The shortfall of commodity customer funds at MF Global Holdings Ltd may be about US$1.2 billion, about double initial estimates from regulators, the trustee liquidating the company said on Monday.
The news was a blow to customers still hoping to get more of their cash out of frozen broker accounts and raised new questions about why the authorities managed to locate only about 60 percent of the segregated customer funds three weeks after the parent firm’s Oct. 31 bankruptcy.
“I’m flabbergasted,” said Tom Ward, a retired Chicago Board of Trade member whose two sons cleared their futures trades through MF Global and have been blocked from accessing their money. “The bottom line is, there’s going to be a haircut involved. It’s devastating, what this has done to the industry.”
Monday’s announcement was trustee James Giddens’ first public statement on the size of the shortfall, which regulators initially said was about US$600 million.
Regulators are investigating what happened to the money and whether MF Global may have improperly mixed customer money with its own — a major violation of industry rules. No charges have been filed.
Hours after the statement, the bankrupt MF Global parent filed court papers along with JPMorgan Chase & Co, one of its key lenders, seeking the rare appointment of a separate trustee to take over the company’s assets in bankruptcy.
Such appointments are reserved for cases in which a company’s executives are accused of wrongdoing or when it may otherwise be in the estate’s best interest. JPMorgan, which pledged US$8 million of its collateral to keep MF Global afloat during bankruptcy, agreed to increase that pledge to US$26 million if a trustee were appointed, the filing said.
The request is on the agenda for a hearing tomorrow afternoon in US Bankruptcy Court in Manhattan.
An MFGlobal spokeswomen declined to comment on the case.
In Monday’s statement, -Giddens said he currently controls about US$1.6 billion of the brokerage’s funds that he can use to pay back customers. His plans to pay back 60 percent of customer funds by early next month would nearly exhaust that amount.
The sharply higher estimate of the shortfall raises questions about the investigation, said Tim Butler, an attorney for a group of customers demanding a fuller payback.
“What did the CFTC [US Commodity Futures Trading Commission] know three weeks ago and what do they know now?” Butler said. “If the amount has changed that much over three weeks, where did the money go? What were [regulators] looking at before?”
Leaders on Capitol Hill have entered the fray with calls for hearings and accountability.
Senator Chuck Grassley said the CFTC should “do everything possible” to get more information to customers on the status of their funds. The call comes as angry farmers and ranchers across the country begin to reconsider a livelihood in the market and how they hedge future crops and livestocks.
“Unlike the big banks, the average farmer who lost money in this fiasco can’t afford to hire an attorney and attend proceedings in a Manhattan courtroom,” Grassley said in a statement.
MF Global was run by former Goldman Sachs & Co Inc chief and New Jersey governor Jon Corzine before its bankruptcy. The Chapter 11 filing came after the New York-based company revealed it made a US$6.3 billion bet on European sovereign debt. Corzine resigned on Nov. 4.
Customers had been clamoring for more specifics, saying that was too large of a cushion — a notion Giddens rejected.
“Restoring 60 percent of what is in segregated customer accounts ... would require approximately US$1.3 to US$1.6 billion to implement,” or nearly all the money at the trustee’s disposal, he said.
Giddens previously transferred more than US$2 billion to other brokers, giving most customers access to a portion of their funds.
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