Saturday, November 26, 2011

MF Global - Complex Structure / Flakey Trustee

As MF Global customers, we need to interact with the court and the trustee. Before we can do this, we must understand what is being liquidated by whom. MFG had a complex corporate structure: A holding company and 47 subsidiaries!

Three of these are in some form of bankruptcy or liquidation in the US.

The full corporate structure can be found in the most recent 10K that MF Global filed with the SEC. I'll reproduce the 11 subsidiaries in the US below.

MF Global Holdings Ltd (A)
-MF Global Special Investor LLC
-MF Global Holdings USA Inc
--MF Global Inc (B)
--MF Global Capital LLC
--MF Global Market Services LLC
--MF Global Finance USA Inc (C)
--MF Global FX Clear LLC
--MFG 717 Firth Avenue Inc
--MF Global Investment Management LLC
--MF Global FX LLC

(B) is the company that held the customer accounts. It has been in SIPA liquidation by trustee James Giddens for about a month now. See the trustee's web site for gory details. US Bankruptcy Court New York Southern District Case No. 11-2790.

Giddens has issued remarkably obtuse statements about missing money. The missing money is the reason he can't give us back the money we had in our accounts. (More on that later.)

(A) is the company whose stock traded on NYSE. US Bankruptcy Court New York Southern District Case No. 11-15059. Former head of the FBI Louis Frees was just appointed trustee in this case on 11/25. At the time of this writing he hasn't had a day in office yet. Frees is the guy to watch!

(C) I have no idea what this subsidiary does, or why it has its own bankruptcy proceeding. US Bankruptcy Court New York Southern District Case No. 11-15058.

The claims notice agent has created a website with information on (A) and (C).

Now, back to our money.

I've reached the conclusion that we (customers) cannot afford to take the statements of the trustee Giddens at face value.

There have been hundreds of news stories in the last few days about the stunning development that the missing money has grown from $600 Million to $1.2 Billion. These stories were all based on a single sentence in a release from the trustee. What did he actually say?

From his 11/21/2011 release...
"At present, the Trustee believes that even if he recovers everything that is at US depositories, the apparent shortfall in what MF Global management should have segregated at US depositories may be as much as $1.2 billion or more."
Yipes. There are a lot of wiggle words in there that never made it into any of the news stories. First, he says "if" he recovers everything "at US depositories". This detail seems to never be reported. (Journalism is dead.) What does it actually mean? Does it mean that the trustee knows of segregated funds that are at non-US depositories? He doesn't say. He seems to work hard to avoid telling us what he knows. Newspapers report this as if the funds are "missing" in the sense of "nobody knows where they are". The trustee hasn't said that. He may know where the funds are.

Now, what does he say about the amount? Some newspapers have reported things like "might be as much as $1.2B". Others have reported "more than $1.2B". Which is right? Astonishingly, the bozo trustee said both of these things! Even more remarkable, he said them both in the same sentence! He said "as much as $1.2 billion or more". When I was in school, "as much as X" meant less than or equal to X. "more" meant greater than X. If you say something is less than or equal to X or it is greater than X, you are saying the number might be anything at all. You reveal no information whatsoever. That's what the trustee did. It is doublespeak.

It is no news that customers like me think this is BS. What do folks who actually know what is going on think? Most of them don't speak up. Astonishingly, one has spoken up. The Chicago Mercantile Exchange issued a release that says, roughly speaking, that the trustee is feeding us nonsense.
"While the final accounting of customer segregated assets and claims will occur in the bankruptcy process, CME Group is confident that recent reports of significantly larger customer segregated shortfalls are incorrect."
Strong words. CME is saying the trustee, Giddens, is full of beans.

My working theory: The trustee only controls a small fraction of the MF Global empire. He's liquidating one of 47 subsidiaries. He's afraid to speak for what he does not control. That includes stuff outside the US, and also stuff in those other ten US subsidiaries. The money we need is probably present, but simply somewhere it was not supposed to be. Now we will learn whether it gets returned.

This is why Freeh is so important. We now have a trustee in charge of the chapter 11 bankruptcy of the holding company. Will he make funds available to Giddens to return to us?

PS: I believe all MF Global customers should consider joining the Commodity Customer Coalition. I have.

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