US regulator digs in at MF Global

A US regulator said he thinks “something nefarious” occurred at MF Global, deepening the criticism facing the fallen futures brokerage.

As customers worried about whether they will recoup the full value of their accounts, some filed court papers on Tuesday looking to form a committee to protect their interests.

Bart Chilton, a Democratic commissioner at the US Commodity Futures Trading Commission, told Reuters Insider that US regulators are closer to finding out what happened to roughly $600 million in missing customer money.

“The money is not where it should be. I think something nefarious has happened, potentially something illegal,” he said.

MF Global, which lost on big bets on European debt, filed for bankruptcy on Oct. 31 after a deal to sell itself to Interactive Brokers Group fell apart.

A huge shortfall was discovered in the customer accounts of the company's brokerage, and the CFTC is among the authorities investigating whether MF Global may have improperly mixed that money with its own funds.

An MF Global representative was not immediately available for comment. Neither MF Global nor its former chief executive, Jon Corzine, has been charged with wrongdoing.

PAYING OUT WHAT'S THERE

There are growing concerns that regulators may be unable to find the missing customer funds, or that the money may be tied up in other assets.

Dealing with those concerns is primarily the job of court-appointed trustee James Giddens.

Giddens on Tuesday took a step toward getting customers some of their money back, asking MF Global's bankruptcy judge, Martin Glenn, to approve an expedited process whereby commodities customers would submit all claims by Jan. 27.

In a court filing, Giddens described a proposed process for mailing claims forms, reviewing claims and making payouts “as promptly as possible,” likely in increments.

The process is set to be discussed at a hearing before the judge in US Bankruptcy Court in Manhattan on Wednesday.

If Giddens and federal regulators are unable to find the missing customer cash, customers with commodities trading accounts could be forced to take significant losses.

ANGRY CUSTOMERS

Customers have clamoured for resolution of the missing money issue. A group of commodities account holders on Tuesday asked Glenn to appoint a committee to represent their interests in the liquidation of the brokerage.

“The lifeblood of a commodity trader's business is the trader's collateral, which is required to be segregated,” customer David Rosen, who organised the group, said in a court filing.

The group has hired bankruptcy lawyers from Stroock & Stroock & Lavan, a large New York law firm.

Some customers also asked Glenn to appoint a customer representative to the official committee of unsecured MF Global creditors.

Typhon Capital Management CEO James Koutoulas, who has separately asked Glenn to invalidate a lien putting JPMorgan ahead of customers for payback, told Reuters on Tuesday he may seek formal permission to join the committee.

The lien was granted to JPMorgan in return for its agreeing to allow MF Global to use $8 million in cash reserved as collateral for JPMorgan, agent on a $1.2 billion credit line. MF Global is using the cash to keep afloat as it charts its course through bankruptcy.

MF said in a Monday court filing it has extended through Nov. 21 its window for spending that cash, giving it five extra days to seek longer-term funding.

Whether it can find such funding will impact the nature and speed of its restructuring or liquidation.

CLAIMS TRADING

Two members of the official committee of MF Global creditors want permission to keep trading MF Global securities during bankruptcy.

Bank of America Corp and Elliott Management Corp each filed court papers asking Glenn to allow them to trade stock, debt and other MF Global securities as long as they impose systems to separate their trading from their role on the committee.

Judges in a few major bankruptcies, including Lehman Brothers Holdings Inc, WorldCom and Enron, have allowed such trading by creditors' committee members, Bank of America said in its court papers seeking permission for the trades.

MF's bankruptcy case is In re MF Global Holdings Ltd, US Bankruptcy Court, Southern District of New York, No. 11-15059.

The brokerage liquidation is In re MF Global Inc, in the same court, No. 11-2790. - Reuters