statement corrected trustees statement - mg statement

8/3/2019 Statement Corrected Trustees Statement - Mg Statement

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James B. Kobak, Jr.David W. Wiltenburg

Savvas FoukasHUGHES HUBBARD & REED LLPOne Battery Park PlazaNew York, New York 10004Telephone: (212) 837-6000Facsimile: (212) 422-4726

Attorneys for James W. Giddens,

Trustee for the SIPA Liquidation of MF Global Inc.

UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORK

In re

MF GLOBAL INC.,

Debtor.

Case No. 11-2790 (MG) SIPA

STATEMENT IN FURTHER SUPPORT OF DISINTERESTEDNESS AND INRESPONSE TO COURT ORDER DATED DECEMBER 7, 2011

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TABLE OF CONTENTS

Page

I. EMPLOYMENT OF PROFESSIONALS AND HANDLING OFCONFLICTS IN SIPA CASES ...........................................................................................3A. Retention of SIPA Trustee and Counsel ..................................................................3B. The MFGI Liquidation .............................................................................................7C. HHR Policies and Practices Regarding Conflicts in SIPA

Proceedings ..............................................................................................................9II. RETENTION OF THE TRUSTEE AND HHR IS APPROPRIATE

UNDER BOTH SIPA AND BANKRUPTCY CODE STANDARDS..............................11A. The SIPA Disinterestedness Standard ...................................................................11B. The Trustee and HHR Are Disinterested Under SIPA ..........................................12 C. Retention of HHR Is Also Proper Under Bankruptcy Code 327 ........................13D. The Trustee And HHR Will Continue To Comply With All

Applicable Disclosure Requirements .....................................................................21III. RESPONSES TO FACTUAL AND LEGAL QUESTIONS .............................................23



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TABLE OF AUTHORITIES

Page(s)CASES

In re Allegheny Intl, Inc., 117 B.R. 171 (W.D. Pa. 1990) ............................................................20

In re AroChem Corp., 176 F.3d 610 (2d Cir. 1999) ..............................................................passim

In re Blinder, Robinson & Co., 131 B.R. 872 (D. Colo. 1991) .........................................18, 21, 28

In re Crivello, 134 F.3d 831 (7th Cir. 1998) ..................................................................................19

In re Diva Jewelry Design, Inc., 367 B.R. 463 (Bankr. S.D.N.Y. 2007) ...................................7, 15

In re Granite Partners, L.P., 219 B.R. 22 (Bankr. S.D.N.Y. 1998) ........................................18, 19

In re Huntco Inc., 288 B.R. 229 (E.D. Mo. 2002) ...............................................................7, 14, 15

In re Leslie Fay Cos., 175 B.R. 525 (Bankr. S.D.N.Y. 1994) .......................................................20

In re Madoff, 2010 WL 3260074 (S.D.N.Y. 2010) ..........................................................................5

In re Perry, Adams & Lewis Sec., Inc., 5 B.R. 63 (Bankr. W.D. Mo. 1980) .................................18

In re Project Orange Assocs., LLC, 431 B.R. 363 (Bankr. S.D.N.Y. 2010) ...........................15, 16

Rome v. Braunstein, 19 F.3d 54 (1st Cir. 1994) ......................................................................17, 18

STATUTES AND RULES

11 U.S.C. 101(14) ...................................................................................................................6, 13

11 U.S.C. 327 ......................................................................................................................passim

11 U.S.C. 521 ................................................................................................................................3

15 U.S.C. 78aaa et seq. .................................................................................................................1

15 U.S.C. 78eee ..................................................................................................................passim

15 U S C 78eee(b)(6) passim



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Page(s)Joint Rules of the Appellate Divisions of the Supreme Court, Rules of Professional

Conduct R. 1.7 (2009) ....................................................................................................9, 10, 15

Joint Rules of the Appellate Divisions of the Supreme Court, Rules of ProfessionalConduct R. 1.9 (2009) ..............................................................................................................15

OTHER AUTHORITIES

RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 128 (2000) ......................................9

H.R. Rep. No. 95-746, 95th Cong., 1st Sess. 26 (1977) .................................................................5

Securities Investor Protection Act of 1977: Hearing on H.R. 8331 Before the Subcomm.

on Consumer Prot. & Fin. of the H. Comm. on Interstate & Foreign Commerce, 95thCong. 173 (1978) (statement of Hugh F. Owens, Chairman, Sec. Investor Prot. Corp.)....................................................................................................................................................6



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James B. Kobak, Jr.David W. Wiltenburg

Savvas FoukasHUGHES HUBBARD & REED LLPOne Battery Park PlazaNew York, New York 10004Telephone: (212) 837-6000Facsimile: (212) 422-4726

Attorneys for James W. Giddens,

Trustee for the SIPA Liquidation of MF Global Inc.

UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORK

In re

MF GLOBAL INC.,

Debtor.

Case No. 11-2790 (MG) SIPA

STATEMENT IN FURTHER SUPPORT OF DISINTERESTEDNESS AND INRESPONSE TO COURT ORDER DATED DECEMBER 7, 2011

James W. Giddens, as Trustee (the Trustee) for the liquidation of the business

of MF Global Inc. (Debtor or MFGI) pursuant to the Securities Investor Protection Act

(SIPA), 15 U.S.C. 78aaa et seq.,1

by his undersigned counsel Hughes Hubbard & Reed, LLP

(HHR or the Firm), having made application to the Court for an order finding that they are

disinterested within the meaning of SIPA (the Disinterestedness Application, ECF No. 45),

respectfully submit this Statement in response to the Courts Order dated December 7, 2011 (the

December 7 Order, ECF No. 660).



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1. The information contained herein and in the Declaration of James B.Kobak, Jr. dated December 12, 2011 (Kobak Declaration), filed herewith, will respond to the

questions set forth in the December 7 Order, and will show that JP Morgan Chase Bank, N.A.

(JPM) is not a current client of HHR and that no other substantive ground exists that would

prevent a finding of disinterestedness under SIPA 78eee(b)(6).

