MF Global trustee sees $3 billion in potential claims

Says Louis Freeh, the trustee overseeing the wind-down of the collapsed broker's parent company

MF Global Holdings Ltd could have more than $3 billion in claims against its former affiliates, according to Louis Freeh, the trustee overseeing the wind-down of the collapsed broker's parent company.

Such claims would be the main source of recovery for creditors of the bankrupt MF Global parent, Freeh said in a 119-page report submitted to US Bankruptcy Court in Manhattan late on Monday.

The report served as a status update on Freeh's efforts to track money belonging to the parent company's estate and recover as much of it as possible for the benefit of its creditors.

Freeh said his investigation into potential claims is in its early stages, and details will be provided to the court as it progresses.

"This report gets to the heart of the complex intercompany relationships inherent in a global firm that provided financing for its affiliates and subsidiaries all over the world," Freeh said.

MF Global collapsed in October after investors abandoned it following revelations of heavy bets it made on European debt. When the firm sank, a huge chunk of money was missing from the accounts of the company's trader customers.

James Giddens, the trustee tasked with recovering money for customers, has estimated that gap at $1.6 billion, and said it was caused by MF Global's improper use of customer money to cover corporate transactions as the firm teetered on the brink.

Warring Trustees

Giddens on Monday released his own 275-page update on his efforts to recover money for former MF Global customers. In the report, Giddens indicated he might bring civil claims against MF Global's former Chief Executive Jon Corzine and other top MF Global executives for negligence and breach of duties to customers.

Giddens and Freeh may wind up as adversaries in court as they piece together the rubble of the collapsed MF Global. As assets are found, disputes are likely to arise over whether they belong to customers or to creditors of the broker's parent.

Freeh's report was at times critical of Giddens, including on the topic of information-sharing. Freeh said Giddens has not provided information about the broker-dealer's securities and futures accounts, and only recently forked over data on how the broker-dealer used about $875 million in intercompany loans made during the month leading up to MF Global's collapse.

Freeh also said Giddens has yet to turn over documents relating to a repurchase agreement between the broker-dealer and MF Global's unregulated finance arm, or FinCo.

The repo agreement, under which the broker-dealer transferred to Finco about 2.9 billion euros of Italian bonds, is a hot-button issue in MF Global's bankruptcy. It was done in August, as the company's sovereign debt positions were deteriorating and counterparties were demanding higher margin calls on trades, Freeh said in the report.

The move transferred economic risk to FinCo, which reduced MF Global's capital requirements because FinCo is unregulated. The strategy thereby had the effect of allowing MF Global to meet its capital requirements, according to the report.

The case is in re: MF Global Holdings Ltd, US Bankruptcy Court, Southern District of New York, No. 11-15059.