While former MF Global clients
anticipate the return of missing funds, few realise the impact of a case
pending in Britain’s Supreme Court on whether and how quickly these funds will
Clients on both sides of the
Atlantic are eagerly awaiting a decision, due in March, of an appeal concerning
the status and distribution of client funds by US investment bank Lehman
At issue is the status of
client money which did not make it into Lehman’s segregated accounts at the
time the firm went bankrupt on 15 September, 2008.
In the UK, client funds are
required by law to be segregated, but Lehman operated an approved “alternative
approach” for the receipt of client funds, where monies received were paid into
the firm’s house accounts and then segregated into client accounts according to
a reconciliation of funds conducted the previous day. Under this arrangement, funds
were not paid directly into client accounts and some client funds remained in
the house accounts when Lehman’s went into administration.
Should this money be
considered segregated and therefore able to be pooled by administrators? While
the UK’s Court of Appeals said it should, we are yet to find out what the
Supreme Court will say. In the meantime, MF Global customers are caught in the
“The timing of the two events
is remarkable,” said James Oldnall, legal director in the finance and banking
group at London and New York-based law firm Mishcon de Reya. “The two bankruptcies
have both called into question how safe is client money under the current rules
for client segregation.”
In early February, KPMG, the
special administrator for MF Global’s UK holdings, began returning client
money, with first payments of 26% in the dollar to clients with “agreed claims”
who had positions frozen or money lost that was supposed to be in segregated
accounts. But no more funds can currently be provided to UK clients until the
Supreme Court ascertains which customers can claim protection.
MF Global’s US bankruptcy
trustee, James Giddens, is also fighting KPMG, asserting around US$740 million
of the UK funds should be repatriated for American customers. The court’s
ruling will also affect what is left for American MF Global clients.
“The key thing about a trust
is you have to be able to identify the funds. If they are co-mingled, then they
may lose their identity,” said David Barwise, a partner at law firm White &
Case, explaining that including money in house funds within the definition of
what is deemed segregated will have complex implications.
Barwise said although MF
Global customers could benefit from the Court of Appeal’s decision if it is
upheld by the UK Supreme Court, it will nonetheless further delay the return of
those funds which did not make it into segregated accounts.
“Some former MF Global
customers will be wanting the Supreme Court to uphold the Court of Appeal’s
decision that client monies which were in the house account are subject to the
statutory trust,” said Barwise. “This would ensure they are returned at least
some pence on the pound or cents on the dollar. It is hoped the Supreme Court
comes up with a logical way to deal with mixed accounts.”
The flipside of this is that
those MF Global customers who know their money to have been in segregated
accounts would likely experience even further delays if the Lehman’s decision
required money in the house account to also be considered segregated.
“Where do you draw the line?
If money in the house accounts doesn’t have to be pooled for recovery, then the
return of segregated funds will be a lot faster,” said Mishcon’s Oldnall. “Any
decision from the Supreme Court will be a double-edged sword, depending on
where whether or not your money was in a segregated account.”
In 2008, the bankruptcy of
Lehman Brothers pushed counterparty risk back to the top of the buy-side agenda,
with many transactions frozen and many commission payments to third-parties
Last year, MF Global filed for
bankruptcy in New York on 31 October after counterparties reacted adversely to
the disclosure of a US$6.3 billion bet on European debt. It has also been
reported widely that regulators have determined that days before the 31 October
bankruptcy filing, MF Global may have moved more than US$100 million in client
money to its own brokerage accounts.
Some US$1.6 billion in client
monies are still believed to be missing.