2. HHR regrets if its prior submissions have left any questions relating toHHRs current clients insufficiently addressed. The Firm takes very seriously its ethical

obligations, and this Statement reflects a substantial additional effort to identify potential client

conflicts based on available information, although, as set forth below, client representations are

not relevant as a legal matter to retention of the Trustee and counsel under SIPA. It is especially

meaningful in this regard that SIPC, which is granted sole discretion to select Trustees

counsel under SIPA 78eee as well as extensive supervisory role, does not believe there is any

ground that would prevent a finding of disinterestedness in this case.2

3. Further, certain letters to the Court in connection with theDisinterestedness Application contain many inaccuracies and seek to create an appearance that

HHR has intentionally withheld relevant information or otherwise acted improperly, which is not

correct.3

The material in the following sections is accordingly submitted in order to set the

record straight, to explain the particular characteristics of SIPA affecting retention of the Trustee

and HHR, and to establish the appropriate legal and factual context for the Courts consideration

of the Disinterestedness Application.



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4. Part I of this Statement addresses the particular attributes of a SIPAproceeding insofar as retention of professionals and the handling of conflicts is concerned. Part

II addresses legal standards and authorities, as directed by the Court in the December 7 Order.

Part III addresses the particular factual and legal questions set forth in the December 7 Order.

I. EMPLOYMENT OF PROFESSIONALS AND HANDLINGOF CONFLICTS IN SIPA CASES

5. The procedures and legal standards governing appointment of the Trusteeand the Trustees counsel in SIPA cases, while similar in some respects to practice under the

Bankruptcy Code, are unique to SIPA. The special characteristics of SIPA cases are described in

the following paragraphs.

A. Retention of SIPA Trustee and Counsel6. In a normal voluntary chapter 7 or 11 case, the debtor selects its counsel in

advance of the filing. The selected firm and (in major cases) other retained professionals work

with the debtors management to gather information and prepare to file the required Petition and

Schedules and Statement of Financial Affairs.4 Thus, by the filing date and the application for

retention of counsel, debtors counsel will already know the identity of the largest secured and

unsecured creditors, the parties to executory contracts, the recipients of payments within 90 days

of the filing, and the identities of insiders, stockholders and other significant parties. This

information becomes part of the supporting data or match list for retention applications under

327(a) of the U.S. Bankruptcy Code (Bankruptcy Code or Code) and Rule 2014 of the



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Federal Rules of Bankruptcy Procedure (Bankruptcy Rules or Rule) typically filed on the

first day of the case.

7. By contrast, the typical SIPA case is an emergency, where a sudden eventcompels immediate action by SIPC to protect customers. This initiates the first-day sequence of

events prescribed under SIPA 78eee:

SIPC makes application for a protective decree to the District Courthaving jurisdiction of the debtor (SIPA 78eee(a)(3));

The District Court enters the decree immediately if the debtorconsents, or holds a hearing on specified issues within 3 days if it doesnot (SIPA 78eee(b)(1)); and

SIPAs exclusive jurisdiction and automatic stay provisions come intoeffect immediately upon the filing (SIPA 78eee(b)(2)).

8. If the decree is granted, the District Court is next required forthwith toappoint the trustee and counsel, pursuant to the following provision:

(3) Appointment of Trustee and Attorney

If the court issues a protective decree under paragraph (1), suchcourt shall forthwith appoint, as trustee for the liquidation of thebusiness of the debtor and as attorney for the trustee, such personsas SIPC, in its sole discretion, specifies. The persons appointed astrustee and as attorney for the trustee may be associated with thesame firm.

SIPA 78eee(b)(3) (emphasis added).

9. Appointment of the trustee and counsel must be immediate and in thesole discretion of SIPC. SIPC must select a trustee and counsel who do not have conflicts vis

a vis the debtor and that have the resources and know-how to carry out the specialized work that



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prevail, subject only to SIPAs disinterestedness standard.5 SIPA further delegates to SIPC

extensive oversight functions regarding trustees and counsel, including monitoring of

compliance with a SIPA disinterestedness standard that is tailored to the goals and purposes of

the statute.6

10. The Disinterestedness standard set forth in SIPA 78eee(b)(6)(A) isadapted to the first day conditions and the role of SIPC that prevail in a SIPA case. A trustee or

counsel to the trustee is not deemed disinterested if:

(i) such person is a creditor (including a customer),stockholder, or partner of the debtor;

(ii) such person is or was an underwriter of any of theoutstanding securities of the debtor or within five yearsprior to the filing date was the underwriter of any securitiesof the debtor;

(iii) such person is, or was within two years prior to the filingdate, a director, partner, officer, or employee of the debtoror such an underwriter, or an attorney for the debtor or such

an underwriter; or

(iv) it appears that such person has, by reason of any otherdirect or indirect relationship to, connection with, orinterest in the debtor or such an underwriter, or for anyother reason, an interest materially adverse to the interestsof any class of creditors (including customers) orstockholders.

SIPA 78eee(b)(6)(A).

11. Each of the four sub-parts of this provision looks to adverse interests vis avis the debtor that a professional may have in hispersonal capacity. In this respect, it mirrors the



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interested person definition in Bankruptcy Code 101(14).7 In fact, SIPA 78eee(b)(6) was

adapted from the interested party definition found in the Bankruptcy Act, which was in turn the

predecessor of current Bankruptcy Code 101(14).8

12. The Second Circuit has strongly emphasized the personal nature of theadverse interest contemplated by the interested person definition. SeeIn re AroChem Corp., 176

F.3d 610, 629 (2d Cir. 1999) (holding that such disinterested person provisions implicate only

the personal interests of the professional whose disinterestedness is under consideration.)

