UNITED STATES BANKRUPTCY COURT 

SOUTHERN DISTRICT OF NEW YORK 

______________________________________ 

 ) 

IN RE: ) Adversary No. 11-2790 (MG) SIPA 

 ) 

MF GLOBAL INC., ) 

 ) 

 Debtor. ) 

______________________________________) 

REPLY OF THE SECURITIES INVESTOR PROTECTION CORPORATION 

REGARDING APPLICABLE LIQUIDATION PROCEDURES 

JOSEPHINE WANG 

General Counsel 

CHRISTOPHER H. LAROSA 

Senior Associate General Counsel - Litigation 

LAUREN ATTARD 

Assistant General Counsel 

SECURITIES INVESTOR PROTECTION 

 CORPORATION 

805 Fifteenth Street, N.W., Suite 800 

Washington, D.C. 20005-2207 

Telephone: (202) 371-8300 

Date: January 18, 2012 

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Pursuant to the Court’s order of November 17, 2011, the Securities Investor Protection 

Corporation (“SIPC”) submits this reply memorandum regarding the procedures applicable in the 

instant liquidation proceeding of MF Global, Inc. (“Debtor”) under the Securities Investor 

Protection Act (“SIPA”), 15 U.S.C. §§ 78aaa et seq. SIPC concurs in, and adopts, the SIPA 

Trustee’s (“SIPA Trustee”) reply regarding the issues raised by John Cassimatis and by the 

“Physicals Customers” and “Metals Clients.” Sapere Wealth Management LLC, Granite Asset 

Management, and Sapere CTA Fund, L.P. (“Sapere”), along with the “Commodity Customer 

Coalition” (“CCC”), raise several additional issues, including: (1) commodities customers are 

entitled to an absolute priority in all assets held by the Trustee; (2) the Trustee has a conflict 

between his duty to securities and commodities customers; (3) the Trustee does not have 

discretion “to ignore the Part 190 rules;” and (4) the Trustee must immediately bring actions to 

recover missing customer property owed to commodities customers against “each and every 

entity” that received such property. Louis J. Freeh (“Chapter 11 Trustee”), the trustee for the 

Chapter 11 proceeding of the Debtor’s parent, MF Global Holdings Ltd. (“Holdings”), takes the 

opposite tack, contending that the Commodity Futures Trading Commission’s (“CFTC”) Part 

190 rules, 17 C.F.R. Part 190, do not apply in this proceeding, and that the Trustee has no power 

to reallocate property from the Debtor’s general estate to the fund of customer property allocable 

to the Debtor’s commodities customers. SIPC responds to these arguments below. 

APPLICABILITY OF PART 190 RULES, PRIORITY OF COMMODITY 

CLAIMS, AND ALLOCATION OF ESTATE PROPERTY 

As noted, both Sapere and the CCC suggest that the Trustee has a duty to apply the 

CFTC’s Part 190 rules such that commodity customers enjoy an absolute priority in all estate 

property, regardless of classification, until their claims have been satisfied in full. According to 

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Sapere, this super-priority is justified because “media reports” indicate that the Debtor 

misappropriated property held for its commodities customers and transferred that property to 

third parties, using its securities broker-dealer business as a conduit. Sapere concludes that the 

fund of customer property allocable to the Debtor’s commodities customers suffered a shortfall 

caused by the Debtor’s misconduct, and that this purported loss somehow creates an 

irreconcilable conflict between the Trustee’s duties to the Debtor’s commodities and securities 

customers. 

Sapere and the CCC misunderstand the law applicable in a SIPA liquidation and assume 

as fact their speculations regarding events that are still under investigation and as to which no 

conclusions have been reached. As made clear in the opening memoranda filed by the SIPA 

Trustee and SIPC, SIPA, by its express terms, balances a trustee’s obligations to the Debtor’s 

commodities and securities customers. In this regard, SIPC provides that a SIPA trustee is 

subject to the duties applicable to a trustee operating under the Commodity Broker Liquidation 

provisions of Subchapter IV of Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 761-67 – and, 

by extension, the Part 190 rules promulgated by the CFTC to implement those provisions – but 

only to the extent that those duties are consistent with SIPA or “as otherwise ordered by the 

court.” See SIPA § 78fff-1(b). The statute thus contemplates the liquidation under SIPA of an 

entity that is both a futures commission merchant and a securities broker-dealer, and provides 

clear rules about how the liquidation is to be conducted. Ignoring those rules – in fact, inverting 

them, as Sapere and the CCC suggest – is not an option. 

