MF Global trustees resolve fight over $130 mln CME settlement

Sat Jul 28, 2012 2:32am IST

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* Trustees Freeh, Giddens had disputed allocation of money

* Freeh can still challenge allocation in future

* Settlement would pay $130 mln to former MF Global customers

By Nick Brown

NEW YORK, July 27 (Reuters) - The warring trustees for MF Global's creditor factions have resolved their dispute over the allocation of a $130 million payment from CME Group Inc.

But the agreement, presented in a filing on Friday in U.S. Bankruptcy Court in Manhattan, preserves the prospect of a future fight over how to divvy up money recovered by the trustees.

Louis Freeh, the trustee recouping money for MF Global Holdings Ltd's bankruptcy creditors, agreed for now not to challenge a settlement under which exchange regulator CME would pay $130 million to be split between former commodities trader customers of MF Global's broker-dealer unit.

The settlement was reached in June between CME and James Giddens, Freeh's counterpart working to recover money for the customers.

Giddens delayed sending the deal to a judge for court approval earlier this month after Freeh raised concerns about it, a source told Reuters in June.

The debate turned on whether Giddens had authority to allocate to customers money that was not segregated as customer cash, a central issue that will affect ultimate payouts for different creditor classes.

Friday's agreement takes the issue off the table for the time being, letting the deal stand, but giving Freeh the right to challenge the CME settlement retroactively and to challenge future settlements like it.

CREDITORS AND CUSTOMERS

MF Global went bankrupt in October after its exposure to European debt spooked investors.

On one hand, its corporate creditors, like lender JPMorgan Chase & Co, are hoping to recover as much as they can from what's left of the firm's estate. But MF's trader customers are also in the red, with regulators estimating a $1.6 billion shortfall in customer accounts caused by the company's improper commingling of corporate and client money.

While Freeh is tasked with recovering funds for creditors, Giddens' jobs is to recoup money for customers, including through litigation and settlements with banks, counterparties, MF Global affiliates and others.

With both sides facing shortfalls, the trustees are liable to butt heads over entitlement to various pots of money like the one fetched through Giddens' CME settlement.

James Koutoulas, who heads an advocate group for former MF Global customers, would like that fight to happen sooner rather than later so it can be resolved once and for all.

"What we really need is for the judge to issue a decision on exactly what priority customers have with certain assets," Koutoulas said on Friday.

Friday's agreement, he said, just "kicks the can down the road."

In the meantime, the CME settlement will go forward as originally planned, with CME making a $160 million payment to the MF broker-dealer's estate. The bulk of the deal would go to customers, with the remaining $30 million going to a general asset pool to be split among other creditors.

Kent Jarrell, a spokesman for Giddens, touted the deal as good for customers, saying Giddens "intends" to distribute it to customers if approved at an Aug. 8 hearing. A spokeswoman for Freeh did not return a call seeking comment.

The settlement pot consists of cash in MF Global's own trading account, CME shares, and seats at CME exchanges. Under Friday's agreement, Freeh will not now mount a challenge as to whether that constitutes customer cash, or, if not, whether it can be reallocated to customers.

But Freeh reserved his right to challenge the deal retroactively if Giddens makes future attempts to reallocate non-customer cash to customers. And such an attempt seems likely from Giddens, who has made it clear in court papers that customers' shortfall "will need to be bridged" with non-customer funds.

The CME settlement is the first major manifestation of the allocation fight, though the parties have been posturing since as early as December, when Judge Martin Glenn asked for position papers on the issue.

Giddens at the time argued that Commodity Futures Trading Commission and CME rules gave him authority to reallocate non-customer cash. Freeh disagreed, challenging the applicability of those rules and saying non-customer money should be split in traditional bankruptcy fashion among all unsecured creditors.

Friday's agreement protects customers. If Freeh successfully challenges the deal in the future, Giddens would return the money from reserve funds, not from clawing back money already paid to customers. The returned funds would not go to Freeh or the MF Global parent's estate, but back to CME, according to the filing.

The bankruptcy is In re MF Global Holdings Ltd, U.S. Bankruptcy Court, Southern District of New York, No. 11-15059.

The brokerage liquidation is In re MF Global Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-2790.