Former FBI Director Freeh Appointed MF Global Bankruptcy Trustee
The Bankruptcy Court has appointed former Federal Bureau of Investigation Director Louis J. Freeh as trustee in the much publicized MF Global Holdings Ltd. bankruptcy case. Both the company and its creditors agree that one sole person should be tasked with the responsibility of getting assets back. Among other things, Freeh is to liaise with all regulators for the prompt recovery of creditor funds. The appointment was filed today.
On October 31 all customer accounts of MF Global Inc., the brokerage unit of MF Global Holdings, were frozen when the company could not account for a shortage of funds required to be segregated under US Commodity Futures Trading Commission rules. Subsequently, MF Global Holdings filed for bankruptcy protection to distribute returns to its bondholders and other creditors. MF Global was managed by Jon Corzine, who was formerly the governor of New Jersey and co-chairman of Goldman Sachs. Corzine has since resigned due to the debacle.
Louis Freeh was an FBI agent who rose in the ranks to become the Bureau’s director when President Bill Clinton was in office from 1993 to 2001. Earlier, Freeh was a federal prosecutor and was appointed by President George W. Bush to the bench in 1991 to become a judge. His appointment as trustee must be approved by bankruptcy judge Martin Glenn who is presiding over the bankruptcy case.
After stepping down as director of the FBI, Freeh ventured into risk management and formed his own company, Freeh Group International Solutions Inc. He also started his own legal firm. Some of his past and current work involvements include:
• In 2008, heading a 2008 investigation of energy trading losses leading up to the bankruptcy of SemGroup LP
• In 2010, conducting an independent monitoring a Justice Department probe of Daimler AG in 2010
• Conducting an independent probe of the child sex-abuse scandal at Pennsylvania State University
• Reviewing the security measures for SAT college-admissions test to be in accordance with the Educational Testing Service of Princeton, New Jersey and the New York-based College Board
There appears to be nothing in Freeh’s current businesses that would pose a conflict of interest in his appointment as trustee for MF Global. Freeh said in court papers, “I do not personally have any connection with any interested party in these case.” Freeh did, however, mention some minor exceptions, for example the work his legal firm has done for Bank of America Corp., that make up less than 1% of its revenue to date.
On Freeh’s part, his appointment necessitates him posting a bond of $26 million within the next 5 days, in accordance with regulations by the Justice Department in its handbook for trustees.
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Filed under Chapter 7 (Tampa) by on Nov 25th, 2011. Comment. 
The country’s seventh largest trading firm, MF Global filed for bankruptcy October 31 and sent shock waves through the investment fraternity. MF Global was a brokerage that acted as a counter party to investors who wanted to buy or sell commodities, including crops like corn and soybeans. In a recent letter the CME Group, owner of the Chicago Board of Trade admitted that MF Global’s bankruptcy created “a difficult period for many of our customers”. However, CME assured everyone that commodity trading investors will still be able to access their accounts despite the bankruptcy.
Nevertheless, the trustee has frozen the customer funds of the firm and as a result, some commodity traders and also farmers have not been able to access their money since the bankruptcy.
MF Global was run by John Corzine, formerly of Goldman Sachs and ex-governor of New Jersey. The firm made bought extensively into European debts, particularly in countries like Italy, Spain, Portugal and Belgium. They are also believed to have dipped into so-called segregated funds held by trading customers in a way that is similar to bank deposits. Regulators have discovered about $600 million in investor funds that went missing and are now investigating the matter.
Some investors blame CME for the malady, saying that the CME guaranteed their funds when invested in any member company. One owner of a commodities brokerage in Delaware County, Ken Ries, said he could potentially lose as much as $1 million if the money remains frozen. But he is determined to make good any losses incurred by his 100 farmer customers. Ries wrote in a letter to his customers, “For the past 30 years we have been operating under the assumption that customer funds are guaranteed under the umbrella of the CME and its clearing members. However, with the events of this past (week) we have come to learn that in this instance of rerouting segregated customer accounts the Exchange will not, in fact, guarantee customer funds.”
