Why James Giddens Needs Receivership Powers in MF Global Bankruptcy + CNBC Hit on JPM

rcwhalen's picture

Was on CNBC this AM ~ 7:15 to talk JPMorgan CEO Jamie Dimon and "da whale"


 -- Chris

Update 1: The bankruptcy trustee in the MF Global case, James W. Giddens, has been making great efforts to convince JPMorgan Chase to return hundreds of millions of dollars in customer money apparently stolen by Jon Corzine and his confederates.  The trustee is also preparing to sue Corzine and other individuals to recover monies taken from MF Global.


James Stewart writes in The New York Times:


"Contrary to vague and self-serving assertions that MF Global’s affairs in its last week were so chaotic that no one really knew what was happening, some people at the firm obviously knew only too well, and took desperate measures that ignored clients’ interests. In doing so, they violated the most basic obligation of any brokerage firm, which is to protect customers’ assets." 


Though the action by Giddens is reason for hope in a moral sense, it is not reason for great optimism in terms of actual recovery of money.  The reason is that Giddens as mere bankruptcy trustee, does not have the legal authority to pursue Corzine and his co-conspiritors among the managers of MF Global.  See my earlier ZH post, "The IRA | It's All About the Fraud: Madoff, MF Global & Antonin Scalia"    




In Sunday's rant on the lack of litigation by managers with respect to RMBS, CDOs, etc, we contrasted the role of the FDIC as receiver for a dead bank's estate and the limited powers of a bankruptcy trustee, which are tied to the dead company.  The key difference is that a receiver can pursue third parties and address many other issues of equity that a bankruptcy trustee or judge cannot. 




As a post on Lexis-Nexus bankruptcy law community notes:

"Irving Picard, the trustee in the SIPA bankruptcy proceeding of Bernard L. Madoff Investment Securities, LLC, has asked the Second Circuit Court of Appeals to overturn two decisions from the Southern District of New York dismissing his common law claims against financial institutions that had done business with Madoff.  In both decisions, Picard's claims were dismissed for lack of standing."




In this case, federal Judge Jed Rakoff dismissed the bankruptcy trustee claims on several grounds, including in pari delicto.  Simply stated, "a bankruptcy trustee lacks standing to pursue claims on behalf of the estate's creditors because the trustee stands in the shoes of the estate and not the creditors," notes Kathy Bazoian Phelps.


The in pari delicto defense is often used by prospective debtors such as Corzine to deflect such claims by trustees.  Indeed, in rare cases, even equity claims by receivers may be barred using the in pari delicto defense, but this manuever does not void the other powers a receiver may weild, such as changing the priority of claims. 


Thus the problem facing Giddens is  precisely the same that defeated the trustee in the Maddoff bankruptcy when attempts were made to sue the banks and other parties.  The trustee does not have standing to pursue third parties, but often the trustee will simply litigate and fail, since everyone involved is working by the hour.  

Just as you should never underestimate the laziness of federal regulators when it comes to doing hard work like, say, liquidating a TBTF bank, likewise trustees and bankruptcy judges are equally passive and dislike giving up their turf to receivers appointed by federal judges. It's a gig, if you know what I mean. 


I asked my friend and mentor Fred Feldkamp, a retired partner of Foley & Lardner, about the situation facing the bankruptcy trustee in the MF Global matter:


"Remembering that if either MF trustee says someone in control "stole the money to cover bets" they might create an in "pari delicto defense" which could preclude them (and the Bankruptcy Court) from pursuing the money, this New York Times article is the strongest support I've seen for the change to require that trustees must request approval to seek receivership powers or a receiver at the District Court level when potentially unlawful funds diversions occur.




Fred continues: "Under present law, we create an economic incentive so neither MF trustee will want to pursue thefts, because they might lose jurisdiction.  The Bankruptcy Judge won't either, for the same reason.  So, there must be a mandate that gives creditors automatic relief from the stay to seek a receiver at the district court in these cases--if the trustee will not do so or is denied a petition to do so--in order that creditors' absolute priority and control is maintained.  By current law, we actually seem to "encourage" theft."


Bottom line:  Giddens ought to approach the bankruptcy judge and suggest that they both apply to Judge Rakoff for the appointment of a receiver in the MF Global bankruptcy.  Giddens himself can perform this role and, in the happy event, rack up even more billable hours.

See, there is a silver lining after all.  We can stimulate the economy via receiverships.  Somebody call Paul Krugman. And have a good week.  

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insanelysane's picture

You were great on CNBS this morning.  Becky didn't know how to respond; hedging, prop trading, it's all the same, right?.  Well, no Becky they are very different. 

John Self's picture

Section 105(b) of the Bankruptcy Code:  "Notwithstanding subsection (a) of this section, a court may not appoint a receiver in a case under this title."

disabledvet's picture

So if the law is on their side what was the point of the "political cover" then? And of course whatever one thinks of standing as OW Holmes famously said "the law is whatever the Judge says it is." these folks can be arrested. These folks can be tried and spend the rest of their lives in prison and they know it. The theory however that "reputational risk" never has been now ever will be of any value on Wall Street has clearly been annihilated here. "You will never work in this or any other town again" comes to mind yes, yes? And with 100 billion now "disappeared" in a Facebook IPO "there go any bailout bucks." TOXIC WASTE with a "debt bomb heading straight for ya'" courtesy of Europe. What was that Taj Mahal song again? "one of these days"? Johnny TOO BAD has come to town New York. Say Hello!

Poundsand's picture

"they violated the most basic obligation of any brokerage firm, which is to protect customers’ assets"


No, the most basic obligation is self-preservation and they seemed to have pulled that one off quite well.  And walking away with $3-4B of other peoples money at the same time shows how good they are at it.  Staying out of jail while doing it, takes some help.

Unbezahlbar's picture

Excellent article. I did no tknow the BK Trustee lacked these powers since always read how powerful they were.

And thank you for th eNYT links. Contributoirs like Whalen provide us with a real education. Thanks!

asteroids's picture

As MF Global demonstrates. When the end comes, your money is NOT safe. This is true of Banks as well. Remember those poor suckers with accounts and Lehmans? Cash or gold. Just be ready.

TexasAggie's picture

also bullets, many, many.

overmedicatedundersexed's picture

corzine is free, the big sting worked roll the credits with a little" scott joplin "playing in the backround

Tirpitz's picture

He can't eat all the dough, after all...

On the other hand, if he had stolen a loaf of bread, and without having any political and tribal connections, he might as well have landed in prison.

booboo's picture

Still waiting video of some farmer with huge calloused hands cornering  Corzine wandering out of a Starbucks and turning him into a square knot while singing "Bringing in the Sheaves"

smlbizman's picture

mr. whalen,

your contributions to zh are top shelf ...thank you for your efforts.....

eddiebe's picture

I smell rats everywhere.

Zero Govt's picture

Giddens "making great efforts" my arse

he's botched this scandal from Day 1, he should be sacked and an out of NY State trustee appointed (by the MF customers, not the NY cartel)

NotApplicable's picture

Realize though, he's making those efforts from the inside of a blow-up bounce-house, where he's completely sheltered from the consequences of his actions. As the article states, if he tries too hard, all he can do is to puncture the house and spoil all of his fun.

So... what's he to do, but bounce along with the music, while us proud parents stand outside and watch his performance.

nevadan's picture

See, there is a silver lining after all.  We can stimulate the economy via receiverships.  Somebody call Paul Krugman. And have a good week.

That's the spirit! :)