This article originally appeared in Futures Magazine.

BY DANIEL P. COLLINS

An interesting discourse went on at last week’s Senate Agriculture Committee hearings on recent failures to protect customer funds in the futures industry between the two MF Global trustees. The hearings were titled, “Examining the Futures Markets: Responding to the Failures of MF Global and Peregrine Financial Group,” and there really wasn’t a discourse as MF Global Holdings Trustee Louis Freeh was not there, though he supplied the committee with a written statement.

In it he stated, “It is my belief … all of the customers of MF Global Inc. eventually will be made whole by the SIPA Trustee.”

The funny thing is that the SIPC trustee charged with making customers whole, James Giddens, disagrees. Perhaps funny is a poor choice of words as Giddens believes they may fall 10% short and Freeh has actively challenged the MF Global Inc. trustee’s efforts to distribute money to customers and has $2.3 billion in claims against MF Global Inc. while building up a pretty hefty legal bill that someone will have to pay.

The odd thing is why Freeh would choose to comment on the customer aspect of this. It is not his role in this. Perhaps it is because to actively pursue assets for the parent and its creditors who may be holding on to customer money nine months after the debacle sounds a little harsh. In a sense he is representing the firm responsible for the shortfall as well as creditors — JP Morgan in particular—that may be holding on tocustomer funds. Trustee Giddens has reported that he is in discussions with JP Morgan about customer claims and in May, nearly six months after MF Global went under, secured $168 million in “excess collateral” held at JP Morgan. No adequate explanation has been offered why these funds took so long to come over and the trustee stated that it was unrelated to his other claims against JP Morgan.

Remember this all happened on Oct. 31, 2011, so being made whole at this point is not exactly a fair exchange. Also remember that MF Global’s only business was that of a broker and operated as one entity. And further the fact that there was a shortfall in customer funds should have required the entire company be placed under receivership, a mistake that may have occurred due to brazen lie told in court on Nov. 1. That is an attorney for MF Global claimed that to his knowledge there was no shortfall at the broker dealer. Whether qualifying the statement with “broker dealer” offers some protection is unclear but the FCM and B/D were treated as one entity under MF Global Inc. and was the reason it went to SIPC as a dually registered firm.

John Roe, co-founder of the Commodity Customer Coalition, said, “The CFTC and SEC obviously knew by Nov. 1 that the shortfall in customer property at MF Global was real. They focused on permitting SIPC to move ahead with a liquidation without considering that MFGH’s voluntary application for Chapter 11 would cause the liquidation to become bogged down in litigation.  A company with a subsidiary missing hundreds of millions of dollars in other people’s money was not going to reorganize and reemerge from bankruptcy as a new entity.  The CFTC and SEC should have fought MFGH’s Chapter 11 application and insisted on and involuntary Chapter 7 liquidation.  That would have been best for customers.”

What is clear is the fact that there are two trustees representing competing interests has delayed the return of customer money and vastly increased the cost of the resolution.

Roe added, “Instead, we get two trustees at twice the price delaying the release of hundreds of millions of customer assets, potentially for years.  The decision that was made seems to have benefited creditors of MFGH more than customers of MFGI.”