The SIPA trustee of collapsed futures broker MF Global, Inc. (“MFGI”) recently issued letters to many IBs asserting that the trustee may file preference actions to recover commission payments made by MFGI to the IBs within 90 days of MFGI’s October 31, 2011 bankruptcy filing. The letter indicates that IBs should contact an attorney in the trustee’s office by September 20, 2013 to discuss the issue.
Depending on individual IBs’ particular facts and circumstances, there are a number of defenses and arguments that the IBs may be able to assert to such preference actions. IBs should analyze how these defenses and arguments apply to their facts and circumstances and then communicate with the trustee’s office with the aim of getting the trustee to agree either that no amount is subject to a preference action or that the trustee will settle for a mutually acceptable amount.
If individual disputes cannot be resolved through such communication then the trustee may initiate preference action against IBs by filing complaints with the bankruptcy court. The trustee has an October 31, 2013 deadline to file such complaints.
In addition to the financial exposure, the potential preference actions pose several regulatory issues for IBs. First, if the trustee files a complaint against an IB with the bankruptcy court then the IB will need to update its Form 7-R to make the Financial Disclosure that the IB has been the subject of an Adversary Action brought by a bankruptcy trustee. Second, the IB may need to book a liability for the potential claw back that would impact the IB’s regulatory net capital.
Neal R. Stevens is an Attorney with Schuyler, Roche & Crisham, P.C and can be reached at 312 565.1045.