13. The Second Circuit inAroChem went on to distinguish Bankruptcy Code 327(a), which incorporates the interested person standard, but also includes the language

holds or represents an interest adverse to the estate. AroChem,176 F.3d at 629. The Second

Circuit held that this use of language was not accidental and that to hold an adverse interest

and to represent an adverse interest simply have different meanings. Id. Because Congress

did not use the term represent in the interested party definition of, the Second Circuit held a

7. The term disinterested person means a person that

(A) is not a creditor, an equity security holder, or an insider;

(B) is not and was not, within 2 years before the date of the filing of the petition, a director,officer, or employee of the debtor; and

(C) does not have an interest materially adverse to the interest of the estate or of any class of

creditors or equity security holders, by reason of any direct or indirect relationship to,connection with, or interest in, the debtor, or for any other reason.

11 U.S.C. 101(14).

8. SeeSecurities Investor Protection Act of 1977: Hearing on H.R. 8331 Before the Subcomm. on Consumer Prot.& Fin. of the H. Comm. on Interstate & Foreign Commerce, 95th Cong. 173 (1978) (statement of Hugh F.Owens Chairman Sec Investor Prot Corp ) (stating that the amendments to section (b)(6) of the 1970 version



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professionals mere representation of an adverse party cannot mean that the professional is not

disinterested. Id. See alsoIn re Diva Jewelry Design, Inc., 367 B.R. 463, 470 n.29 (Bankr.

S.D.N.Y. 2007) (observing that hold and represent are not the same thing); In re Huntco

Inc., 288 B.R. 229, 233 (E.D. Mo. 2002) (a law firm is disinterested under 101(14)(E) unless

it personally holds a materially adverse interest to the estate, creditor or equity holders).

14. It necessarily follows that the absence from SIPA of reference torepresentation of an adverse interest means that a professionals representation of clients with

interests adverse to the estate cannot support a finding that the professional is not deemed

disinterested within the meaning of SIPA 78eee(b)(6)(A).

15. The logic of SIPAs choice of standards regarding professional disinterestis equally compelling, given the first day conditions described above and SIPCs role in the

selection and supervision of professionals. As a SIPA filing is taking place, beyond the name of

the debtor itself, little is reliably known about the identities of every party that may ultimately

have a financial stake or otherwise be adverse to the estate. Because the holders of potentially

adverse interests are not yet known, it would illogical and counterproductive for SIPA to

condition professional retention on an adverse representation factor. (See SIPC Memo.)

B. The MFGI Liquidation16. The history of the present case follows exactly the pattern established by

SIPA. On October 31, 2011, the Honorable Paul A. Engelmayer, United States District Court for

the Southern District of New York, entered the Order Commencing Liquidation of MFGI (the



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liquidation of the business of MFGI pursuant to SIPA 78eee(b)(3); (iii) appointed HHR as

counsel to the Trustee pursuant to SIPA 78eee(b)(3); and (iv) removed the case to this Court

pursuant to SIPA 78eee(b)(4).

18. The actions of SIPC in connection with retention of the Trustee andcounsel is set forth in the SIPC Memorandum and accompanying Affidavit. HHR also

established through conflict checks that it did not represent and was not adverse to any known

affiliate of MFGI.9 HHR also knew from its experience in Lehman and other SIPA liquidations

that HHR was free to act with respect to securities and commodities clearing agencies and

exchanges, MFGIs principal custodian banks, and other significant parties. (Kobak Decl. 12.)

19. The Liquidation Order was entered on October 31, 2011, at 5:10 p.m.During the ensuing 8 days, over $1.5 billion in customer property was transferred to solvent

brokers and futures commission merchants for the benefit of approximately 10,200 customers of

MFGI.

20. On November 8, 2011, the Trustee and HHR filed the TrusteesDisinterestedness Application, with a hearing scheduled for November 22.10 This early

application and hearing date were to fulfill the mandate of SIPA that there be a hearing on

disinterestedness, promptly after the appointment of a Trustee. SIPA 78eee(b)(6)(B).

21. As mentioned repeatedly in the Fine Letters, the DisinterestednessApplication also made gratuitous references to Bankruptcy Rule 2014 and Bankruptcy Code

327. This was unnecessary, as these bankruptcy provisions are inapplicable by their terms in this


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proceeding. (Seealso SIPA Memo.) Nevertheless, HHRs retention and disclosures fully meet

the substance of these bankruptcy provisions, as set forth below.

22. During the 14 day interval between the filing of the DisinterestednessApplication and the hearing, a further $477 million in customer property was transferred to

solvent brokers and FCMs for the benefit of approximately 15,100 customers.

23. A hearing was held on the Disinterestedness Application on November 22,2011. In response to the Courts request at the hearing, HHR filed the Supplemental Declaration

of James B. Kobak, Jr. Regarding Disinterestedness, dated November 29, 2011 (Supplemental

Declaration) (ECF No. 509). Thereafter, Mr. Fine filed the December Fine Letter, based largely

on information from the HHR website about past and present client representations.

24. The present Statement is filed in response to the December 7 Order, whichset forth certain factual and legal questions and directed the filing of supplemental disclosures

and memoranda of law. This Statement is based on current knowledge, and will be

supplemented as further information becomes available.

C. HHR Policies and Practices Regarding Conflicts in SIPA Proceedings25. In its many prior representations of SIPA trustees, HHR has adhered

strictly to all legal and ethical requirements surrounding the representation of clients having

conflicting interests, as expressed in the Other Authorities referenced in the December 7

Order. See Joint Rules of the Appellate Divisions of the Supreme Court, Rules of Professional

Conduct R. 1.7 (2009) ( Joint Rules); see also Model Rules of Profl Conduct R. 1.7 & Cmt.


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In appropriate cases, HHR will not handle matters involving client but work with SIPC to have

conflicts counsel appointed. See Joint Rules, R. 1.7(b); Model Rules R. 1.7.

26. These rules and principles have been fully followed by HHR as theTrustees counsel in the SIPA liquidation of Lehman Brothers Inc. (LBI), as the most recent

example. As a large broker dealer, LBI (the Lehman entity subject to liquidation under SIPA)

had dealings with thousands of parties, inevitably including some existing clients of HHR. In the

vast majority of cases, financial professionals on both sides of the transaction could agree on the

appropriate monetary outcome of a bankruptcy-related termination or similar event, and there

was no dispute. It is anticipated that the same will be true of the dealings of MFGI most of

the time, sophisticated parties will not disagree about sums due on the closeout of a particular

repurchase transaction, forward or futures contract, foreign currency transaction, or the like.

