Why SIPC? MF Global Customers Were Thrown Under the Bus on Day 1

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Guest Post by MFGFacts.com

Below is the text of the SIPC answer to Judge Glenn addressing the question as to how the Trustee was appointed.  Declaration here.

This declaration was in response to the court order last week for additional information to determine the Trustee’s disinterestedness.

Underlines are our own, and [italicized] text [contains] comments to the declaration.  SIPC’s declaration did not address how and why the Trustee was assigned.  In fact, it raises even more questions.



Pursuant to 28 U.S.C. § 1746, I, Stephen P. Harbeck, declare as follows:

1. I am the President and Chief Executive Officer of the Securities Investor Protection Corporation (“SIPC”).

2. On Monday morning, October 31, 2011, at 5:20 a.m., I received a telephone call from a representative of the Securities and Exchange Commission’s (“SEC”) Division of Trading and Markets, who was then in New York. The purpose of the call was to inform SIPC that a liquidation proceeding under the Securities Investor Protection Act, 15 U.S.C. §§ 78aaa et seq. (“SIPA”), was necessary with respect to MF Global Inc. (“Debtor”). This call was the first notice to SIPC that such action was required to protect the Debtor’s investors. SIPC subsequently received a formal written notification from the SEC via an e-mail at 7:29 a.m. stating that the commencement of a liquidation proceeding with respect to the Debtor was appropriate under Section 78eee(a)(1) of SIPA, and setting forth the legal and factual basis for commencing the case.

We note there was no call to protect Debtor’s (MFGI) depositors.  In other words customers.  SIPC was notified to protect “investors.”  Assuming this language refers to the less than 400 securities accounts at MFGI, why would this turn into a SIPC liquidation when less than .010% were security accounts subject to SIPC protections and 99.99% of the client accounts were not covered under SIPC?  Role of the CFTC was to step in and protect MFGI customers/depositors.

3. While four members of SIPC’s staff flew to New York, other legal personnel drafted the documents necessary to initiate a SIPA liquidation with respect to the Debtor. SIPC personnel also made simultaneous inquiries to a number of professionals concerning whether those persons, and the law firms with which they are associated, were presently engaged in the Chapter 11 proceedings initiated with respect to the Debtor’s parent company, or were otherwise disqualified from serving as trustee or counsel under the disinterestedness definition in Section 78eee(b)(6) of SIPA.

This answer rings of the ongoing Jon Corzine testomony.  Lots of words, but no answers. If Mr. Harbecks’s answered the question his statement would tell us what “professionals” were contacted.  Professional what?  His staff in the early hours?   What number is how many exactly?  Names and positions of professionals are needed to evaluate the process.  What firms were considered?  As most all clients were commodity customers, were firms specializing in the commodity industry considered?

4. Approximately ten possible trustees and counsel having the requisite bankruptcy experience, skill, and resources were considered. A number of persons were not contacted because it was public knowledge that they or their firms were involved in the Chapter 11 proceedings involving the Debtor’s parent company. Approximately five persons were contacted, of whom only two were associated with firms eligible to serve.

Which approximately ten possible council were considered?  For those deemed not to be candidates, what was the known extent of their involvement with the Debtor’s parent company?

5. Of the two remaining law firms, one had never served previously as the trustee or counsel in a SIPA liquidation. Due to the fact that the Debtor operated both a substantial securities business and a multi-billion dollar commodities business, and that its liquidation therefore would be unprecedented and unique, SIPC determined that the Debtor’s liquidation would not be appropriate for a law firm with no prior experience in SIPA matters.

Fewer than 400 securities accounts is not “substantial” by any measure. The current Trustee has absolulte no experience in liquidation in the commodities industry.  Was a firm with experience in the commodities industry considered?

6. Instead, SIPC selected James W. Giddens as trustee and his law firm, Hughes Hubbard & Reed LLP (“HHR”), as his counsel. In SIPA matters, Mr. Giddens is the most experienced attorney currently practicing, and has served as the trustee or counsel in SIPA cases since the early 1970s. He is also serving as the trustee, with HHR as his counsel, in the liquidation under SIPA of Lehman Brothers, Inc., the largest and most complex SIPA liquidation in history. SIPC selected Mr. Giddens and HHR after discussions with Mr. Giddens to ensure that he and HHR were disinterested within the meaning of Section 78eee(b)(6) of SIPA.

In Mr. Giddens own words,”he has been involved with SIPC from the time of its creation in 1970….”  Over 40 years.   Further Mr. Giddens is on the SIPC Modernization Task Force.  A trusteeship is a highly desirable assignment and it was clearly assigned by SIPC to an insider.

7. Given the extreme fragility of the Debtor, and the risk to which any delay might have exposed its customers, all of the foregoing actions were, and had to be, taken within hours. Consistent with this urgency, Mr. Giddens and HHR were designated by SIPC pursuant to SIPA Section 78eee(b)(3), and were appointed by the United States District Court for the Southern District of New York, on October 31, 2011. As a result, they were able to take control of the Debtor’s premises in New York on the afternoon of the same day. I declare under penalty of perjury that the foregoing is true and correct.

The initial order (docket #1) was standard boilerplate for a SIPC liquidation of a securities dealer .  Remarkably, it had to be modified by hand (apparently after the filing) to remedy all deficiencies as it did not even address commodity regulation. The actions of the trustee shortly after assignment as Trustee introduced additional risk to all customers and markets.  This demonstrated an inappropriate, perhaps disastrous,  assignment to HHR.

Executed on

December 12, 2011.

/s/ Stephen P. Harbeck


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The following is reposted from EconomicPolicyJournal.com

Why was MF Global put through a SIPA liquidation designed for securities brokers?


Answer: to protect the creditors.

Had MF Global been resolved under Subchapter IV of Chapter 7 of the Bankruptcy Code (appropriately entitled "Commodity Broker Liquidation"), customers would have been put first, against the interests of the large bank creditors of MF Global. From the unambiguous Historical and Revision Notes in the US Code (emphasis ours):


[Section 765] Subsection (a) of this section [enacted as section 766(h)] provides that with respect to liquidation of commodity brokers which are not clearing organizations, the trustee shall distribute [commodity] customer property to customers on the basis and to the extent of such customers' allowed net equity claims, and in priority to all other claims. This section grants customers' claims first priority in the distribution of the estate. Subsection (b) [enacted as section 766(i)] grants the same priority to member property and other customer property in the liquidation of a clearing organization. A fundamental purpose of these provisions is to ensure that the property entrusted by customers to their brokers will not be subject to the risks of the broker's business and will be available for disbursement to customers if the broker becomes bankrupt.

Some tough questions need to be asked to those who approved the last minute handing over of what was primarily a commodities broker into the hands of a trustee experienced only with securities brokers, and pursuant to SIPA legislation that does not afford protections first to the commodities customers. The entire model of customer protection under SIPA is that it establishes an insurance fund for securities customers. Because no such fund exists for commodities customers, they are put at an extreme disadvantage from the outset.

Who made the decision to throw MF Global into a SIPA liquidation? More to come...