By Joseph Checkler
J.P. Morgan Chase & Co. (JPM) says a group of hedge funds is
trying to use a "pocket veto" to derail the bank's bid to recover
$928 million it lent to MF Global Holdings Ltd. just before the
firm's 2011 collapse.
In a Tuesday filing with U.S. Bankruptcy Court in Manhattan,
J.P. Morgan said the hedge funds, which filed a payback plan that
MF Global (MFGLQ) creditors are currently voting on, are attempting
to deny creditors of the financing subsidiary information about
what their claims should be worth.
"By denying information to voters about the result of a "no"
vote, the Creditor Co-Proponents are trying to unfairly influence
the voting on the plan," J.P. Morgan said in its filing. A
spokesman representing some of the hedge funds didn't immediately
have a comment.
Essentially, J.P. Morgan is saying that if it's granted standing
to pursue those claims, other creditors would be better informed as
to their chances of getting back more money and possibly vote "no."
If the bank isn't granted standing, creditors may assume the claims
will never be pursued and just vote "yes," J.P. Morgan said.
The hedge-fund managers, Silver Point Capital, Cyrus Capital
Partners LP and Knighthead Capital Management LLC, filed their
creditor payback proposal with the court in January. Those
creditors own about 65% of MF Global's $2.2 billion in unsecured
debt.
The hedge-fund managers are fighting J.P. Morgan's request to go
after $928 million in claims related to a loan the bank and others
made to MF Global in the days before it filed for bankruptcy in
October 2011. After receiving a $931 million loan from J.P. Morgan
and others, MF Global transferred $928 million of it to subsidiary
MF Global Finance USA Inc.
J.P. Morgan says that transfer created $928 million in claims
for the finance subsidiary against its parent, even though the
entire intercompany transaction could have been avoided; the
finance subsidiary could have borrowed directly from J.P. Morgan
and the other lenders.
Now, the hedge-fund managers' payback plan has been filed. It
says that while J.P. Morgan and its co-lenders can go after the
$928 million, so can creditors of the finance subsidiary, thanks to
a series of intercompany settlements. J.P. Morgan says the double
claim could potentially dilute recovery for itself, Aurelius
Capital Management and others holding claims on the original loan.
Meanwhile, J.P. Morgan says, the plan could increase recoveries for
the finance subsidiary creditors by more than 25%.
J.P. Morgan says the hedge-fund managers trying to stop it from
going after the claims are conflicted, because they would benefit
from the "double" counting of the claim. Judge Martin Glenn will
decide next week whether to slow down J.P. Morgan's bid to launch a
lawsuit to go after the claims.
The hedge-fund managers say Judge Glenn should at least
temporarily stop the suit from going forward, because it would slow
down the timetable for approval of their payback proposal. The
matter, they say, can be pushed back until after a confirmation
hearing on the plan, which is tentatively set for April 5.
The $928 million "double" claim is part of a larger proposal
that would pay back creditors of MF Global's general estate within
a year and could restore the accounts of brokerage customers to
100% within months.
Unlike customers of MF Global's brokerage, however, the holding
company's creditors aren't expected to recover every cent of their
money.
Louis Freeh, a former director of the Federal Bureau of
Investigation who is overseeing the holding company's Chapter 11
case, has joined the hedge funds in calling for approval of the
liquidation plan.
The holding company's bankruptcy is being administered
separately from the liquidation of MF Global's main broker-dealer
business. That estate is being wound down by James W. Giddens under
the Securities Investor Protection Act, which governs the
liquidation of failed brokerage firms.
Late last year, Mr. Freeh, Mr. Giddens and a third official
liquidating MF Global's U.K. arm struck a wide-ranging deal
designed to get customers their money back more quickly and settle
disputes among themselves.
Individual customers of MF Global's broker-dealer have received
most of their money back through a series of bulk transfers
initiated by Mr. Giddens and approved by the court.
MF Global, led by former New Jersey governor and Goldman Sachs
Group Inc. (GS) Chairman and Chief Executive Jon S. Corzine,
collapsed in October 2011 when customers panicked over the New York
firm's large bets on European debt. The firm's collapse into
bankruptcy initially exposed a $1.6 billion shortfall in U.S.
customer accounts.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Joseph Checkler at joseph.checkler@dowjones.com. Follow
him on Twitter at @JoeCheckler
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