27. However, where agreement could not be reached among the financialprofessionals for the Trustee and a counterparty, creating a need for lawyers to be involved, the

Trustee retained conflicts counsel or utilized non-HHR attorneys on the Trustees staff to pursue

or defend claims vis a vis HHR clients. In some cases, adversary proceedings or other formal

litigation was commenced by conflicts counsel, as has also occurred in theMadoffliquidation.11

In other instances, settlements were reached without the involvement of HHR attorneys, and

were entered on the Bankruptcy Court docket.12

28. In other instances in the LBI liquidation, HHR has secured waivers fromsome existing clients as well as SIPC and has requested advance waivers by new financial clients


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with respect to potential conflicts with the LBI Estate on matters unrelated to representation of

the client by HHR. This practice will be continued where appropriate to include waivers or

advance waivers with respect to unrelated conflicts with the MFGI Estate.

29. In the present proceeding, the Trustee has had occasion to use staffpersonnel other than HHR attorneys in dealings with Wells Fargo, an HHR client. This was

done in an abundance of caution, as it is not clear that any legal dispute will arise between the

MFGI estate and Wells Fargo. (See Kobak Decl. at 6 n.7.) An important feature of situations

where the Trustee must retain alternative counsel is the consent of SIPC. See SIPA

78eee(b)(3). Retention of conflicts counsel is also subject to Bankruptcy Court approval.13

II. RETENTION OF THE TRUSTEE AND HHR IS APPROPRIATE UNDERBOTH SIPA AND BANKRUPTCY CODE STANDARDS

A. The SIPA Disinterestedness Standard30. The Courts December 7 Order and the Fine Letters concern HHRs

representation in unrelated matters of parties that may have an interest in the liquidation,

including JPM and PricewaterhouseCoopers, LLP (PwC). As a matter of law, such

representations do not make the Trustee or HHR persons not deemed disinterested under SIPA.

31. As explained in above, under SIPA, an attorneys representation ofentities does not make that attorney or law firm not disinterested. Indeed, the plain language of

SIPA refers not to the person representing a materially adverse interest, but rather to it appearing

that the person himselfhas such an interest. SIPA 78eee(b)(6)(A)(iv). In contrast, Bankruptcy

C d 327( ) f t h d t h ld or represent i t t d t th t t


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32. As explained above, the Second Circuits decision inAroChem establishesthat the Codes definition of disinterestedness (like SIPAs) does not ask whether the

professional represents interests materially adverse to a class of creditors, but rather asks

whether the professional personally has such an interest:

We believe that section 101(14)(E) is properly read to implicateonly the personal interests of the professional whose

disinterestedness is under consideration. See In re BH & P, 949F.2d at 1310 & n.12. Accordingly, to run afoul of section101(14)(E), a professional personally must have the prohibitedinterest. At most, [the law firm] represented interests adverse toa class of AroChem creditors when it represented [the secondcreditor] in his Texas Action; because [the firm] personally doesnot have such an adverse interest, it remains a disinterestedperson within the meaning of section 101(14)(E).

AroChem, 176 F.3d at 629.

33. Because Congress did not use the term represent in the definition ofdisinterestedness as it did in Bankruptcy Code 327(a), a professionals mere representation is

insufficient to conclude that the professional is not disinterested. See id.

34. The same is true with respect to the definition of disinterestedness underSIPA 78eee(b)(6)(A)(iv). The relevant inquiry is whether it appears the SIPA trustee or his

counsel personally has an interest materially adverse to a class of creditors, not whether the

professional represents such an interest.

B. The Trustee and HHR Are Disinterested Under SIPA35. Applying the appropriate standard, there is no question that the Trustee

and HHR are disinterested under SIPA 78eee(b)(6)(A) (and under the similar definition in




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declarations attached to the Trustees Disinterestedness Application, neither the Trustee nor

HHR has any such interest.

37. Accordingly, even assuming that HHRs representation of potentialparties-in-interest in unrelated matters constituted the representation of an interest materially

adverse to a class of creditors (and as outlined below it does not), under the Second Circuits

decision inAroChem, such representation cannot result in the Trustee or HHR being not

disinterested under SIPA.

C. Retention of HHR Is Also Proper Under Bankruptcy Code 32738. Even if the test found in 327(a) of the Code were applicable to the

retention of HHR as counsel to the Trustee, which it is not, HHRs retention would be

appropriate.

39. Section 327 of the Code allows a trustee, with the Courts approval, toemploy a professional that (1) is a disinterested person under 101(14) of the Code, and (2) does

not hold or represent an interest adverse to the estate. 11 U.S.C. 327(a). For the reasons

outlined above with respect to the question of disinterestedness under SIPA, HHR is a

disinterested person under the Code as well. The Firms employment would therefore be

appropriate under 327(a) unless HHR holds or represents an interest adverse to the estate. As

discussed above, there is no allegation that HHR itself holds any adverse interest; rather the

Fine Letters regard HHRs representation.

40. The Second Circuit inAroChem also addressed the meaning of this

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41. TheAroChem court also observed that, while the Code does not define thephrase hold or represent an interest adverse to the estate, many other courts defined the phrase

to mean (1) to possess or assert any economic interest that would tend to lessen the value of the

bankruptcy estate or that would create either an actual or potential dispute in which the estate is a

rival claimant; or (2) to possess a predisposition under circumstances that render such a bias

against the estate. Id. at 623 (quotingIn re Roberts, 46 B.R. 815, 827 (Bankr. D. Utah 1985)).

