Hearing Date: January 19, 2012

Time: 11:00 a.m. Eastern Time

Location: New York, New York

Dan M. Berkowitz

General Counsel

Jonathan L. Marcus

Deputy General Counsel

Robert B. Wasserman 

Chief Counsel, Division of Clearing and Risk

Martin B. White

Assistant General Counsel

Robert A. Schwartz

Assistant General Counsel

Commodity Futures Trading Commission

3 Lafayette Centre

1155 21st Street, N.W.

Washington, D.C. 20581

(202) 418-5129

mwhite@cftc.gov

UNITED STATES BANKRUPTCY COURT

SOUTHERN DISTRICT OF NEW YORK

In re:

MF GLOBAL HOLDINGS LTD., et al., 

Debtors.

Chapter 11

Case No. 11-15059 (MG) 

(Jointly Administered)

MEMORANDUM OF THE COMMODITY FUTURES TRADING COMMISSION

IN RESPONSE TO THE MOTION BY SAPERE WEALTH MANAGEMENT, LLC, et al., 

TO DIRECT THE DEBTORS’ ESTATE TO BE ADMINISTERED

PURSUANT TO 11 U.S.C. §§ 761-767 AND 17 C.F.R. § 190

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The Commodity Futures Trading Commission (“CFTC” or “Commission”) respectfully 

submits this memorandum of law in response to the Motion by Sapere Wealth Management, 

LLC, Granite Asset Management, and Sapere CTA Fund, L.P. [collectively “Sapere”] to Direct 

the Debtors’ Estate to Be Administered Pursuant to 11 U.S.C. §§ 761-767 and 17 C.F.R. § 190

(Doc. # 217). Subchapter IV of chapter 7, 11 U.S.C. §§ 761-767, and Part 190, 17 C.F.R. 

§§ 190.01-10 & appendices, are, respectively, the specialized Bankruptcy Code provisions and 

CFTC regulations applicable to commodity broker liquidations. Sapere explains that its motion 

is intended to ensure “priority status to commodities customers to the extent of their segregated 

accounts at MF Global, Inc. (‘MFGI’), a subsidiary of” the primary debtor in this case, MF 

Global Holdings, Ltd. (“MFG Holdings”). (Doc. # 217 at 1.) The CFTC agrees with certain of 

the legal propositions stated by Sapere and reaffirms that commodity customers’ priority status 

must be ensured so that all customer property is returned to its rightful owners and may not be 

used to satisfy the claims of other creditors. 

It is not clear, however, that the Court can and should adopt the approach that Sapere 

suggests in order to protect commodity customers’ priority status. As Sapere implicitly 

acknowledges, subchapter IV and Part 190 by their terms only apply to the liquidation of a 

commodity broker. Those provisions could also conceivably apply to related entities, but only if 

certain factual predicates exist – for example, if the Court determined that MFGI was, in effect, 

the alter ego of MFG Holdings. (Doc. # 217 at 6-7.)1 

The CFTC believes that it may be unnecessary at this juncture to determine whether such 

a predicate exists, or what the legal effects would be in terms of vicarious liability, because there 

 

1 Based on the current record before the Court, which is largely undeveloped, the Commission takes no view at this 

time as to whether the facts would justify the wholesale attribution of MFGI’s actions to MFG Holdings. See also 

7 U.S.C. § 2(a)(1)(B) (providing that agency principles apply under the Commodity Exchange Act in determining 

whether an act or omission is attributable to a given entity).

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are other means available by which to vindicate the priority status of commodity customers. 

Provisions of the Commodity Exchange Act (“CEA”), Bankruptcy Code and related common 

law principles provide the trustees and the Court with many tools by which to reclaim customer 

property and return it to commodity customers, free of other claims. The SIPA trustee should 

continue to use every means at his disposal to accomplish the goal of 100 percent reimbursement 

of all commodity customers, and the Chapter 11 trustee, if any such property is under his control,

should deliver it to the MFGI estate, forthwith, so that it may promptly be returned. 

I. Subchapter IV and Part 190 Do Not Directly Apply to MFG Holdings.

Bankruptcy Code Section 103(d) provides that “Subchapter IV of chapter 7 of this title 

applies only in a case under such chapter concerning a commodity broker.” 11 U.S.C. § 103(d). 

This provision contains at least two facial obstacles to application of subchapter IV in this 

proceeding.

