Threatening Letters Sent to 140 MF Global Vendors

When MF Global collapsed in 2011, Lorie Meg Karlin’s brokerage company nearly disappeared along with it.

The company, Managed Capital Advisory Group, cleared trades through MF Global and was owed more than $100,000 in commissions from the firm. Ms. Karlin, a widow who runs Managed Capital from her Westchester County home overlooking a horse farm, figured that MF Global was unlikely to pay her.

But she did not anticipate that MF Global’s brokerage unit might threaten to sue her company two years later.

James W. Giddens, the court-appointed trustee liquidating the brokerage unit, recently warned Ms. Karlin’s company that he was “considering whether to seek to recover” $529,000 it received from MF Global in the months before its bankruptcy.

“Records suggest,” Mr. Giddens said in a letter reviewed by The New York Times, that Ms. Karlin’s company might have “received more than” it was entitled to. If she did not contact the trustee by this Friday, he said, “litigation may be commenced against you.”

Ms. Karlin’s 15-year-old company is not the only one on Mr. Giddens’s radar. It is one of about 140 brokerage companies and other MF Global vendors swept up in the trustee’s pursuit of cash. Under United States bankruptcy law, Mr. Giddens must verify whether MF Global’s eve-of-bankruptcy payouts to the companies were in the “ordinary course of business” and were not “preferential.”

Yet his effort has left Ms. Karlin and her colleagues asking: Why us? The $529,000 in payments, Ms. Karlin said, were commissions her brokers earned from July to September of 2011. And a review of her company’s bank records confirms that Managed Capital received similar amounts from MF Global around the same time each month in 2010 and 2011, suggesting that the payments in question were routine.

Still, the scrutiny by Mr. Giddens is the latest setback for so-called introducing brokers like Ms. Karlin, who were among the hardest-hit by MF Global’s demise. MF Global, whose collapse was the largest Wall Street bankruptcy since the financial crisis, still owes the brokers millions of dollars in commissions.

These struggles were largely overshadowed by the stunning loss of customer money at MF Global â€" more than $1 billion belonging to farmers and other clients was missing â€" and a regulatory investigation into the firm’s chief executive, Jon S. Corzine, the former governor and United States senator from New Jersey.

“We already got kicked in the butt,” Ms. Karlin said. “Now, with this threat, the whole industry is even more angry and upset.”

Paradoxically, many who received the letters from Mr. Giddens are creditors themselves. And if Mr. Giddens recovers any money as a result of the letters, he will turn it over to creditors.

Mr. Giddens, widely praised for his separate efforts to recover money for MF Global customers, has held off suing the introducing brokers. A spokesman for Mr. Giddens described the letters as routine, explaining that the trustee had focused on certain vendors who received more than $50,000 from MF Global within 90 days of the bankruptcy. Collectively, these vendors received about $42 million during that time.

The bankruptcy code allows Mr. Giddens to scrutinize such payments, with an eye toward taking back money from companies that foresaw MF Global’s collapse and demanded payments earlier than usual to circumvent the bankruptcy process.

“The trustee has the duty to verify that significant payments made to noncustomers of MF Global Inc. on the eve of bankruptcy were made properly and in the normal course of business, and these letters are a customary step taken to fulfill that duty,” said the spokesman, Kent Jarrell. “We are seeking information about a limited number of payments to make sure that the payments were not preferential or accelerated, which would render them subject to return to the MF Global Inc. estate under the Bankruptcy Code.”

Mr. Giddens contacted the 140 companies, Mr. Jarrell said, because he lacked access to bank records and other statements that could verify the legitimacy of the payments. In the letters, Mr. Giddens asked the companies to outline any “defenses that you might have.” And in recent days, Mr. Jarrell said, the trustee received “information we did not have access to before” indicating that some payments were appropriate.

“We will only pursue payments,” he added, “for which there is no reasonable explanation.”

Even so, fighting Mr. Giddens could be costly.

MF Global owes more than $25,000 to Joseph J. Mazza’s company, Compliance Supervisors Inc., which conducted inspections of MF Global’s branch offices. But Mr. Giddens is contemplating clawing back a similar amount that Compliance Supervisors received from MF Global in the 90 days before the bankruptcy.

To combat Mr. Giddens’s inquiry â€" Mr. Mazza said that Compliance Supervisors has invoices showing that it worked with MF Global for 10 years â€" his company must hire a lawyer.

“I believe in the end we’ll prevail, but we may still incur substantial attorney’s fees and expend time and effort away from our clients,” said Mr. Mazza, a former regulator at the National Futures Association.

Some companies objected to the aggressive tone of Mr. Giddens’s letter. After warning about potential “litigation,” and reserving “his right to insist on payment,” the letter offered to settle for 90 percent of the “preference amount.” Mr. Giddens attached instructions for wiring the money.

Even Mr. Giddens’s supporters questioned the tactic.

“There’s such a presumption of guilt,” said James L. Koutoulas, a Chicago hedge fund manager and lawyer who became a voice for thousands of MF Global customers whose money disappeared. Mr. Koutoulas, who praised Mr. Giddens’s efforts on behalf of MF Global customers, added, “It’s low-class behavior coming from a trustee who’s been a class act.”

While acknowledging that “we do want to get the attention of the recipients of these letters,” Mr. Jarrell said that Mr. Giddens did not intend to intimidate anyone. The letters, he said, were sent out of fairness to examine whether anyone “in effect, got 100 cents on the dollar, to the detriment” of MF Global’s creditors.

“These are standard and routine letters sent out to a limited number of sophisticated parties, many of whom have counsel and already have filed claims against the MF Global Inc. estate,” Mr. Jarrell said.

Until now, Mr. Giddens has largely focused on the plight of MF Global customers. As MF Global teetered on the brink of collapse, employees transferred more than $1 billion in customers’ money to plug holes in the firm’s own accounts. Much of that money vanished into MF Global’s banks and clearinghouses.

Filling that gap â€" a task that once seemed impossible â€" is now surprisingly within reach. After recovering money from banks like JPMorgan Chase, Mr. Giddens has returned 98 percent to customers who traded in the United States. That group, which is ultimately expected to recover all of its money, has largely praised his effort.

“He’s always had the agenda of getting the money back in the hands of customers as quickly as possible,” said Mahesh Desai, a software account executive who was an MF Global customers.

Mr. Giddens also joined a private lawsuit against Mr. Corzine, whom many customers have blamed for failing to prevent the firm’s downfall. The lawsuit foreshadowed a regulatory action against Mr. Corzine, who is fighting the civil charges.

For Ms. Karlin’s part, she is hopeful that Mr. Giddens will drop his inquiry into her firm.

“I do think this will be resolved,” she said. “I think they were following a protocol, but one hopes there would have been a kinder way of doing it.”