hughes hubbard & reed llp one battery park plaza new york...
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Hearing Date: October 31, 2013 at 2:00 p.m. (prevailing Eastern Time) Response Deadline: October 16, 2013 at 4:00 p.m. (prevailing Eastern Time)
HUGHES HUBBARD & REED LLP One Battery Park Plaza New York, New York 10004 Telephone: (212) 837-6000 Facsimile: (212) 422-4726
Attorneys for James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK In re
MF GLOBAL INC.,
Debtor.
Case No. 11-2790 (MG) SIPA
NOTICE OF TRUSTEE’S MOTION TO (I) APPROVE THE TRUSTEE’S
ALLOCATION OF PROPERTY AND (II) APPROVE THE TERMS OF AN ADVANCE OF GENERAL ESTATE PROPERTY FOR THE PURPOSE
OF MAKING A FINAL 100% DISTRIBUTION TO FORMER COMMODITY FUTURES CUSTOMERS OF MF GLOBAL INC.
PLEASE TAKE NOTICE that on October 2, 2013, James W. Giddens (the
“Trustee”), as Trustee for the liquidation of the business of MF Global Inc. (“MFGI” or the
“Debtor”), under the Securities Investor Protection Act (“SIPA”) of 1970, as amended, 15 U.S.C.
§ 78aaa et seq., by and through his undersigned counsel, filed a motion (the “Motion”) to (i)
approve the Trustee’s allocation of property, and (ii) approve the terms of an advance of general
estate property for the purpose of making a final 100% distribution to former commodity futures
customers of MFGI, as more fully described in the Motion.
PLEASE TAKE FURTHER NOTICE that a hearing on the Motion will be held
before the Honorable Martin Glenn, United States Bankruptcy Judge, at the United States
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Bankruptcy Court for the Southern District of New York, Courtroom 501, One Bowling Green,
New York, New York, 10004 (the “Bankruptcy Court”), on October 31, 2013 at 2:00 p.m.
(Prevailing Eastern Time) or as soon thereafter as counsel may be heard (the “Hearing”).
PLEASE TAKE FURTHER NOTICE that responses, if any, to entry of the
Order must (i) be in writing; (ii) state the name and address of the objecting party and nature of
the claim or interest of such party; (iii) state with particularity the legal and factual bases of such
objection; (iv) conform to the Federal Rules of Bankruptcy Procedure and Local Bankruptcy
Rules; (v) be filed with the Bankruptcy Court, together with proof of service, electronically, in
accordance with General Order M-399, by registered users of the Court’s Electronic Case Filing
System, and by all other parties in interest, on a 3.5 inch disk, compact disk, or flash drive,
preferably in Portable Document Format (PDF), WordPerfect or any other Windows-based word
processing format no later than October 16, 2013 at 4:00 p.m. (Prevailing Eastern Time) (the
“Response Deadline”); and (vi) be served on (a) Hughes Hubbard & Reed LLP, One Battery
Park Plaza, New York, New York, 10004, Attn: James B. Kobak, Jr., Esq. and Dustin P. Smith,
Esq.; (b) the Securities Investor Protection Corporation, 805 Fifteenth Street, N.W., Suite 800,
Washington, D.C., 20005, Attn: Josephine Wang, Esq. and Christopher H. LaRosa, Esq.; and (c)
the Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street N.W.,
Washington, D.C., 20581, Attn: Martin B. White, Esq., with a courtesy copy to the chambers of
the Honorable Martin Glenn, United States Bankruptcy Court, Courtroom 501, One Bowling
Green, New York, New York, 10004.
PLEASE TAKE FURTHER NOTICE that objecting parties are required to
attend the Hearing, and failure to appear may result in relief being granted or denied upon
default.
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Dated: New York, New York October 2, 2013
HUGHES HUBBARD & REED LLP
By: /s/ James B. Kobak, Jr. James B. Kobak, Jr. Christopher K. Kiplok Jeffrey R. Coleman Josiah S. Trager Dustin P. Smith One Battery Park Plaza New York, New York 10004 Telephone: (212) 837-6000 Facsimile: (212) 422-4726 Email: [email protected] Attorneys for James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc.
HUGHES HUBBARD & REED LLP One Battery Park Plaza New York, New York 10004 Telephone: (212) 837-6000 Facsimile: (212) 422-4726 Attorneys for James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc. UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
In re
MF GLOBAL INC.,
Debtor.
Case No. 11-2790 (MG) SIPA
TRUSTEE’S MOTION TO (I) APPROVE THE TRUSTEE’S
ALLOCATION OF PROPERTY AND (II) APPROVE THE TERMS OF AN ADVANCE OF GENERAL ESTATE PROPERTY FOR THE PURPOSE
OF MAKING A FINAL 100% DISTRIBUTION TO FORMER COMMODITY FUTURES CUSTOMERS OF MF GLOBAL INC.
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TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT .....................................................................................................2
JURISDICTION AND VENUE ......................................................................................................6
BACKGROUND .............................................................................................................................7
A. The District Court Class Action ...............................................................................7
B. CFTC Action and the Proposed Consent Order .......................................................9
RELIEF REQUESTED ....................................................................................................................9
I. THE TRUSTEE’S DIVISION OF THE ASSETS UNDER HIS CONTROL IS PROPER UNDER THE BANKRUPTCY CODE AND THE CFTC RULES. ....................................................................................10
A. Step One: The Trustee’s Treatment of Assets as Customer Property or Property of the General Estate ................................................11
i. The Definition of Customer Property under the Bankruptcy Code and the CFTC Rules .............................................................11
ii. Application of the CFTC Rules to the Assets Under the Trustee’s Control ...........................................................................16
a. Customer Property .............................................................17
i. The Segregated Assets Directly Distributed or Returned by MFGI’s Former Exchanges and Depository Banks Were Customer Property. .................................................................17
ii. The Assets Recovered under the MFG Canada Settlement Agreement Were Customer Property. ................................................19
iii. The Assets Recovered under the MFGUK Settlement Agreement Were Customer Property. .................................................................20
iv. The $100 Million Settlement Payment from JPMorgan under the JPMC Settlement Agreement Was Customer Property. .....................21
TABLE OF CONTENTS
(Continued)
Page
ii
v. The Account 9102591063 Balance Was Customer Property. ................................................22
b. General Estate Property .....................................................23
i. The Proprietary Assets Returned by MFGI’s Former Depositories, Financial Counterparties, and other Third Parties Were Property of the General Estate. ..............................23
ii. Prior to the Advance and Allocation Approved by the CME Settlement Order, the Assets Recovered by the CME Settlement were Proprietary, Non-Customer Property. ...........24
iii. Prior to the Advance and Allocation Approved by the JPMC Settlement Order, the Returned Collateral Made Available by the JPMC Settlement Agreement was Proprietary Non-Customer Property. .....................26
c. The Securities Excess Becomes a Part of the General Estate Under SIPA. .......................................................................28
B. Step Two: The Principles of Allocation of Customer Property to the Appropriate Separate Account Classes .............................28
C. The Gap between All Customer Property Marshaled by the Trustee and Allowed Net Equity Claims ...................................................31
II. THE REQUESTED ADVANCES OF GENERAL ESTATE FUNDS SUFFICIENT TO FULLY SATISFY ALLOWED CUSTOMER NET EQUITY CLAIMS ARE REASONABLE AND APPROPRIATE. ..........................................................................................32
A. The Trustee’s Request for Authority to Make the Final Advance and Distribution Is Appropriate and Consistent with the Proposed Consent Order. .............................................................33
B. The Authorized Advances and the Final Advance Will Be Repaid by the Future MFGUK Distributions as well as Possible Recoveries in the MDL. ...............................................................36
TABLE OF CONTENTS
(Continued)
Page
iii
III. THE REQUESTED ADVANCES DO NOT MEAN THAT A SHORTFALL IN SEGREGATED PROPERTY DID NOT OCCUR AT MF GLOBAL AND DO NOT AFFECT THE LIABILITY OF THIRD PARTIES. ......................................................................36
A. The Requested Advances Shift the Time When a Customer Can be Paid but Do Not Rectify the Original Shortfall or the Current Gap or Affect Liability. ..........................................................36
B. MFGI’s Customers Have Assigned Their Claims against the MDL Defendants to the General Estate. ..............................................37
C. The General Estate is Subrogated to the Claims of MFGI’s Customers against the MDL Defendants. ..................................................38
i. The Authorized Advance and the Final Advance Constitute Involuntary Payments by the General Estate. ................................41
ii. The General Estate is Not Primarily Liable for the Shortfall in the 4(d) and 30.7 Estates. ...........................................................42
iii. The Obligations Arising from the Shortfall will be Fully Paid by the Authorized Advances and the Final Advance. ............43
iv. The Equities of the Case Support the Subrogation of the General Estate to the Customers’ Claims against the MDL Defendants. ....................................................................................43
CONCLUSION ..............................................................................................................................44
iv
TABLE OF AUTHORITIES
Page(s) CASES
3105 Grand Corp. v. N.Y.C., 288 N.Y. 178 (1942) .......................................................................39
Advance Trading Corp. v. Nydegger & Co., 127 N.Y.S.2d 800 (Sup.Ct.1953) ............................37
Allstate Ins. Co. v. Mazzola, 175 F.3d 255 (2d Cir. 1999) ............................................................41
Am. Mfrs. Mut. Ins. Co. v. Payton Lane Nursing Home, Inc., No. CV-05-5155 (SJF), 2007 WL 674691 (E.D.N.Y. Feb. 28, 2007)......................................................................40, 41
Banque Arabe et Internationale D’Investissement v. Bulk Oil (USA) Inc., 726 F. Supp. 1411 (S.D.N.Y. 1989) ..............................................................................................................37
In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229 (2d Cir. 2011) .....................................10, 39
Brown v. Bellamy, 170 A.D.2d 876 (3d Dep’t. 1991) ...................................................................40
In re Carley Capital Group, 119 B.R. 646 (W.D.Wisc.1990) .......................................................43
Domino of California Inc. v. Helmsley-Spear, Inc., 180 A.D.2d 565 (1st Dep’t 1992) ................43
Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F. Supp. 2d 162 (S.D.N.Y. 2011) .......................................................................................................................37
Gerseta Corp. v. Equitable Trust Co. of N.Y., 241 N.Y. 418 (1926) .............................................39
In re Griffin Trading Co., 245 B.R. 291 (N.D. Ill. Bankr. 2000), vacated, 270 B.R. 882 (N.D. Ill. 2001).........................................................................................................................15
In re Griffin Trading Co., 270 B.R. 882 (N.D. Ill. 2001) ..............................................................15
Hamlet at Willow Creek Dev. Co. v. N.E. Land Dev. Corp., 64 A.D.3d 85 (2d Dep’t 2009) ........................................................................................................................................40
Kusch v. Mishkin (In re Adler, Coleman Clearing Corp.), No. 95-08203, 1998 Bankr. LEXIS 1076 (Bankr. S.D.N.Y. Aug. 24, 1998), aff’d, 208 F.3d 202 (2d Cir. 2000).........................................................................................10, 33, 34
Liberty Mut. Ins. Co. v. Borsari Tank Corp., 248 F.2d 277 (2d Cir. 1957) ...................................41
Metro. Prop. and Liab. Ins. Co. v. Cassidy, 127 Misc.2d 641 (Sup. Ct. 1985) .............................43
In re MF Global Holdings LTD. Investment Litigation, No. 11 Civ. 7866 (S.D.N.Y. filed Nov. 03, 2011) .......................................................................................................................1, 7
v
In re MF Global Inc., 466 B.R. 244 (Bankr. S.D.N.Y. 2012) .................................................11, 13
In re Momentum Mfg. Corp., 25 F.3d 1132 (2d Cir. 1994) ...........................................................35
National Granite Title Ins. Agency, Inc. v. Cadlerock Props. Joint Venture, 5 A.D.3d 361 (2d Dep’t 2004) ........................................................................................................................39
Pearlman v. Reliance Ins. Co., 371 U.S. 132 (1962) .....................................................................42
Peerless Ins. Co. v. Michael Beshara, Inc., 75 A.D.3d 733 (3d Dep’t 2010) ................................41
Pep’e v. McCarthy, 249 A.D.2d 285 (2d Dep’t 1998) ..................................................................40
Rink v. State, 27 Misc.3d 1159 (N.Y. Ct. Cl. 2010), aff’d, 87A.D.3d 1372 (4th Dep’t 2011) ........................................................................................................................................39
Rosen v. Mega Bloks Inc., No. 06 Civ. 3474 (LTS)(GWG), 2009 WL 929474 (S.D.N.Y. April 7, 2009) ...........................................................................................................................38
Securities Investor Protection Corp. v. MF Global Inc., Case No. 11-CIV-7750 (PAE) (2011) .........................................................................................................................................6
Semi-Tech Litigation, L.L.C. v. Ting, 13 A.D.3d 185 (1st Dep’t 2004) ........................................38
In re Suprema Specialties, Inc., No. 02-10823 (JMP), 2006 WL 2583648 (Bankr. S.D.N.Y. June 8, 2006), aff'd, 370 B.R. 517 (S.D.N.Y. 2007), aff’d, 309 F. App’x. 526 (2d Cir. 2009) ....................................................................................................................40
U.S. Commodity Futures Trading Commission v. MF Global Inc., No. 13-0446, ECF No. 1..................................................................................................................................................9
In re Wingspread Corp., 145 B.R. 784 (S.D.N.Y. 1992), aff’d sub nom. In re Wingspread Co. v. Paramount Comm., 992 F.2d 319 (2d Cir. 1993) ..............................................40, 42, 43
STATUTES AND RULES
7 U.S.C. § 24 .................................................................................................................................15
7 U.S.C. § 24(a)(1) ........................................................................................................................12
11 U.S.C.§ 105(a) ................................................................................................................. passim
11 U.S.C. § 761 ..............................................................................................................................12
11 U.S.C. § 761(10) ............................................................................................................... passim
11 U.S.C. § 766(J)(2) ....................................................................................................................35
15 U.S.C. § 78aa ..............................................................................................................................7
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15 U.S.C. §§ 78aaa et seq. ..............................................................................................................1
