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JOSEPHINE WANG General Counsel CHRISTOPHER H. LAROSA Associate General Counsel LAUREN ATTARD Staff Attorney SECURITIES INVESTOR PROTECTION CORPORATION 805 Fifteenth Street, N.W., Suite 800 Washington, D.C. 20005-2207 Telephone: (202) 371-8300

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ___________________________________ ) IN RE: ) ) MF GLOBAL INC., ) ) Debtor. ) ___________________________________ )

Adversary No. 11-2790 (MG) SIPA

MEMORANDUM OF THE SECURITIES INVESTOR PROTECTION CORPORATION IN RESPONSE TO THE COURTS ORDER DIRECTING TRUSTEE TO FILE FURTHER DISCLOSURES REGARDING DISINTERESTEDNESS The Securities Investor Protection Corporation (SIPC) submits this memorandum in response to the Courts order directing James W. Giddens (Trustee), as trustee for the liquidation of MF Global, Inc. (Debtor) under the Securities Investor Protection Act (SIPA), 15 U.S.C. 78aaa et seq., to file further disclosures regarding his disinterestedness and that of his counsel, Hughes Hubbard & Reed LLP (Counsel). SIPC has elected to file a separate memorandum in response to the Courts order for the purposes of providing background concerning the SIPA provisions governing the appointment of the trustee and counsel in a SIPA liquidation with some attention to the differences between those provisions and the governing provisions under the Bankruptcy Code (11 U.S.C.) and of addressing several questions posed

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by the Court in its order regarding SIPCs policies and practices and SIPCs authority to specify itself as trustee. BACKGROUND A. Appointment of the Trustee and Counsel Under SIPA, SIPC selects the persons who will serve as the trustee and counsel in a SIPA liquidation, and the court entering a protective decree commencing the liquidation appoints those persons specified by SIPC. See SIPA 78eee(b)(3); SIPC v. Barbour, 421 U.S. 412, 417 (1975); SIPC v. BDO Seidman, LLP, 222 F.3d 63, 67 (2d Cir. 2000); Alan N. Resnick, Henry J. Sommer, 1 Collier on Bankruptcy 12.09[4] (16th ed. 2011) (Collier). SIPC may select itself or one of its employees as trustee, but only in cases in which SIPC has determined that the liabilities of the debtor to unsecured general creditors and to subordinated lenders appear to aggregate less than $750,000 and that there appear to be fewer than five hundred customers of such debtor. SIPA 78eee(b)(3). Where SIPC selects an outside trustee and counsel, the persons selected may be, and typically are, associated with the same law firm. See id. (The persons appointed as trustee and as attorney for the trustee may be associated with the same firm); Stephen P. Harbeck, Stockbroker Bankruptcy: The Role of the District Court and the Bankruptcy Court Under the Securities Investor Protection Act, 56 Am. Bankr. L.J. 277, 283 (1982); 1 Collier 12.09[4]. Prior to 1978, SIPA provided that SIPC was empowered to select the trustee and counsel but did not make express that SIPC was entitled to exercise this authority in its sole discretion. See Securities Investor Protection Act of 1970 5(b). Congress modified this provision as part of a larger overhaul of SIPA in 1978 in order to eliminate any question concerning the scope of SIPCs authority and to fortify SIPCs sole discretion to designate the trustee and his counsel.
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See H.R. Rep. No. 95-746, at 26 (1977) (House Report); and S. Rep. No. 95-763, at 11 (1978), reprinted in 1978 U.S.C.C.A.N. 764, 774. Congresss decision to vest sole responsibility for the selection of the trustee and counsel in SIPC stemmed, in part, from its understanding of the need for exceptional administrative speed in the early stages of a broker-dealer liquidation. When a broker-dealer fails, its customers can no longer access the cash and securities held for them by the firm, preventing them from continuing to trade in the securities markets and exposing them to the risk of adverse market movements. See, e.g., House Report at 39-40, Statement of Hugh F. Owens, Chairman, SIPC. Where the broker-dealer is of substantial size, this interruption in access and trading can cause significant market disruption and, in some cases, may even present risks to the integrity of the securities markets as a whole. Vesting the power to select the trustee and counsel in SIPC facilitates the rapid appointment of those persons, and thus helps to maximize the speed at which actions necessary to protect customers and minimize market damage can be taken.1 See, e.g., id. B. Disinterestedness In fact, the only limitation on SIPCs power of selection is SIPAs requirement that the persons selected as trustee and counsel be disinterested within the meaning of the statute. See SIPA 78eee(b)(3). Even then, the statute provides that, with the approval of SIPC and the