First, this proceeding is being conducted under chapter 11 rather than chapter 7 of title 

11. Thus, so long as MFG Holdings remains subject to chapter 11 rather than chapter 7, 

Section 103(d) renders subchapter IV inapplicable. See also id. § 109(d) (providing that a 

commodity broker may not be a “debtor under chapter 11”). 

Second, the Code defines “commodity broker,” in relevant part, as a “futures commission 

merchant [(“FCM”)], foreign futures commission merchant, clearing organization, leverage 

transaction merchant, or commodity options dealer.” Id. § 101(4). An FCM (the category to 

which Sapere suggests MFG Holdings belongs (Doc. # 217 at 5-6)), is a person or entity engaged 

in “soliciting or accepting orders” that, “in connection with” such solicitation or acceptance, also

accepts cash, securities, or other property to margin, guarantee, or secure a trade or contract. 

7 U.S.C. § 1a(2). Thus, in order to qualify as a commodity broker that is an FCM, the entity

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must not only solicit or accept customer funds, but do so in connection with that entity’s 

solicitation or acceptance of orders. Thus, if customer funds were solicited and accepted by an 

FCM and then transferred later to a separate entity, that would not, on its own, be sufficient to 

bring the separate entity within the definition of FCM or “commodity broker.” If MFG 

Holdings in fact maintained formal separation from MFGI, it is not likely that MFG Holdings 

would meet the definition of FCM.

If subchapter IV does not apply, Part 190 also does not apply because the key provisions 

concerning customer property, including 17 C.F.R. § 190.08(a)(1)(ii)(J) cited by Sapere, 

supplement and clarify subchapter IV. 

II. Any Commodity Customer Property Within the MFG Holdings Estate Is Held in 

Trust and Must Be Returned to Its Owners.

Although the specialized statutes and regulations applicable to commodity broker 

liquidations do not apply here absent additional determinations by the Court, other provisions of 

the CEA and the Bankruptcy Code and common law principles would enable the return to 

customers of customer property transferred improperly from MFGI to MFG Holdings. 

Section 4d of the CEA requires that a commodity broker separately account for, and not 

commingle with other funds, any money, securities, or property the broker receives from a public 

customer to margin, guarantee, or secure futures or commodity options transactions. 7 

U.S.C. § 6d(a)(2). This statute “establishes a specific statutory trust” over such property in the 

broker’s possession as to which the customer is the beneficial owner. Marchese v. Shearson 

Hayden Stone, Inc., 822 F.2d 876, 878 (9th Cir. 1987); see also In re Smith, 72 B.R. 61, 62-63 

(N.D. Iowa 1987) (“The Court finds that [Section 4d(a)(2) of] the [Commodity Exchange] Act 

and regulations created a technical trust[.]”).

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Trust property, transferred in breach of the trust, remains in trust for the benefit of the 

beneficiaries, so long as the transferee has knowledge of the breach or of the circumstances that 

render the transaction unlawful. See Saltzman v. Commissioner of Internal Revenue, 131 F.3d 

87, 90 (2d Cir. 1997); Restatement 2d. of Trusts § 290 (1959) (“If the trustee in breach of trust 

and as part of an illegal transaction transfers trust property to a person who knows the 

circumstances which make the transaction illegal, the transferee does not hold the property free 

of the trust, although he had no notice of the trust.”); id. § 288 (“If the trustee in breach of trust 

transfers trust property to a person who takes with notice of the breach of trust, the transferee 

does not hold the property free of the trust, although he paid value for the transfer.”). If Sapere’s 

allegations regarding the actions of MFG Holdings are true (Doc. # 217 at 3 (“MF Global cast 

aside or destroyed the [segregation] wall, acting for the benefit of the parent (Holdings)”); id. at

5 (“[MFG Holdings] utilized its control of [MGFI] to strip from the subsidiary’s commodities 

customers’ segregated accounts massive sums.”), the Court should find that such property within 

the MFG Holdings estate remains in trust for the benefit of MFGI commodity customers. 

Ordinarily, when such a transfer in breach of trust occurs, “the beneficiary can in equity 

compel the third person to restore the property to the trust.” Saltzman, 131 F.3d at 90 (internal 

quotation marks omitted) (applying New York law). The same is true under the Bankruptcy 

Code, which provides that the debtor’s estate does not include property held in trust for another. 