CME Group issued a statement explaining their own limitations, “the US bankruptcy code requires that free credit balances be frozen at least on an interim basis, and that fully paid securities and warehouse receipts may not be made immediately.” Hence, it said, its hands were tied.
Commodity Futures Trading Commission chairman Gary Gensler recently recused himself from the investigations on the basis of his close personal ties with Corzine as both had been colleagues in Goldman Sachs in the past.
US Senator Chuck Grassley (R-Ia) commented, “MF Global’s case is a big collapse that requires a lot of work from the commission to try to figure out what went wrong and minimize further investor losses if possible.”
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Filed under Chapter 7 (Tampa) by on Nov 9th, 2011. Comment.
Groupon recently escaped having to file for bankruptcy when the company listed its initial public offer (IPO) at $20. With the successful listing, Groupon will not have to file for bankruptcy, at least this quarter. The company’s liabilities as at the end of September amounted to $505 million, which was more than twice the $243 million cash they had in their kitty. Out of that amount, they owed $465 million to their own merchants for whom they sold Groupons, their half price coupons.
Just after the start of listing, the price of Groupon shares rose to $31 but thereafter fell rapidly. Anyone who bought at higher than $30 would have likely gotten burned. Even the underwriters knew the flaws of the company but agreed to underwrite anyway because they needed the fees due to the recession. These included Goldman Sachs, Credit Suisse and Morgan Stanley. Even with such a large group of 11 lead underwriters the deal had to be cut back to 5% of the shares outstanding to get it sold.
Furthermore, about 95% of Groupon’s merchants never come back. This is because the company insists the merchants cut their prices to half before Groupon would take them in. Then Groupon charges 40-60% of the coupon value as their cut for marketing the merchant’s goods or services. So effectively, the merchant only receives 20-30% of income for their goods or services. Very few merchants would be able to make any profit with such razor slim margins. Little wonder that Groupon has to constantly look for new merchants all the time. As for the customers who use Groupon’s discount coupons, they discover that the coupons are not convenient to where they live. So they too are unlikely to keep using Groupon.
Nevertheless, the founders of Groupon have made their money. However, the last 2 Chief Operating Officers quit in 2011. The last one left weeks ago just before the IPO and knowing her more than a million shares would be worth a lot on paper.
Even though Groupon is likely to take a long time to return to profitability, it will probably see a better end than Rupert Murdoch’s purchase of MySpace in 2005 for $580 million. This year, Murdoch commented about that purchase, “We paid $600 million. We could have sold it for $6 billion a month later.” News Corp sold MySpace recently for only $35 million to a group that included Justin Timberlake. It incurred a loss of 94% on its purchase price.
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Filed under Chapter 7 (Tampa) by on Nov 7th, 2011. Comment.
Jon Corzine, the Chairman and CEO of MF Global has submitted his resignation, barely 20 months after being appointed to head the futures brokerage firm. Corzine’s task was to turn the brokerage firm into an investment bank. He drew a salary of almost $4 million over his tenure and does not plan to seek severance pay. Corzine was the former co-chief executive of Goldman Sachs Group Inc. and former governor of New Jersey.
Corzine said in a statement, “I have voluntarily offered my resignation to the Board of Directors of MF Global. This was a difficult decision, but one that I believe is best for the firm and its stakeholders.”
On his resignation, Corzine added, “I feel great sadness for what has transpired at MF Global and the impact it has had on the firm’s clients, employees and many others,” and confirmed his commitment to cooperating with regulatory investigations and the “disposition of the firm’s assets”.
