Why James Giddens Needs Receivership Powers in MF Global Bankruptcy + CNBC Hit on JPM
Was on CNBC this AM ~ 7:15 to talk JPMorgan CEO Jamie Dimon and "da whale"
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.