42. Consistent with this definition, the Second Circuit observed that anattorney is not disqualified simply by virtue of the fact that the attorney also represents a

creditor. AroChem, 176 F.3d at 624. Further, 327(c) of the Bankruptcy Code states that

creditor representation may be a ground for disqualification only in cases of actual conflict of

interest. Thus, the concurrent representation of the creditor must implicate and create an actual

conflict regarding matters involved in the bankruptcy representation. In re Huntco Inc., 288

B.R. at 236 (an attorneys representation runs afoul of 327(a) only if the issues on which it

represented the interest holder [are] somehow germane to the issues involved in the

bankruptcy).

43. Applying these principles here, there is no basis for a finding that HHRcurrently represents any interest adverse to the estate. With respect to JPM, as set forth in the

Kobak Declaration, HHR has terminated its one insignificant active representation. Because

terminated representations do not implicate 327(a), HHRs prior work for JPM is of no

consequence. Indeed, in the LBI liquidation, HHR has in fact successfully pressed the Trustees

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44. But even if the past representations were relevant, and even assuming thatJPM itself were adverse to the estate as a result of its status as a potential creditor or its pre-

Filing Date conduct, the matters for which HHR provided services to JPM were entirely

unrelated to the debtor or the estate and they would accordingly not constitute representations of

interests adverse to the estate. See AroChem, 176 F.3d at 624;Huntco, 288 B.R. at 236.

45. Similarly, with respect to PwC and other HHR clients, even assuming thatthe entities posture in the liquidation were in fact adverse to the estate, the representations at

issue are entirely unrelated to the debtor or the liquidation and therefore HHR is not representing

interests adverse to the estate. Id. Accordingly, HHRs retention would be proper even under

327(a) of the Code.14

46. Moreover, as discussed above, with the consent of SIPC, the Trustee willemploy conflicts counsel to pursue any claims that the estate may possess against any clients of

HHR, as HHR will not file suit against current clients (absent appropriate waivers) consistent

with its ethical obligations. See Joint Rules, R. 1.7.

47. The employment of conflicts counsel in this manner is typical in complexbankruptcy proceedings, including SIPA liquidations. See,e.g.,AroChem, 176 F.3d at 626

(estate can secure separate counsel prosecute claims);Diva Jewelry, 367 B.R. at 474 (even

assuming the existence of estate claims against attorneys former clients, the trustee can secure

independent counsel to prosecute them); see also In re Project Orange Assocs., LLC, 431 B.R.

363, 375 (Bankr. S.D.N.Y. 2010) (In many cases, the employment of conflicts counsel to

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regarding the retention of general bankruptcy counsel). Indeed, the Trustee has utilized

conflicts counsel in pursuing claims in the LBI liquidation against HHR clients.

48. Thus, this is not a case such as Project Orange, in which the Courtconcluded that the use of conflicts counsel to deal with a Chapter 11 debtors largest unsecured

creditor and essential supplier was not sufficient to permit the appointment of counsel for the

debtor that had significant ties to the creditor. 431 B.R. at 365-366. In that case, the debtor

operated a power facility that had two turbines manufactured and maintained by GE, and the

debtor and GE had significant disagreements over the maintenance of the turbines, leading to a

multi-million dollar arbitration victory by GE against the debtor. Id. at 367. The proposed

debtors counsel, DLA Piper, represented GE in multiple matters, but stated that conflicts

counsel could deal with GE. Id. at 369.

49. The Court concluded that in this situation, conflicts counsel would not beappropriate to warrant retention of DLA Piper because the relationship and interaction with GE

was central to the debtors reorganization. Id. at 375. GE was the largest unsecured creditor

and also was responsible for the return of the turbines which were critical to the debtors ability

to reorganize. Id. at 375-76. GE and the debtor were still directly adverse in litigation regarding

the turbines and GE was also an active participant in the bankruptcy, making multiple filings

including a motion to lift the stay to confirm its arbitration award. Id. at 376. Accordingly, since

DLA Piper was conflicted from participating in significant matters that were central to the

debtors ability to reorganize, its employment was not proper under Bankruptcy Code 327(a).

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involvement HHR clients may have in the later stages of the liquidation, this has not prevented

and will not prevent the Trustee and HHR from performing their central roles under SIPA. Any

ancillary or other proceedings involving current HHR clients can and will be handled by

conflicts counsel, as is not unusual in SIPA liquidations. As noted in the Kobak Declaration, it

was determined by HHR at the outset that it had no impediment to acting in any way that might

be necessary to with respect to securities and commodities clearing agencies and exchanges,

principal custodian banks, and others that it knew from experience would likely be key players

in a SIPA proceeding.

51. Many of the other cases identified in the Courts December 7 Ordersimilarly involve the type of representations that raised significant questions as to whether the

attorneys were capable of performing their central functions and acting in the estates best

interests on matters central to the relevant proceedings.

52. For example,Rome v. Braunstein, 19 F.3d 54 (1st Cir. 1994), involved thedenial of fees to an attorney who had several disqualifying conflicts of interest. InRome, the

attorney was the longtime corporate clerk and counsel to the debtor and filed a Chapter 11

proceeding on its behalf. Id. at 56. As counsel to the debtor, the attorney filed three

reorganization plans, all of which were rejected on the grounds that they favored the debtors

main insider (who was accused of looting the debtor) and his family. Id. at 57. The attorney also

concurrently served as counsel to the principal insider with respect to a Chapter 7 proceeding

initiated against the insider, and as counsel to an acquaintance of the insider in the purchase of

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representation of many actually adverse parties. Id. at 60-62. Nothing similar has or will occur

in this case.

53. Similarly, inIn re Perry, Adams & Lewis Sec., Inc., 5 B.R. 63 (Bankr.W.D. Mo. 1980), counsel for the SIPA trustee was disqualified as not disinterested where the

firm was general counsel to a bank that was adverse to the debtor, one of the firms partners was

the chairman of the banks board, and the lead lawyer for the trustee was also currently

representing the bank in two pending proceedings. 5 B.R. at 64. No showing can be made here

of any such relationship between HHR and any materially adverse party.