15 U.S.C. § 78eee(b)(3) ...................................................................................................................7
15 U.S.C. § 78eee(b)(4) ...................................................................................................................7
15 U.S.C. § 78fff-1(a) ....................................................................................................................19
15 U.S.C. § 78fff-2(c)(1) .................................................................................................................4
15 U.S.C. § 78fff-3(c)(2) ...............................................................................................................28
15 U.S.C. § 78fff(b) .......................................................................................................................19
Federal Rule of Bankruptcy Procedure 9019 ...........................................................................19, 21
N.Y. Gen. Oblig. Law § 13-101 .....................................................................................................37
17 C.F.R. § 190 (2013) ............................................................................................................11, 29
17 C.F.R. § 190.01(a) ....................................................................................................................29
17 C.F.R. § 190.01(ll)(3) ..............................................................................................................13
17 C.F.R. §§ 190.01–190.10 ...........................................................................................................1
17 C.F.R. § 190.08 ........................................................................................................................11
17 C.F.R. § 190.08(a)(1)(i) ................................................................................................18, 25, 27
17 C.F.R. § 190.08(a)(1)(i)(A) .......................................................................................................14
17 C.F.R. § 190.08(a)(1)(i)-(ii) .............................................................................................. passim
17 C.F.R. § 190.08(a)(1)(i)(A)-(F) ...............................................................................................13
17 C.F.R. § 190.08(a)(1)(ii)(A) .........................................................................................13, 18, 19
17 C.F.R. § 190.08(a)(ii)(B) ..........................................................................................................13
17 C.F.R. § 190.08(a)(1)(ii)(C) ......................................................................................................13
17 C.F.R. § 190.08(a)(1)(ii)(I) ................................................................................................14, 18
17 C.F.R. § 190.08(a)(1)(ii)(D) ....................................................................................................14
17 C.F.R. § 190.08(a)(1)(ii)(E) ...............................................................................................14, 18
17 C.F.R. § 190.08(a)(1)(ii)(F) ......................................................................................................14
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17 C.F.R. § 190.08(a)(1)(ii)(G) ........................................................................................14, 21, 22
17 C.F.R. § 190.08(a)(1)(ii)(H) .....................................................................................................14
17 C.F.R. § 190.08(a)(1)(ii)(J) .................................................................................................14, 15
17 C.F.R. § 190.08(c)...............................................................................................................11, 30
17 C.F.R. § 190.08(c)(1) ..........................................................................................................28, 29
17 C.F.R. § 30.7 .............................................................................................................................20
46 Fed. Reg. 57,535, 57,554 ..........................................................................................................29
SECONDARY SOURCES
72 C.J.S. Principal and Surety § 264 .............................................................................................41
Restatement (First) of Restitution § 162 (1937) ............................................................................39
1 Collier on Bankruptcy § 12.02 (16th ed. 2013) ....................................................................12, 34
62380763_16
1. James W. Giddens (the “Trustee”), as Trustee for the liquidation of the business
of MF Global Inc. (“MFGI”) under the Securities Investor Protection Act of 1970, as amended
(“SIPA”), 15 U.S.C. §§ 78aaa et seq. (2012),1 by and through his undersigned counsel, hereby
submits this motion to (i) Approve the Trustee’s Allocation of Property; and (ii) Approve the
Terms of an Advance of General Estate Property for the Purpose of Making a Final 100%
Distribution to Former Commodity Futures Customers of MF Global Inc. (the “Motion”),
pursuant to section 105(a) of title 11 of the United States Code (the “Bankruptcy Code”), and 17
C.F.R. §§ 190.01–190.10 (the “Part 190 Regulations” or the “CFTC Rules”).
2. Through the Motion, the Trustee seeks the entry of an Order (i) approving the
Trustee’s allocation of property between the customer and general estates; and (ii) authorizing
the Trustee to advance property from the general estate for allocation to the 4(d) and 30.7 Estates
and to distribute that property to satisfy the deficit in customer property and permit a one
hundred percent distribution of all allowed customer net equity claims (the “Proposed Order”).
The Proposed Order will also confirm that, in exchange for the advances of general estate funds,
the claims of MFGI’s former customers arising from the shortfall in customer property will
belong to, and be pursued on behalf of, the general estate through principles of subrogation,
assignment and other similar theories of recovery. The relief sought in the Proposed Order is
supported by MF Global Holdings Ltd. (“Holdings”), which is by far MFGI’s largest general
creditor, the representatives of MFGI’s former customers in the class action against MF Global’s
former senior management and others, the U.S. Commodity Futures Trading Commission
(“CFTC” or the “Commission”), and the Securities Investor Protection Corporation (“SIPC”).
1. For convenience, subsequent references to SIPA will omit “15 U.S.C.”
2
3. The approval of the Trustee’s allocation is appropriate at this time because all
customer claims have been determined (with all but a handful of these determinations now final),
and substantial amounts of property have been recovered for the customer estates and the general
estate. The relief sought in the Motion is also consistent with the terms of the Consent Order,2
for which the Trustee has received authority from the Court to enter into with the CFTC.
PRELIMINARY STATEMENT
4. The relief sought through this Motion will allow the Trustee to satisfy every one
of the over 26,000 allowed customer net equity claims within approximately two years of the
commencement of the liquidation. In order to make this final distribution, the Trustee seeks an
order from the Court confirming the final allocation of certain assets under his control (or
already distributed to customers pursuant to prior Court Orders)3 as customer property to the 4(d)
and 30.7 Estates or as proprietary assets to the general estate. Because the amount of customer
property so allocated is less than the amount of allowed net equity claims, the Trustee is also
seeking authority to advance, consistent with the proposed CFTC Consent Order, sufficient
general estate funds to make one hundred percent distributions on all allowed customer net
equity claims. The relief sought in this Motion, if granted, should allow every one of the more
than 26,000 former customers of MFGI with allowed net equity claims to be paid in full before
the end of the calendar year, satisfying all customer claims within just over two years of the
2. Consent Order Authorizing the Trustee to Execute the Final Consent Order of Restitution, Civil Monetary Penalty and Ancillary Relief Against MF Global Inc., (the “Consent Order”) authorized by the Bankruptcy Court on September 12, 2013, ECF No 7034.
3. See Order Granting Emergency Motion of James W. Giddens, Trustee for the Liquidation of MF Global Inc., Approving the Transfer of Certain Segregated Customer Commodity Positions and Extending the Trustees Authorization to Operate the Business of MF Global Inc. in the Ordinary Course, Nov. 11, 2011, ECF No. 14; Order Granting Expedited Motion of James W. Giddens, Trustee for the Liquidation of MF Global Inc., for an Order Approving Further Emergency Transfers and Distributions to Customers, Nov. 17, 2011, ECF No. 316; Order Granting Expedited Motion to Approve Further Transfers and Distributions for MF Global Inc. United States Commodity Futures Customers, Dec. 12, 2011, ECF No. 717 (collectively, the “Bulk Transfer Orders”).
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collapse of MF Global. This would be an unprecedented result and one which seemed
unimaginable at the commencement of MFGI’s liquidation. It is a testament to what SIPA, the
CFTC Rules and the U.S. Bankruptcy system can achieve when entities such as MF Global’s
former affiliates, SIPC, the Commission, and the representative of MFGI’s former customers in
the class action identify common interests and work cooperatively to achieve those goals.
5. The Trustee has now completed the process of reviewing and determining all
customer claims asserted in the SIPA Proceeding and has made substantial progress in
marshaling customer and general estate assets. The purpose of this Motion is to establish a
sound basis for the final distribution to customers by fixing the aggregate fund of customer
property and allocating this customer property to the appropriate customer estates for
distribution. This process will also establish the current size of the general estate. If this
application is approved, all customer net equity claims in the securities and commodities estates
will be fully satisfied and any future recovery of assets will be added to the general estate in
accordance with the Bankruptcy Code and SIPA.
6. All recovered assets that were held in segregated accounts at derivative clearing
organizations or financial institutions are customer property. Additional amounts constituting
customer property include all recovered assets that were held for customers at MFGI’s affiliates.
These amounts comprise the recoveries in previously approved and now final settlements,
including: the $60 million recovered from MF Global Canada Inc. (“MFG Canada”), the $385.5
million settlement payments recently received from MF Global UK Ltd. (“MFGUK”), and the
$174 million – $195 million settlement payment the Trustee is due to receive from MFGUK in
4
the future. Additionally, consistent with the Court’s previous order,4 the $100 million settlement
payment received from JPMorgan Chase Bank, N.A. (“JPMorgan”) is also customer property.
7. The Trustee also now has control over assets of the debtor’s estate that were
recovered from proprietary accounts or as a result of the unwind of proprietary transactions. The
debtor’s estate also includes the $133 million excess from the securities customer estate which is
general estate property by operation of law under SIPA § 78fff-2(c)(1) (although, as detailed
below, the Trustee seeks authority to advance an amount equal to the securities excess to the 4(d)
and 30.7 Estates to satisfy allowed commodity customer net equity claims).
8. In order to make an immediate one hundred percent distribution to customers and
comply with the proposed Consent Order, the Trustee will need to advance sufficient general
estate funds to cover the gap between currently available customer property and the amount of
allowed customer net equity claims. The Trustee has already received authority under previous
Orders5 to advance $330 million of general estate funds to the 4(d) and 30.7 Estates, and the
Trustee has distributed these previously advanced funds to MFGI’s former customers in partial
4. Order Granting the Trustees Motion for (i) Approval of the Settlement Agreement between the Trustee, the Class Representatives, and JPMorgan; and (ii) Authorization to Allocate Certain Assets Made Available by the Settlement Agreement to the Customer Estates for Distribution to Customers, June 8, 2013, ECF No. 6747 (the “JPMC Settlement Order”).
5. Under the authority granted to the Trustee in the JPMC Settlement Order, the Trustee advanced $200 million of proprietary collateral that was held by JPMC in connection with MFGI’s proprietary clearing activity and made available by the JPMC Settlement Order to the 4(d) and 30.7 Estates. See JPMC Settlement Order at 3. Under the authority granted to the Trustee in the CME Settlement Order, the Trustee advanced $130 million of proprietary assets that were held by the CME and made available by the CME Settlement Order to the 4(d) and 30.7 Estates. See Memorandum Opinion and Order Granting Trustee’s Motion for Approval of an Agreement Providing for the Return of MFGI Property, Extinguishment of Duplicate Claims Filed with CME Group Inc., and Allocation of the MFGI Property to Customers of the MFGI Estate, Aug. 10, 2012, ECF No. 2824; Order Granting Trustee’s Motion for Approval of an Agreement Providing for the Return of MFGI Property, Extinguishment of Duplicate Claims Filed with CME Group Inc., and Allocation of MFGI Property to Customers of the MFGI Estate at 2, Aug. 10, 2012, ECF No. 2825 (together the “CME Settlement Order”).
5
satisfaction of their allowed net equity claims.6 As a result of the previously authorized
advances, the Trustee will need to advance an additional $305 million to satisfy immediately all
allowed customer net equity claims, the majority of which will be recouped over time from
future distributions due from MFGUK. Specifically, this advance (the “Final Advance”) consists
of two elements:
Advance Against Future MFGUK Distributions: The Trustee requests authority to
advance $174 million – $195 million in general estate funds against the future
distributions of 30.7 customer property from MFGUK. This portion of the Final
Advance merely serves to shift the time when customers will receive a final distribution
by allowing for immediate payment of customers as opposed to payments in the future
when the final distributions are received from MFGUK.
Securities Excess Advance: The Trustee requests authority to advance $110 million –
$131 million of general estate funds to cover the remaining gap between available
customer assets and allowed net equity claims. This represents the advance of a portion
of the excess property from the securities customer estate, which became general estate
property by operation of law under SIPA. The remaining $2 million – $23 million of the
excess property from the securities customer estate will remain in the general estate.
6. Beginning on August 19, 2013, the Trustee commenced the fourth interim distribution to customers on a rolling basis by which 4(d) customers will receive 98 percent of the value of their allowed net equity claims and 30.7 Customers will receive 74 percent of their allowed net equity claims.
6
Although there remains significant work to be done in the administration of MFGI’s general
estate, which the granting of relief sought herein should accelerate, this Motion represents the
final chapter in the process of making MFGI’s former customers whole.7
9. The Motion also seeks to confirm the assignment of rights and subrogation
principles with respect to claims against third parties that will apply to the previous and current
advances of general estate funds to satisfy allowed customer net equity claims.8 The request for
authority to advance sufficient general estate funds to satisfy all remaining unpaid allowed
customer net equity claims is being made to prevent the continued disruption and harm to
MFGI’s former customers caused by a failure of responsible parties to segregate customer assets
properly. It does not change the fact that there was a segregation failure or absolve anyone of
civil or other liability for the damage caused by their conduct.
