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  • Writer's pictureKirk Hartley

Bankruptcy Court and Wall Street – Home to Conflicts of Interest and Claim Trading

Current events provide yet another reminder that it is wrong to pretend that law and civil litigation are still (if they ever were) a noble calling where obligations to clients are trumped by economic self-interest. The pretenders include various bar associations on all sides of issues.

The pretenders’ postures cannot be reconciled with bankruptcy court. There, conflicts of interest are rife, proceedings are settled based only on economics, and litigation claims are traded almost as freely as futures contracts offered on the MERC. The most recent example is provided by a bankruptcy court approving the power to trade in claims against the now-infamous MF Global. Indeed, the court went further and approved banks to use "ethical walls" to create a way to trade claims related to MF Global even though they owe conflicting duties to other members of the creditors’ committee the banks sit on because they also are creditors. Meanwhile, on Wall Street, hedge funds are trading MG Global claims to make money. The University of Chicago Law School has it right – law is about economics.

Bloomberg has part of the story – key excerpts are below:

Dec. 20 (Bloomberg) — JPMorgan Chase & Co., a lender to bankrupt MF Global Holdings Ltd., asked a judge if it can trade claims on the company, including its bank loans and 6.25 percent bonds.

The biggest U.S. bank asked U.S. Bankruptcy Judge Martin Glenn, who is handling the bankruptcy, to create a so-called safe harbor so that its trading isn’t deemed to violate its duty as a member of MF Global’s creditors committee, and its claims aren’t disallowed.

Like fellow committee members Bank of America Corp. and Elliott Management Corp. who sought permission to trade MF Global claims, JPMorgan said it would have “ethical walls” to ensure that knowledge it gains from being on the committee doesn’t reach its traders, it said in a court filing today.

“Although JPMorgan owes fiduciary duties to the unsecured claimholders of these estates, it also has fiduciary duties to maximize returns to its respective clients,” including pension funds and high-net-worth individuals whose money it manages, the bank said.

Glenn gave his approval in an order issued today to Bank of America for its trades in MF Global claims, saying he would “take action” if there were any violations.

Such requests are common among banks and hedge funds that have loans and investments in bankrupt companies along with separate trading desks. Elliott sought and got permission to trade claims in the Lehman Brothers Holdings Inc. case, where it also is a member of the creditors’ committee.

MF Global’s $325 million of 6.25 percent notes traded at 33 cents on the dollar on Dec. 19, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The debt, issued at par in August, has declined from 50 cents on the dollar since the company’s Oct. 31 bankruptcy filing. The bonds have declined from 35 cents at the end of November.

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About Kirk

Since becoming a lawyer in 1983, Kirk’s 35+ years of practice have focused on advising a wide range of corporations, associations, and individuals (as both plaintiffs and defendants) on both tort and commercial law issues centered around “mass torts.”

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