Four days prior to Corzine’s resignation, MF Global filed for bankruptcy amid investigations into financial irregularities. The Commodity Futures Trading Commission is investigating $633 million in customer accounts that is unaccounted for. The regulator sent a subpoena to MF Global’s auditor, PriceWaterhouseCoopers LLP, asking for information on the missing accounts. In addition, the trustee authorized to liquidate MF Global was tasked with questioning directors, officers, lenders, affiliates and investors on this matter.
Although Corzine resigned of his own accord, he was requested to do so by the board after efforts to sell the company did not succeed.
Corzine increased the MF Global’s risk and used its money to invest in sovereign debt from European countries like Spain, Italy, Portugal, Belgium and Ireland. The company has $6.3 billion worth of these debts. With the worsening European economic crisis came credit downgrades, margin calls and demands from regulators to boost capital that prompted the firm’s bankruptcy filing.
The Securities and Exchange Commission had questioned MF Global in March on its Repo-to-Maturity transactions. Jennifer Monick, an SEC senior staff accountant asked the firm to disclose how the accounting treatment affected its financial metrics and ratios.
MF Global filed its response saying the Repo-to-Maturity transactions had increased its revenue by $2 million and that the underlying collateral was US Treasury securities.
In June, the Financial Industry Regulatory Authority objected to similar Repo-to-Maturity transactions when it noticed the collaterals used were European sovereign debts and promptly instructed the MF Global to boost its capital position.
Records show that as at March 31, MF Global had $7.6 billion Repo-to-Maturity transactions with European sovereign debt as collateral. This increased to $11.5 billion by June 30, according to a quarterly filing.
According to the Commodity Futures Trading Commission, MF Global’s customer funds have a shortfall of $633 million out of a segregated fund requirement of about $5.4 billion. Investigations continue.
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Filed under Chapter 7 (Tampa) by on Nov 3rd, 2011. Comment.
As the economy recovers, many companies are exiting bankruptcy. Some of these companies have been bought over by hedge funds (partly or entirely) who are now keen in making some ROI. Hedge funds like Paulson & Co, Avenue Capital and Silver Point Capital bought over control of many bankrupt companies and are now seeking to sell them at a profit.
This means many companies are expected to come to the market soon, according to investment bankers. The companies come from a wide range of industries like the auto, media, chemicals and technology industries.
Recently emerged from bankruptcy, Delphi Corp, with Silver Point and Elliott Management among its owners, is planning an initial public offering. Auto parts supplier Cooper Standard, exited bankruptcy in May 2010 under the control of hedge funds including Silver Point and Oak Hill Advisors. It is now shopping itself. Others that will follow suit in the next one or two years are Dura Automotive, in which Patriarch Partners has a majority stake, and Lear Corp, owned partly by Goldman Sachs.
According to one investment banker, “There are some great brand names that are being rehabilitated and re-purposed into healthier companies. There will be demand for them when they come off the shelf.”
The same goes for media companies and direct marketing companies. Another banker said, “Some of the now-bankrupt media companies still have broad customer bases and strong franchises. Once that gets fixed and repackaged, these can be viable companies again.”
Vertis Holdings (that exited bankruptcy with GE Capital and Avenue Capital), Source Interlink (that came out of bankruptcy with JPMorgan Chase), media company Charter Communications (partly owned by Apollo Management), ION Media Networks, RHI Entertainment and Young Broadcasting are some of the recently revived media and marketing companies set to consolidate and maybe enter the market.
There are also technology companies such as Satelites Mexicanos and MagnaChip Semiconductor Corp that have emerged from bankruptcy under hedge fund and investor control over the last two years and chemical companies such as Tronox Inc. who are also in a similar situation.
Hedge funds reorganize bankrupt companies by taking various forms of action like closing loss-making departments, shutting down manufacturing plants and negotiating with workers’ unions. They usually push for quick solutions to turn bankrupt companies around with the least cost so that they can exit bankruptcy ASAP. Then they would sell the company or do some other thing to get returns on their investments.
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Filed under Chapter 7 (Tampa) by on Sep 6th, 2011. Comment.
