NEW YORK (Reuters) — The shortfall of commodity customer funds at MF Global Holdings Ltd may be around $1.2 billion, about double initial estimates from regulators, the trustee liquidating the company said on Monday.
The news was a blow to customers still hoping to get more of their cash out of frozen broker accounts and raised new questions about why the authorities managed to locate only about 60 percent of the segregated customer funds three weeks after the parent firm’s Oct. 31 bankruptcy.
“I’m flabbergasted,” said Tom Ward, a retired Chicago Board of Trade member whose two sons cleared their futures trades through MF Global and have been blocked from accessing their money. “The bottom line is, there’s going to be a haircut involved. It’s devastating, what this has done to the industry.”
Monday’s announcement was trustee James Giddens’ first public statement on the size of the shortfall, which regulators initially said was about $600 million. Regulators are investigating what happened to the money and whether MF Global may have improperly mixed customer money with its own — a major violation of industry rules.
The amount MF Global should have segregated for customers may be short by “$1.2 billion or more,” Giddens said in a statement. He added the figure could still change.
Giddens also said he currently controls about $1.6 billion of the brokerage’s funds that he can use to pay back customers. His plans to pay back 60 percent of customer funds by early December would nearly exhaust that amount.
The sharply higher estimate of the shortfall raises questions about the investigation, said Tim Butler, an attorney for a group of customers demanding a fuller payback.
“What did the CFTC know three weeks ago and what do they know now?” Butler said. “If the amount has changed that much over three weeks, where did the money go? What were (regulators) looking at before?”
FIRST PUBLIC STATEMENT
MF Global was run by former Goldman Sachs & Co Inc chief and New Jersey governor Jon Corzine before its bankruptcy. The Chapter 11 filing came after the New York-based company revealed it made a $6.3 billion bet on European sovereign debt. Corzine resigned on Nov. 4.
Customers have criticized Giddens, calling for quicker access to a higher percentage of their accounts. The trustee has argued a piecemeal approach is necessary until he can peg the exact size of the shortfall.
On Sunday, Reuters reported that, based on initial reports of what was supposed to be segregated for customers, the trustee appeared to be keeping about $3 billion on hand to cover the shortfall.
Customers had been clamoring for more specifics, saying that was too large of a cushion — a notion Giddens rejected.
“Restoring 60 percent of what is in segregated customer accounts … would require approximately $1.3 to $1.6 billion to implement,” or nearly all the money at the trustee’s disposal, he said.
Giddens previously transferred more than $2 billion to other brokers, giving most customers access to a portion of their funds.
If the trustee does exhaust the funds he now controls, his focus would shift to going after monies that may belong to the brokerage, but may be tied up in foreign depositories, or may be part of the shortfall, Giddens spokesman Kent Jarrell said.
“We can’t distribute money we don’t have, but we do have legal means for going after other assets,” Jarrell said.
The Commodity Futures Trading Commission and other regulators, as well as the U.S. Attorney’s Offices in New York and Chicago, are investigating MF Global.
CFTC Commissioner Jill Sommers refused to speculate on how the $1.2 billion figure might compare with earlier estimates.
“From the very beginning we have tried as much as possible to never use a figure, out of fear that it’s not right,” said Sommers, who has been leading the agency’s investigation into MF Global after Chairman Gary Gensler recused himself from the probe because of his ties to Corzine.
“Until the final reconciliation (of accounts) is done, you don’t know what the shortfall is.”
CME Group Inc, operator of the clearinghouse for most of MF Global’s customers, declined to comment.
Commodity customers say they have more questions than answers about MF Global’s collapse and the safety of their money.
Sean McGillivray, vice president of Great Pacific Wealth Management, still has about $5 million tied up in MF Global for his customers. He was aware of the latest estimates of the shortfall, but wants exact figures.
“It would be in the best interest of all clients, brokers and anyone else caught in this mess to know just how much has been transferred … and how much is supposed to be there,” he said. “You could do this with an abacus and it would take less (time).”
A spokesman for the Commodity Customer Coalition in Chicago, which represents more than 7,000 former MF Global customers, said it was unclear how much of the trustee’s estimate related to possible co-mingling of customer money.
Some of the missing money could be tied up overseas, said spokesman John L. Roe.
“We’re hopeful given what was accounted for initially that more of the money will be found and that the trustee will work with us on an expedited claims process for customers,” he said.
In a sign that even distressed investors are losing faith in a decent return, MF Global’s bonds fell to an all-time low below 30 cents on the dollar, according to Tradeweb, down more than 5 cents on the day. The $325 million in 6.25 percent notes were issued at par in August.
Meanwhile, two pension funds have sued seven banks, including Bank of America Corp, JPMorgan Chase & Co and Goldman Sachs, over prospectuses that allegedly concealed the problems that led to MF’s collapse.
In court papers on Friday, the funds said registration statements and prospectuses for about $900 million of MF Global note offerings this year omitted how the company was using high leverage, investing heavily in risky European sovereign debt and not properly segregating client assets from its own.
The trustee’s case is In re MF Global Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-2790.
The MF Global bankruptcy is In Re MF Global Holdings Ltd, in the same court, No. 11-15059.
Posted by Haylie Shipp