JURISDICTION AND VENUE
10. On October 31, 2011 (the “Filing Date”), the Honorable Paul A. Engelmayer,
United States District Court Judge for the Southern District of New York, entered an order (the
“MFGI Liquidation Order”) commencing the liquidation of MFGI pursuant to the provisions of
SIPA in the case captioned Securities Investor Protection Corp. v. MF Global Inc., Case No. 11-
CIV-7750 (PAE) (2011) (ECF No. 3).
7. The Trustee has already made 100% distributions to MFGI’s former securities and delivery class commodities customers.
8. As the Trustee has previously noted in the Notice of Trustee’s Motion Pursuant to Federal Rule of Bankruptcy Procedure 9019 for Entry of an Order (i) Approving the Settlement Agreement Between the Trustee, the Class Representatives, and JPMorgan; and (ii) Authorizing the Allocation of Certain Assets Made Available by the Settlement Agreement to the Customer Estates for Distribution to Customers (the “JPMC Settlement Motion,” ECF No. 6148), “[t]o the extent that the Trustee allocates general estate funds (including the allocation of Remitted Funds proposed above) to the customer estate to remedy any shortfalls, the general estate (and the general creditors) are subrogated to any possible claims that MFGI’s former customers may have to recover customer property from third parties as to whom the Trustee has previously assigned claims.” Id. at 26 n.18.
7
11. The MFGI Liquidation Order, inter alia: (i) appointed the Trustee for the
liquidation of the business of MFGI pursuant to SIPA § 78eee(b)(3); (ii) appointed counsel to the
Trustee pursuant to SIPA § 78eee(b)(3); and (iii) removed the case to this Court for all purposes
as required for SIPA cases by SIPA § 78eee(b)(4) in the case caption In re MF Global Inc., Case
No. 11-2790 (the “SIPA Proceeding”).
12. Following removal to this Court for all purposes as required for SIPA cases by
section 78eee(b)(4) of SIPA, this Court has “all of the jurisdiction, powers, and duties conferred
by SIPA upon the court to which application for the issuance of the protective decree was
made.”
13. Venue is proper in this Court pursuant to SIPA § 78eee(a)(3) and 15 U.S.C. §
78aa.
BACKGROUND
14. The relief sought in the Motion builds on several advances and allocations
previously approved by the Court (including the advances and allocations approved in the CME
Settlement Order and the JPMC Settlement Order), and is also related to two separate
proceedings involving MFGI in the District Court, which are summarized below.
A. The District Court Class Action
15. On November 22, 2011, former commodity customers of MFGI filed the first of
twelve class actions against, among others, certain members of senior management of Holdings
and MFGI alleging violations of the Commodity Exchange Act’s (the “CEA”) and the CFTC
Rules’ segregation requirements that led to the shortfall in customer property available to satisfy
allowed net equity claims (as well as other damages arising from the shortfall). All pending
customer actions were consolidated for pretrial purposes under the case caption In re MF Global
Holdings LTD. Investment Litigation, No. 11 Civ. 7866 (S.D.N.Y. filed Nov. 03, 2011) (the
8
“Multi-District Litigation” or “MDL”) presently pending before the honorable Judge Victor
Marrero. The Defendants named in the Multi-District Litigation include: Bradley Abelow, Jon
Corzine, David Dunne, Laurie Ferber, Vinay Mahajan, Edith O’Brien, Christine Serwinski and
Henri Steenkamp, as well as CME Group Inc. and MF Global’s former independent auditor
(collectively, the “MDL Defendants”). Certain former commodities account holders have been
named as interim lead plaintiffs for the class of similarly situated former commodities account
holders at MFGI in the MDL (the “Customer Representatives”).9
16. In an effort to conserve the resources of the estates and to avoid the duplication of
efforts, on August 15, 2012, the Trustee and the Customer Representatives executed the
Continuing Cooperation and Assignment Agreement under which the Trustee assigned all claims
he held on behalf of customers and the general estate against the former directors and officers of
MFGI and Holdings to the Customer Representatives. Under the terms of the Continuing
Cooperation and Assignment Agreement all recoveries by the Customer Representatives in the
MDL will be returned to the Trustee for distribution in accordance with SIPA, the CFTC Rules,
the Bankruptcy Code, and other applicable law. This Court approved the Continuing
Cooperation and Assignment Agreement on October 11, 2012,10 and the District Court approved
it on October 22, 2012.11
9. The Customer Representatives include: Augustus International Master Fund L.P.; Bearing Fund LP; Mark Kennedy; Robert Marcin; Thomas G. Moran; Paradigm Equities Ltd.; Paradigm Asia Fund Ltd.; PS Energy Group, Inc.; Summit Trust Company; Henry Rogers Varner Jr.; and Thomas S. Wacker.
10. Order Approving Amended Agreement to Cooperate with and Assign Certain Claims to Class Action Plaintiffs in Pending Actions and to Distribute Funds Recovered to Customers, Oct. 11, 2012, ECF No. 3764 (the “CCAA Order”).
11. Order Approving Amended Agreement to Cooperate With And Assign Certain Claims To Class Action Plaintiffs In Pending Actions and to Distribute Funds Recovered To Customers, 11 Civ. 7866 (S.D.N.Y 2012), ECF No. 375 (the “District CCAA Order”).
9
B. CFTC Action and the Proposed Consent Order
17. On June 27, 2013, the CFTC filed an enforcement action in the District Court
against MFGI, Holdings, Jon S. Corzine, and Edith O’Brien based on MF Global’s failure to
properly segregate customer funds as well as other violations of relevant CFTC rules and
regulations.12
18. In connection with that complaint, the CFTC prepared the Consent Order to
resolve claims for penalties and other relief against MFGI. The proposed Consent Order will
facilitate payment of all allowed customer net equity claims, a goal shared by the Trustee, SIPC
and the Commission. This Court authorized the Trustee to enter into the proposed Consent
Order after notice to all parties on September 12, 2013,13 and the proposed Consent Order was
presented to the District Court on September 30, 2013
19. In relevant part, the Consent Order obligates the Trustee to seek an Order from
this Court (i) authorizing the advance of sufficient funds from the general estate to satisfy all
allowed customer net equity claims; and (ii) finding that the general estate is subrogated to the
customers’ claims against third parties arising from the shortfall to the extent that general estate
funds are used to satisfy the allowed customer net equity claims.14
RELIEF REQUESTED
20. The relief requested herein is consistent with the proposed Consent Order,
Bankruptcy Code § 105(a), and the Part 190 Regulations applicable to this SIPA Proceeding.
12. Complaint for Injunctive and Other Equitable Relief and for Civil Monetary Penalties Under the Commodity Exchange Act, U.S. Commodity Futures Trading Commission v. MF Global Inc., No. 13-0446, ECF No. 1.
13. Order Authorizing the Trustee to Enter the Final Consent Order of Restitution, Civil Monetary Penalty and Ancillary Relief Against MF Global Inc., ECF No. 7034 (the “Authorizing Order”).
14. The issue of whether the general estate was subrogated to the claims of MFGI’s former customers was reserved by a stipulated order between the Trustee and the MDL Defendants that was approved by this Court on September 12, 2013. Stipulated Order Reserving Rights, ECF No. 7035.
10
The Proposed Order confirms the current division of property under the Trustee’s control among
the 4(d) Estate, the 30.7 Estate, and the general estate based on the source of the funds and
previous Court Orders. The Proposed Order also authorizes the Trustee to advance $305 million
(the “Final Advance”) from the general estate (in addition to that which has already been
advanced), effectively as a loan, part of which will be repaid from the $174 million – $195
million future distributions from MFGUK, but the remainder of which will be recouped, if at all,
from recoveries in the MDL. The Final Advance, along with the $330 million of advances
already approved by the Court, will allow the Trustee to fully satisfy all allowed customer net
equity claims. The Proposed Order also confirms that the general estate, to which all further
returns or recoveries of property will now accrue, is entitled to pursue the claims of MFGI’s
former customers against third parties to the extent that general estate assets funds have been
used, or will be used, to satisfy allowed customer net equity claims.
I. THE TRUSTEE’S DIVISION OF THE ASSETS UNDER HIS CONTROL IS PROPER UNDER THE BANKRUPTCY CODE AND THE CFTC RULES.
21. Determining the assets that comprise customer property and allocating this
property to MFGI’s separate commodity estates involves the interplay of the Bankruptcy Code,
the CEA, and the CFTC Rules within the context of a SIPA proceeding. The Second Circuit has
emphasized in this connection that courts should defer to a SIPA trustee’s reasonable
discretionary determinations, including as to the methods for classifying property under his
control. See In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 238 n.7 (2d Cir. 2011) (“a
reviewing court could and should accord a degree of deference to such an exercise of discretion
so long as the method chosen by the trustee [for determining net equity]… is not clearly inferior
to other methods under consideration”); Kusch v. Mishkin (In re Adler, Coleman Clearing
Corp.), No. 95-08203 (JLG), 1998 Bankr. LEXIS 1076, at *97 (Bankr. S.D.N.Y. Aug. 24, 1998)
11
(application of SIPA is “committed to the broad discretion of a SIPA trustee in administering the
estate of a failed broker dealer”), aff’d, 2000 U.S. App. LEXIS 14008 (2d Cir. 2000). Indeed, a
SIPA trustee is accorded even more discretion in carrying out his responsibilities than a trustee in
a standard Chapter 7 liquidation. See 1 Collier on Bankruptcy ¶ 12.02 (16th ed. 2013).
22. As this Court has observed, the CFTC Rules establish a multi-step process for the
administration of the estate of a futures commodities merchant (“FCM”). See In re MF Global
Inc., 466 B.R. 244, 248 (Bankr. S.D.N.Y. 2012).15 Under the first step, section 761(10) of the
Bankruptcy Code and CFTC Rule 190.08(a)(1)(i)-(ii) define what assets under the Trustee’s
control constitute customer property. Under the second step, CFTC Rule 190.08(c) establishes
how the customer property identified under step one is allocated between account classes on the
basis of whether it was (i) segregated for an account class before the bankruptcy of the FCM; or
(ii) readily traceable to an account class after the bankruptcy of the FCM. The purpose of
allocating customer property to separate customer accounts is to reflect the different regulatory
schemes and protections applicable to different account classes by the CEA and the CFTC Rules.
A. Step One: The Trustee’s Treatment of Assets as Customer Property or Property of the General Estate
i. The Definition of Customer Property under the Bankruptcy Code and the CFTC Rules
23. In the liquidation of a FCM or a broker-dealer, assets can be classified into one of
two categories: (i) customer property available for allocation to the separate customer class as
appropriate under the CFTC Rules and SIPA (including in the instant case to the 4(d), 30.7,
15. In In re MF Global Inc., this Court stated that “[t]he CFTC's Part 190 Regulations guide trustees and assist courts in implementing the CEA and subchapter IV of title 11 of the Bankruptcy Code. See 17 C.F.R. § 190 et seq. (2013). Those regulations: (1) define what constitutes customer property, see 17 C.F.R. § 190.08 (2013); (2) establish a system of customer classes and account classes, which ensures a fair and orderly process of pro rata distribution, see id. §§ 190.01(a), (m), (bb), & (hh); and (3) provide a formula for calculating allowable ‘net equity claims.’”
12
Delivery, and Securities Estates) in order to satisfy allowed customer net equity claims of the
former customers of the debtor; or (ii) general estate property available to satisfy the claims of
general creditors of the debtor. See 1 Collier on Bankruptcy § 12.02 (16th ed. 2013) (“[A] SIPA
estate is composed of two parts: a general estate and a separate fund of ‘customer property’
consisting generally of the cash and securities entrusted to the liquidating broker dealer by
‘customers.’”)
24. The determination of what constitutes customer property for a FCM is governed
by section 761(10) of the Bankruptcy Code.16 Additionally, as part of the CEA, Congress
empowered the CFTC, by rule or regulation, to further define the boundaries of “customer
property,” and the CFTC defined these boundaries in CFTC Rule 190.08(a)(1)(i)-(ii). See
7 U.S.C. § 24(a)(1) (2012) (“[T]he Commission may provide, with respect to a commodity
broker that is a debtor under chapter 7 of Title 11, by rule or regulation--(1) that certain cash,
securities, other property, or commodity contracts are to be included in or excluded from
customer property or member property”). If an asset does not meet the criteria listed in § 761 of
16. 11 U.S.C. § 761(10) states that: “‘customer property’ means cash, a security, or other property, or proceeds of such cash, security, or property, received, acquired, or held by or for the account of the debtor, from or for the account of a customer-- (A) including-- (i) property received, acquired, or held to margin, guarantee, secure, purchase, or sell a commodity contract; (ii) profits or contractual or other rights accruing to a customer as a result of a commodity contract; (iii) an open commodity contract; (iv) specifically identifiable customer property; (v) warehouse receipt or other document held by the debtor evidencing ownership of or title to property to be delivered to fulfill a commodity contract from or for the account of a customer; (vi) cash, a security, or other property received by the debtor as payment for a commodity to be delivered to fulfill a commodity contract from or for the account of a customer; (vii) a security held as property of the debtor to the extent such security is necessary to meet a net equity claim based on a security of the same class and series of an issuer; (viii) property that was unlawfully converted from and that is the lawful property of the estate; and (ix) other property of the debtor that any applicable law, rule, or regulation requires to be set aside or held for the benefit of a customer, unless including such property as customer property would not significantly increase customer property; but (B) not including property to the extent that a customer does not have a claim against the debtor based on such property.”
13
the Bankruptcy Code and CFTC Rule 190.08(a)(1)(i)-(ii), it is considered property of the general
estate.
