Insight: Clients who fled MF Global face clawback risk

Thu Nov 10, 2011 8:03am EST
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By Jeanine Prezioso

NEW YORK (Reuters) - Former MF Global customers like Koch Industries, who pulled billions of dollars out of the stricken broker's accounts weeks or months before its collapse, have counted their blessings in recent days.

But their relief may prove premature depending on the outcome of a separate, four-year-old bankruptcy case involving Sentinel Management Group Inc. The lawyer overseeing that case has gone to court to try to force some of Sentinel's former clients to take a share of the losses.

Thousands of MF Global's commodity clients have been clamoring over more than $1 billion in cash and collateral that is still frozen. Yet many customers pulled out a large sum of cash before the company declared bankruptcy on October 31, regulatory data and exchange estimates show.

"Everybody and their brother started pulling money out early," said one commodity hedge fund manager who withdrew some of his funds prior to MF Global's fall. "People pulled money out of Lehman and Bear segregated accounts when they knew they were going bankrupt and nothing happened to them. It doesn't mean it can't happen, but I don't see it."

At issue is MF Global's "segregated accounts" -- client money meant to be kept strictly separate from the broker's own funds, but which regulators say is now $600 million short.

That pot of money shrank by $1.5 billion in August alone, government data showed. Another $1.8 billion fled over the following two months, according to preliminary estimates.

In total, customers pulled out more than a third of their accounts in the three months leading up to MF Global's downfall, much of that in the frenzied final days, traders reckon.

For instance, privately held Koch Industries -- whose businesses make it a leading commodities trader -- sent a letter to trading partners on October 3 saying it was switching eight accounts from MF Global to Mizuho Securities USA.   Continued...