Andrew Abraham

andy-0101 My name in Andrew Abraham. I have been investing in commodities and managed futures since 1994. I adhere to the philosophy of trend following. Trend following stresses a disciplined approach to commodity/ futures trading. Successful trend following and commodity futures investing requires patience, discipline and actively managing the risk. What sets me apart from other traders is that I am not only concerned about the return on investment but how much risk I will have to tolerate to achieve my goals.

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Missing funds and fees likely to go higher with MF Global Bankruptcy

This is a recent article from MFG Facts

Within days of the of the MF Global bankruptcy, the court approved a motion granting what is essentially authorization to continue commingle and use customer funds held at MFGI broker unit.
Bob English, writing on EconomicsPolicyJournal.com shines a bright light into this dark corner: The grant of this seemingly routine motion gives those that control the bankrupt holding company the green light to further plunder segregated customer accounts held at MF Global, Inc. (the Futures Commission Merchant), while the Trustee racks up additional billable hours at $891.00 per hour. Additionally ,the recipients of customer funds via approved “intercompany” transactions could be assured priority status over customers of MF Global Inc.
The rapidly filed pleading was to allow, among other things, AUTHORIZING THE CONTINUATION OF INTERCOMPANY TRANSACTIONS AMONG THE DEBTORS AND NON-DEBTOR AFFILIATES AND ACCORDING SUPER PRIORITY STATUS TO ALL POSTPETITION INTERCOMPANY CLAIMS.
On the Motion
In this motion, MF Global Holdings, Ltd (Parent Company) and MF Global Finance (Subsidiary) MF are the named debtors. MF Global, Inc. (the FCM) while not named is a non-debtor affiliate. This is an important distinction and explains much of the ongoing confusion of what is now the “cluster circus.” As Bob English points out, and as we read in the filing, only MF Global Finance and MF Global Holdings, Ltd. declared bankruptcy on this day. MF Global, Inc (the FCM holding segregated funds) did not declare bankruptcy and was not a debtor.
Additionally, the language of this pivotal motion, filed in a flurry, adds even more confusion. “Debtor” and “Company” appears to be used interchangeably throughout. Just an example: “Accordingly, the efficiencies realized by permitting the Debtors to maintain their current Bank Accounts and serve as a conduit for the Company’s cash management system would preserve value for both the Debtors…” Yet “Company” as English points out, “refers specifically to MF Global Inc., the broker dealer/futures commission merchant unit that did NOT file for bankruptcy.” And “Debtors” refers to MF Global Holdings and MF Global Finance, which did file for bankruptcy. This is planted confusion which English comments, “as to intent or allows for an expansive interpretation that justifies the continued looting of customer accounts.” We’ll see how this works:
But first, and further adding to the perplexities of that day-one motion, we note two days later, Trustee Giddens submitted a seemingly minor administrative motion seeking permission to completely change the name of the case to James W. Giddens (the “Trustee”), as Trustee for the liquidation of the business of MF Global Inc. (“MFGI” or the “Debtor”).
(Meanwhile, MF Global Holdings,Ltd. and almost month after given permission for continued trading, a Trustee was finally assigned to MF Global Holdings.)
Back to the motion in question filed on that fateful day: What happened is that it gave MF Global Holdings and it’s affiliates the ability to continue trading in the same way and in the same markets that led to its downfall. It allows MFG Holdings and MF Global Finance to conduct business “as normal.” (Remember MF Global Holdings, Ltd., was bankrupt, but had no Trustee at this point. )
As an important aside, this order – as we will see — this filing explains something else: It tells us why the Trustee leaves open ever upward estimates of “missing money.” It explains what may be behind the mystifying dueling statements between the Trustee and the CME: The Trustee makes claims of an “apparently greater” segregated account shortfall than the initial 600 million. In contrast, the CME publicly insists the Trustee is incorrect with his projections.
But let’s go back to English’s analysis at EconomicsPolicyJournal.com of this court order giving “MF Global Holdings and its affiliates permission to continue the very risky and suspicious trading that led to its demise.” In other words, absolute authority of MF Global Holdings Ltd. to loot from customer funds that were flushed into the estate of MF Global, Inc. under the pretense of missing money that remains undiscovered.
Prepare to weep:
To highlight language from the approved motion (underlining is our own):
D. The Debtors Should Be Authorized to Continue Their Investment Practices
23…The Deposit and Investment Practices are governed by an investment policy, which provides that such investment activities must comply with federal and state regulations, as well as any regulations imposed by its regulators. In addition, the investment policy describes the Company’s permissible investments, which include: (a) government securities and government guaranteed securities; (b) money funds; (c) United States Treasury and government money funds; (d) federal agency obligations; (e) corporate obligations; (f) money market instruments; and (g) other permissible investments approved by the Company’s investment committee from time to time.
As English explains, and aided by confusions of the court motions, this is authorization to trade in previously traded instruments, “including the famed $6.3 billion in European debt [off balance sheet] repo-to-maturity trades.”
How can this possibly be we might ask? “Ordinarily, any such investments not guaranteed directly or indirectly by the US government are subject to a performance bond,” English writes. But in this case, the court allowed those that control the debtors yet another exception to the rules:
25. The Court has discretion to modify the section 345(b) requirements “for cause.” 11 U.S.C. § 345(b). Indeed, while these requirements may be “‘wise in the case of a smaller debtor with limited funds that cannot afford a risky investment to be lost, [they] can work to needlessly handcuff larger, more sophisticated debtors…