54. In In re Blinder, Robinson & Co., 131 B.R. 872 (D. Colo. 1991), thedistrict court considered an appeal from the denial of an objection to the retention of a SIPA

trustee and his counsel. The firm selected by the trustee represented a potential creditor in

litigation against the debtorat the time that the trustee and the firm were appointed by SIPC. Id.

at 876. The firm had not withdrawn from the representation of the creditor against the debtor at

the time of the appointment. Accordingly, the district court concluded that there is a legitimate

argument that the representation rendered the trustee and the firm not disinterested under SIPA.

Id. at 879. Nothing similar has or will occur in this case.

55. In re Granite Partners, L.P., 219 B.R. 22 (Bankr. S.D.N.Y. 1998) was anon-SIPA case in which the court partially disallowed the final fee application of counsel to a

Chapter 11 trustee as a result of undisclosed conflicts of interests arising out of the law firms

concurrent representation of a significant potential target of claims by the estate. The estate had

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would not be able to sue Price Waterhouse, it would be able to obtain waivers from its broker-

dealer clients, including Merrill Lynch, in order to investigate and prosecute any claims against

them. Id. at 27-28.

56. However, Willkie Farrs work for Merrill Lynch grew substantially fromthe time of its retention by the trustee, from three open matters to hundreds of active matters. Id.

at 28-29. Further, Merrill Lynch refused to provide a signed waiver. Id. at 30. Willkie Farr did

not disclose these facts to the court or even to the trustee, and after years of work, ultimately

declared it was unable to prosecute claims against the broker-dealers. Id. at 30-31. Based on

these facts, the court concluded that Willkie Farr represented adverse interests, and had a

meaningful interest, or the perception of one, to act contrary to the interests of the estates. Id. at

36. Nothing similar has or will occur in this case.

57. InIn re Crivello, 134 F.3d 831 (7th Cir. 1998), the Seventh Circuitaddressed a non-SIPA case involving a law firm employed as counsel to a Chapter 11 debtor.

Subsequent to the law firms appointment, it was discovered that the firm had significant,

undisclosed prepetition dealings with the debtor and related parties and those dealings continued

during the bankruptcy proceeding. Id. at 833-35. The firm conceded that it was not disinterested

and the bankruptcy court withdrew its approval of the firms employment and denied its fee

application, finding a willful failure to disclose the facts of its representation. Id. at 835. The

district court found that the factual findings of willfulness were not supported by the record but

upheld the denial of the fee application. Id. The Seventh Circuit concluded that the court instead

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similar has or will occur in this case, where HRRs only prior representation of the debtor

(relating to the real estate lease) was terminated three years before HHRs appointment.

58. In re Leslie Fay Cos., 175 B.R. 525 (Bankr. S.D.N.Y. 1994), is similarlyinapposite. There, the court concluded that counsel to Chapter 11 debtors failed to disclose

numerous significant relationships: (i) it had professional relationships with members of the

debtors audit committee who were potential targets, (ii) it represented and would not sue an

underwriter of the debtors securities, and (iii) it also represented a significant stockholder, the

debtors auditor and a large creditor. Id. at 529-30. The court concluded that the firm

represented many interests materially adverse to debtors, and failed to meet its disclosure

obligations under Rule 2014(a). Id. at 533-37. Here HHR had no relationship with insiders of

the debtor and will continue to disclose information about any representations of other potential

parties in interest.

59. In re Allegheny Intl, Inc., 117 B.R. 171 (W.D. Pa. 1990), did not concernretention of counsel but of a special advisor to a Chapter 11 estate. A significant potential

investor in the estate had made this employment a condition of its funding of the reorganization

plan and contemplated including the advisor in the management of a reorganized entity. Id. at

179. The court concluded that the advisor was not improperly employed because the possibility

that [the advisor] may eventually play a managerial role in an as-yet speculative reorganization

plan does not mean that [he] would fall prey to conflicting loyalties while employed under the

special advisor agreement, or that his interest would be materially adverse to those of the estate,

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60. The existence of interactions between the debtor and clients of the counselto the Trustee in this case are not in any way unusual nor are they a basis for a conclusion that

counsel is not disinterested, a conclusion in which SIPC concurs.

61. Indeed, even inBlinder, Robinson, where a SIPA trustees counsel hadactually represented a creditor in litigation against the debtor that was active at the time of

counsels appointment, the court did not remove the trustees counsel. 131 B.R. at 881.

Recognizing the complexity of large firm practice and the substantial likelihood that conflicts

will arise in any complex liquidation or bankruptcy proceeding, the court accepted the firms

withdrawal from the adverse representation of the creditor and accepted the appointment of

special counsel to evaluate any claim against the creditor. Id. at 880. Further, the court observed

that replacement of the trustee and counsel would be a major disruption to the litigation and

therefore did not order their replacement. Id. at 881.

62. Here, where there is no conflict approaching the level seen inBlinder,Robinson, and where the Trustee and his counsel have already accomplished much and built the

foundation for a successful SIPA liquidation, there is no basis to conclude that HHR is incapable

of meeting fulfilling the role of Trustees counsel in this case. Again, the concurrence of SIPC

on this carries particular weight.

D. The Trustee And HHR Will Continue To ComplyWith All Applicable Disclosure Requirements

63. The objection filed by Mr. Fine asserts that the Trustee and HHR failed tol i h h i di l bli i d h ld b i d b h did fil

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this proceeding. Bankruptcy Rule 2014 applies only to applications for employment of

professionals pursuant to 327, 1103, or 1114 of the Code, and to such applications made

by the trustee or committee. F.R.B.P. 2014. Here, the Trustee and HHR were appointed under

SIPA 78eee(b)(3) on the application of SIPC. They were not retained on the application of the

trustee or the committee, nor were they retained under the sections of the bankruptcy Code

referenced in Rule 2014.

15

65. The Trustee and HHR recognize and take seriously their obligation toprovide the Court information sufficient to determine the question of disinterestedness under

SIPA 78eee(b)(6). To that end, the Trustee and HHR have expended significant effort in

response to the December 7 Order to provide the expanded disclosures contained herein and in

the Kobak Declaration.

66. The expanded disclosures provide a level of detail that exceeds what isnormally provided by the SIPA trustees and counsels in recent liquidations.

