MF Global Customer Sapere Seeks First Priority for Commodities Customers

By Tiffany Kary – Jan 9, 2012 10:35 PM GMT+0000

MF Global Inc. (MFGLQ)’s former customer Sapere Wealth Management LLC said it and other commodities customers should get first priority to be repaid because of the way MF Global’s $1.2 billion seems to have gone missing.

News coverage and testimony in Congress indicate funds were transferred from the futures commission merchant side of its business to the broker-dealer side, which disbursed the money to cover obligations of the parent company, pitting commodities customers against securities customers to be repaid, lawyers for the investment manager said today in papers in U.S. Bankruptcy Court in Manhattan. A group of commodities customers and the Hong Kong unit of the failed broker-dealer also filed court papers about how they think distributions should be prioritized.

That gives the trustee overseeing distributions a conflict of interest, since to repay commodity customers, he will have to wrest $1.2 billion from the broker-dealer, and to repay securities customers, he must keep the estate as full as possible, lawyers for Sapere said. To resolve the conflict, commodity customers should be put before security customers, Sapere said.

“It should in principle be allocated first to restoring the deficiencies in commodities customers’ segregated accounts, then to restoring deficiencies in securities customers’ segregated accounts,” said the Matthews, North Carolina-based fund, which is missing $90 million from its accounts, according to court papers.
Commodities Customers

A group of commodities customers also said in court papers filed today that commodity customers should be repaid before all creditors, “whether such property is considered ‘other property’ of MFGI, is found at entities other than MFGI, or passed through entities other than MFGI.”

MF Global Hong Kong Ltd., liquidating in Hong Kong, said its accounts with the U.S. unit are $9 million. The unit noted that as an affiliate of MF Global Inc. and considered a “non- public customer,” and said it reserves its right to dispute laws about how the missing money is distributed.

James Giddens, the trustee liquidating the brokerage, has set in motion distributions that will return about 72 percent to customers. Kent Jarrell, a spokesman for Giddens’s lawyer James Kobak, declined to comment.

Parent company MF Global Holdings, once run by Jon Corzine, a former New Jersey governor and Goldman Sachs Group Inc. co- chairman, filed the eighth-largest U.S. bankruptcy after a wrong-way $6.3 billion trade on its own behalf on bonds of some of Europe’s most indebted nations. It’s winding down in a separate but related Chapter 11 bankruptcy to apportion returns to creditors including JPMorgan Chase & Co.

To execute his European debt trade, Corzine used agreements to repurchase in the near future at an agreed-upon price. In earnings calls, MF Global said it was seeking to profit from the difference between the yield it received on the European bonds and the interest rates it paid under the repurchase agreements.

Sapere said in court papers that the funds were transferred from the futures commission merchant side of its business to the broker-dealer side, “in a perhaps-undocumented or form-over- substance ‘internal repo’ of the broker-dealer business.”

The fund called the transactions “gambles on sovereign debt of distressed European countries.”

Giddens hasn’t identified the amount of securities customers’ shortfall within the $1.2 billion estimated missing from customer accounts. MF Global has about 50,000 commodity accounts and about 400 securities accounts, Jarrell has said.

“The trustee, who owes undivided loyalty to both commodities customers and securities customers, cannot properly use the rubric of “discretion” to resolve those conflicts,” lawyers for Sapere wrote.

The brokerage case is Securities Investor Protection Corp. v. MF Global (MFGLQ) Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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