25. CFTC Rules 190.08(a)(1)(i)-(ii) closely track the language of section 761(10) and
specify fifteen categories of “customer property.” The first five categories of customer property
are based on assets that the FCM received pre-petition for the account of a customer including:
(i) cash, securities or other property acquired or held to margin, guarantee, secure, purchase or
sell a commodities contract; (ii) open commodities contracts; (iii) warehouse receipts or other
documents of title acquired by the debtor to fulfill a commodities contract; (iv) letters of credit;
and (v) hypothecated property to the extent that it exceeds the proceeds of the loan. 17 C.F.R. §
190.08(a)(1)(i)(A)-(F) (2013). Similarly, CFTC Rule 190.08(a)(1)(ii)(A) states that customer
property includes any assets that were actually segregated for the benefit of customers on the
Filing Date, while CFTC Rule 190.08(a)(1)(ii)(C) includes any asset that is specifically
identifiable to a customer in the definition of customer property.17 In sum, under CFTC Rule
190.08(a)(1)(i)(A)-(E) and CFTC Rule 190.08(a)(1)(ii)(A) and (C), an asset will constitute
customer property to the extent that it was in MFGI’s possession or control on the Filing Date
and was (i) received or held by MFGI on account of a customer’s account; (ii) actually
segregated for the benefit of MFGI’s customers; or (iii) specifically identifiable to a customer.
These seven categories of customer property represent the “Core Customer Property” of MFGI.18
17. “Specifically identifiable property” is a class of property defined as, among other things: physical commodities received, acquired, or held by or for the account of the debtor for the purpose of making or taking delivery or exercise from or for the account of a customer, any such document of title or commodity which as of the entry of the order for relief can be identified on the books and records of the debtor as received from or for the account of a particular customer as held specifically for the purpose of delivery or exercise. 17 C.F.R. § 190.01(ll)(3) (2013); see also In re MF Global Inc., 466 B.R. 244, 249 (Bankr. S.D.N.Y. 2012) (applying 190.08(a)(1)(ii)(C)).
18. Additionally, CFTC Rule 190.08(a)(1)(ii)(B) includes in the definition of customer property any securities owned by the debtor to the extent there are customer claims for securities of the same class and series. This
14
26. The CFTC Rules also include in the definition of customer property assets that are
in the debtor’s possession that were unlawfully converted from segregated accounts,
17 C.F.R. § 190.08(a)(1)(ii)(F), or assets of the debtor that any applicable rule, law, regulation or
order required to be set aside for the benefit of customers. 17 C.F.R. § 190.08(a)(1)(ii)(G)
(2013).
27. The next four categories of customer property referred to in CFTC Rule
190.08(a)(1)(ii) include certain types of assets recovered by the Trustee or the Commission after
the Filing Date consisting of: (i) any assets described in CFTC Rule 190.08(a)(1)(i)(A), that were
recovered by the Trustee using his avoidance powers, 17 C.F.R. § 190.08(a)(1)(ii)(D) (2013); (ii)
any assets recovered by the Trustee on account of a debit balance, margin deficient or other
claim of the debtor against a customer account, 17 C.F.R. § 190.08(a)(1)(ii)(E) (2013); (iii) any
assets recovered by the Commission in any proceeding against the principal agents or employees
of the debtor, 17 C.F.R. § 190.08(a)(1)(ii)(H) (2013); and (iv) any property that represents
proceeds from the investment of customer property, 17 C.F.R. § 190.08(a)(1)(ii)(I) (2013).
28. The CFTC has also promulgated CFTC Rule 190.08(a)(1)(ii)(J), which allows for
the use of general estate property to satisfy commodities customer property claims. By its terms,
CFTC Rule 190.08(a)(1)(ii)(J) applies only, if at all, once all sources of recovery have been
completed. As detailed in the Declaration of Josiah S. Trager in Support of the Motion attached
as Exhibit B (the “Trager Declaration”), the Trustee expects to receive the Future MFGUK
Distributions over time and it is uncertain when and to what extent there will be a recovery in the
MDL. See Trager Declaration at ¶ 47-49. In an effort to make immediate, one hundred percent
distributions to customers in order to mitigate the continuing harm caused by the collapse of
section is, however inapplicable here. The Trustee did not receive any commodities claims for securities of the same class and series of any securities held by MFGI.
15
MFGI, the Trustee (with the support of the CFTC and as required by the Consent Order) is
seeking to advance sufficient funds from the general estate to satisfy allowed customer claims.
The proposed advance, if approved by the Court, will ensure that there is sufficient property
available to satisfy all allowed customer claims and the potential application of CFTC Rule
190.08(a)(1)(ii)(J) is not at issue.
29. The structure of the relief sought by the Trustee also preserves, through
assignment, subrogation, and other similar theories of recovery described below, the customers’
claims against the MDL defendants arising from the gap between customer property and allowed
customer net equity claims.
30. Moreover, if not for the relief sought by this motion, CFTC Rule
190.08(a)(1)(ii)(J) might be challenged. In In re Griffin Trading Co., the bankruptcy court for
the Northern District of Illinois held that 17 C.F.R. § 190.08(a)(1)(ii)(J) exceeded the CFTC’s
authority to define “customer property” pursuant to 7 U.S.C. § 24. See In re Griffin Trading Co.,
245 B.R. 291 (N.D. Ill. Bankr. 2000), vacated, 270 B.R. 882 (N.D. Ill. 2001). Following a
settlement between the parties in that case, the U.S. District Court for the Northern District of
Illinois vacated the bankruptcy court’s decision. In re Griffin Trading Co., 270 B.R. 882 (N.D.
Ill. 2001). Litigation of this issue is, for the reasons given above, unnecessary, and would be
wasteful of estate resources, as well as the public resources of the Commission and this Court.
The relief sought herein with the concurrence of the general estate’s largest creditor (which
eliminates many of the Griffin court’s concerns) would obviate the need for such waste. As
structured, the relief sought in this Motion would allow customers to be made whole without
affecting the rights and liabilities of the defendants in the MDL to the extent it is determined that
16
their conduct caused damage to the debtor, its customers or its creditors, whether that damage
would be borne by the customer estate or the general estate.
ii. Application of the CFTC Rules to the Assets Under the Trustee’s Control
31. As detailed in the Trustee’s Interim Reports, the Trustee engaged in a
comprehensive and exhaustive process to marshal the assets of the MFGI estate and, where
appropriate, to seek damages from entities arising from the collapse of MFGI.19 As a result of
these efforts, the Trustee marshaled over $5.3 billion in segregated and secured assets from
MFGI’s former exchanges and depositories. As detailed below, the source of these assets was
clearly customer property. The Trustee has also marshaled the proprietary assets of MFGI from
MFGI’s former financial institutions, financial counter parties, and other third parties. As also
detailed below, the sources of these assets were clearly proprietary accounts belonging to the
general estate.
32. The Trustee also entered into a number of settlement agreements with MFGI’s
former affiliates, exchanges and financial institutions. The settlement agreements entered into by
the Trustee (and approved by the Court) that are relevant and material to the instant Motion are
detailed below. The assets recovered as a result of the settlement agreements are properly
classified either as customer property or general estate property depending on the assets returned,
the basis of the Trustee’s claims settled through the agreement, and the Order entered by the
Court approving the settlement agreement. Finally, after the satisfaction of all allowed securities
customer net equities claims, the securities estate has an excess of approximately $133 million
19. See First Interim Report for the Period of October 31, 2011 through June 4, 2012 (the “First Interim Report,” ECF No. 1864); Second Six Month Interim Report for the Period of June 5, 2012 through December 4, 2012 (the “Second Interim Report,” ECF No. 4763); Third Six Month Interim Report for the Period of December 5, 2012 through June 4, 2013 (the “Third Interim Report,” ECF No. 6548).
17
(the “Securities Excess”). For the reasons detailed below, the Securities Excess becomes
property of the general estate by operation of law.
a. Customer Property
i. The Segregated Assets Directly Distributed or Returned by MFGI’s Former Exchanges and Depository Banks Were Customer Property.
33. Immediately upon entry of the MFGI Liquidation Order, the Trustee engaged the
CME Group Inc. (the “CME”) and MFGI’s other former Derivatives Clearing Organizations
(“DCOs”) to establish a process to transfer open customer commodities future contracts, with
notional values of over $100 billion, and associated clearing level customer margins to qualified
receiving FCMs through a series of bulk transfers (the “FCM Account Transfers”).20
34. The FCM Account Transfers resulted in the direct transfer to customers of the
majority of the funds being held in segregated accounts for the benefit of MFGI’s customers at
the CME and the other DCOs pursuant to section 4(d) of the CEA, with the remainder of the
funds held in these segregated accounts being returned to the Trustee for future distribution to
customers pursuant to the Court approved claim procedures. As a result of the FCM Account
Transfers, over $2.5 billion in segregated funds were transferred directly by the CME and the
other DCOs to MFGI’s former customers’ new accounts at the recipient FCMs (the “Transferred
DCO Customer Property”). After the FCM Transfers, the CME and the DCOs returned over
$280 million in segregated property to the Trustee (the “Returned DCO Customer Property”, and
along with the Transferred DCO Property, the “DCO Customer Property”). A breakdown of the
20. After seeking and obtaining Court approval, the FCM Account Transfers were accomplished in three phases: (1) the Position Transfer, which transferred all open 4(d) customer commodities contracts and a percentage of the associated margining collateral to accounts at new FCMs; (2) the Cash-Only Transfer, which resulted in the transfer of a percentage of 4(d) customer accounts who had only cash or cash equivalent in their accounts to account at new FCMs; and (3) the True-Up Transfer, which allowed 4(d) customers to access approximately 72% of the value of their MFGI accounts at their new FCM.
18
assets directly transferred and the assets subsequently returned by each DCO is contained in the
Trager Declaration.21 See Trager Declaration at ¶¶ 20-26.
35. Prior to the Filing Date, MFGI’s commodities customer property was primarily
held in segregated and secured accounts at JPMorgan Chase Bank N.A. and BMO Harris Bank
N.A., with lesser amounts held at other banking institutions. In response to the Trustee’s request
made shortly after the Filing Date, these financial institutions returned over $2.3 billion in
property that was held in segregated accounts for the benefit of MFGI’s 4(d) customers (the
“Segregated Bank Property”) and over $112 million in property that was held in secure accounts
for the benefit of MFGI’s 30.7 customers (the “Secured Bank Property”). A breakdown of the
segregated and secured assets returned by each financial institution is contained in the Trager
Declaration. See Trager Declaration at ¶¶ 17-18.
36. The DCO Customer Property, the Segregated Bank Property, and the Secured
Bank Property consist of assets that were held by MFGI on behalf of customers and that were
held in segregation on the Filing Date, thus satisfying the definition of customer property under
CFTC Rule 190.08(a)(1)(i) and 190.08(a)(1)(ii)(A). Accordingly, the DCO Customer Property,
the Segregated Bank Property and Secured Bank Property constitute the core customer property
of the MFGI estate, which has been or will be used to satisfy allowed customer net equity
claims.22
21. Shortly after the Filing Date, the Trustee began the process of recovering assets from former MFGI customers whose accounts had negative or debit positions in their accounts as of the Filing Date. The Trustee collected over $13 million from former customers who had debit positions (“Customer Account Debits”). Pursuant to CFTC Rule 190.08(a)(1)(ii)(E), the Customer Account Debits constitutes customer property.
22. A portion of the assets returned by MFGI’s former financial institutions included securities and the Trustee has collected approximately $5.1 million of interest and dividends on account of these securities since the Filing Date (“Customer Post-Petition Income”). Pursuant to CFTC Rule 190.08(a)(1)(ii)(I), the Customer Post-Petition Income constitutes customer property.
19
ii. The Assets Recovered under the MFG Canada Settlement Agreement Were Customer Property.
37. On November 2, 2011, the Trustee and MFG Canada executed a settlement
agreement (the “MFG Canada Settlement Agreement”), which provided for the global settlement
of all claims between the two estates. The Trustee’s claims against MFG Canada consisted of,
among other things, a claim on behalf of MFGI’s foreign futures and foreign options customers
for the return of the $103 million of assets that were segregated at MFG Canada for the benefit of
MFGI’s 30.7 customers. As a result of the MFG Canada Settlement Agreement, MFG Canada
agreed to return over $60 million to the Trustee (the “MFG Canada Settlement Payment”) and to
waive its $53 million customer claim in the SIPA Proceeding. After briefing and a hearing, on
July 11, 2012, the Court entered a Memorandum Opinion and Order (together, the “MFG Canada
Order”) 23 approving the MFG Canada Settlement Agreement.
38. The Trustee’s claims against MFG Canada sought to recover assets held at MFG
Canada that both parties agreed were segregated for the benefit of MFGI’s 30.7 customers.24
Accordingly, these assets satisfy the definition of customer property under CFTC Rule
190.08(a)(1)(i) and 190.08(a)(1)(ii)(A) and are properly considered customer property.
23. See Order Granting Motion of James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc., Pursuant to Section 105(a) of the Bankruptcy Code, SIPA Sections 78fff(b) and 78fff-1(a), and Rule 9019 of the Federal Rules of Bankruptcy Procedure for Approval of an Agreement with KPMG Inc., as Trustee in the Bankruptcy of MF Global Canada Co., July 11, 2012, ECF No. 2395.
24. See Motion of James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc., Pursuant to Section 105(a) of the Bankruptcy Code, SIPA Sections 78fff(b) and 78fff-1(a), and Rule 9019 of the Federal Rules of Bankruptcy Procedure for Approval of an Agreement with KPMG Inc., as Trustee in the Bankruptcy of MF Global Canada Co. at 1, June 26, 2012, ECF No. 2242 (stating that neither the Trustee nor MFG Canada disputed that the funds claimed by the Trustee were held in segregated accounts for the benefit of MFGI’s customers).
