MF Global Clients May Lose in $700M Fight
By Kit Chellel – Jan 26, 2012 5:22 AM ET
MF Global (MFGLQ) Holding Ltd.’s clients may be the losers no matter who wins a $700 million dispute between bankruptcy administrators in London and New York that threatens the return of money locked in customer accounts.
The trustee of MF Global Inc., the New York brokerage unit, is seeking the return of money used as margin for American customers trading in Europe. It wants U.K. administrators KPMG LLP to tap into $1.2 billion it had set aside for customers with segregated accounts, which are supposed to be protected.
MF Global Inc. trustee James Giddens “is prepared to use all legal avenues available to him in recovering the customer funds, including litigation,” Kent Jarrell, a spokesman for Giddens, said in an e-mailed statement.
If successful, the trustee’s claim would significantly reduce KPMG’s client money pool and lower returns for U.K. customers, said two people with knowledge of the discussions who declined to be identified because they are confidential. Should KPMG win, U.S. customers will be treated as unsecured creditors and face a lengthy wait for any payout.
MF Global filed the fifth-largest bankruptcy for a financial company Oct. 31 after placing losing bets on European debt.
“There appears to be continuing uncertainty over the $700 million claimed as client money by the U.S. trustee,” said Sean Donovan-Smith, an attorney at Speechly Bircham LLP in London who represents clients and creditors of MF Global’s U.K. unit. “Some of our clients are worried that this could impact the client money claims that have been made and they would like to see this addressed as soon as possible.”
A dispute over client money held by Lehman Brothers International Europe is still being fought out in U.K. courts more than three years after the bank collapsed.
KPMG was appointed special administrator of MF Global’s U.K. unit on Oct. 31. While KPMG has found all the money in protected accounts, MF Global Inc.’s claim is the first serious threat to the return of customer funds in the U.K.
“We are aware of the trustee’s claim on the client money pool,” KPMG administrator Richard Heis said in a statement. “We do not agree with it but will continue to work constructively with his team to bring about an early resolution of the matter.”
In the U.S. bankruptcy, trustees said as much as $1.2 billion is missing from segregated accounts. Jon S. Corzine, MF Global’s former chief executive officer, has apologized to customers and employees affected by the collapse.
KPMG was forced to set aside funds pending the resolution of the dispute, which means it can’t return the majority of money it has recovered to customers, people with knowledge of the matter said. It wants the $700 million to be treated as an unsecured claim, which would be paid after clients get reimbursed from the customer money pool.
“The Trustee strongly believes these funds were segregated for U.S. customers who traded on foreign exchanges and, thus, should be returned to those customers,” Jarrell said. Giddens has hired law firm Slaughter and May to handle the dispute, according to New York court documents.
Giddens told the New York court last month the dispute would “significantly affect, in the near term, my ability to return a substantial amount to U.S. customers dealing in foreign futures.”
Around $1.2 billion of U.K. customer money was frozen in segregated accounts at external banks when MF Global collapsed. More than 1 billion pounds ($1.57 billion) was held in unsegregated accounts, which lack special protection. Those with unsegregated funds are being treated as unsecured creditors, KPMG said at a Jan. 9 creditors meeting.
“The regulators failed to make certain that segregated funds couldn’t be moved without authorization from someone independent of MF Global,” said Douglas Makepeace of New York-based Sperry Fund Management, which had money in a segregated U.K. client account. “Once the money is gone, litigation is a poor remedy, with no certainty of recovery.”
KPMG, which has yet to return any money, has said it will make an initial payment to segregated account holders soon after a London court hearing scheduled for Feb. 3. The firm posted a document on its website last week explaining its treatment of customer funds and how it has accumulated fees of 14 million pounds in three months of working on the administration.
Regulators in the U.S are investigating whether MF Global Holdings Ltd. intentionally used customer funds to cover the bankrupt firm’s margin payments on European government bond trades, according to people with knowledge of the probe.
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 company’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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