Bloomberg Business Week: MF Global Customers Will Be Made Whole, Freeh Says

August 1st, 2012

Bloomberg Business Week
By Silla Brush and Tiffany Kary
August 01, 2012

MF Global Holdings Ltd. (MFGLQ) (MFGLQ)’s brokerage customers, facing a $1.6 billion gap in funds, will eventually recoup their money, according to the trustee overseeing the parent company’s liquidation.

Louis Freeh, the holding company trustee, said in testimony submitted for a Senate Agriculture Committee hearing scheduled for today, that “it is my belief” customers will be repaid. He said he based his conclusion on estimates of the return of customer funds from foreign jurisdictions and settlements obtained by a separate trustee for the MF Global Inc. brokerage unit.

“All of the customers of MF Global Inc. eventually will be made whole” by the brokerage trustee, Freeh said in written testimony. James W. Giddens, the trustee overseeing the bankruptcy of the brokerage unit, said in prepared testimony for the hearing that the $1.6 billion gap remains. He also said his office has received $10 billion in claims from commodities customers, $1.4 billion from securities customers and $23 billion from general creditors.

U.S. congressional lawmakers called for the hearing today to oversee the response to the MF Global downfall and the recent collapse of Peregrine Financial Group Inc., which has left about $220 million in client funds unaccounted. The failures, which are being probed by the U.S. Commodity Futures Trading Commission and Justice Department among others, have undermined confidence in the futures market and spurred calls for new rules, according to lawmakers and regulators.

The CFTC’s investigation into MF Global could lead to allegations that rules governing fund segregation and supervision of customer accounts were violated, Jill E. Sommers, a Republican commissioner and senior agency member overseeing the probe, said in testimony prepared for the hearing. The enforcement division could also file an action against corporate entities or individuals, including management.

Shortfall Shock

“The shortfall in customer funds was a shock to the markets from which we have not yet recovered,” Sommers said.

So far, Giddens has distributed about 80 percent of what commodity future customers are owed, he said. The largest disputes with claimants include those with the company’s U.K. Joint Special Administrators. A trial is expected to start in April to resolve a dispute over $700 million of customer funds.

Giddens is still evaluating creditor and customer claims, and may litigate those where an agreement can’t be reached on what the brokerage owes. He said he still sees lawsuits against former MF Global Chief Executive Jon S. Corzine, former chief financial officer Henri Steenkamp and former assistant treasurer Edith O’Brien, among others, as a way to recover more money for creditors.

JPMorgan Talks

JPMorgan Chase & Co. (JPM) (JPM) has already returned $89.2 million in customer property and $518.4 million in other assets. Talks with the bank, which served as an agent to a $1.2 billion loan to the brokerage, continue, Giddens said. He had previously said he planned to bring lawsuits to recover more customer funds by Aug. 3. No lawsuits have been filed.

“I am urgently working to eliminate the shortfall,” Giddens said in the testimony.

Freeh, who submitted testimony but is not scheduled to appear at the hearing, said that in total, the parent’s claims against various units are worth $3.1 billion to $3.3 billion, including the $2.3 billion in claims against MF Global Inc. He said he can’t give any detail on potential lawsuits that could recover more money for creditors at this time, citing his ongoing investigation into how the company failed.

Chicago attorney and former U.S. Trustee Ira Bodenstein, the trustee for Peregrine, said in prepared testimony that he is working to return customer funds. The Cedar Falls, Iowa-based commodities brokerage filed for bankruptcy protection on July 10.

Peregrine’s Losses

About $220 million in segregated client money is unaccounted for at Peregrine, which did business as PFG Best. Founder and Chief Executive Officer Russell Wasendorf Sr. was ordered held in custody July 13 following a suicide attempt. He confessed to a 20-year fraud in a signed statement linked, according to a federal complaint.

Wasendorf forged the company’s statements from Firstar Bank, US Bank and Harris Bank, he said in the signed statement. He also made forgeries of official letters and correspondence from the banks, along with trade confirmation statements. He used photo-editing and spreadsheet software, as well as scanners and printers, to produce “convincing forgeries” of almost every bank document.

“I intend to confirm the validity of the information on the books and records at Peregrine so that such information can be disseminated to the account holders with all deliberate speed,” and that customers can be repaid as soon as possible, Bodenstein said.

Watching Self-Regulators

The MF Global and Peregrine failures demonstrate the need for new surveillance of self-regulators, including the National Futures Association, according to CFTC Chairman Gary Gensler. NFA was the primary overseer of Peregrine, while the CFTC oversaw NFA and conducted at least three limited reviews of the futures brokerage.

“It is clear that the system failed to protect the customers of Peregrine,” Gensler said in testimony for the hearing. “I have directed the CFTC’s staff to do a full review of how the agency conducts oversight” of the self-regulatory organizations.

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