20
iii. The Assets Recovered under the MFGUK Settlement Agreement Were Customer Property.
39. On December 22, 2012, the Trustee and MFGUK executed a settlement
agreement (the “MFGUK Settlement Agreement”), which provided for the global settlement of
all claims between the two former affiliates.25 The Trustee’s claims against MFGUK consisted
of, among other claims, a claim for the return of the approximately $700 million in customer
property that should have been segregated at MFGUK for the benefit of MFGI’s 30.7 customers.
After briefing and a hearing, on January 31, 2013, the Court entered a Memorandum Opinion
and Order (together, the “MFGUK Order”)26 approving the MFGUK Settlement Agreement.
40. Under the MFGUK Settlement Agreement, the Trustee received certain agreed
claim amounts (which include various provisions for setoffs and shortfalls) in the special
administration of MFGUK. On August 22, 2013, the Trustee received the initial distribution of
$366.1 million from MFGUK, an amount greater than originally anticipated, and has since
received an additional $19.4 million (the collective $385.5 million in distributions comprising
the “Initial MFGUK Distribution”). The Trustee will also receive, over time, an additional
estimated $174 million – $195 million in further distributions from MFGUK under the MFGUK
Settlement Agreement on account of the Trustee’s allowed claims in the special proceeding (the
“Future MFGUK Distributions”).
41. The Initial MFGUK Distribution and the Future MFGUK Distributions represent
customer property. The Trustee’s claims against MFGUK sought to recover assets held at
MFGUK for MFGI’s 30.7 customers that were required by applicable regulations (CFTC Rule
25. The MFGUK Settlement included the partial setoff of claims by the Trustee for the return of 30.7 property and
claims by MFGUK against the 4(d) estate. As all allowed customer net equity claims in the 4(d) Estate will be resolved through the current Motion, the Trustee has allocated the recoveries under the MFGUK Settlement to the 30.7 Estate.
26. See Order Approving Settlement Agreement Between the Debtor, The Trustee, MFGlobal UK Limited (In Special Administration) and the MFGUK Joint Special Administrators, Jan. 31, 2013, ECF No. 5724.
21
30.7) to be secured for MFGI’s 30.7 customers. The Initial MFGUK Distribution and the Future
MFGUK Distribution represent a return of funds to the Trustee’s control that should have been
segregated by MFGI on the Filing Date.27 Accordingly, the Initial MFGUK Distribution does –
and when received, the Future MFGUK Distributions will – meet the definition of customer
property stated in 17 C.F.R. § 190.08(a)(1)(ii)(G), that is, “property of the debtor that any
applicable law, rule, regulation, or order requires to be set aside for the benefit of customers.”
iv. The $100 Million Settlement Payment from JPMorgan under the JPMC Settlement Agreement Was Customer Property.
42. After an exhaustive investigation of the relationship between MFGI and
JPMorgan, on March 19, 2013, the Trustee and the Customer Representatives executed a
settlement agreement with JPMorgan resolving all of the Trustee’s and the Customer
Representatives’ claims against the bank, including claims based on the Trustee’s avoidance
powers under SIPA, the CFTC Rules, and the Bankruptcy Code (the “JPMC Settlement
Agreement”). The JPMC Settlement Agreement was approved by this Court and the District
Court on July 9, 2013 following a joint hearing held before both Courts on July 3, 2013. See
JPMC Settlement Order.
43. The JPMC Settlement Agreement provides for the influx of $100 million in new
funds to the MFGI estate for distribution to customers (in addition to the other consideration to
the MFGI estate detailed below). Pursuant to the JPMC Settlement Order, this $100 million
27. See Declaration of Christopher K. Kiplok in Support of Trustee’s Motion Pursuant to Federal Rule of Bankruptcy Procedure 9019 for Entry of Order Approving Settlement Agreement between the Debtor, the Trustee, MF Global UK Limited (in Special Administration) and MFGUK Joint Special Administrators (the “Kiplok Declaration”) at ¶8, Jan. 10, 2013, ECF No. 5365. (“The 30.7 Claimants would be the most immediate beneficiaries of the Settlement Agreement; approximately $290 million would rapidly come into the MFGI estate as a result of the Settlement Agreement becoming effective, essentially doubling the assets marshaled for the 30.7 Claimants to date. Ultimately, as more distributions are made by the JSAs, the amount available for 30.7 Claimants could reach more than triple its present level.”)
22
constitutes customer property that will be allocated to the 4(d) Estate. See JPMC Settlement
Order at 3.
v. The Account 9102591063 Balance Was Customer Property.
44. Shortly after the Filing Date, JPMorgan returned approximately $29 million to the
Trustee representing the balance of account 9102591063 (the “Account 9102591063 Balance”),
which MFGI maintained at JPMorgan. The Trustee believed that account 9102591063 was a
secured account established by MFGI to custody assets received from 30.7 customers who were
trading on foreign commodities exchanges. JPMorgan asserted that MFGI failed to provide the
appropriate documentation to establish a secured account and that, as a result, account
9102591063 was a proprietary account subject to certain liens and setoff rights. As part of the
JPMC Settlement Agreement, JPMorgan released any purported liens or setoff rights to the
Account 9102591063 Balance.
45. The Account 9102591063 Balance represents customer property. The receipt of
the Account 9102591063 Balance is a return of funds to the Trustee’s control that should have
been segregated by MFGI on the Filing Date but were not due to MFGI’s failure to comply with
relevant CFTC rules and regulations to properly establish account 9102591063 at JPMorgan.
Accordingly, the Account 9102591063 Balance meets the definition of customer property stated
in 17 C.F.R. § 190.08(a)(1)(ii)(G), that is, “property of the debtor that any applicable law, rule,
regulation, or order requires to be set aside for the benefit of customers.”
23
b. General Estate Property
i. The Proprietary Assets Returned by MFGI’s Former Depositories, Financial Counterparties, and other Third Parties Were Property of the General Estate.
46. At the same time that the Trustee was in the process of marshaling MFGI’s
segregated assets, he also established a parallel procedure to marshal MFGI’s proprietary assets
from MFGI’s former DCOs, financial institutions, and other third parties.
47. As a result of these efforts, the Trustee has recovered nearly $140 million in
MFGI proprietary property held by the Options Clearing Corporation, the Kansas City Board of
Trade, New York Portfolio Clearing, the Intercontinental Exchange Inc., the International
Derivatives Clearing House, and the Minneapolis Grain Exchange. The Depository Trust &
Clearing Corporation has returned over $235 million in proprietary cash and has also returned
proprietary securities with an estimated value of $299 million in response to the Trustee’s
marshaling efforts. Similarly, the Bank of New York-Mellon has returned over $217 million in
cash and securities that had been held in MFGI’s proprietary accounts at the bank, and BMO
Harris has returned over $3 million in proprietary MFGI assets.28 The Trustee and his
professionals have also worked diligently on the recovery of value from the unwind of financial
product transactions between MFGI and other broker-dealers, financial institutions, and other
parties. As a result of these efforts, the Trustee has recovered an additional $91 million in
proprietary assets. In addition to the funds returned by JPMorgan described below, MFGI’s
DCOs, financial institutions, and other third parties have returned over $1 billion of proprietary
assets (the “Marshaled Proprietary Assets”) to the Trustee. A detailed summary of these
recoveries is contained in the Trager Declaration at ¶ 19.
28. The proprietary assets returned by JPMC are addressed separately in section iii below.
24
48. The Marshaled Proprietary Assets do not meet any of the criteria to be considered
customer property under 11 U.S.C.A. § 761(10) of the Bankruptcy Code or, as discussed above,
CFTC Rule 190.08(a)(1)(i)-(ii). As detailed in the Report of the Trustee’s Investigation and
Recommendations filed with the Court on June 4, 2012 (the “Investigation Report”), there is no
basis to conclude that the proprietary assets recovered through the marshaling process contain
any property that belongs to customers or other assets that should have been segregated on the
Filing Date. The Marshaled Proprietary Assets represent assets that were used to support
MFGI’s proprietary business activities apart and separate from any customer transactions. The
Marshaled Proprietary Assets were not entrusted by customers to MFGI or held on behalf of
customer accounts; nor were they held in segregated accounts on the Filing Date. Likewise, the
Marshaled Proprietary Assets were not converted from segregated accounts or recovered by the
Trustee or the Commission from agents or employees. They fail to meet the Bankruptcy Code’s
or CFTC Rules’ definition of customer property, under the circumstances discussed above, and
are properly considered property of the general estate.
ii. Prior to the Advance and Allocation Approved by the CME Settlement Order, the Assets Recovered by the CME Settlement were Proprietary, Non-Customer Property.
49. On June 14, 2012, the Trustee filed a motion for approval of an agreement
between the Trustee and the CME providing for the return of MFGI property, extinguishment of
duplicate claims filed with the CME, and allocation of proprietary MFGI property to customers
of the MFGI estate (the “CME Settlement Agreement”). After briefing and a hearing, on August
25
10, 2012, the Court entered a Memorandum Opinion and Order (together, the “CME Settlement
Order”) 29 approving the CME Settlement Agreement.
50. As part of that CME Settlement Agreement, the CME agreed to return certain
proprietary assets to the Trustee (subject to certain court-approved hold backs authorized in the
CME Order), including: (i) $161 million in cash and cash equivalents collectively held by the
CME exchanges that was originally posted by MFGI as guaranty fund money; (ii) $13 million in
cash and cash equivalents in MFGI’s house origin account at the CME exchanges; (iii) certain
open proprietary commodity futures positions and associated margin to a third party on
November 1, 2011; and (iv) other proprietary assets including CME Group Inc. common stock
and memberships on various exchanges previously held by MFGI (the “CME Proprietary
Assets”). See CME Settlement Agreement at ¶ 6.
51. The CME Proprietary Assets were property of the general estate, not customer
property. The CME Proprietary Assets do not meet any of the criteria listed in 11 U.S.C. §
761(10) of the Bankruptcy Code or, under the circumstances described above, CFTC Rule
190.08(a)(1)(i)-(ii). As proprietary assets entrusted by MFGI to the CME, the CME Proprietary
Assets do not constitute cash, securities, or other property received, acquired or held for a
customer and do not meet the criteria for customer property contained in 17 C.F.R. §
190.08(a)(1)(i). The CME Proprietary Assets were not segregated for the benefit of MFGI’s
customers on the Filing Date, specifically identifiable to a customer, recovered by the Trustee
using his avoidance powers, or unlawfully converted from a customer account. Therefore, and
29. See Memorandum Opinion and Order Granting Trustee’s Motion for Approval of an Agreement Providing for the Return of MFGI Property, Extinguishment of Duplicate Claims Filed with CME Group Inc., and Allocation of the MFGI Property to Customers of the MFGI Estate, Aug. 10, 2012, ECF No. 2824; Order Granting Trustee’s Motion for Approval of an Agreement Providing for the Return of MFGI Property, Extinguishment of Duplicate Claims Filed with CME Group Inc., and Allocation of MFGI Property to Customers of the MFGI Estate at 2, Aug. 10, 2012, ECF No. 2825 (together, the “CME Settlement Order”).
26
for the reasons discussed above, the CME Proprietary Assets do not meet any of the criteria
under CFTC Rule 190.08(a)(1)(ii) and are not customer property.30
52. As detailed in Section III below, the Trustee received authority in the CME Order
to advance $130 million of the CME Proprietary Assets equally between the 4(d) and 30.7
Estates. Pursuant to the CME Order, the Trustee advanced the $130 million and distributed it to
customers in partial satisfaction of their allowed customer net equity claims, and this $130
million advance is part of the advances finalized by this Motion and subject to the subrogation
principle discussed below.
iii. Prior to the Advance and Allocation Approved by the JPMC Settlement Order, the Returned Collateral Made Available by the JPMC Settlement Agreement was Proprietary Non-Customer Property.
53. In addition to the $100 million settlement payment, the JPMC Settlement
Agreement also provides for the return of over $29 million in proprietary MFGI funds held by
JPMorgan to secure potential obligations under a Revolving Credit Facility Agreement and
JPMorgan’s Clearance Agreement with MFGI (the “Reserve Collateral”) and the release of
certain liens and setoff rights in over $390 million in MFGI proprietary funds that the bank had
previously returned to the MFGI estate. The $390 million in assets unencumbered as a result of
the settlement included approximately $314 million in proprietary assets that MFGI had posted
with JPMorgan to support its proprietary clearing activity (the “Remitted Clearance Collateral”)
and $76 million in proprietary assets that MFGI had posted as collateral for a revolving credit
facility for which JPMorgan was the administrative agent (the “Remitted RCF Collateral” and
30. These CME Proprietary Assets were also described as proprietary estate assets in the Trustee’s Motion to approve the CME Settlement Agreement. See Notice of Trustee’s Motion for Approval of an Agreement Providing for the Return of MFGI Property, Extinguishment of Duplicate Claims Filed with CME Group Inc., and Allocation of MFGI Property to Customers of the MFGI Estate (the “CME Settlement Motion”, ECF No. 2029) (stating the funds were “not set aside specifically for customers”). The Trustee received no objection to the description contained in the CME Settlement Motion prior to the approval of the CME Settlement Agreement.
