Former clients of collapsed MF Global UK had their ‘client status’ recategorised just days before the firm entered administration meaning they could now miss out on the redistribution of cash planned for February.
Practitioners at Baker & McKenzie representing clients caught up in the collapsed derivatives brokerage said KPMG’s ‘special’ administrators have classified those owed money into two categories – ‘creditors’ and ‘clients’.
Clients are due to be paid a cash distribution from next month while creditors have been told they will have to wait.
However, evidence has come to light to suggest that some customers were moved between categories just days before the firm collapsed.
Arun Srivastava, head of Baker & McKenzie’s financial group in London, said a number of customers of the brokerage received a letter just days before confirming the switch.
He explained: “The people who are in the category of ‘client’ with a big C, they (KPMG) will be making some kind of distribution to them.
“The will ask the court to approve the distribution in February but it will only be an interim distribution so we don’t know the percentage they will be returning.
“They (KPMG) have been relying on the firm’s own books. There are a lot of people in there who say they should be treated as clients but are being treated as creditors.
“There are also prospective court applications to come as well. You can have some sympathy for KPMG because when an investment firm collapses, it gives rise to some very complicated issues. Until you have resolved the different legal issues, you don’t know to whom that money should be going.”
Srivastava’s colleague, Louise Webb is one of the firm’s European restructuring and insolvency steering committee.
She added that clients who are disputing their classification could be significantly impacted if they have been misclassified.
She explained: “If you have not been treated as a client, but a creditor, you don’t know when you will see that money.
“You have to bear in mind who these clients are. You could think it is only other financial institutions, but in the commodities business, a lot of people have these accounts for hedging purposes and having their money tied up causes a real problem.
“For some, it means increasing risk within the business because they will not have the cash available to fund these positions. With your account with MF Global, you could have had some open positions and some cash. Without that, if you’re small, you can’t just go somewhere else.
“If your positions have been transferred, that’s fine, but a lot of people had their positions closed out. There is a greater need for transparency of the criteria (used to classify customers).
“Some clients who thought they met the criteria still had their positions closed out and were not transferred.”
In the recent creditors’ meeting, KPMG told attendees that MF Global UK had used FSA guidance to classify companies into ‘client’ and ‘creditor’ bands.
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