Congress also charged SIPC with responsibility for the active oversight and supervision of the trustee and counsel. See, e.g., House Report at 27. In this regard, for example, SIPC is obligated to file with the court a recommendation with respect to every application for compensation made by the trustee and counsel. See SIPA 78eee(b)(5)(C). In cases where SIPC is obligated to advance the funds necessary to pay this compensation without reasonable expectation of recoupment, SIPCs recommendation is binding. Id. Otherwise, SIPCs recommendation is entitled to considerable reliance. Id. SIPC takes its oversight obligations seriously and, in practice, actively reviews not only the compensation of the trustee and counsel, but also conflicts, the scope of work to be performed, and the quality of the performance.
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court, the appointed trustee may employ an attorney who is not disinterested for any specified purpose other than to represent a trustee in conducting a liquidation proceeding. Id. The standards governing disinterestedness under SIPA focus almost exclusively on the relationship between the person selected as trustee or counsel and the debtor. A person cannot be disinterested if such person: (1) is a creditor, stockholder, or partner of the debtor; (2) is or was, within a five-year look-back period, an underwriter of any outstanding securities of the debtor; (3) is or was, within a two-year look-back period, a director, partner, officer, or employee of, or an attorney for, the debtor or an underwriter of the kind described in the preceding subparagraph; or (4) appears to have an interest materially adverse to the interests of any class of creditors or stockholders by reason of any interest in, connection with, or relationship to the debtor or such an underwriter, or for any other reason. See SIPA 78eee(b)(6)(A) (emphasis added); 1 Collier 12.09[4]. Importantly, disinterestedness is measured at the time the trustee and counsel are appointed and in light of the information then available. Intercontinental Enterprises, Inc. v. Keller (In re Blinder, Robinson & Co., Inc.), 131 B.R. 872, 879 (D. Col. 1991). As a result, a person cannot be barred by the disinterestedness standard from serving as trustee or counsel, for example, if, at the time that person is selected for one of those roles, and in light of the information then available to SIPC and the person selected, it does not appear that the person has an interest materially adverse to the interests of a class of creditors or stockholders. These limitations on the scope of the disinterestedness test serve two purposes. First, they enable SIPC and prospective trustees and counsel to identify potentially disqualifying conflicts with the speed necessary to enable SIPC to make selections for those positions at the extraordinary pace required in SIPA liquidations. Second, they take proper account of the
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information deficit that typically exists at the inception of a SIPA liquidation, and the sometimes limited pool of counsel, in a particular city, with the specialized skill and experience necessary to take the immediate actions required to protect customers and stabilize markets. The latter factor is especially important. The filing by SIPC of an application for the entry of a protective decree with respect to a SIPC-member broker-dealer is not, and cannot be, accompanied by the schedules, statements, and other documents that must be filed with, or within days after, the filing of a petition under the Bankruptcy Code. See Fed. R. Bankr. P. 1007(b) and (d). Thus, for instance, when SIPC files its application, and makes its selection of the trustee and counsel, neither SIPC nor the persons selected as trustee and counsel, have the benefit of the asset and liability schedules, statement of financial affairs, or schedule of executory contracts and unexpired leases required as part of every bankruptcy filing, nor the list of the debtors twenty largest creditors required in a case under Chapter 11. See id. As a consequence, in sharp contrast to cases under the Bankruptcy Code, at the time a SIPA trustee and counsel must be selected, SIPC and the candidates for the trustee and counsel positions often have no way of knowing whether, for example, those candidates have relationships with creditors of the debtor that might conflict with their duties under SIPA and the Bankruptcy Code. The problem is especially acute in particularly large liquidations like the present one where it often is nearly impossible to find a trustee or counsel with no significant nexus to the debtor or its creditors or counterparties. See, e.g., Blinder Robinson, 131 B.R. at 880