27
along with the Remitted Clearance Collateral and the Reserve Collateral, the “Returned
Collateral”).31
54. The $390 million of Returned Collateral was property of the general estate, not
customer property. The Returned Collateral consists of proprietary assets that MFGI posted with
JPMorgan as collateral to (i) support the firm’s propriety trading activity that was transacted
through JPMorgan, which served as MFGI’s clearing bank; or (ii) support draws under the
revolving credit facility. The assets comprising the Returned Collateral are separate and distinct
from the assets that the MDL Defendants permitted to be transferred from MFGI’s segregated
and secured accounts prior to the Filing Date. The proprietary nature of the assets comprising
the Returned Collateral is described in detail in the JPMC Settlement Motion. See JPMC
Settlement Motion at 8-10.
55. Accordingly, the Returned Collateral does not meet any of the criteria listed in 11
U.S.C.A. § 761(10) of the Bankruptcy Code or, under the circumstances discussed above, 17
C.F.R. § 190.08(a)(1)(i)-(ii). As proprietary assets posted by MFGI with JPMorgan, the
Returned Collateral was not cash, securities, or other property received, acquired or held for a
customer and does not meet the criteria for customer property contained in 17 C.F.R. §
190.08(a)(1)(i). The Returned Collateral was not segregated on the Filing Date, specifically
identifiable to a customer, recovered by the Trustee using his avoidance powers, or unlawfully
converted from a customer account. Therefore, and for the reasons discussed above, the
Returned Clearance Collateral does not meet any of the criteria under CFTC
Rule190.08(a)(1)(ii).
31. The Account 9102591063 Balance was also unencumbered as a result of the JPMC Settlement Agreement.
28
56. As detailed in Section III below, the Trustee received authority in the JPMC
Settlement Order to advance $200 million of the Returned Collateral to the 4(d) and 30.7 Estates.
Pursuant to the JPMC Settlement Order, the Trustee advanced the $200 million and distributed it
to customers in partial satisfaction of their allowed customer net equity claims.
c. The Securities Excess Becomes a Part of the General Estate Under SIPA.
57. Any excess assets in the fund of securities customer property established under
SIPA (the “Securities Estate”) after all allowed securities customers’ net equity claims are
satisfied becomes property of the general estate under SIPA. The Trustee has received over $376
million in allowed securities net equity claims against the Securities Estate as against $509
million in assets currently held in segregated securities accounts, resulting in an excess of $133
million (the “Securities Excess”). SIPA § 78fff-2(c)(1) titled “Allocation of Customer Property”
states:
[T]he Trustee shall allocate customer property of the debtor as follows: (i) first, to SIPC in repayment of advances made under 78fff-3(c)(1), (ii) second to customers to satisfy net equity claims (securities only), (iii) third to SIPC as subrogee, and (iv) fourth to SIPC to repay any advance made under section 78fff-3(c)(2). Any property remaining after allocation in accordance with this paragraph shall become part of the general estate of the debtor. (emphasis added)
In accordance with this mandate, the Trustee has paid all allowed security customer net equity
claims and repaid SIPC for any advances made as part of the SIPA Proceeding. To the extent
there is an excess in the Securities Estate, it becomes general estate property.
B. Step Two: The Principles of Allocation of Customer Property to the Appropriate Separate Account Classes
58. Once it has been determined that an asset constitutes customer property, the
Trustee is required by the CFTC Rules to allocate the asset to one of the separate and distinct
customer estates. CFTC Rule 190.08(c)(1) states that:
29
[P]roperty held by or for the account of a customer, which is segregated on behalf of a specific account class, or readily traceable on the filing date to customers of such account class, must be allocated to the customer estate of the account class for which it is segregated or to which it is readily traceable.” 17 C.F.R. § 190.08(c)(1).
As described by the CFTC when it first proposed the Part 190 Regulations, this separate account
class treatment was intended to track the different regulatory protections: “This approach is
consistent with the fact that differing segregation requirements exist for different classes of
accounts. Obviously, much of the benefit of segregation would be lost if property segregated on
behalf of a particular account class could be allocated to pay the claims of customers of a
different account class for which less stringent segregation provisions were in effect.”
Bankruptcy, 46 Fed. Reg. 57,535, 57,554 (proposed Nov. 24, 1981) (to be codified at 17 C.F.R.
pt. 190).
59. The CFTC Rules identify six potential account classes that customer property
could be allocated to: futures accounts; foreign futures accounts; leverage accounts; commodity
option accounts; delivery accounts; and cleared OTC derivatives accounts. 17 C.F.R.
§ 190.01(a) (2013). Of these, at MFGI there were two principle account classes: (i) an account
class comprising domestic futures accounts, commodity option accounts, and cleared OTC
derivatives accounts that cleared on domestic exchanges that share in the MFGI Section 4(d)
segregated customer property pool (the “4(d) Estate”); and (ii) an account class comprised of
foreign futures accounts and cleared OTC derivatives accounts that cleared on foreign exchanges
that share in the MFGI 30.7 foreign secured customer property pool (the “30.7 Estate”).32
32. Where accounts were treated as one by MFGI, the accounts may be treated as one account class. Id.; see also 6 Collier, supra, ¶ 761.18[1] (“The number of separate estates for distribution purposes will depend, in part, on whether commodity options accounts and/or cleared OTC derivatives accounts have been commingled with futures account positions.”). MFGI did not maintain leverage accounts; it commingled domestic futures
30
60. The Trustee allocated the Exchange Customer Property and the Depository
Customer Property to the 4(d) and 30.7 Estates on the basis of how it was segregated by MFGI
prior to the SIPA Proceeding. As part of his marshaling efforts described above, the Trustee
recovered over $2.7 billion in assets that had been in segregated accounts for the benefit of its
4(d) customers at numerous exchanges and over $2.3 billion in assets that had been in segregated
accounts that had been segregated for the benefit of its 4(d) customers at numerous financial
institutions. See Trager Declaration at ¶ 17. Pursuant to the requirement of CFTC Rule
190.08(c) that customer property should be allocated to the account class for which it was
segregated by the debtor pre-petition, the Trustee has allocated these assets to the 4(d) Estate
(some of which has been distributed to satisfy allowed 4(d) customer net equity claims pursuant
to the Bulk Transfer Orders). Similarly, the Trustee recovered over $114 million in assets that
had been segregated for the benefit of its 30.7 customers at numerous financial institutions. See
Trager Declaration at ¶ 18. In compliance with the requirements of CFTC rule 190.08(c), the
Trustee has allocated these assets to the 30.7 Estate (and a portion of these assets has been
distributed to satisfy allowed 30.7 customer net equity claims pursuant to the Bulk Transfer
Orders).
61. The Trustee has allocated the MFG Canada Settlement Payment, the Initial
MFGUK Distribution, the Future MFGUK Distributions and the Account 9102591063 Balance
to the 30.7 Estate because these payments are readily traceable to the activities of MFGI’s former
30.7 customers. The Trustee’s claims against MFG Canada, which were resolved through the
MFG Canada Settlement Agreement, sought the return of property held at MFG Canada for the
benefit of MFGI’s 30.7 customers. Similarly, the Trustee’s claims against MFGUK, which were
accounts with commodity options and other CEA Section 4(d) domestic accounts. Foreign futures accounts were held and reported separately.
31
resolved through the MFGUK Settlement Agreement, sought the return of property held at
MFGUK for the benefit of MFGI’s 30.7 customers. The Account 9102591063 Balance also
represents the return of funds entrusted to MFGI by MFGI’s 30.7 customers. The MFG Canada
Settlement Payment, the Initial UK Distribution and the Future MFGUK Distributions represent
the partial return of the 30.7 customer assets held by MFGUK or MFG Canada. The Account
9102591063 Balance represents the return of funds listed on MFGI’s books and records as being
held in secured accounts for the benefit of MFGI’s 30.7 customers. Accordingly, the MFG
Canada Settlement Payment, the Initial UK Payment, the Future MFGUK Distributions and the
Account 9102591063 Balance are traceable under the CFTC Rules to the assets entrusted by
former 30.7 customers to MFGI and are properly allocated to the 30.7 Estate.
62. Under the JPMC Settlement Agreement, the Trustee received a $100 million
settlement payment, which was directly allocated to the 4(d) Estate pursuant to the JPMC
Settlement Order. See JPMC Settlement Order at 3.33
63. As detailed below, the Trustee has requested authority to advance sufficient
general estate funds to satisfy all allowed customer net equity claims. The Trustee seeks to
allocate the funds advanced from the general estate funds to the 4(d) and 30.7 estates in such a
proportion so as to ensure sufficient funds in each estate to satisfy all allowed customer net
equity claims.
C. The Gap between All Customer Property Marshaled by the Trustee and Allowed Net Equity Claims
64. The Trustee has completed the process of reviewing and determining all customer
claims asserted in the SIPA Proceeding. The Trustee has also consummated a number of
33. The Trustee has allocated the Post-Petition Income to the customer estate that contains the underlying security.
Additionally, the Trustee has allocated the Customer Account Debits to the customer estate that contained the account with the relevant underlying debit.
32
settlements (described above), and substantially completed the process of marshaling customer
property (other than any recoveries through the MDL). The completion of the claims and
marshaling process has allowed the Trustee to further refine the accounting of the assets under
his control and to conduct a review of the bulk transfer distributions. As explained in the Trager
Declaration, there was a failure to segregate or segregate effectively over $1.5 billion of
customer property. See Trager Declaration at ¶ 59. The Trustee has now marshaled property
from other parties through the negotiated settlements of litigations and potential litigations
described above. The gap between the value of all allowed customer net equity claims and the
value of customer property, including the customer property that was originally segregated and
customer property that was subsequently recovered from other sources by the Trustee, is now
$345 million in the 4(d) Estate and $287 million in the 30.7 Estate. The gap in the 30.7 Estate
will be reduced to $92 million – $113 million upon the receipt of the Future MFGUK
Distributions. The total current deficit across the commodities estates is therefore $632 million.
This gap will be reduced to $437 million – $458 million upon the receipt of the Future MFGUK
Distributions.
II. THE REQUESTED ADVANCES OF GENERAL ESTATE FUNDS SUFFICIENT TO FULLY SATISFY ALLOWED CUSTOMER NET EQUITY CLAIMS ARE REASONABLE AND APPROPRIATE.
65. The Trustee has already received authority in the CME Order to advance $130
million in general estate assets to satisfy allowed net equity claims34 and in the JPMC Settlement
Order to advance $200 million in general estate assets to satisfy allowed customer net equity
34. The CME Order authorized the Trustee to allocate $65 million of the proprietary property returned by the CME to the 4(d) Estate and $65 million of the proprietary property returned by the CME to the 30.7 Estate (collectively, the “CME Advance”). See CME Settlement Order at 3-4.
33
claims35 (the “Authorized Advances”). The Trustee requires authority from the Court to advance
approximately $305 million in general estate funds in order to satisfy immediately all allowed
customer net equity claims consistent with the terms of the proposed Consent Order (the “Final
Advance”).36 The Final Advance would consist of (i) an advance of approximately $174 million
– $195 million that will be replenished as funds are received from MFGUK as part of the Future
MFGUK Distributions; and (ii) an advance of approximately $110 million – $131 million to
cover the remaining gap between available customer funds and allowed net equity claims
(representing the advance of a portion of the value of the excess funds in the Securities Estate
that became part of the general estate by operation of law under SIPA 78fff-2(c)(1)).37 The
Final Advance is consistent with the proposed Consent Order.
A. The Trustee’s Request for Authority to Make the Final Advance and Distribution Is Appropriate and Consistent with the Proposed Consent Order.
66. SIPA, the Bankruptcy Code, and the Part 190 Regulations recognize that, in
appropriate cases, the Court may approve the Trustee’s allocation of general estate property to
certain customer account classes. SIPA trustees are accorded considerable discretion in carrying
out their responsibilities, discretion greater than that of a trustee in a bankruptcy liquidation. See
Kusch, 1998 Bankr. LEXIS 1076, at *97 (application of SIPA is “committed to the broad
discretion of a SIPA trustee in administering the estate of a failed broker dealer”), aff’d, 2000
35. As part of the Order approving the JPMC Settlement Agreement, the Trustee received authorization from this Court to: (i) advance $150 million of the Remitted Clearance Collateral from the general estate for distribution to 4(d) allowed net equity claims, and (ii) advance $50 million of the Remitted Clearance Collateral from the general estate for distribution to 30.7 allowed net equity claims. JPMC Settlement Order at 3.
36. In an abundance of caution, the Final Advance includes $3 million above what the Trustee projects is currently required to satisfy all allowed customer net equity claims in case the Trustee is required to satisfy any additional customer net equity claims after the Final Advance is complete. Any amount of the Final Advance that is not needed to satisfy allowed customer net equity claims will be returned to the general estate.
37. The remaining $2 million – $23 million of excess property from the securities customer estate will remain in the general estate after the Final Advance.
34
U.S. App. LEXIS 14008 (2d Cir. 2000); 1 Collier on Bankruptcy ¶ 12.02 (16th ed. 2013).
Additionally, the requested authority to make the Final Advance is consistent with the relief the
Court has previously granted in the SIPA Proceeding. See, e.g., CME Settlement Order at 3;
JPMC Settlement Order at 3.
67. The authority to make the Final Advance requested in the Motion is also
consistent with the relief sought by the CFTC in the proposed Consent Order. The Consent
Order requires the Trustee to advance from the general estate sufficient funds to satisfy all
allowed customer net equity claims. In order to achieve this goal, the Consent Order empowers
the Trustee to obtain an Order from this Court authorizing the advance of the required funds
from the general estate and subrogating the general estate to the rights of customers to the extent
of such advance. The Trustee’s request through this Motion satisfies the terms of the proposed
Consent Order.
