* Customer group to argue for conversion to Chapter 7
bankruptcy
* Group concerned about mounting fees of trustee Louis Freeh
* Freeh estimates has accrued $25 mln in fees so far
By Nick Brown
May 16 (Reuters) – The legal team winding down MF Global’s
bankruptcy estate, led by former FBI director Louis
Freeh, has racked up nearly $25 million in estimated fees since
its Nov. 25 appointment.
Now a customer group is planning to ask that the case be
streamlined so that Freeh and his team receive less and
customers receive more.
On Friday, a coalition of former MF Global customers plans
to argue in U.S. Bankruptcy Court in Manhattan that the Chapter
11 liquidation of the MF parent entity should be converted to a
so-called Chapter 7, coalition leader James Koutoulas said on
Wednesday.
In Chapter 11 cases, businesses or their court-appointed
trustees try to restructure debt or sell assets to recover as
much money as possible to pay off creditors, a process that can
be drawn out. In Chapter 7, a trustee sells off assets as
quickly as possible, with less involvement from professionals
like lawyers, but sometimes at the expense of drawing top-shelf
value.
Under bankruptcy law, administrative fees are paid ahead of
other creditor claims, so Freeh’s mounting bills are siphoning
money from creditors, said Koutoulas, a Chicago fund manager who
had $55 million tied up in MF Global on behalf of his clients.
Freeh has released estimated fee figures but not yet
formally submitted compensation requests.
The effort to curb Freeh’s work and convert the proceeding
to a Chapter 7 could be a long shot.
Judge Martin Glenn, presiding over the bankruptcy, denied an
earlier attempt by another customer group to convert the case,
citing potential costs to creditors and the disruption of
federal investigations into MF Global’s collapse.
But Koutoulas said his group plans to use new legal theories
based on information that was not available at the time Glenn
made his previous ruling, including that MF Global executives
knew at the time of the company’s collapse that the company had
no viable chance of restructuring.
It is also unclear whether customers like Koutoulas are
eligible to share in the proceeds of Freeh’s recovery efforts.
MF Global, once led by Jon Corzine, a former Goldman Sachs
chief executive and New Jersey governor, filed for bankruptcy on
Oct. 31, 2011, after revealing exposure to risky European
sovereign debt.
Commodity traders who had personal accounts at the company’s
broker-dealer unit are waiting to be paid back much of the money
they lost when, according to investigators, MF Global improperly
commingled customer funds with corporate assets.
Investigators have estimated there could be a roughly $1.6
billion shortfall in customer accounts.
DEADLINE ISSUES
The customer coalition’s conversion effort was prompted by
Freeh’s request earlier this month to extend a Friday deadline
to provide data relating to the company’s debts, assets,
transaction history and personnel.
If granted, it will be the sixth such extension for Freeh,
and would stretch the procedure out until June 18. That would
allow Freeh’s legal team to continue to accrue fees that could
otherwise go to creditors, said Koutoulas, who filed court
papers asking Judge Glenn to deny the motion.
A person close to Freeh on Wednesday said that despite the
extension request, Freeh’s team will likely file the data on
Friday for five of MF Global’s six bankrupt entities. Only its
MF Global Holdings USA unit, which did not file for bankruptcy
until March, will take longer, said the person.
Freeh’s spokeswoman, Diana DeSocio, declined to respond to
Koutoulas’ criticism. Instead, she pointed to Freeh’s written
extension request indicating that his team is still waiting on
data from MF Global foreign affiliates. Those affiliates, Freeh
said in the filing, have been slow to respond since they are
winding down their own affairs.
“Although these estates are working diligently to compile
information, each has competing duties that occasionally take
priority over the gathering and release of information for and
to the” MF parent, Freeh said.
A MOOT POINT?
In the unwinding of MF Global, the parent estate is separate
from the estate of the broker-dealer, which held customer
accounts. Each has its own trustee charged with trying to
recover money for its respective creditor groups.
Freeh’s job is to recover money for creditors of the MF
Global parent. It is unclear exactly how much the parent entity
owes, or how much Freeh will be able to recover. For starters,
the estate owes about $1.2 billion to a lender group led by
JPMorgan Chase & Co, and another $650 million in notes.
Freeh is not in charge of recovering money for customers.
That task falls to James Giddens, the trustee for the MF
broker-dealer. In theory, then, Freeh’s perceived delays have no
bearing on the recoveries that customers can obtain.
But some customers have argued they should nonetheless be
allowed to recover from the parent because their accounts were
improperly tampered with. What’s more, Paul Musser, an attorney
with Barnes & Thornburg who represents the Commodity Customer
Coalition in court proceedings, says his clients have been kept
in the dark, making it more difficult for them to navigate the
market for their claims.
Customers need as much information as possible about what’s
going on within the various MF estates so they can make informed
decisions on whether to keep or sell their claims, Musser said.
“People are being approached by third parties looking to buy
claims, and once you sell, you’re giving up rights,” he said.
A number of financial firms, including Barclays PLC
and the Seaport Group, have begun acquiring claims from
customers at a discount in hopes of making a profit through the
bankruptcy recovery process.
The bankruptcy is In re MF Global Holdings Ltd, U.S.
Bankruptcy Court, Southern District of New York, No. 11-15059
The broker-dealer liquidation is In re MF Global Inc, U.S.
Bankruptcy Court, Southern District of New York, No. 11-2790.
