Koutoulas Objection to Motion to Approve Liquidatio - Main Document

8/3/2019 Koutoulas Objection to Motion to Approve Liquidatio - Main Document

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James L. Koutoulas, Esq. (Pro Hac Vice Pending)190 S. LaSalle St., #3000Chicago, IL 60603(312) 836-1180James L. Koutoulas

Vincent P. Schmeltz III (Pro Hac Vice Pending)Deborah L. Thorne (Pro Hac Vice Pending)Kathleen L. Matsoukas (KL-1821)BARNES & THORNBURG LLPOne N. Wacker Drive, #4400Chicago, IL 60606(312) 357-1313

Attorneys for Commodity Customer Coalition

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

In re:

MF GLOBAL HOLDINGS,

LTD, et al.,

Debtors.

In re:

MF GLOBAL INC., Debtor.

Chapter 11

Case No. 11-15059 (MG)

Jointly Administered

Case No. 11-02790 (MG) (SIPA)

OBJECTION TO THE SIPA TRUSTEE’S EXPEDITED APPLICATION FOR ENTRY OF

AN ORDER ESTABLISHING PARALLEL CLAIMS PROCESSES, ETC.

Certain commodity broker customers (the “Commodity Customer Coalition”)1 of MF

Global Inc. (“MFGI”), hereby object to the Trustee’s Motion for an Order: (1) establishing parallel

claims processes for commodity futures customer and securities customer claims; (2) approving the

1 The Commodity Customer Coalition speaks on behalf of over 7,000 MF Global Customers. Within that

group, about 80 representatives have formally retained Mr. Koutoulas as pro bono counsel, including, a hog

farmer from central Illinois, as well as those other customers listed on Exhibits A and B, have more than $25

million held in customer segregated accounts frozen.

11-02790-mg Doc 251 Filed 11/16/11 Entered 11/16/11 14:00:47 Main DocumentPg 1 of 6



form and manner of the publication and mailing of the notice of commencement of this proceeding;

(3) specifying procedures and forms for the filing, determination, and adjudication of claims; (4)

fixing a date for the entry of a meeting of customers and other creditors; and (5) fixing an interim

reporting procedure pursuant to SIPA. In support of their objection, the Commodity Customer

Coalition states:

1. The Commodity Customer Coalition (“CCC”) is a grass roots organization and

represents a growing number of former MF Global clients, currently numbering over 7,000. The

CCC is organized by a volunteer group of commodity futures professionals who are working on a

pro bono basis to represent MF Global customers in the bankruptcy process. In a very short time,

the group has created electronic communication networks, a website, organized thousands of

customers with frozen assets, and is working on behalf of all MF Global commodity account holders

to ensure the swift and complete return of these assets.

2. In addition to authoring a white paper on the bankruptcy crisis for non-financial

professionals, the CCC has already filed two motions with the bankruptcy court. One seeks to

protect the primacy of customer segregated funds over the claims of creditors, while the other seeks

a swift alternative claims process to the arduous one proposed by the SIPC Trustee. The CCC has

already developed an outline to such a plan. The CCC is also working in support of the motion filed

by Thomas Butler seeking the immediate release of 85% of customer funds and has supported the

National Introducing Broker Association’s efforts on behalf of introducing brokers. The CCC also is

seeking the formation of an ad-hoc committee to represent the interest of former MF Global

customers in the bankruptcy process—in both matters being administered by this Court. The CCC

also will seek to work with Mr. Rosen’s group of 40 NYMEX floor brokers, as well as any other

interested MF Global customers.




3. The Trustee has filed a motion, with nearly no notice, that impacts the rights of all

MFGI customers, perhaps irreparably. By implementing a claims process, the Trustee effectively

cements this as a liquidation under the Securities Investor Protection Act (“SIPA”), even though a

SIPA Liquidation may not actually be in the best interests of all of MFGI’s customers.

4. There are at least three major flaws in the Trustee’s plan—although the Commodity

Customer Coalition has only had a few hours to examine the Trustee’s seventy-six page submission

and prepare this response (Exhibit G is the Trustee’s plan). The Commodity Customer Coalition

respectfully suggests that it could craft a more efficient plan that returns customer funds far more

quickly than the Trustee’s plan and already has an outline of this plan that it is prepared to discuss

with the Court at this hearing.

5. The first, most glaring, flaw is that the plan (and a SIPA liquidation, generally) does

not necessarily account for the priority that commodity investors should receive.2 Commodities

investors do not necessarily have a right to insurance under the SIPA, in the same manner securities

investors do. Instead, commodities investors rely on the concept of “segregated accounts,” which

are supposed to be held inviolate under CFTC Regulation 4.20(c). They also rely on the right of

customers in a futures commission merchant (or “FCM”) to receive a first -priority right of recovery

under 11 U.S.C. § 766(h) and 17 C.F.R. § 190.08.

6. Yet, under a SIPA liquidation, it is not clear that Securities Investor Protection

Corporation (“SIPC”) agrees that commodity customers will receive a first-priority right of recovery.

2 A SIPA liquidation is the tail wagging the dog, given that SIPC only has a stated guarantee of approximately

400 securities accounts, as compared to over 50,000 active commodity accounts and upwards of 150,000 total

commodity accounts. Moreover, neither the Trustee nor SIPC has taken a position as to whether the cash, T-

Bills, and other cash equivalents held in commodity accounts are covered by SIPC, nor has the Trustee

delineated his view as to how the duties of the Trustee in liquidating a commodity futures merchant may be

inconsistent with SIPA.