68. The Trustee’s request for authority to make the Final Advance is consistent with
his duty to the estate as a whole rather than any particular class of creditors, and the Trustee
believes that the Final Advance is in the best interest of the MFGI estate. See Kusch, 1998
Bankr. LEXIS 1076, at *49. The Final Advance will allow the Trustee to fully satisfy all
allowed customer net equity claims and is clearly in the best interest of the customer estates. The
nature and structure of the advances also preserve claims against certain third parties, which will
inure to the benefit of MFGI’s general creditors after the advances are completed. See Section
III, infra. Additionally, a portion of the Final Advance will also be repaid by the future
payments that would otherwise be customer property under the MFGUK Settlement Agreement
(the $174 million – $195 million Future MFGUK Distribution), which will now become property
of the general estate. A large portion of the Final Advance is therefore simply a loan of property
35
from the general estate to be paid back from a known future source, the Future MFGUK
Distributions. Only a portion of the property comprising the Final Advance is general estate
property not previously allocated to the customer estates by Court Order, and it derives
completely from the excess in the securities estate. The structure of the Final Advance not only
preserves the general estate’s ability to recover the value of the Final Advance, but also
eliminates claims against the general estate that would arise from the unsatisfied portion of
customer net equity claims under section 766(J)(2) of the Bankruptcy Code.
69. The Trustee’s request through this Motion for authority to advance the general
estate funds required to make the Final Advance is also appropriate under section 105(a) of the
Bankruptcy Code, which authorizes the Court to “issue any order, process, or judgment that is
necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a) (2012). In
practice, section 105(a) of the Bankruptcy Code grants bankruptcy courts broad statutory
authority to enforce the Bankruptcy Code’s provisions either under the specific statutory
language of the Bankruptcy Code or under equitable doctrines. See, e.g., In re Momentum Mfg.
Corp., 25 F.3d 1132, 1136 (2d Cir. 1994). The Trustee’s request for authority to make the Final
Advance is appropriate under the facts and circumstances of this case. The Final Advance will
allow the Trustee to fully satisfy the claims of MFGI’s former customers, mitigating the damage
and disruption to these individuals caused by the collapse of MFGI and achieving the
overarching goal of the CEA and CFTC Rules, which is the protection of customers in the event
of the collapse of a FCM. The relief sought herein allows for the protection of the rights of the
general estate to future recoveries, reduces potential claims against the general estate, and
advances the Trustee’s ability to make interim general estate distributions.
36
B. The Authorized Advances and the Final Advance Will Be Repaid by the Future MFGUK Distributions as well as Possible Recoveries in the MDL.
70. The Authorized Advances and the Final Advance will be repaid by any recovery
obtained by the Customer Representative in the MDL, by the Future MFGUK Distributions, and
by any other recovery received by the Trustee. Even after the completion of the Authorized
Advances and the Final Advance, the Trustee estimates that there will still be approximately
$764 million in assets in the general estate available to pay administrative costs and other general
estate claims.38 This figure will be augmented by the Future MFGUK Distributions and any
other recoveries, all of which will go to the general estate if this Motion is approved.
Additionally, as detailed below, if the general estate is deemed subrogated to the claims of MFGI
customers against third parties to the extent of the advance, the available assets in the general
estate will be increased by any recovery in the MDL.
III. THE REQUESTED ADVANCES DO NOT MEAN THAT A SHORTFALL IN SEGREGATED PROPERTY DID NOT OCCUR AT MF GLOBAL AND DO NOT AFFECT THE LIABILITY OF THIRD PARTIES.
A. The Requested Advances Shift the Time When a Customer Can be Paid but Do Not Rectify the Original Shortfall or the Current Gap or Affect Liability.
71. Although the Authorized Advance and Final Advance will allow the Trustee to
make a 100 percent distribution to MFGI’s former customers, this does not change the fact that
the failure by the senior management of MF Global and others to comply with the segregation
requirements of the CEA and the CFTC Rules resulted in the original, massive shortfall in
segregated customer property and a gap of hundreds of millions of dollars even after litigation
and negotiation to recover what is deemed to be customer property from other sources. The
Authorized Advance and Final Advance do not change the conduct and damages at issue in the
38. This estimate is based on the Trustee’s book and records as of August 2013, and will be augmented by estate
recoveries in September, including the $29 million returned by JPMorgan as part of the JPMC Settlement Agreement, as well as any future recoveries.
37
MDL. The Trustee’s recovery of assets from other third parties and advance of general estate
funds to facilitate prompt payment of customer claims does not absolve any party from liability
that would otherwise exist. The general estate, from which funds will be advanced to satisfy
customer claims, is entitled to pursue the claims of MFGI’s former customers against the MDL
Defendants.
B. MFGI’s Customers Have Assigned Their Claims against the MDL Defendants to the General Estate.
72. As a result of the Authorized Advances and the Final Advance, MFGI’s former
customers have agreed to assign their claims against the MDL Defendants to the general estate
pursuant to the terms of the Assignment Agreement attached to the Trager Declaration as Exhibit
I (the “Assignment Agreement”).39 Under New York law, causes of action are freely assignable,
unless an assignment is expressly forbidden by statute or unless there are strong policy reasons
against transferability. N.Y. Gen. Oblig. Law § 13-101 (McKinney); see also Ellington Credit
Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F. Supp. 2d 162, 180 (S.D.N.Y. 2011) (“[A]
plaintiff generally has standing to pursue a cause of action that was properly assigned to him.”).
The assignment of a claim does not need to be in writing; all that is needed for a proper
assignment is that the transferor has made some statement or act to demonstrate its intent to
transfer an accrued claim. See Banque Arabe et Internationale D’Investissement v. Bulk Oil
(USA) Inc., 726 F. Supp. 1411, 1417 (S.D.N.Y. 1989) (“[A]ny act or words are sufficient which
‘show an intention of transferring the [cause of action] to the assignee.’”) (quoting Advance
39. The Assignment Agreement only assigns the net equity claims of former MFGI customers and does not assign any additional claims that MFGI’s former customer may have outside of the SIPA Liquidation for other damages arising from the failure of MF Global’s senior management to comply with the CEA and other relevant rules and regulations. Claims in the liquidation for damages beyond the customers’ allowed net equity claims will be determined by the Trustee in accordance with the CFTC Rules, SIPA and other applicable bankruptcy law, which generally do not provide for the allowance of claims for interest or for the loss of use of property.
38
Trading Corp. v. Nydegger & Co., 127 N.Y.S.2d 800, 801 (Sup. Ct. 1953)). New York courts
have consistently found that claims for breach of fiduciary duty, fraud and breach of contract are
freely assignable. See, e.g., Rosen v. Mega Bloks Inc., No. 06 Civ. 3474 (LTS)(GWG), 2009 WL
929474, at *11 (S.D.N.Y. April 7, 2009) (approving assignment of breach of fiduciary duty
claims); Semi-Tech Litigation, L.L.C. v. Ting, 13 A.D.3d 185, 187 (1st Dep’t 2004) (approving
assignment of fraud claims).
73. Here, the Assignment Agreement states that the Customer Representatives, as
representatives of the former customers of MFGI who have asserted claims against the MDL
Defendants in the Multi-District Litigation, have agreed to assign their claims to the general
estate upon approval of the relief requested in the instant Motion. Consideration for the
assignment is the immediate transfer and advance or loan of funds to make customers whole.
This clear statement of the intent to assign the claims constitutes a proper assignment under New
York law. The general estate is therefore the assignee of the claims that MFGI’s former
customers asserted against the MDL Defendants in the Multi-District Litigation.40
C. The General Estate is Subrogated to the Claims of MFGI’s Customers against the MDL Defendants.
74. The general estate is equitably subrogated to the claims that MFGI’s customers
have against third parties based on the shortfall in customer property to the extent that the
Authorized Advances and Final Advance (or any other advance of general estate property)
40. The Customer Representatives will continue to pursue the claims of MFGI’s former customers on behalf of the general estate, avoiding any disruptions to the ongoing MDL proceedings or any increased cost to the general estate as a result of pursuing the claims.
39
satisfies allowed customer net equity claims that the Trustee is otherwise unable to pay because
of the shortfall in the 30.7 and 4(d) Estates.41
75. The doctrine of equitable subrogation “is broad enough to include every instance
in which one party pays a debt for which another is primarily answerable and which in equity
and good conscience should have been discharged by the latter, so long as the payment was
made either under compulsion or for the protection of some interest of the party making the
payment, and in discharge of an existing liability.” Gerseta Corp. v. Equitable Trust Co. of N.Y.,
241 N.Y. 418, 425-26 (1926); see National Granite Title Ins. Agency, Inc. v. Cadlerock Props.
Joint Venture, 5 A.D.3d 361, 362 (2d Dep’t 2004) (“The doctrine of subrogation is applicable
where a party… has a legal duty to pay the debts of another….”). Equitable subrogation
recognizes that a person who pays for another’s loss steps into that person’s shoes, and has the
opportunity to recover from whoever is liable for that loss. Rink v. State, 27 Misc.3d 1159, 1162
(N.Y. Ct. Cl. 2010), aff’d, 87A.D.3d 1372 (4th Dep’t 2011) (stating that subrogation allows a
party “to stand in the shoes” of the party whose debt it satisfied and to seek reimbursement from
the entity that caused the loss).42
76. Courts favor the application of equitable subrogation and have extended, rather
than restricted, its application. See, e.g., 3105 Grand Corp. v. N.Y.C., 288 N.Y. 178, 182 (1942)
(“[Subrogation] is a highly favored remedy and, while not a matter of strict right, the courts are
41. “Where property of one person is used in discharging an obligation owed by another or a lien upon the property of another, under such circumstances that the other would be unjustly enriched by the retention of the benefit thus conferred, the former is entitled to be subrogated to the position of the obligee or lien-holder.” Restatement (First) of Restitution § 162 (1937).
42. The Second Circuit’s recent decision in In re Bernard L. Madoff Investment Securities LLC (“In re Madoff”), 721 F.3d 54 (2d. Cir. 2013), which held that a SIPA Trustee could not be subrogated to the claims of securities customers, is inapplicable to the current case because the payment of MFGI’s commodities customer claims is governed by the CFTC Rules and not SIPA, and because the claims here include direct claims of customers themselves, which the Customer Representatives are asserting in the MDL for the customers apart from any claims by the Trustee.
40
inclined to extend rather than restrict its application.”); Brown v. Bellamy, 170 A.D.2d 876, 877
(3d Dep’t. 1991) (“[P]rinciples of the equitable doctrine of subrogation have been extended,
rather than restricted.”). “As an equitable doctrine, subrogation is designed to promote justice,
and thus, is dependent upon the particular relationship of the parties and the nature of the
controversy in each case.” Hamlet at Willow Creek Dev. Co. v. N.E. Land Dev. Corp., 64
A.D.3d 85, 106 (2d Dep’t 2009).
77. Equitable subrogation is appropriate when: (1) the claimant makes an involuntary
payment (or a payment to protect their interest), see Am. Mfrs. Mut. Ins. Co. v. Payton Lane
Nursing Home, Inc., No. CV-05-5155 (SJF), 2007 WL 674691, at *8 (E.D.N.Y. Feb. 28, 2007)
(“[A] party who discharges another’s obligation under compulsion or who acts to protect his own
rights and interests is not considered a ‘volunteer.’”); (2) the payment satisfies a debt for which
the claimant was not primarily liable, In re Wingspread Corp., 145 B.R. 784, 789 (S.D.N.Y.
1992) (“An essential prerequisite to the right of equitable subrogation is that the person seeking
subrogation must have made a payment of another's obligation.”), aff’d sub nom. In re
Wingspread Co. v. Paramount Comm., 992 F.2d 319 (2d Cir. 1993); (3) the entire debt was paid,
see Pep’e v. McCarthy, 249 A.D.2d 286, 287 (2d Dep’t 1998) (“As a general rule, in order to be
equitably subrogated to the rights of a creditor with respect to another’s obligation, one must
have completely discharged the obligation”); and (4) subrogation will not harm the rights of
others and is otherwise equitable, In re Suprema Specialties, Inc., No. 02-10823 (JMP), 2006
WL 2583648, at *7 (Bankr. S.D.N.Y. June 8, 2006), aff'd, 370 B.R. 517 (S.D.N.Y. 2007), aff’d,
309 F. App’x. 526 (2d Cir. 2009) (whether the doctrine of subrogation is applicable “depends
upon the facts and circumstances of each case”). The subrogee acquires all of the subrogor’s
rights, defenses and remedies, and can proceed directly against third parties to recoup the amount
41
paid. See Peerless Ins. Co. v. Michael Beshara, Inc., 75 A.D.3d 733, 735 (3d Dep’t 2010) (it is
“well settled” that a subrogee steps into the subrogor’s shoes and attains to all their claims and
rights); see also Allstate Ins. Co. v. Mazzola, 175 F.3d 255, 258 (2d Cir. 1999) (same).
i. The Authorized Advance and the Final Advance Constitute Involuntary Payments by the General Estate.