16HHR will continue

to update disclosures an additional information becomes available.17

15. That Rule 2014 is inapplicable to any application regarding disinterestedness for a SIPA trustee and counsel isfurther demonstrated by other clear differences between that rule and the relevant SIPA provision. Indeed, Rule2014(a) mandates that the application for an order approving an appointment of professionals be filed andtransmitted to the United States Trustee. Of course, the United States Trustee has no role in a SIPA liquidation,and therefore notice of the disinterestedness hearing under SIPA is instead given to SIPC and to all potential

customers, creditors, or stockholders of the debtor. See SIPA 78eee(b)(6)(B).

16. Declaration of David J. Sheehan of Disinterestedness of Counsel to Trustee, SIPC v. Bernard L. MadoffInvestment Secs. Inc.,Case No. 08-1789 (BURL) (Bankr. S.D.N.Y.) (ECF No. 24) (Jan. 2, 2009); Declarationof James B. Kobak, Jr. re: Disinterestedness of Counsel, SIPC v. Lehman Brothers Inc., Case No. 08-1420(JMP) (SIPA) (Bankr. S.D.N.Y.) (ECF No. 54) (Oct. 3, 2008); Declaration of Rosanne Thomas Matzat, Esq. re:

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III. RESPONSES TO FACTUAL AND LEGAL QUESTIONS67. The Factual and Legal Questions set forth in the December 7 Order are

addressed in the following paragraphs, which also make reference where relevant to assertions

contained in the Fine Letters regarding information on the HHR website.

Factual Question 1: Are JPM, PwC, or any lenders involved in MFGIs $300 millionsecured credit facility current clients of HHR?

JPM

68. JPM is no longer a current client of HHR in any sense. Details regardingpast representation of JPM, which had no relationship to MFGI, are set forth in the Declaration

of James B. Kobak, Jr., submitted herewith.

PwC

69. PwC is a current client and auditor of HHR, and information regardingcurrent and past representations is included in the Supplemental Declaration of James B. Kobak,

Jr. Regarding Disinterestedness.18 HHRs historical and current relationships with PwC are such

that HHR will not be adverse to PwC, either in assertion or defense of claims.

70. Two of the ten secured credit facility lenders are or may become currentclients of HHR. Information regarding representations during 2010 and 2011 is shown in

spreadsheet form as Exhibit A hereto.

(Footnote continued from prior page)James B. Kobak, Jr. on Behalf of Hughes Hubbard & Reed LLP Regarding Disinterestedness of Counsel, No.

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Factual Question 2: Are any other current clients of HHR creditors of MFGI?

71. Research by the Trustees professionals has not identified any othercurrent clients of HHR that are creditors of MFGI. As the Court is aware, there is no petition in

this proceeding showing the largest creditors of MFGI. Accordingly, HHR made an emergency

request to the Trustees professionals to aid in responding to the December 7 Order, requesting

identification of the 20 largest non-subordinated creditors of MFGI.19

The list produced on this

expedited basis, which is preliminary and subject to revision, did not show any other current

HHR clients as creditors.20

Factual Question 3: If the answers to Questions 1 or 2 are affirmative, provide details ofeach current matter, including the name of the client, a description

of the matter and the nature of the services being provided by HHR,the date when HHR was retained, an estimate of when the matterwill be concluded the amount of fees billed and/or collected to date,and if possible, an estimate of future fees before the matter isconcluded.

72. Detail regarding current clients, matters, and fees is shown in Exhibit Awith respect to Factual Question 1. However, HHR respectfully submits that including the

requested level of detail as to current individual client matters in this Statement, and thereby

placing it on the public record, would risk disclosure of confidential information. Accordingly,

if the Court deems further detailed information regarding individual client matters to be essential,

HHR will request that a procedure be put in place for examination of such information in

camera.

Factual Question 4: Are JPM or PWC creditors of MFGI? If so please provide details.



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73. It is not yet known whether JPM or PwC are creditors of MFGI. Based oncurrent information, it is believed that the lenders under the $300 million secured credit facility

referenced in Factual Question 1 were fully secured, and that MFGIs obligations under that

facility were fully satisfied. Other potential MFGI obligations to JPM are not known at this time.

It is clear, however, that certain of its actions are likely to be the subject of investigation and the

Trustee is free to act with the respect to them.

21

Whether MFGI owed fees for services to PwC

as of the Filing Date is not known.

Factual Question 5: Can HHR commence legal action against JPM, PWC, or any othercurrent clients that are creditors of MFGI, if necessary andappropriate?

74.

HHR may threaten or bring an action against JPM in the context of a

potential dispute between financial institutions, including MFGI, as occurred in the LBI

proceeding, because it is a former client (with respect to unrelated matters) and is not a current

client of the Firm.22 Absent an appropriate waiver, any legal action against PwC that may arise

in the MFGI liquidation, should there in fact be any, would be handled by conflicts counsel after

consultation with SIPC.

Factual Question 6: Does HHR have an engagement letter with JPM, PwC or any othercurrent clients that are creditors of MFGI, that addresses whetherHHR may be adverse to those clients in other unrelated matters?

75. No, with respect to known creditors. HHR may have or obtain such letterswith clients not currently known to be creditors of MFGI.



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Factual Question 7: Based on information currently available to HHR, during the ninetydays prior to the commencement of the SIPA Liquidation, didMFGI make any payments or transfers of property or fundsbelonging to MFGI or to any of MFGIs customers, to or for thebenefit of JPM, or to any other current clients of HHR?

Factual Question 8: Based on information currently available to HHR, if there were suchpayments or transfers, do you believe that the trustee or any ofMFGIs customers have a basis in fact and law to seek to recoverany payments or transfers that were made to or for the benefit ofJPM or other current clients of HHR?

Factual Question 9: If necessary and appropriate to commence legal action to recoverany payments or transfers, can HHR do so with respect to eachrecipient of such payment or transfer?

