* Trustees Freeh, Giddens had disputed allocation of money
* Freeh can still challenge allocation in future
* Settlement would pay $130 mln to former MF Global
By Nick Brown
NEW YORK, July 27 The warring trustees for MF
Global's creditor factions have resolved their
dispute over the allocation of a $130 million payment from CME
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
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
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
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
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
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
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.