78. The Authorized Advances and the Final Advance are involuntary payments by the
general estate to comply with the terms of the proposed Consent Order, the Orders of this court
(and in the case of the $200 million advance of funds made available by the JPMC Settlement
Agreement, the Order of the District Court) and the Trustee’s duty to satisfy allowed net equity
claims to the fullest extent permitted in a FCM liquidation under the Bankruptcy Code and
relevant CFTC regulations. A payment by an entity seeking subrogation rights will be
considered involuntary if the obligation to make the payment would otherwise be enforceable
against the payor. See Am. Mfrs. Mut. Ins. Co. , 2007 WL 674691, at *8 (“[A] party who
discharges another's obligation under compulsion or who acts to protect his own rights and
interests is not considered a “volunteer”); Liberty Mut. Ins. Co. v. Borsari Tank Corp., 248 F.2d
277, 289 (2d Cir. 1957) (noting that payments required by law would not be voluntary),
remanded as 159 F.Supp. 939 (S.D.N.Y. 1958) (finding subrogation applicable due to
involuntary nature of payments required by law); see also 72 C.J.S. Principal and Surety § 264
(payment by a party seeking subrogation is not voluntary as long as the obligation is enforceable;
a party does not need to wait to be coerced into making a payment).
42
ii. The General Estate is Not Primarily Liable for the Shortfall in the 4(d) and 30.7 Estates.
79. The general estate is not primarily liable for the shortfall in the 4(d) and 30.7
Estates.43 A required element of subrogation is that the party seeking to be subrogated must have
satisfied an obligation owed by another. In re Wingspread Corp., 145 B.R. at 789. In the instant
case, under the applicable sections of the Bankruptcy Code and the CFTC Rules, the claims of
MFGI’s former customers are first paid from the separate and distinct funds of customer
property. The general estate is only liable to the extent that there is a deficiency in customer
property available to satisfy allowed customer net equity claims. Accordingly, the general estate
is only liable, and only required to advance funds to cover the deficit as a result of the failure of
the MDL Defendants to comply with the relevant segregation requirements. Because customer
claims are first paid from the customer estates, the general estate is not primarily liable for the
unpaid customer claims arising from the shortfall in customer property.
80. By making the Authorized and Final Advances to satisfy the obligation owed by
the MDL Defendants to the 4(d) and 30.7 Estates, the general estate is serving a role that is
analogous to a guarantor or to an insurer. Among other ways of showing that a party is not
primarily liable, it is well settled that the payment of an obligation by a guarantor necessarily
entails the payment of a debt primarily owed by another. In re Wingspread Corp., 145 B.R. at
790 (“The satisfaction of a guaranty similarly entails satisfaction of another's obligation.”).44
43. The CFTC, in its separate enforcement action against Holdings, has alleged that Holdings is vicariously liable for MF Global’s failure to comply with relevant CFTC Rules and regulations and for the harm caused by this failure. However, while Holdings is a creditor of the general estate of MFGI, it is legally distinct from the general estate itself.
44. Moreover, it is not essential that the party invoking subrogation contractually occupy the position of guarantor if that party is otherwise performing the functions of a guarantor. See Pearlman v. Reliance Ins. Co., 371 U.S. 132, 137 n.12 (1962) (“The right of subrogation is not founded on contract. It is a creature of equity; is enforced
43
Similarly, courts have consistently held that serving as an insurer satisfies the requirement that a
party not be primarily liable for an obligation. Metro. Prop. and Liab. Ins. Co. v. Cassidy, 127
Misc.2d 641, 644 (Sup. Ct. 1985) (“Upon payment of an existing debt by a party who is
secondarily liable, the paying party is subrogated to the position of his principal and may proceed
against a party primarily responsible.” (citation omitted) (internal quotation marks omitted)); see
also Domino of California Inc. v. Helmsley-Spear, Inc., 180 A.D.2d 565, 566 (1st Dep’t 1992)
(finding that an insurer was entitled to enforce rights and remedies against the primarily liable
party). As the general estate is serving a role that is analogous to a guarantor or insurer by
satisfying the shortfall in the 4(d) and 30.7 Estates that the MDL Defendants’ actions created, the
general estate is not primarily liable for the shortfall.45
iii. The Obligations Arising from the Shortfall will be Fully Paid by the Authorized Advances and the Final Advance.
81. As described above, the Authorized Advances and the Final Advance will fully
satisfy the shortfall in customer property in the 4(d) and 30.7 Estates.
iv. The Equities of the Case Support the Subrogation of the General Estate to the Customers’ Claims against the MDL Defendants.
82. It is equitable for the general estate to be subrogated to the claims of MFGI’s
customers against the MDL Defendants to the extent of the Authorized Advances and the Final
Advance. The Authorized Advances and the Final Advance are required in order to mitigate the
harm and disruption caused to MFGI’s former customers originating from the shortfall in
segregated assets at MFGI and leading to a current deficit even after every other potential source
for recovery of customer property had been exhausted. To allow the very same individuals who
solely for the purpose of accomplishing the ends of substantial justice; and is independent of any contractual relations between the parties.”)
45. A guaranty is an obligation “to pay in the event that the other does not,” In re Wingspread Corp., 145 B.R. at 790 (citing In re Carley Capital Group, 119 B.R. 646, 648 (W.D. Wis. 1990)), which is effectively what the general estate is doing in the instant case.
44
caused the shortfall to reap a windfall as a result of the Trustee’s and the CFTC’s efforts to make
customers whole would be highly inequitable and a perverse outcome for the CFTC’s active use
of its regulatory powers.
83. The subrogation of the general estate to the claims of MFGI’s customers would in
no way impair the rights of the MDL Defendants. The Authorized Advance and Final Advance
do not reduce or eliminate the gap between customer assets and the amounts owed to customers
on account of their allowed net equity claims. Rather, they shift the time when the customer
phase of this liquidation will be completed. Accordingly, the subrogation and assignment of the
general estate to the claims of MFGI’s customers against the MDL Defendants would merely
confirm the preservation of the status quo in the MDL. The MDL Defendants, as they should,
will face the same potential liability on account for the same amount of claims and will be able to
raise the same merit defenses. There is no prejudice or harm to the MDL Defendants as a result
of the shifting of the time when MFGI’s former customers are made whole.
CONCLUSION
84. The relief sought in the Motion will serve to shift the time when the former
customers of MFGI will receive final satisfaction on their allowed net equity claims by allowing
the Trustee to make immediate one hundred percent distributions to customers. The relief will
also largely conclude the customer phase of the liquidation with the only remaining issues being
the actual disposition of the assets in the 4(d) and 30.7 Estates to customers. The relief will allow
customers and general creditors to be treated as closely as possible to the manner in which the
CFTC Regulations intended for them to be treated, both when MFGI was an operating entity and
in its liquidation.
85. SIPC, the CFTC and Holdings have authorized the Trustee to state that they
support this Motion.
45
WHEREFORE, the Trustee respectfully requests that this Court enter an Order, in
the form attached hereto as Exhibit A, and grant the Trustee such other and further relief as is
just and proper.
Dated: New York, New York October 2, 2013
HUGHES HUBBARD & REED LLP
By: /s/ James B. Kobak, Jr. James B. Kobak, Jr. Christopher K. Kiplok Jeffrey R. Coleman Josiah S. Trager Dustin P. Smith One Battery Park Plaza New York, New York 10004 Telephone: (212) 837-6000 Facsimile: (212) 422-4726 Email: [email protected] Attorneys for James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc.
EXHIBIT A
UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK
In re
MF GLOBAL INC.,
Debtor.
Case No. 11-2790 (MG) SIPA
[PROPOSED ORDER] GRANTING THE TRUSTEE’S MOTION TO (I) APPROVE THE TRUSTEE’S ALLOCATION OF PROPERTY AND (II)
APPROVE AN ADVANCE OF GENERAL ESTATE PROPERTY FOR THE PURPOSE OF MAKING A FINAL 100% DISTRIBUTION TO FORMER
COMMODITY FUTURES CUSTOMERS OF MF GLOBAL INC.
Upon consideration of the Motion1 dated October 2, 2013, of James W. Giddens (the
“Trustee”), as Trustee for the liquidation of MF Global Inc. (“MFGI” or the “Debtor”) under the
Securities Investor Protection Act (“SIPA”), pursuant to section 105(a) of title 11 of the United
States Code (the “Bankruptcy Code”), and 17 C.F.R. sections 190.01 through 190.10 (the “Part
190 Regulations” or the “CFTC Rules”) for entry of an order (i) approving the Trustee’s final
allocation of property between the customer and general estates; and (ii) authorizing the Trustee
to advance property from other sources for allocation to the 4d and 30.7 Estates and to permit
distribution of such property to permit one hundred percent distribution of all allowed customer
net equity claims; and the Court having jurisdiction to consider the Motion and the relief
requested therein in accordance with SIPA § 78eee(b)(4); and venue being proper before this
Court pursuant to SIPA § 78eee(a)(3) and 15 U.S.C. § 78aa; and upon consideration of the
Motion, any objections thereto, briefs and arguments of counsel, the Affidavit of Josiah S. Trager
executed on October 2, 2013; and due and proper notice of the Motion having been provided,
including in accordance with the Amended Case Management Order, to all parties in interest,
1 Capitalized terms not defined herein shall have the meaning ascribed to them in the Motion.
2
and it appearing that the notice of the Motion is sufficient, adequate, and timely under the
circumstances of this case and that no other or further notices need be provided; and a reasonable
opportunity to object or be heard regarding the motion having been given to all such parties; and
a full and fair opportunity having been afforded to litigate all issues raised in all objections, or
which might have been raised, and all objections having been fully and fairly litigated;
ORDERED, that the Motion is granted in all respects; and it is further
ORDERED, the DCO Customer Property, the Segregated Bank Property, the
Secured Bank Property, the Customer Post-Petition Income, the Customer Account Debits, the
Account 9102591063 Balance, the MFG Canada Settlement Payment, the Initial MFGUK
Distribution and the Future MFGUK Distributions constitute customer property as defined in
Section 761(10) of the Bankruptcy Code and CFTC Rule 190.08(a)(i)-(ii); and it is further
ORDERED, that the Trustee’s allocation of DCO Customer Property, the
Segregated Bank Property, the Secured Bank Property, the Customer Post-Petition Income, the
Customer Account Debits, the Account 9102591063 Balance, the MFG Canada Settlement
Payment, the Initial MFGUK Distribution and the Future MFGUK Distributions to the 4d and
30.7 Estates as detailed in the Motion is approved; and it is further
ORDERED, that the Marshaled Proprietary Property, the CME Proprietary
Assets, and the Returned Collateral are property of the general estate of MFGI; and it is further
ORDERED, that the Securities Excess is property of the general estate of MFGI
pursuant to SIPA § 78fff-2(c)(1); and it is further
ORDERED, that the Trustee is authorized to advance funds from the general
estate of MFGI, in an amount that does not vary materially from $305 million, to the 4d and 30.7
customer estates in order to satisfy all allowed customer net equity claims and that this advance,
3
as well as all previous advances authorized by the Court are now final and complete and are
based on this Court’s determination that the total current deficit across the commodities estates is
at least $632 million ($345 million in the 4(d) Estate and $287 million in the 30.7 Estate); and it
is further
ORDERED, that the Trustee is authorized to allocate the funds advanced from
the general estate of MFGI between the 4d and 30.7 Estates in such a manner so as to allow the
full satisfaction of all allowed customer net equity claims; and it is further
ORDERED, that once all allowed customer claims are satisfied, any property
hereafter recovered by the Trustee will be directed to the general estate of MFGI, including the
Future MFGUK Distributions; and it is further
ORDERED that, the Trustee, acting as representative of the MFGI general estate
and its creditors, is the assignee of, and otherwise subrogated to, the rights of all customers and
is hereby specifically authorized by this Court to pursue claims against third parties based on the
deficit in the 4d and 30.7 customer estates to the extent that general estate funds have been
advanced (either by prior Order of the Court or pursuant to this Order) to satisfy allowed
customer net equity claims (the “Assigned Claims”), including without limitation the right to
receive any and all recoveries recovered or collected by the Customer Representatives in the
Customer Class Action or in connection with the Customer Class Action solely in satisfaction of
those Assigned Claims. For avoidance of doubt, all potential claims of customers against third
parties to recover for the shortfall in the 4d and 30.7 Estates in existence as of the moment before
any advances of funds from the general estate (which this Court finds to be in the amount of at
least $632 million) shall be preserved for the benefit of the Trustee as assignee and subrogee; and
it is further
4
ORDERED, that the Assignment Agreement is approved; and it is further
ORDERED, that pursuant to the Trustee’s assignment of general creditor claims
to the Customer Representatives contained in the Continued Cooperation and Assignment
Agreement approved on October 11, 2012, the Customer Representatives will continue to pursue
and enforce the Assigned Claims subject to the terms of the Continued Cooperation and
Assignment Agreement and the Customer Representatives’ interim co-lead counsel and
executive committee counsel are entitled to seek reasonable fees pursuant to terms of the
Continued Cooperation and Assignment Agreement , and it is further
ORDERED, that pursuant to the Part 190 Regulations, the Trustee is authorized
and shall use his best efforts to distribute all property constituting the 30.7 and 4d Estate or
advanced to the 30.7 and 4d Estate (either through this Order or by any previous Order of the
Court) in order to effect one hundred percent distributions to all unpaid allowed customer net
equity claims; and it is further
ORDERED, that the Trustee is authorized to take any and all actions reasonably
necessary to effectuate the relief granted in this Order; and it is further
ORDERED, that the Court shall retain jurisdiction to hear and determine all
matters arising from or related to this order
ORDERED that this Order shall be effective and enforceable immediately upon
entry and shall constitute a final order within the meaning of 28 U.S.C. § 158(a). To the extent
applicable, Bankruptcy Rule 6004(h) is hereby waived.
5
Dated: New York, New York _________________ ____________________________________ HONORABLE MARTIN GLENN UNITED STATES BANKRUPTCY JUDGE