A year ago, the bankruptcy of MF Global, the collapsed brokerage run by former New Jersey Governor Jon Corzine, seemed like it would be a long and messy affair involving plenty of courtroom drama around the world.
But that was before a surprising meeting of minds between court-appointed administrators in the United States and Britain, and the cooperation of Louis Freeh, former director of the FBI, who is the trustee representing MF Global's creditors.
That led to a proposed settlement, expected to get a judge's sign-off on Thursday, that would give MF Global's U.S. customers 93 percent of their money back - a figure many thought unlikely when the meltdown happened in October 2011.
When MF Global collapsed, regulators found an estimated $1.6 billion hole in customer accounts at its U.S. broker-dealer unit and determined the money had been improperly used to cover corporate needs.
Most of the firm's assets were scattered in subsidiaries around the globe. That resulted in billions of dollars in legal claims between the company's entities, with the interests of broker-dealer customers competing with those of the bankrupt parent's financial creditors.
The bankruptcy world was still immersed in the collapse of Lehman Brothers, which was in the third year of its epic Chapter 11 and today remains embroiled in a slew of lawsuits. While its capital structure was larger and more complex than MF's, Lehman nonetheless painted a clear picture of how complex, transatlantic bankruptcies can devolve into years of litigation.
TRANSATLANTIC FACE OFF
In December 2011, James Giddens, the trustee representing U.S. customers of MF's broker-dealer, knew he might have a lengthy court battle on his hands.
About $700 million of customer money was tied up in MF Gobal's British unit and Giddens believed it belonged to U.S. customers. The money was associated with the accounts of U.S. customers who traded on British exchanges and laws in the two countries clashed on how it should be distributed. Giddens, who had also represented brokerage customers in Lehman's wind-down, knew the laws better than most.
Giddens negotiated for a few months with a team from KPMG that was liquidating the British unit, but by April both sides determined they would need a court to hash out the dispute. That month, Giddens asked KPMG to initiate litigation in Britain and a hearing was set for 12 months later, in April 2013.
With customers and creditors clamoring for payback, neither Giddens nor Richard Heis, the KPMG administrator leading the British liquidation, were happy with the schedule.
If nothing else, it gave them an extra year to negotiate.
The turning point came when money for customers began to flow in from other places, sources close to the negotiations said. Giddens reached settlements with exchange regulator CME Group Inc, MF Global's Canadian affiliate, and others. In Britain, Heis recovered money held by financial institutions and, in November, won a court battle with Giddens over the rights to an undisclosed amount in repurchase transactions, further stabilizing funds for the British side.
By around August, the liquidators began to sense a chance for compromise, said Kent Jarrell, a spokesman for Giddens.
With customer recoveries growing, room for compromise on the intercompany disputes became greater, he said.
"We had been in communication regularly, but the momentum picked up dramatically in the late summer and early fall," Jarrell said. "We started to see ways in which the differences between us could be reduced."
But the trustees needed cooperation from Louis Freeh, the trustee for MF's bankrupt parent, who represents its creditors.
Freeh "had filed claims in the UK administration that the administrators believed to be duplicative" of the claims asserted by Giddens, Marcia Goldstein, a partner at Weil Gotshal who helped represent Heis' team, told Reuters.
Heis felt those claims should be resolved as part of the settlement, Goldstein said, and Giddens began talks to bring Freeh into the deal.
When Freeh agreed, the three sides became eager to tie up loose ends by the end of the year. They reached their goal with 10 days to spare, announcing a global accord on December 21 that would return between $500 million and $600 million to the estate of the U.S. broker-dealer for the benefit of customers.
WORK TO DO
While U.S. Bankruptcy judge Martin Glenn is expected to approve the settlement, which would give U.S. customers up to 93 percent of their money back, work remains.
The last few percentage points of customer money are often the hardest to come by, said Chris Dickerson, a bankruptcy lawyer at DLA Piper.
"I think you're going to find, even in this case, that that last little bit could drag on for a while," said Dickerson, who is not involved in the case.
Giddens said last year he would likely seek court permission to augment customer recoveries by allocating a portion of the estate of the MF Global parent company to customers, setting up a potential court battle if Freeh objects.
Jarrell told Reuters on Wednesday that Giddens is still planning to take that path, despite the boost for customers from the December settlement.
Giddens also remains in settlement talks seeking to recover money from JPMorgan Chase & Co, one of MF Global's most common counterparties, and is also helping customers litigate civil claims against Corzine and other former executives.
Corzine, who left the company days after its collapse, has kept a low profile as he defends the civil claims. He has denied any wrongdoing in connection with the company's implosion.
For his part, Freeh has a handful of claims pending against MF Global affiliates in Australia, Canada, Hong Kong and elsewhere, including a $26.5 million claim against the company's Singapore unit. And in Britain, Heis awaits a court decision on a fight over the methodology of valuing certain customer claims.
Meanwhile, a payout plan filed by a group of hedge fund creditors on January 10 adds another wrinkle to the case. The group, led by Silver Point Capital, Knighthead Capital and Cyrus Capital Partners, owns about 65 percent of MF Global's roughly $2.2 billion in unsecured claims.
Under the plan, trader customers would be paid back in full, while holders of about $1 billion in unsecured bonds would receive only 11.5 cents to 41.5 cents on the dollar. Lenders, including JPMorgan, would recover between 27 cents and 80 cents.
With Silver Point's plan on the docket for court approval on February 14, bankruptcy experts said the filing may have been an attempt to force Freeh to move the bankruptcy along.
"The next logical response is probably a reply from Freeh," said Kevin Starke, a bankruptcy analyst at CRT Capital Group. "That's probably very much what the creditors wanted."
Whatever the final outcome, the case has progressed much more smoothly than experts expected when MF Global Holdings filed its messy Chapter 11 nearly 15 months ago.
"Six months ago, I don't think anyone expected them to be where they are now," said Dickerson.
The case is In re MF Global Holdings Ltd, U.S. Bankruptcy Court, Southern District of New York, No. 11-15059.
The brokerage liquidation is In re MF Global Inc, in the same court, No. 11-2790.
(Reporting by Nick Brown; Editing by Eddie Evans and Andre Grenon)