Sophisticated debtors? The irony is too much, but it gets worse and with alarming implications. English points out, the final sentence of section 26, is not just about routine bank account sweeps among the related parts of MF Global Holdings. The approved policies go way beyond that.
26. Finally, in addition to the Company’s own investment policies that serve as a safeguard of the Debtors’ funds, there is a significant distinction between the Debtors’ own investments and deposits—which support the Debtors’ cash-management function—and those made by non-Debtor affiliates engaging in the Company’s core investments businesses.
Remember, “Company” here refers to MF Global, Inc., the Broker Dealer and FCM, while “Debtors” refers to MF Global Holdings and MF Global Finance.
Under part 27, the motion authorized the “Debtors to continue to deposit funds and invest in accordance with the Deposit and Investment Practices and grant the Debtors a 60-day extension, without prejudice to seek further extensions, to either comply with Bankruptcy Code section 345(b) or to make other arrangements that would be acceptable to the U.S. Trustee.”
In other words, carte blanche and whatever is “acceptable to the U.S. Trustee” and with the ability to seek further time extensions.
Aided by more legal-spinola, the court then granted continuation of “Intercompany Transactions.”
Counter to all protections of customers, the other affiliates of the debtors appear to have secured superior status for “intercompany claims” over segregated customer deposits with this clause:
29. To ensure that each individual Debtor will not, at the expense of its creditors, fund the operations of another Debtor entity…all intercompany claims against a Debtor by another Debtor arising after the Petition Date as a result of intercompany transactions and allocations (“Postpetition Intercompany Claims”) be accorded superpriority status…
This is how the shuffling can happen, (and could be going on right now) with this “legal” looting of customer funds using, as the motion reads the efficient intercompany “Cash Management System” for intercompany loans. I.e. the ability for MFGI to make loans to the bankrupts MF Global Holdings, Ltd.
30. In addition, in connection with their role under the Cash Management System facilitating the operations of the non-Debtor affiliates, the Debtors may, in the ordinary course of business, periodically infuse capital into certain of their subsidiaries and affiliates, including non-Debtor non-U.S. affiliates. These infusions of capital generally are accomplished through the making of intercompany loans. The Debtors use repayments of such loans as a tax efficient method of managing cash throughout their worldwide business enterprise. Because the non-Debtor affiliates are part of the same group of affiliated entities as the Debtors, the entirety of intercompany transactions among Debtors and non-Debtor affiliates alike remain within the spectrum of the Debtors’ control.
Business as usual?
On the surface this appears a normal request to efficiently seek benefit of all debtors. But this is not what is happening here. First, and importantly, MF Global Inc customers are not creditors. But their money has been put into the MFGI estate and is now available for loan to the bankrupt parent company and “remain within the spectrum of the Debtors’ control.“
Customer funds were swept into the MF Global Inc. (MFGI) estate under the pretense of “missing money.” Without providing any accounting, the Trustee of the broker unit, MFGI, tells the public the expected amount missing may likely continue upward. No wonder! When the judge granted this motion he allowed the use and commingling MF Global assets. The public is now being prepared for greater losses of customer funds.
The potential, now even likelihood, for additional shortfalls with this ability of continued use of customer funds is enormous. (Not to mention the added ability for MFGI to now make payments — from the frozen customer funds – to non-US affiliates, making clawback recovery exceedingly costly and difficult.)
How can it be possible?
Finally, English astutely asks, exactly how can it even be possible, that the Euro debt repo-to-maturity trades might continue to this day, when they were performed by MF Global Inc. with an affiliate (not Goldman or JP Morgan,) to that receives 80% of profits from the transactions?
How is this possible, we ask, as J. Christopher Flowers and others are among MF Global Holdings Ltd. largest shareholders? With this approved motion it is, indeed, possible that outflows will continue an affiliate of Jon Corzine’s (former) good friend and others.
With this green light from the Bankruptcy court, the abuses will most surely go on for many months to come. It is pre-programmed in this early filing and the compensation scheme of US Courts for Bankruptcy Trustees.
An abuse of a Federal Bankruptcy court?
This discussion of the paved potential for abuse and more looting, does not even consider that is not at all remotely in Trustee Giddens’ interest to rapidly return customer (non-creditors) assets and liquidate MFGI. All confusion, all delays, the bigger the mess and less efficient, the more a liquidation Trustee and supporting Bankruptcy industry will earn from the estate of MFGI. Now estimated to be well over $100 million or more per year! Added to this, and in spite of most recent announcements, few US customers will see a 60% recovery going into December. The requirements for a 60% recovery are so rigid; we are now finding out, few can qualify according to the Trustee rules. Who knows what additional hurdles for recovery are going to be created in the hunt for fees?
To reiterate English’s call, it is now imperative that Judge Glenn immediately demand disclosure of all trading and intercompany transfers. Without urgent action to secure these records, protection of customers is impossible, and the integrity of the Court forever in peril.

Andrew Abraham
Abraham Investment Management


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1 comment to Missing funds and fees likely to go higher with MF Global Bankruptcy

  • Hi Andrew,
    I really want to thank you for this post. I have got to say the whole idea of comingling these funds , if I am understanding it correctly, is a little scarey to me. It seems like more of the same thing to me that is to say “robbing from Peter to pay Paul”. Did I understand what you were saying correctly. I am going to look at my live charts and see how this is effecting the market. Thanks again for the timely update.

    Regards,

    Glenn

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