MF Global Customers Will Recover All They Lost

Two years after $1.6 billion vanished from their accounts, MF Global’s customers are now all but assured to collect every last penny.

A federal bankruptcy court judge approved a plan on Tuesday that would close the remaining shortfall for some 20,000 customers, many whose lives were derailed when their money disappeared in the firm’s final days.

As MF Global fought for survival in 2011, it improperly transferred customer money to its banks and clearinghouses, violating a cardinal rule of the financial industry. Federal investigators soon swarmed MF Global, a brokerage firm run by Jon S. Corzine, the former New Jersey governor.

James W. Giddens, the trustee unwinding MF Global’s brokerage unit, recovered large swathes of the money and gradually disbursed it to clients. But Mr. Giddens, still facing a roughly $230 million gap, recently petitioned Judge Martin Glenn to free up remaining funds from MF Global Incorporated’s general estate.

Judge Glenn agreed, potentially allowing Mr. Giddens to make customers whole by the end of the year.

The decision hands Mr. Giddens and MF Global clients â€" a hodgepodge of farmers, small-time investors and hedge funds â€" a long-sought victory. It also represents an unlikely bookend to the debacle and a remarkable turnaround from the firm’s bankruptcy filing when such a recovery seemed a long shot.

“In the opening moments of the liquidation proceeding, it seemed inconceivable that we would even consider the possibility of 100 percent return of property owed to former customers of MF Global,” Mr. Giddens said to Judge Glenn before he ruled.

Judge Glenn echoed the observation, noting the sudden turn in fortunes for customers. “At the outset of the case, nobody thought that customers would recover everything they lost,” he said at the hearing.

Some customers adopted a similarly skeptical view. In early 2012, they started to sell their claims to investment firms and big banks like Barclays for roughly 90 percent of face value. The investors wagered that, when the dust settled, Mr. Giddens would deliver the full amount of the claim. The judge’s ruling on Tuesday effectively lent credibility to the strategy.

Customers who traded overseas also had much to gain from the judge’s ruling. Until now, Mr. Giddens’s spokesman said, they have received only 74 percent of what once sat in their accounts.

For MF Global customers who traded in the United States, the ruling was largely symbolic. Mr. Giddens has already returned 98 percent to most of them.

Still, the final payout will provide closure. “It closes the chapter so we can move on,” said Mahesh Desai, a software account executive who was an MF Global customer.

Mr. Desai, who saw his $580,000 nest egg disappear when MF Global toppled, noted that he lost two years’ worth of potential interest in the markets. But praising Mr. Giddens for his efforts, Mr. Desai added, “We got a fair and reasonable outcome.”

It could have been worse. When MF Global failed for myriad reasons â€" a risky bet on European sovereign debt, a one-time charge that depressed its earnings and years of quarterly losses â€" authorities struggled to trace the money.

The authorities came to believe that an employee in MF Global’s Chicago office transferred the customer money, perhaps inadvertently, to banks like JPMorgan Chase.

Mr. Giddens targeted the banks. He also joined a private lawsuit against Mr. Corzine, whom many customers have blamed for failing to prevent the firm’s downfall.

But the banks were slow to cooperate. And even as Mr. Giddens recovered money here and there, he warned Congress last year that “a time-consuming, difficult and uphill battle” lay ahead.

Past cases also suggested that a 100 percent payout was unlikely. A trustee returning money to Bernard L. Madoff’s customers, for example, has recovered about half of the $17.5 billion of lost principal. Of course, unlike MF Global, Mr. Madoff carried out an elaborate Ponzi scheme over many years.

Mr. Giddens became more optimistic this summer. When the Commodity Futures Trading Commission filed civil charges against Mr. Corzine in June, saying he failed to supervise the employee accused of misusing the customer money, Mr. Giddens signaled that a 100 percent payout was in sight.

But until Tuesday’s ruling, he was still short $233 million. Now, with the judge allowing Mr. Giddens to tap the general estate for that sum and with the trustee already sitting on $456 million, Mr. Giddens expects to pay out a total of $689 million to customers in the coming weeks.

Mr. Giddens also said he expected to repay that loan from the estate “through future recoveries,” perhaps from the lawsuit against Mr. Corzine. Unsecured creditors of the estate, like contract employees and other vendors, however, are “likely to sustain very substantial losses.”

Mr. Corzine is fighting the trading commission’s charges and Mr. Giddens’ lawsuit. He also objected to Mr. Giddens’ use of money from the estate to repay customers. Even so, he welcomed the return of customer money on Tuesday.

“Mr. Corzine is very pleased that all customers will receive a full recovery,” a spokesman for Mr. Corzine said. “This is a great outcome, which has been anticipated for many months.”

The spokesman, however, noted that it could have come sooner. And for that delay, he pinned blame partly on the banks.

“It is unfortunate that the complexities of U.S. and U.K. bankruptcy laws, as well as the slow return of funds to the trustee by various financial institutions, kept customers from receiving a full recovery sooner,” he said.