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MF Global Trustee Lobs Lawsuit Threat

Source: WSJ

Posted on 13 Apr 2012

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The trustee unwinding the brokerage operations of MF Global Holdings Ltd. said Thursday that he may sue former officers and directors of the company, a group that includes former Chief Executive Jon S. Corzine.

The trustee, James W. Giddens, said in a statement that he may assert claims for, "among other things, breach of fiduciary duties" owed to both the MF Global brokerage unit and its customers, "and violations of the segregation requirements of the Commodity Exchange Act."

MF Global dipped into customer funds that are supposed to be kept separate from the firm's own money under federal regulations as it struggled to survive, contributing to a large shortfall in customer accounts.

The announcement from the trustee followed a court hearing in which a judge declined to approve Mr. Giddens's plan to approve the distribution of more money to MF Global customers. The judge said he would consider it and asked for more details about a particular part of the plan in which MF Global customers would relinquish to Mr. Giddens some of their rights to sue for damages.

The trustee's announcement also represented the first time in the 5½ months since MF Global filed for bankruptcy protection that a major investigator in the case has said he might bring claims against individuals that worked at the company. Various civil and criminal investigators are probing the circumstances around the firm's demise, but no one has been accused of wrongdoing.

A spokesman for the trustee, Kent Jarrell, declined to name any individuals that might be sued. He said that the list of people could include anyone listed as an officer or director on MF Global's most-recent annual report, filed last May, as well as "other employees." In the statement, Mr. Giddens noted that he might also sue the holding company itself.

MF Global filed for Chapter 11 protection last October. In the days following, a substantial shortfall was discovered in brokerage customers' accounts, which by law should have been segregated from other parts of the company. Mr. Giddens, who is unwinding the brokerage in accordance with the Securities Investor Protection Act, has since estimated the shortfall at about $1.6 billion, including U.S. customers' money that was tied up in foreign markets.

Mr. Corzine, a former New Jersey governor, U.S. senator and Goldman Sachs Group Inc. chairman, has said that he didn't direct anyone to misuse client funds and that he wasn't aware of a shortfall in funds until days after it apparently developed. A spokesman for Mr. Corzine had no immediate comment.

At a hearing Thursday morning, Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan held off on deciding whether Mr. Giddens could distribute an additional $685 million to customers, which if approved would add about 10 cents on the dollar to the 72 cents already recovered by U.S. customers who held funds on deposit.

The major stumbling block for the judge was a provision in the customer-payback plan that would strip away their rights to pursue legal claims against third parties and assign them to Mr. Giddens.

Judge Glenn said "there's nothing" in legal statutes that would give him the power to approve that request, a statement confirmed by Hughes Hubbard & Reed LLP's James B. Kobak Jr., an attorney for Mr. Giddens.

Judge Glenn said he'd try to rule on the matter quickly. Mr. Kobak said that the trustee felt that taking charge of the third-party claims would be more "efficient." A spokesman for Mr. Giddens said the trustee would work to move ahead with paying customers as planned, pending court approval, even if the legal-claims provision is denied by the judge.