04 April 2012

MF Global: The Awkward Construct of a Dual Bankruptcy and the Two Trustees

I outlined the somewhat adversarial relationship between the two trustees due to the odd and awkward construct of the bankruptcy a few days ago. Louis Freeh Asks for $25 Million From MF Global Estate to Pay the Defense Costs of Corzine and Execs.
"I am not an attorney and have never been personally involved in a bankruptcy so I am not particularly knowledgeable in the finer points of US corporate bankruptcy practices. It almost appears more like a divorce than a bankruptcy. The duality of it with the two trustees is fascinating. And the primacy of Mr. Freeh over federal investigators was a bit surprising.

It seems odd to have dual trustees, one for the Chapter 7 brokerage, and another in the Chapter 11 representing the interests of MF Global Holdings management and the banking creditors. Every time a headline says 'the Trustee' I have to look to see if it is Mr. Giddens or Mr. Freeh. I understand the rationale for the two forms of bankruptcy, but the structure of having two trustees answering to competing interests is awkward. Were there two trustees for Lehman and Bear Stearns?

As you may recall, Mr. Freeh had recommended paying bonuses to the executives earlier this year. He also had refused to turn over MF Global emails and documents regarding the accounts and transfers of money to federal investigators, claiming attorney client privilege between himself and MF Global, until his own people had a chance to look them all over.

Is this perhaps why it is so hard to obtain indictments in financial cases? The firms do not have to hand over any evidence until they and their attorneys have had a chance to go through everything first, and then decide what they wish to hand over to investigators?

...Just as this case may provoke some activity in the regulatory area, so one might think that in addition to making an interesting case study for law schools, it could involve some changes and streamlining in the bankruptcy practices in which companies like banks and brokers are holding customer money in trust, in addition to the standard classes of creditors. Certainly there is plenty of room for clarification."
Even under the best of circumstances there is a natural tendency for confusion to occur when there is an apparent cover up by the company's management. After all, everyone claims complete ignorance of what happened to a huge amount of customer money, except for the assistant Treasurer, who at this point is pre-occupied with making a deal for immunity from prosecution in return for her testimony.

If the money 'simply vaporized' what is she seeking immunity from? Practicing magic without a license?

And perhaps in the future, in addition to streamlining the bankruptcy process, there might be some consideration to giving the appropriate law enforcement the primary control over the company records from day one when customer money has been stolen, and not leaving it up to the management of the company and their attorneys to decide how they wish to manage the dispostion of critical information, otherwise known as 'evidence.'

I understand that this may not have become an issue in the past, when brokerages went bankrupt, and the primacy of customer claims was upheld. And I admit to being a touch Socratic here. If these things were not a problem in the past, why are they such a heartache and stumbling block now?

Sometimes TBTF banks and TCTP (Too Connected To Prosecute) financiers flout the law and use their influence to twist the existing laws and the compliant legal system to suit their purposes. And that is a symptom of a much greater problem.