76. In response to Questions 7-9, HHR has not yet conducted any preferenceanalysis, either legal or factual. For purposes of responding to the December 7 Order, HHR

made an emergency request to the Trustees professionals and obtained a preliminary list of

payments within the ninety days prior to commencement of the SIPA liquidation. This list

(which may not be complete) shows a total of approximately $62 million in payments during the

period. Inevitably, HHR clients (or affiliates) are among the recipients, with an estimated total

of less than $2 million.23

Accordingly, given the scale of the MFGI liquidation, the potential

dollar value of preference recoveries suggested by these preliminary numbers will not be a

material amount.

77. It is also respectfully submitted that it would be unfair to any particularrecipient to identify payments in this Statement, thereby placing on the public record information

that might be misinterpreted to suggest potential preference exposure, when (as mentioned



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information to be essential at this time, HHR will request that a procedure be put in place for

examination of such information in camera. In any event, HHR will not commence preference

litigation against any current client.24

78. However, it should be noted that, to the extent that JPM was a transferrecipient, whether during the preference period or at any other time, HHR is not restricted from

dealing appropriately with any such transfer. Furthermore, as stated in the Kobak Declaration,

HHR determined that it had no conflicts and is free to be adverse with the entities and parties in

addition to JPM most likely to be major focuses of attention and investigation in the MFGI

liquidation.

Factual Question 10: What, if any, policy or practice has SIPC followed with respect toselecting conflicts counsel to handle any matters that a trusteescounsel may not handle in a SIPA liquidation because of a conflict ofinterest?

Factual Question 11: What, if any, policy or practice has SIPC followed with respect toaddressing issues customarily addressed by a SIPA trustee if thetrust has a conflict of interest in a particular matter?

79. In response to factual Questions 10 and 11, HHR understands that SIPCwill address these questions in the SIPC Memorandum. As mentioned above, use of conflicts

counsel is available in SIPA liquidations.

Legal Question 1: Can HHR threaten or bring an action on behalf of the Trustee

against JPM or any other current client of HHR?

80. HHR may threaten or bring an action against JPM in the context of apotential dispute between financial institutions, including MFGI, as occurred in the LBI



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consultation with SIPC, and appropriate disclosures. As noted above, HHR is free to be adverse

to most of the significant parties in this liquidation.

Legal Question 2: Can conflicts counsel be used in a SIPA liquidation proceeding ifa trustees counsel is precluded by ethical rules from undertaking aconflicting representation?

81. Yes.Legal Question 3: If HHR is not disinterested in a particular matter is this SIPA

Liquidation, is the Trustee who is a partner in HHR likewise notdisinterested?

82. No. Practice in SIPA liquidations has been for trustees to retain conflictscounsel where the Trustees counsel has a conflict.

25This is consistent with SIPA 78eee(b)(3),

which provides that the trustee and counsel may be associated with the same firm. This

provision would be counter-productive if a conflict of a SIPA trustees counsel (a not uncommon

occurrence) would automatically entail disqualification of the trustee, who is acting in a fiduciary

rather than legal capacity in the liquidation. Non-disqualification of SIPA trustees in such

circumstances is also consistent with the idea that a trustee or executor acting in a fiduciary

capacity is not tainted by representation of adverse interests by his law firm, absent actual

conflict. E.g.,Blinder, Robinson, 131 B.R. at 881. (See also SIPC Memo.)

Legal Question 4: If the Trustee is not disinterested with respect to a particular matterwithin this SIPA Liquidation, may SIPC act instead of the Trustee

in that matter? See 15 U.S.C. 78eee(b)(6)(A) (stating that exceptthat SIPC shall in all cases be deemed disinterested, and anemployee of SIPC shall be deemed disinterested if such employeewould, except for his association with SIPC, meet the standards setforth in this subparagraph).



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83. HHR understands that SIPC will address this question in the SIPCMemorandum.

Legal Question 5: Please address at least the following cases and other authorities inany further memorandum of law filed in response to this Order:

Cases

In re AroChem Corp., 176 F.3d 610 (2d Cir. 1999)

In re Crivello, 134 F.3d 831 (7th Cir. 1998)

Rome v. Braunstein, 19 F.3d 54 (1st Cir. 1994)In re Blinder, Robinson & Co., 131 B.R. 872 (D. Colo. 1991)

In re Allegheny Intl, Inc., 117 B.R. 171 (W.D. Pa. 1990)

In re Project Orange Assocs., LLC, 431 B.R. 363 (Bankr. S.D.N.Y. 2010)

In re Granite Partners, L.P., 219 B.R. 22 (Bankr. S.D.N.Y. 1998)

In re Leslie Fay Cos., 175 B.R. 525 (Bankr. S.D.N.Y. 1994)

In re Perry, Adams & Lewis Sec., Inc., 5 B.R. 63 (Bankr. W.D. Mo. 1980)

Other Authorities

RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS 128 (2000) (stating that alawyer may not represent one client to assert or defend a claim against or brought byanother client currently represented by the lawyer, even if the matters are notrelated)

MODEL RULES OF PROFL,CONDUCT R. 1.7 & cmt. (2010) (discussing rule and general

principles of conflicts of interest regarding current clients)

JOINT RULES OF THE APPELLATE DIVISIONS OF THE SUPREME COURT,RULES OFPROFESSIONAL CONDUCT R. 1.7 (2009) (stating New York rule on Conflict ofInterest: Current Client)

84. These cases and authorities, as well as other relevant authorities, areaddressed as indicated in the Table of Authorities.

Conclusion

For the foregoing reasons, it is respectfully submitted that the Trustees



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Dated: New York, New YorkDecember 12, 2011

Respectfully submitted,

HUGHES HUBBARD REED LLP

By: s/ James B. Kobak, Jr.James B. Kobak, Jr.David W. WiltenburgSavvas Foukas

One Battery Park PlazaNew York, New York 10004Telephone: (212) 837-6000Facsimile: (212) 422-4726Email: [email protected]

Attorneys for James W. Giddens,Trustee for the SIPA Liquidation of MF Global Inc.



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EXHIBIT A


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