A leading financial services lawyer has warned MF Global clients not to pin too many hopes on a UK Supreme Court decision which extends the definition of segregated client money beyond segregated accounts.
The landmark Supreme Court case has shed light on the status and distribution of client funds by US investment bank Lehman Brothers and has implications for MF Global clients who are missing money from their accounts months after the futures broker went bust.
At issue was the position of client money that failed to make it into Lehman’s segregated client accounts at the time the firm went bankrupt on 15 September, 2008.
“The judgment should open the door to some clients seeing additional cash released from MF Global, including those with outstanding segregation requests and margin,” said Sean Donovan-Smith, a senior associate at London-based law firm Speechly Bircham. “But this decision should not be interpreted too widely. It doesn’t mean all client money – no matter where it is located – can now be retrieved.”
While in the UK client funds are required to be segregated in separate accounts, Lehman operated an “alternative approach” for holding client funds, where monies were paid into the firm’s house accounts and then segregated into client accounts later. Under this arrangement, funds were not paid directly into client accounts and some client funds remained in the house accounts when Lehman went into administration.
The UK Supreme Court has upheld a Court of Appeals decision that means money which did not make it into segregated accounts can nonetheless be deemed segregated client funds and therefore pooled for return to account holders.
The judgment impacts MF Global clients in the UK who are yet to be compensated for money lost which should have been in segregated client accounts.
“This is good news and everyone welcomes the clarity. The administrators of both Lehman’s and MF Global can now move forward with the resolution of numerous outstanding client money claims,” said Donovan-Smith. “But other issues still need to be resolved, like the effect of MF Global’s standard terms of business and identification of client money in its house accounts.”
Donovan-Smith said the Supreme Court’s ruling provides three important rules for client money protection: protection applies from the point when client money is received; if client money is identifiable in any account, it must be pooled; clients share the client money pool on a claims basis, irrespective of whether they contributed to the client money pool.
As authorities look for missing MF Global customer cash in the order of US$1.6 billion, US futures exchange CME Group said it now planned to let swaps traders keep collateral with a third party. The move is aimed at providing increased protections.
In early February, MF Global’s UK special administrator KPMG, began returning client money but was unable to continue the process until the Supreme Court ruling.
MF Global’s US bankruptcy trustee, James Giddens, is fighting KPMG, asserting around US$740 million of the UK funds should be repatriated for American customers.