Battle lines forming between MF Global customers, hedge funds

Fri Feb 24, 2012 2:36pm EST
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By Nick Brown and Katya Wachtel

(Reuters) - The MF Global saga could soon become a legal battle between hedge funds and the futures brokerage's shortchanged customers, with more than a billion dollars at stake.

As the investigation into the collapse of the Jon Corzine-led brokerage moves into more of a regulatory whodunnit than a criminal case, the guessing game centers on who the two court-appointed trustees overseeing MF Global's liquidation will sue to recoup money owed to customers of MF's broker-dealer unit and creditors of its parent.

Those decisions are not easy ones, legal experts say, and they could end up pitting hedge funds like David Tepper's Appaloosa Management and Paul Singer's Elliott Management - who own MF Global bonds - against brokerage customers trying to recover an estimated $1.6 billion shortfall in their accounts.

It's likely that James Giddens, the trustee in charge of recovering customer funds, and Louis Freeh, the trustee in charge of recovering money for parent creditors, will dispute the ownership of certain assets, said attorney Chris Ward, vice chair of Polsinelli Shughart's bankruptcy practice, who is not involved in the case.

A more complex battle could arise from the fact that both customers and bondholders claim priority for payouts from MF Global's general estate.

Customer groups have said that if efforts to recoup customer cash do not make them whole, they have a right under Commodity Futures Trading Commission regulations to demand payment from the parent company.

"Customers are going to claim they should be satisfied in entirety first before one penny goes to" MF Holdings' bond holders and other creditors, said Fred Grede, an attorney who served as trustee for fallen cash-management firm Sentinel Management Group.

But distressed debt investors like Elliott and Appaloosa, who scooped-up MF Global's bonds after the firm filed for bankruptcy on October 31, say bankruptcy laws paint a different picture, one giving them priority over customers for general estate payouts.   Continued...

The sign marking the MF Global Holdings Ltd. offices at 52nd Street in midtown Manhattan is seen in New York November 2, 2011.  REUTERS/Shannon Stapleton