MF Global Friday: Follow the Money

From insurance funds to pay exec legal fees to payments authorized by the trustee, cash is moving.

Published on: Apr 13, 2012

This week a bankruptcy judge in New York ruled that former execs from MF Global could tap up to $30 million in insurance money to help pay for their defense against a range of lawsuits. The insurance fund, which could be valued as high as $375 million, is there to help compensate those who lost money when the firm misplaced $1.6 billion in customer cash.

In ruling on the access to the insurance, the judge - in a 32-page decision - says that the potential hardships that might be experienced by the executives was part of the decision. And he says the $30 million for defense costs was "appropriate."

Trustee May Sue MF Global Execs

WRANGLING FOR CASH: From insurance money for legal defense, to paying the trustee, the MF Global mess keeps rolling on.
WRANGLING FOR CASH: From insurance money for legal defense, to paying the trustee, the MF Global mess keeps rolling on.

James Giddens, trustee in the MF Global bankruptcy is considering a move to sue former execs for the busted brokerage, according to the New York Times. This is the first time Giddens has talked about efforts to recover money that goes beyond potential lawsuits against banks and clearinghouses that received customer money during MF Global's final days.

In a statement issued after a court hearing, the trustee noted that civil claims would center on accusations that MF Global employees breached their fiduciary duties to the firm and its customers. A lawsuit would also accuse certain employees of violating rules protecting customer money. Check out the whole story.

Trustee Considers Return of $685 Million

Customers impacted by the MF Global debacle may soon have access to a $685 million distribution, and that payment won't force those people to give up claims against unknown parties, or hold them to other undefined conditions. Those conditions have been a challenge for the bankruptcy judge ruling on the case.

The trustee has been under fire because of talk that to get the money victims would have to sign away further claims or opportunities to seek compensation in court. The planned distribution of moneys gathered from liquidating the company could give some customers as much as 80% of their lost cash back.

Commodity customers who traded on foreign exchanges would get their first payments of about $50 million, another $600 million would be headed to customers who traded on U.S. exchanges. Holders of physical assets including precious metals are in line to get about $35 million. The bankruptcy judge in the case has yet to rule on the final payout. Check out the story.

Questions About Trustee Fees…Just Wait

It looks like it will be June 8 before the trustee for the MF Global bankruptcy - James Giddens - will report fees and expenses to the court. that's a full eight months since the bankruptcy Oct. 31. According to a CNBC report, Giddens had originally gained court approval for a schedule for his firm to submit its first fee report in March or April, but the schedule has been revised to bring all lawyers and advisers in the case onto the same filing timetable.

The trustee's firm - Hughes Hubbard - is being compensated from the corporate estate of MF Global Inc., the company's broker-dealer unit. The estate is separate from assets deemed to be customer property. Trustee payments in a bankruptcy this size are often controversial. Currently the firm is being paid at about 85% of its fees, with the rest to paid after bankruptcy court approval.

Grain Group Weighs in on MF Global

The National Grain and Feed Association issued its preliminary recommendations for safeguarding the sanctity of customer funds in the wake of the bankruptcy. The group says its initial recommendations will help enhance reporting, transparency and accountability in handling customer funds, but they represent first steps that can and should be implemented quickly.

The recommendations including the following:

  • The CFTC should require daily reporting of segregated fund positions by futures commission merchants (FCMs) to both their Self-Regulatory Organization (SRO) and to the CFTC.
  • The CFTC should require daily reporting of segregated fund investments by FCMs, detailed by maturity and quality, to both their SRO and to the CFTC.
  • The CFTC should conduct a formal review of FCM investment options for customer funds, with a view as to whether the agency should further limit allowable investments only to very safe instruments.
  • The CFTC should require reporting by FCMs to their SRO and to the CFTC of significant changes in investment policies or holdings.
  • FCMs should be required to provide greater transparency to customers of where customer funds are invested, potentially achieved through such means as posting on the CFTC website, FCM websites and/or publication in customer prospectuses.
  • The CFTC and SROs should enhance monitoring of FCM reporting. Both sets of regulators should conduct more detailed and more frequent audits, as well as unannounced spot checks of FCMs.
  • To assign accountability and to aid in establishing that fraudulent activity has occurred in the event customer funds are misappropriated, the CFTC should require the signature of two authorized principals of an FCM, such as the chief executive officer, chief financial officer or other senior officers, to move funds out of segregated customer fund accounts to non-customer accounts.
  • FCMs should be required to provide immediate notice to their SRO and to the CFTC if the firm moves more than a specified percentage (to be determined by the CFTC) of excess segregated funds to non-customer accounts.
  • FCMs should be required by their SRO periodically to certify policies and procedures to ensure the safeguarding of customer-segregated accounts and compliance with applicable laws and regulations regarding such accounts. All SRO examinations should require principals of FCMs to certify that policies and procedures are adequate, effective and being observed by the FCM, the NGFA said. At least annually, SROs should be required by the CFTC to review policies and procedures to determine adequacy and compliance.
  • A rigorous review by the CFTC of capital requirements for FCMs and broker-dealers needs to be conducted, with a view to scrutinizing the current practice of allowing double-counting of required capital when a firm operates as both an FCM and a broker-dealer.