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* Customer group to argue for conversion to Chapter 7 bankruptcy
* Group concerned about mounting fees of trustee Louis Freeh
* Freeh estimates $25 mln in professional fees so far
By Nick Brown
May 17 (Reuters) - The legal team winding down MF Global's bankruptcy estate, led by former FBI director Louis Freeh, estimates the fees charged by the team and other professionals have reached nearly $25 million since the bankruptcy was filed in October.
Now a customer group is planning to ask that the case be streamlined so that those professionals -- especially Freeh -- receive less and customers receive more.
On Friday, a coalition of former MF Global customers plans to argue in U.S. Bankruptcy Court in Manhattan that the Chapter 11 liquidation of the MF parent entity should be converted to a so-called Chapter 7, coalition leader James Koutoulas said on Wednesday.
In Chapter 11 cases, businesses or their court-appointed trustees try to restructure debt or sell assets to recover as much money as possible to pay off creditors, a process that can be drawn out. In Chapter 7, a trustee sells off assets as quickly as possible, with less involvement from professionals like lawyers, but sometimes at the expense of drawing top-shelf value.
Under bankruptcy law, administrative fees are paid ahead of other creditor claims, so Freeh's mounting bills are siphoning money from creditors, said Koutoulas, a Chicago fund manager who had $55 million tied up in MF Global on behalf of his clients.
Freeh has released estimated fee figures but not yet formally submitted compensation requests. The estimates consist of Freeh's fees and those of certain other professionals, including MF Global's creditors' committee, but do not break down who has accrued what.
The effort to curb Freeh's work and convert the proceeding to a Chapter 7 could be a long shot.
Judge Martin Glenn, presiding over the bankruptcy, denied an earlier attempt by another customer group to convert the case, citing potential costs to creditors and the disruption of federal investigations into MF Global's collapse.
But Koutoulas said his group plans to use new legal theories based on information that was not available at the time Glenn made his previous ruling, including that MF Global executives knew at the time of the company's collapse that the company had no viable chance of restructuring.
It is also unclear whether customers like Koutoulas are eligible to share in the proceeds of Freeh's recovery efforts.
MF Global, once led by Jon Corzine, a former Goldman Sachs chief executive and New Jersey governor, filed for bankruptcy on Oct. 31, 2011, after revealing exposure to risky European sovereign debt.
Commodity traders who had personal accounts at the company's broker-dealer unit are waiting to be paid back much of the money they lost when, according to investigators, MF Global improperly commingled customer funds with corporate assets.
Investigators have estimated there could be a roughly $1.6 billion shortfall in customer accounts.
DEADLINE ISSUES
The customer coalition's conversion effort was prompted by Freeh's request earlier this month to extend a Friday deadline to provide data relating to the company's debts, assets, transaction history and personnel.
If granted, it will be the sixth such extension for Freeh, and would stretch the procedure out until June 18. That would allow Freeh's legal team to continue to accrue fees that could otherwise go to creditors, said Koutoulas, who filed court papers asking Judge Glenn to deny the motion.
A person close to Freeh on Wednesday said that despite the extension request, Freeh's team will likely file the data on Friday for five of MF Global's six bankrupt entities. Only its MF Global Holdings USA unit, which did not file for bankruptcy until March, will take longer, said the person.
Freeh's spokeswoman, Diana DeSocio, declined to respond to Koutoulas' criticism. Instead, she pointed to Freeh's written extension request indicating that his team is still waiting on data from MF Global foreign affiliates. Those affiliates, Freeh said in the filing, have been slow to respond since they are winding down their own affairs.
"Although these estates are working diligently to compile information, each has competing duties that occasionally take priority over the gathering and release of information for and to the" MF parent, Freeh said.
A MOOT POINT?
In the unwinding of MF Global, the parent estate is separate from the estate of the broker-dealer, which held customer accounts. Each has its own trustee charged with trying to recover money for its respective creditor groups.
Freeh's job is to recover money for creditors of the MF Global parent. It is unclear exactly how much the parent entity owes, or how much Freeh will be able to recover. For starters, the estate owes about $1.2 billion to a lender group led by JPMorgan Chase & Co, and another $650 million in notes.
Freeh is not in charge of recovering money for customers. That task falls to James Giddens, the trustee for the MF broker-dealer. In theory, then, Freeh's perceived delays have no bearing on the recoveries that customers can obtain.
But some customers have argued they should nonetheless be allowed to recover from the parent because their accounts were improperly tampered with. What's more, Paul Musser, an attorney with Barnes & Thornburg who represents the Commodity Customer Coalition in court proceedings, says his clients have been kept in the dark, making it more difficult for them to navigate the market for their claims.
Customers need as much information as possible about what's going on within the various MF estates so they can make informed decisions on whether to keep or sell their claims, Musser said.
"People are being approached by third parties looking to buy claims, and once you sell, you're giving up rights," he said.
A number of financial firms, including Barclays PLC and the Seaport Group, have begun acquiring claims from customers at a discount in hopes of making a profit through the bankruptcy recovery process.
The bankruptcy is In re MF Global Holdings Ltd, U.S. Bankruptcy Court, Southern District of New York, No. 11-15059
The broker-dealer liquidation is In re MF Global Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-2790.
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