In any event, the only areas where an accommodation of the interests of commodities and 

securities customers may be in question are the allocation between the commodities, securities, 

and general estates of any recoveries by the SIPA Trustee, and the possible reallocation of 

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general estate assets to the commodities and securities estates. No such allocation or reallocation 

is imminent, and any attempt to craft a rule governing such allocations would be premature at 

this point. Moreover, contrary to Sapere’s assertions, the factual predicate necessary for such 

allocations does not exist at the present time. It is likely, for example, that, to the extent 

permissible at all, any reallocation of general estate property would be impacted by the relative 

sizes of the shortfalls in customer property allocable to the commodities and securities estates. 

“Media reports” notwithstanding, the SIPA Trustee repeatedly has made clear that he has not 

concluded his investigation and is not certain of either the magnitude of any shortfall in customer 

property or how any such shortfall can or should be allocated between the Debtor’s commodities 

and securities estates. 

For the same reason, it would be premature for the Court to address the question whether 

the Trustee, and/or the Court, has the power to reallocate general estate assets to the commodities 

estate. Sapere and the CCC insist that such reallocation is not only permissible, but mandatory, 

while the Chapter 11 Trustee asserts the contrary, citing the only case that has explored the issue. 

See In re Griffin Trading Co., 245 B.R. 291, 308-19 (Bankr. N.D. Ill. 2000), vacated as mooted 

sub nom., Inskeep v. MeesPierson N.V. (In re Griffin Trading Co.), 270 B.R. 882 (N.D. Ill. 

2001). Not only has the SIPA Trustee not reached a conclusion as to the amount of any 

shortfalls, he has noted that there is not at this time a substantial general estate property to 

allocate should it appear possible to do so. As the Trustee has not proposed any reallocation of 

general estate assets, and as the factual predicate for any such reallocation is missing, the Court 

should not attempt to resolve this issue at present. Instead, the Court should do so only in the 

context of an appropriate factual record, and upon the Trustee’s request, at a later stage in the 

Trustee’s investigation. 

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 AVOIDANCE ACTIONS 

 In the same vein, the CCC next argues that the Trustee should be ordered to immediately 

commence avoidance actions against “each and every entity” that received transfers of customer 

property from the Debtor. Again, this argument is premised on an incorrect understanding of the 

law and an assumption of facts not yet established or known. To the extent consistent with 

SIPA, Chapters 1, 3, and 5, and Subchapters I and II (and IV, in this case) of Chapter 7, apply in 

a SIPA liquidation. See SIPA § 78fff(b). Accordingly, consistent with SIPA, and with limited 

modifications not relevant here, a SIPA trustee has the same powers and duties as a trustee in a 

Chapter 7 proceeding. See SIPA §§ 78fff-1(a) and (b). Those powers include discretion 

concerning whether to bring the avoidance actions provided for in the Bankruptcy Code and 

under state law made applicable by the Code. See, e.g., In re Tognetti, 2006 WL 2587544 at *8 

(Bankr. S.D.N.Y. June 21, 2006); In re Toronto, 165 B.R. 746, 755 n. 12 (Bankr. D. Conn. 1994) 

(“[W]hether or not to seek the avoidance of a preference rests in the discretion of the trustee...”). 

 For the reasons stated above, the Trustee does not presently have the factual predicate 

necessary to enable him to make informed decisions concerning whether and against whom to 

bring avoidance actions, and there is no reason to require him to make those decisions now. The 

applicable limitations periods extend for several years into the future, and the Trustee’s 

investigation of the events surrounding the Debtor’s failure is ongoing and has not been 

completed. See, e.g., 11 U.S.C. § 546(a); Lippe v. Bairnco Corp., 225 B.R. 846, 852-53 

(S.D.N.Y. 1998) (describing statute of limitation for claims brought under New York’s Debtor 

Creditor Law). 

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Accordingly, the Court should address this issue only if necessary in the future, and then 

only in the context of a ripe dispute between the parties and on the basis of a fully-developed 

factual record. 

Dated: Washington, D.C. 

 January 18, 2012 Respectfully submitted, 

 

 JOSEPHINE WANG 

 General Counsel 

 /s/ Christopher H. LaRosa 

 CHRISTOPHER H. LAROSA 

Senior Associate General Counsel - Litigation 

 LAUREN ATTARD 

 Assistant General Counsel 

 SECURITIES INVESTOR PROTECTION 

 CORPORATION 

 805 15th Street, N.W., Suite 800 

 Washington, D.C. 20005 

 Telephone: (202) 371-8300 

 Facsimile: (202) 371-6728 

 E-Mail: jwang@sipc.org

 clarosa@sipc.org

lattard@sipc.org

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