Indeed, as set out in Subchapter IV of Chapter 7 of the Bankruptcy Code, Section 766(h) accords the

customer first-priority in the distribution of customer property. 11 U.S.C. § 766(h) (2011). It would

appear that SIPC does not agree with this view and, instead, under the Securities Investor Protection

Act (“SIPA”), the SIPC has an equal or greater priority claim on the general estate. See Andrea M.

Corcoran, “Markets’ Self -Assessment and Improvement of Default Strategies After the Collapse of

Baring,” 2 Stan. J.L. Bus. & Fin. 265, 281 n. 51 (Spring 1996).

7. Indeed, the Trustee has issued a plan that seems to favor SIPC in the liquidation. As

noted, SIPC is obligated to backstop securities investors. In return, it has a right to recover from the

estate of a defunct broker-dealer (here, MFGI). The plan the Trustee has issued attempts to make

sure that the SIPC will not have a hole to fill for securities investors that it cannot recover from

MFGI. This is an untenable situation—and may work to the irreparable detriment of commodities

investors.

8. In addition, the Trustee’s plan has the Trustee exercising discretion as to whether or

not to make certain distributions. Under the Bankruptcy Code, no such discretion exists—

commodity investors should get their funds immediately. It is inappropriate and unfair, given the

disparity in rights between securities investors (who receive SIPC insurance, much like the FDIC’s

protection of bank depositary accounts) and commodity investors (whose only protection is to

receive first-priority distribution of their segregated accounts), to give the Trustee the discretion to

treat commodity investors like everyone else.

9. It also makes almost no sense to begin a claims process for creditor claims. No

creditor claims should be processed in either this case, or In Re: MF Global Holdings, Ltd., Case No.

11-15059 (MG) until 100% of customer funds held in customer segregated accounts have been

returned.




10. The next significant flaw in the Trustee’s plan is that he does not intend to meet with

creditors (or, really, customers) until well into the process. These meetings should take place right

now, so that customers have a say in how their segregated property will be treated. Their property is

not the Trustee’s, over which the Trustee could exercise his discretion; quite simply, it is the

customers’ property.

11. Indeed, the failure to include customers in the process is reflected in the significant

problems and damages caused by the implementation of the transfer process. For example, clients of

Typhon Capital Management, LLC had significant positive open trade equity in livestock trades

placed by Typhon on customers’ behalf. This open trade equity was sufficient enough to provide

self-financing to the positions, even with the limited amount of collateral transferred during the

Trustee-supervised transfer process. However, during the Trustee-supervised transfer process, these

trades were not simply transferred. Rather, they were liquidated at MF Global, resulting in the open

trade equity being converted into cash that was left in the clients segregated accounts at MF Global.

This deficiency in the Trustee-supervised transfer process deprived customers of the value of the

trades, and in many cases, resulted in further damages as the trades were then automatically re-

established at the destination FCMs without enough margin to finance them, resulting in a second

liquidation of the positions.

12. The final flaw in the Trustee’s plan is simply the amount of time it will take to return

the property of MFGI’s customers. In paragraph 17, the Trustee provides for a six-month claim

period. The plan that CCC is developing for the court provides for a far more efficient, automated

approach to returning customer funds. Then, in paragraph 43, the Trustee provides for a report every

6 months. This seems to indicate that the Trustee anticipates a long, drawn-out and very expensive

liquidation process. See “Lawmakers Question MF Global Trustee’s Work on Lehman Brokerage”




by Robert Schmidt, for Bloomberg Businessweek, http://www.businessweek.com/news/2011-11-

14/lawmakers-question-mf-global-trustee-s-work-on-lehman-brokerage.html .

13. At a minimum, MFGI customers ought to have the opportunity to form an Ad Hoc

Committee (as the Commodity Customer Coalition has requested in the companion bankruptcy and

intends to request in this liquidation, as well), work with the Trustee to determine whether a SIPA

liquidation will negatively impact commodity customers’ rights, and either propose an alternative

plan or work with the Trustee to modify the current plan.

WHEREFORE, the Commodity Customer Coalition respectfully requests that the

Court delay approval of the Trustee’s Motion until November 22, 2011, by which time: (i) an Ad

Hoc Committee of Commodity Customers will have been appointed; (ii) the Ad Hoc Committee can

assess whether the proposed liquidation is appropriate; and (iii) the Ad Hoc Committee can form an

alternative plan or negotiate amendments to the Trustee’s proposed plan.

Dated: November 16, 2011 By: /s/ Kathleen L. MatsoukasVincent P. Schmeltz III ( pro hac vice pending)Deborah L. Thorne ( pro hac vice pending)Kathleen L. Matsoukas (KL-1821)BARNES & THORNBURG LLPOne N. Wacker Drive, #4400Chicago, IL 60606(312) 357-1313

James L. Koutoulas, Esq.Pro Hac Vice Pending

On Behalf of Commodity Customer Coalitionand Plaintiffs Listed in Exhibit A190 S. LaSalle St., #3000

Chicago, IL 60603(312) 836-1180


http://www.businessweek.com/news/2011-11-

http://www.businessweek.com/news/2011-11-

Documents

Koutoulas Objection to Motion to Approve Liquidatio - Main Document