money is there, he has to clear all the litigation before he can release it.”

Perhaps more controversial than disputes over certain funds is the difference as it pertains to officers of MF Global, many of whom are still employed by the firm under Freeh’s direction. In his August report Giddens states, “There are colorable claims, including claims for breach of fiduciary duty and negligence, against former MF Global CEO Jon Corzine, former MF Global CFO Henri Steenkamp and former MF Global Assistant Treasurer Edith O’Brien, among others.”

Giddens has agreed to cooperate with class action lawsuits filed against these officers and will provide the claims structure to distribute any awards from those suits. Steenkamp still is listed as chief financial officer and has signed off on Holdings financial statements. 

So to answer our original questions, the “who” is MF Global officers and, while intent is hard to prove, it is difficult to deny negligence on the part of all senior officials. The amount taken was $900 million, with another $700 million stuck in the UK; most was transferred to creditors like JPMorgan to cover margin on overleveraged trades; 80% of 4d money has been returned with a likelihood those accounts will be made whole; secured funds will depend on the U.K. litigation in 2013.  

Roe reports that the distressed debt market on non-secured claims is bidding 30¢, which indicates some introducing brokers and other non-secured creditors of the brokerage will get some money back. 

Giddens has received approval for fees of primary counsel through February 2012 totaling approximately $17 million. Another $1.9 million in outside counsel fees have been approved. 

Freeh has submitted fees of approximately $35 million for services through July 2012. 

Giddens notes that no fees or expenses associated with the liquidation proceeding are being paid for out of customer funds.

Futures trader and MF Global victim Lowell says he is more careful now and keeps just enough money to cover the small trades he makes.  “The trustee has done a good job working for us,” Lowell says, “But it was truly the work of James Koutoulas with the CCC that really kept us in the spotlight.  He and the rest of the team have done wonders for commodity traders as far as keeping the pressure on and helping us get back the 80% so far.”

So as we approach the one-year mark chances for customer being made whole, at least 4d customers, look good. But the process has been a long, difficult one. 

In the world of futures trading when customers can face margin calls twice a day, waiting for more than a year to get your money — money you were assured was safely segregated by your introducing broker, clearing broker, futures exchange, industry regulator, industry trade groups and Futures magazine — is wrong and requires more than new rules. It requires someone to pay.

The MF Global debacle has many interesting angles and has taken on a variety of conspiracy theories, though none really are necessary. At the end of the day, what we are talking about is theft, as National Futures Association President and CEO Dan Roth simply put it.

That leaves us with “who did it, how much was taken, where did it go, will it be returned and when?” And considering we are a full year into this, how much is the bankruptcy process with two separate and competing trustees costing, and who will pay?

When MF Global failed to sell its brokerage unit, it was thrust into bankruptcy on All Hallows Eve, Oct. 31, 2011. No surprise because we learned in the week preceding that the firm was under great monetary stress and those more intimately in the know had been pulling money out in the preceding months

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