See 11 U.S.C. § 541(d) (“Property in which the debtor holds . . . only legal title and not an 

equitable interest . . . becomes property of the estate . . . only to the extent of the debtor’s legal 

title to such property, but not to the extent of any equitable interest in such property that the 

debtor does not hold.”); United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n.10 (1983) 

(“Congress plainly excluded property of others held by the debtor in trust at the time of the filing 

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of the petition.”). Assets held in trust, therefore, may not be used to pay claims of creditors. See 

Pearlman v. Reliance Ins. Co., 371 U.S. 132, 135-36 (1962) (“[Bankruptcy law] simply does not 

authorize a trustee to distribute other people’s property among a bankrupt’s creditors.”);

5-541 Collier on Bankruptcy ¶ 541.28 (LexisNexis 2011) (“[A]ssets held in trust will thus 

normally not be available to the debtor or the debtor’s creditors.”). If MFG Holdings has 

possession of trust assets acquired in knowing violation of the statutory trust or otherwise with 

knowledge of illegality, that property must be returned to the rightful owners free and clear of 

any other claims against the estate.

The return of funds may be accomplished even if fungible assets such as cash have been 

commingled such that it is impossible to determine their source as a factual matter. “Equity,” 

under those circumstances, “can serve as a means of attributing rights in such a commingled 

account by tracing the subsequent payments to particular deposits.” GE Capital Corp. v. Union 

Planters Bank, NA, 409 F.3d 1049, 1059 (8th Cir. 2005); see also FTC v. Bronson Partners, 

LLC, 654 F.3d 359, 374 (2d Cir. 2011) (“The rules of tracing ‘enable victims to identify 

particular dollars or assets as the ones they lost.’” (quoting Douglas Laycock, Modern American 

Remedies 673-74 (3d ed. 2002))). For example, when trust funds are commingled with those of 

a wrongdoer, courts frequently apply “an irrebuttable presumption that,” in subsequent 

withdrawals from the account, the “wrongdoer spends his own money first.” Bronson Partners, 

654 F.3d at 374 (internal quotation marks, alterations omitted). Thus, “as long as the amount in 

the account exceeds the amount of misappropriated funds that were deposited there, all the 

plaintiffs’ money is still in the account.” Id. If the account balance drops below the total 

amount of misappropriated funds, courts typically will conclude that the “lowest intermediate

balance” consists entirely of the trust property. United States v. Coriaty, 300 F.3d 244, 253 (2d 

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Cir. 2002); Restatement of the Law, Restitution § 212 (1937). Any such property recovered by 

the SIPA trustee would become customer property pursuant to 17 C.F.R. § 190.08(a)(ii)(D).

Finally, under certain circumstances, it may also be possible to recover customer property 

transferred to MFG Holdings or related entities, even if such property was subsequently 

transferred to third parties before the petition date. See, e.g., 11 U.S.C. § 548(a)(1)(A).

Conclusion

The Commission agrees with certain of the general legal principles stated in Sapere’s 

motion as well as the proposition that all customer property, as defined in subchapter IV and Part 

190, must be returned to commodity customers free and clear of other claims. The Commission 

notes, however, that application of these laws as Sapere suggests requires, at a minimum, certain 

antecedent determinations by the Court, as to which the Commission takes no position at this 

time. The Commission believes that, at this juncture, it is not clear that the approach Sapere 

proposes is necessary to vindicate the rights of commodity customers, because the CEA, the 

Bankruptcy Code, and common law principles provide the Court and the trustees with other 

means by which commodity customer property can and should be returned to its rightful owners.

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Dated: January 12, 2011

 Washington, D.C. By:

COMMODITY FUTURES TRADING COMMISSION

/s/Jonathan L. Marcus

Dan M. Berkovitz 

General Counsel

Jonathan L. Marcus 

Deputy General Counsel

Robert B. Wasserman 

Chief Counsel, Division of Clearing and Risk

Martin B. White 

Assistant General Counsel

Robert A. Schwartz

Assistant General Counsel

Commodity Futures Trading Commission

Three Lafayette Plaza

1155 21st Street N.W.

Washington, DC 20581

(202) 418-5000 

jmarcus@cftc.gov

rwasserman@cftc.gov

mwhite@cftc.gov

rschwartz@cftc.gov

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