(recognizing the substantial likelihood that conflicts will arise in any complex liquidation or bankruptcy proceeding). With these problems in mind, SIPA does not require the disqualification of a trustee or counsel who, when selected and appointed, do not appear to fall into any of the categories listed
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in SIPAs disinterestedness definition, but who are later learned to have an actual or potential conflict of the kind described therein. See Blinder Robinson, 131 B.R. at 881. On the contrary, in such situations where, for example, counsel is found to be conflicted with respect to a particular matter, SIPC simply selects, and the court appoints, substitute counsel for the trustee for that matter. Such appointments have occurred in SIPA liquidations and have been made, most recently, with respect to several matters pending in the liquidations of Bernard L. Madoff Investment Securities Ltd. and Lehman Brothers Inc. (LBI) proceedings. The same procedure is available, if necessary, for the selection and appointment of a co-trustee with respect to a particular matter. These curative measures are particularly appropriate, where the liquidation proceedings have progressed to the point that appointing a new Trustee and counsel would be a major disruption. Id. As the foregoing suggests, the disinterestedness standards under SIPA should not be confused with those of the Bankruptcy Code. While the definitions of disinterestedness are similar in the two statutes (compare 11 U.S.C. 101(14) with SIPA 78eee(b)(6)), the contexts in which those definitions are applied differ markedly. The procedure for the appointment of a trustee and counsel under Section 327 of the Bankruptcy Code, for example, has no application whatsoever under SIPA. Likewise, by the express terms of Bankruptcy Rule 2014(a), the disclosure obligations imposed by that rule apply only to an order approving the appointment of counsel under Bankruptcy Code Sections 327, 1102, or 1114, not to an order issued under Section 78eee(b)(3) or (6) of SIPA. See Fed. R. Bankr. R. 2014(a). Given the paucity of information available at the time SIPA counsel is selected, to hold otherwise would require such counsel to make disclosures regarding its connections with the debtors creditors without knowing the identities of those creditors, an impossible standard to meet.
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C. The Present Case The present case neatly illustrates nearly all of the principles discussed above. SIPC was first notified that the Debtor was unable to meet its obligations to its customers, and should be placed in a liquidation under SIPA on Monday morning, October 31, 2011 at 5:20 a.m., when SIPCs President and Chief Executive Officer received a telephone call from a representative of the Securities and Exchange Commissions (SEC) Division of Trading and Markets, who was then in New York. (Declaration of Stephen P. Harbeck (Harbeck Decl.) 2.) At 7:29 a.m. the same day, SIPC received a formal written notification to this effect from the SEC. (Id.) While four members of SIPCs staff flew to New York in connection with the commencement of an MF Global Inc. liquidation proceeding, SIPC made simultaneous inquiries of a number of professionals concerning their eligibility. Some were presently engaged in the Chapter 11 proceeding involving the Debtors parent company or had a relationship with the Debtor that would preclude them from qualifying as disinterested within the meaning of Section 78eee(b)(6) of SIPA. (Harbeck Decl. 4.) Approximately ten possible trustees and

counsel having the requisite bankruptcy experience, skill, and resources, were considered, several of whom were not contacted because it was public knowledge that they were involved in the Chapter 11 case. Approximately five persons were contacted, of whom three had

disqualifying conflicts. (Id. at 5) Of the two remaining law firms, one had never served in a previous SIPA case. (Id. at 6.) As this Court is well aware, the Debtors liquidation is unprecedented, involving for the first time a single entity with both a substantial securities business and also a multi-billion dollar commodities business. Because of its exceptional complexity, and its unique nature, the instant liquidation would not have been appropriate for a firm with no prior experience in SIPA matters.
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Accordingly, SIPC selected James W. Giddens. Mr. Giddens, who has more experience in SIPA liquidations than any other attorney currently practicing, is currently trustee for the liquidation of LBI, the largest and most complex SIPA liquidation in history, and has handled numerous SIPA cases as counsel or trustee since the early 1970s, was identified as the prospective trustee best suited for this complex case. (Harbeck Decl. 7.) After discussions with Mr. Giddens to assure that he and his law firm had sufficient resources available for this matter, and that they were disinterested, SIPC designated Mr. Giddens as Trustee and his firm, Hughes, Hubbard & Reed, as Counsel. (Id.) Given the extraordinarily fragility of the Debtors business, and the substantial risks to customers from any delay, all of the above decisions were, and had to be, made within hours. Consistent with this urgency, within the space of fewer than twelve hours after it was first contacted about the Debtor, SIPC contacted several potential trustees and counsel, made a selection from those eligible, filed in the District Court an application for the entry of a protective decree placing the Debtor in liquidation under SIPA, and obtained the necessary decree. As a result, the Trustee took control of the Debtors premises in New York on the afternoon of October 31, 2011. None of these actions could have occurred within this

