Anger mounts as MF Global clients see $3 billion still stuck

NEW YORK Sun Nov 20, 2011 7:55pm EST

People walk through the office complex where MF Global Holdings Ltd have an office on 52nd Street in midtown Manhattan New York, October 31, 2011.  REUTERS/Brendan McDermid

People walk through the office complex where MF Global Holdings Ltd have an office on 52nd Street in midtown Manhattan New York, October 31, 2011.

Credit: Reuters/Brendan McDermid

NEW YORK (Reuters) - Three weeks after MF Global's collapsed, furious former customers are still fighting for access to billions of dollars as they question why as much as two-thirds of their money is still stuck.

While authorities have touted the fact that they are returning 60 percent of the collateral and cash that had been frozen in the wake of the broker's October 31 bankruptcy, a closer look shows that in fact only about 40 percent of customers' total funds have been authorized for release so far.

The remainder, more than $3 billion, ostensibly remains on hand to cover a shortfall originally estimated by MF Global to regulators at just $600 million.

Because the bankruptcy trustee, regulators and exchanges have made no comment on the missing funds in weeks -- and have given no information as to how much cash they are retaining -- customers are left guessing exactly how much might end up in the creditors' process of the bankruptcy.

After weeks of intense lobbying by customers and exchanges, trustee James Giddens last week won court approval to release another $520 million in funds from MF Global accounts that contained only cash as of October 31.

But that has still left thousands of customers in an uproar. Clients who had a mix of cash and trading positions have yet to see a dime of their excess funds, they say. The trustee is planning a third cash transfer to cover these clients, but no timing for that tranche has been announced.

"The whole process is a mess," said Jason Skole, a private investor who had invested $200,000 at the start of this year in a small hedge fund who traded through MF Global.

"Those who had just cash positions will get some of their money. All I've got is 60 percent of the small amount of collateral I had backing trades," he said. He says around $185,000 of his money is still frozen at the bankrupt firm.

Giddens said late last week that they were working on a third bulk transfer to "true up" the value of distributions so that all former customers get the total 60 percent of their net equity, but they weren't yet confident enough in MF Global's bookkeeping and cash on hand to go beyond that.

"We've seen enough (money) to make the 60 percent distributions but we can't distribute money we don't have," Giddens' spokesman Kent Jarrell told Reuters on Sunday.

"As soon as we identify assets under our control, we are trying to distribute them. And we can't get ahead of that because then we can run out of assets.... We have to find the assets and we have to make sure we have to control those assets. It's a time consuming, complex task and we have hundreds of people working on it on our end now."

CME Group referred all questions to the trustee.

MONEY TRAIL

The tale of the customer's funds goes like this. On October 31, exchange operator CME Group estimated in a court filing that there was a "requirement" of some $5.5 billion in segregated customer funds -- including, presumably, the missing funds that could not be immediately located.

Over the following weeks, while authorities poured over sloppy and haphazard records, the trustee identified two pools of money that could be partly returned to customers.

The first was $2.5 billion in collateral that was being used as margin to cover existing trades. Those trading positions were transferred to new brokers along with 60 percent of the value of the collateral, or about $1.55 billion.

The second was $869 million that was left in MF Global accounts that contained nothing but cash -- either because customers had liquidated all their trades before October 31, or because they simply had no positions open as it failed. The bankruptcy court ruled last week that those account holders would also get back 60 percent, or about $520 million.

Those two pools of funds only account for about $3.4 billion of the original total $5.5 billion. The customers whose accounts hold that remaining $2-plus billion have never been explicitly identified, or told when they will get their funds.

"We have the $520 million to do distribution of cash accounts. And we knew we had the assets to distribute on the first one around. Now we also feel confident we have enough to true up. What we don't know is what we'll have beyond that," said Jarrell.

It's clear that some cash is being held back in order to cover the missing money that regulators say MF Global may have taken from customer accounts, an unprecedented violation of one of the fundamental tenets of commodity brokers.

What has not been clear is why officials have declined to be more specific about how much money they believe should be in those accounts, regardless of what is missing.

"...The Trustee should publish a report showing how much funds have been accounted for, how much has been distributed and how much he is still holding," said Ronald Filler, director of the Center on Financial Services Law at New York Law School.

"Once the accounting nears completion, one would hope that another 20 percent or more will soon be distributed, leaving an adequate amount to cushion any shortfall. If the Trustee holds on to the remaining 40 percent without explanation, then one could possibly presume that the shortfall may be greater than $600 million. Let's hope not."

One answer became clearer on Friday: Some, perhaps most, of those unexplained funds are being held by customers who had both open trades and large sums of money on account at the stricken brokerage, ex-MF Global customers said. While these customers have been reunited with their open trades, their cash is still frozen.

The result? More than $3.3 billion or 60 percent of total customer funds at the time of the bankruptcy are still frozen.

MOUNTING ANGER

While customers were initially outraged at the thought that MF Global had tapped into their segregated funds, that rage has increasingly been targeted at the trustee and the bankruptcy court for the handling of an unprecedented collapse.

"The (bankruptcy) Trustee is creating new protected classes within a pool of segregated customer assets," said John Roe, a spokesman for the Commodity Customer Coalition, a group lobbying for the speedy release of funds representing 7,000 former MF Global customers.

"(This) has dangerous implications in future Future Commission Merchant (FCM) bankruptcies. How is this in the interests of customers, FCMs, bankruptcy creditors or the system as a whole?"

It is still unclear what happened to the $600 million of customer funds unaccounted for since MF Global's Chapter 11 filing, and whether MF Global might have illegally mixed customer funds with its own or used them for its own proprietary trading.

The Commodity Futures Trading Commission, federal prosecutors and the Securities and Exchange Commission are all investigating the bankruptcy.

(Additional reporting by Nick Brown in New York; editing by Marguerita Choy, Jonathan Leff and Edward Tobin)

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Comments (4)
XRayD wrote:
America is the world’s cop!

We don’t need cops here at home, except to protect the bankers on Wall Street from the OWS demonstrators, who are being clubbed and pepper sprayed.

Nov 20, 2011 8:09pm EST  --  Report as abuse
shadowL wrote:
I fail to understand how the CEO, CFO and upper management of MF Global and the board of directors have not yet being charged. Illegally using customers funds, they should be held accountable as the military would. The captain of the ship is always responsible for their subordinates and if they fail to do his/her duty they are held accountable. This is why people don’t trust banks or politicians anymore, used car sales men have more ethics.

Nov 21, 2011 12:16am EST  --  Report as abuse
aef61 wrote:
agree with shadowL and have also heard that the funds tied up (or missing!) represent normal folks’ investments and even farmers who use brokerages like these to help fund their annual farming enterprises. What’s really going on here and why can’t these people get their money back?…this is nothing like making a bad investment and “buyer beware.” Its missing funds that rightly belong to these people!

Nov 21, 2011 10:41am EST  --  Report as abuse
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