BOMBSHELL: Damning SEC OIG Audit of SIPC Raises Conflicts of Interest for MF Global Liquidation Trustee James. W. Giddens


While MF Global figurehead, Jon Corzine, has grabbed most of the headlines with respect to MF Global's demise, it is our hope that US Congressman investigating this debacle shine light on the racket that is SIPC--an organization that can appoint a crony insider who is unrestrained by bankruptcy laws on the amount of fees he can rack up.  The looting of the MF Global customer funds by the liquidation trustee, James W. Giddens (who has no experience with a futures broker liquidation, by the way)  must stop and not be allowed to be repeated. -EB

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The SEC Office of Inspector General published  a damning audit of the Securities Investor Protection (SIPC) Activities just this past March.   Yet most everything in it appears to have been ignored.  Prominent among the ongoing grave accountability problems inside SIPC are that Trustee Fees are excessive, with practically no oversight and absolutely no recourse.

From the report:

Liquidations are similar to ordinary bankruptcy cases, it does not provide any limit on the amount of trustee fees in SIPA liquidations, unlike bankruptcy cases. Second, under SIPA, where payments are made out of the SIPC fund, courts have no discretion whatsoever to limit fees that SIPC has recommended for trustees or their counsel. Thus, even if a court finds the amount of fees awarded to the trustee to be excessive, it is required to approve such excessive fees if SIPC determines that the fees are reasonable. We found that in one case, a Southern District of New York bankruptcy judge deemed fees to be awarded to the trustee in a liquidation to be excessive, but found that he had no choice but to approve the fees.

Fees around the LBI liquidation are among those singled out as excessive, regardless the SIPC hired the same trustee for the MF Global, Inc liquidation.

According to the latest published report, the fees paid to the trustee and his counsels processing the Lehman claims for the period from September 2008 to September 2010 (24 months) totaled approximately $108 million. According to the fourth interim fee application, as of September 30, 2010, the entire administrative fees, including fees for accountants, consultants, etc., totaled approximately $420 million.

We hadn’t see anything yet.  October 24th Bloomberg reported that LBH had spent “642 million on its liquidation, with most of the money going for professional and consulting fees. Trustee James Giddens and his law firm, Hughes Hubbard & Reed LLP, have earned about $169 million.”

No reviews of fees and a weak warning

An entire section of the OIG report is dedicated to the problem that “The SEC Does Not Review Fees SIPC Pays to Court-Appointed Trustees on a Periodicor Systematic Basis”

Remember, this is a government sponsored corporation, and in a time of the exploding bankruptcies in the financial sector we discover that there have been no reviews of fees paid to trustees since 2003 — almost a decade.

Disparagingly, the report continues that Unlike Chapter 7 or 11 bankruptcies  “with respect to SIPA liquidations, there is no equivalent provision capping fees and, thus, there is no statutory limit on the amount of fees a trustee can earn in a SIPA case.”

This must be repeated:  “no statutory limit on the amount of fees a trustee can earn in a SIPA case.”

So the the report is obliged to make  a number of recommendations to try and deal with excessive fees by Trustees.  But right now, even if SIPC complains (would they ever dare?) or seeks recourse on extreme fees, there is simply nothing a judge can do about it under current SIPC regulations

And with that, the audit report concludes with a weak warning that Congress might be called upon to get abusive conditions under control

The Division of Trading and Markets, in consultation with the Commission, shall determine whether to request that Congress modify the Securities Investor Protection Act (SIPA) to allow bankruptcy judges who preside over SIPA liquidations to assess the reasonableness of administrative fees in cases where administrative fees are paid by the Securities Investor Protection Corporation.

No Shame

If this is not bleak enough, note that the trustee for both Lehman Brothers and MF Global, Inc. has been also  the SIPC “house lawyer” for decades.  The SIPC is a private corporation and can hire whoever it wants.  A private corporation, albeit with a government charter and vast public responsibility.  The glaring conflicts for a corporation with this degree of accountability to the public, is beyond the pale by any standard of “good governance.”  Gidden’s own public profile reports, “He has been involved with SIPC from the time of its creation in 1970, served as counsel to SIPC in a variety of matters and has served as Trustee or principal counsel in seven major SIPC liquidations,  He has also served as a special funds administrator appointed by the Securities and Exchange Commission.”  Giddens is a is a member of the SIPC Modernization Task Force.  (Which means he is on the committee charged with things like updating the making of recommendations to Congress on any modifications to the Securities Investor Protection Act (SIPA) to fix things like lack of recourse due to excessive fees!)

Just as example of how a trustee get named by SIPC for the LBI liquidation two days before LBI  filed for bankruptcy on on September 15th, 2008. The SIPC had already decided who would be hired. In a September 13th letter  from Stephen Harbeck, head of SIPC tells the board “The situation is both very fluid and very “non-public”. Should it become necessary to take action, Jim Giddens of Hughes Hubbard and Reed will serve as trustee and counsel.

There is no shame. In March we have a government report on lack of controls, accountability and the problems of Trustees gone wild.  And on October 31st, obviously ignoring the implications of the published audit, the SIPC hands over yet another liquidation to their main man, likely in the same manner of the LBI assignment.  MFG Facts and others continue to ask how is it that the CFTC abdicated their congressional mandate and pushed a Futures Commission Merchant into the jaws of SIPC who then with no competition, no regard of the recent OIG audit, and obviously no debate,  immediately handed it to James W. Giddens of the firm Hughes Hubbard & Reed?

Today Bart Chilton of the CFTC called for an insurance scheme just like SIPC for the futures industry.