extraordinarily compressed time span without the expedited procedures for the selection and appointment of the trustee and counsel provided by SIPA, and without a disinterestedness standard narrowly, but properly, focused on the relationship between a prospective trustee and counsel and the debtor. The Trustee and Counsel have more than justified SIPCs confidence in them. As the Court is aware, the Trustee has made great strides in returning property to customers in a short period of time. Although the liquidation is now only six weeks old, the Trustee has been
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authorized, and has or expects shortly, to return over $4.2 billion in cash and other property to the Debtors U.S. commodities customers, representing approximately 72% of the property owed to them, and to return sufficient property to the Debtors securities customers to make whole 85% of affected account-holders, with the remainder receiving between 60 and 90% of the property owed to them. By any measure, these results, and the performance of the Trustee and Counsel in achieving them, are exemplary. The putative conflicts created by Counsels representations of JPMorgan Chase (JPMC) and PricewaterhouseCoopers should not detain the Court for long. Counsel represents that the former representation is of minimal size, is unrelated to the securities business or industry, and has not prevented the Trustee and Counsel from successfully engaging in litigation with JPMC in the LBI liquidation. Should the latter representations prove to create a

disqualifying conflict of any kind, SIPC can and will select substitute counsel. ANSWERS TO SPECIFIC QUESTIONS SIPC submits the following answers to several specific questions posed in the Courts order. A. Factual Questions 10 and 11 Question 10: What, if any, policy or practice has SIPC followed with respect to selecting conflicts counsel to handle any matters that a trustees counsel may not handle in a SIPA liquidation because of a conflict of interest?

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Question 11: What, if any, policy or practice has SIPC followed with respect to addressing issues customarily addressed by a SIPA trustee if the trustee has a conflict of interest in a particular matter? Answer: If a SIPA trustee or counsel has a conflict of interest with respect to a matter that cannot be waived or otherwise mitigated (e.g., through isolation of the conflicted attorneys from the matter in question), SIPC will select a substitute trustee or counsel for that matter who is not conflicted and seek court approval of their appointment. B. Legal Questions 2 and 4 Question 2: Can conflicts counsel be used in a SIPA liquidation proceeding if a trustees counsel is precluded by ethical rules from undertaking a conflicting representation? Answer: Yes, for the reasons explained above. See also, Blinder Robinson, 131 B.R. at 880. Question 4: If the Trustee is not disinterested with respect to a particular matter within this SIPA Liquidation, may SIPC act instead of the Trustee in that matter? See 15 U.S.C. 78eee(b)(6)(A) (stating that except that SIPC shall in all cases be deemed disinterested, and an employee of SIPC shall be deemed disinterested if such employee would, except for his association with SIPC, meet the standards set forth in this paragraph).

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Answer: No, SIPC is precluded from acting as trustee in this matter because the liabilities of the debtor to unsecured creditors appear to exceed $750,000 and because there appear to be more than 500 customers of the Debtor. See SIPA 78eee(b)(3). SIPC believes that the Trustee is disinterested within the meaning of SIPA. If the Trustee is found to have a conflict of interest with respect to a particular matter, SIPC will exercise its authority under Section 78eee(b)(3) to select a substitute trustee for that matter and seek court approval of the designation. See id. Dated: Washington, D.C. December 12, 2011

Respectfully submitted, JOSEPHINE WANG General Counsel /s/ Christopher H. LaRosa CHRISTOPHER H. LAROSA Associate General Counsel LAUREN T. ATTARD Staff Attorney 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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