Applicant CMP Richard Charles Faulkner 2nd Witness Statement Exhibit RF2/RH15 19 June 2014

Transcription

1 CMP Resolution Application Applicant CMP Richard Charles Faulkner 2nd Witness Statement Exhibit RF2/RH15 19 June 2014 IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION COMPANIES COURT No 9527 of 2011 IN THE MATTER OF MF GLOBAL UK LIMITED (in special administration) AND IN THE MATTER OF THE INVESTMENT BANK SPECIAL ADMINISTRATION REGULATIONS 2011 SECOND WITNESS STATEMENT OF RICHARD CHARLES FAULKNER I, RICHARD CHARLES FAULKNER of KPMG LLP, 15 Canada Square, London E14 5GL STATE AS FOLLOWS: A INTRODUCTION 1 I am a partner at KPMG LLP. My fellow partners, Richard Heis, Michael Robe rt Pink and Richard Fleming (together the "Administrators") are the joint administrators of MF Global UK Limited ("MFGUK"). MFGUK is trustee of the trust of client money under the Financial Conduct Authority's (the "FCA") client money rules ("CASS 7") of which the "firm" within the meaning of CASS 7.7.2R is MFGUK (the "CMP"). 2 I am authorised by Richard Fleming (in his capacity as the CMP Administrator (as defined at paragraphs 10 and 11 below)) to make this statement in support of an application by MFGUK as trustee of the CMP pursuant to the inherent jurisdiction of the Court and/or Civil Procedure Rule 64.2, and pursuant to paragraph 7 of the Judge's Order dated 11 June 2013 in these proceedings and Rule 11(2) of the procedure ("the Client Money Distribution Procedure") which was attached as E U W _ACTIV E: \4\

2 Schedule A to that Order. The application is made concurrently with an application for directions by the Administrators on behalf of MFGUK's general estate (the "General Estate"). 3 I will refer to the application made by MFGUK as trustee of the CMP as the "CMP Application", and the application made by the Administrators on behalf of the General Estate as the "General Estate Application" (together, the "Applications"). 4 The facts and matters stated herein are either within my own knowledge and are true or are based on documents and information supplied to me and are true to the best of my knowledge, information and belief. 5 In referring to any legal advice the Administrators have received, the Administrators do not intend to, and do not, waive any privilege by such reference or otherwise. 6 Unless otherwise stated, capitalised terms defined below have the meaning ascribed to them in the Application Notice dated 7 April I refer in this witness statement to a paginated bundle of documents marked "RF2/RH15". Unless otherwise stated, any page or tab references in this statement are references to the pages and tabs of that exhibit. 8 This witness statement is divided into the following sections: (a) Introduction (paragraphs [1] to [8]). (b) Background (paragraphs [9] to [14]). (c) Key settlement issues (paragraphs [15] to [41]). (i) Discharge of tracing and other claims (paragraphs [20] to [30]). (ii) Affiliate receivables (paragraphs [31] to [36]). (iii) Acknowledgement of sums owing by the CMP to the General Estate (paragraphs [37] to [38]). (iv) Division of costs (paragraphs [39] to [41]). (d) Settlement benefits (paragraphs [42] to [49]). (e) Impact of the Settlement on Decreased Clients (paragraphs [50] to [54]). (f) Consultation with clients (paragraphs [55] to [59]). (g) FCA Modification Application (paragraphs [60] to [63]). (h) Claimed but not paid client money (paragraphs [64] to [69]). 2 EUW ACTIVE:\ \4\

3 B BACKGROUND 9 The background to the Applications is set out in the 14th witness statement of Richard Heis dated 25 April 2014, which was filed on behalf of the CMP and General Estate in support of the Applications. 10 At the Procedural Hearing on 1 May 2014, the Court granted an order approving the procedure for negotiating a settlement between the CMP and the General Estate (the "Order"). A copy of the Order was posted on the Administrators' website with an update (tab [8]). 11 Under the procedure detailed in the Order, Richard Fleming was appointed as the CMP Administrator (to represent the interests of the CMP) and Richard Heis was appointed as the General Estate Administrator (to represent the interests of the General Estate). 12 Each of us has employed different teams within KPMG to assist us. The work on behalf of the CMP has been principally undertaken by myself and Richard Beard. We have also each been advised and represented by separate legal teams within Weil, Gotshal & Manges and separate Counsel. The CMP has been advised and represented by a team at Weil, Gotshal & Manges led by Paul Bromfield, and by Antony Zacaroli QC and Adam Al-Attar, with a view to negotiating a settlement between the CMP and the General Estate so that the CMP can close. 13 A settlement has now been agreed in principle between the two estates (the "Settlement"). 14 The purpose of this witness statement is to explain the rationale for the CMP entering into the Settlement and therefore I make this statement on behalf of the CMP in my capacity as the lead KPMG partner assisting the CMP Administrator. C KEY SETTLEMENT ISSUES 15 The 15th witness statement of Richard Heis dated 19 June 2014 explains: at section (b), the Settlement issues and procedure; and at section (d), the steps taken by the Administrators to notify and consult with clients and creditors regarding the Settlement. 16 I adopt that explanation which is true to the best of my knowledge and belief. I do not repeat those points here save to note that, in order to set the parameters for the Settlement negotiation, on 20 May 2014 the General Estate Administrator and the CMP Administrator exchanged position papers. The General Estate Administrator's position paper is at tab [10] and the CMP Administrator's position paper is at tab [9]. The CMP Administrator subsequently served a reply to the General Estate Administrator's position paper, which is at tab [11]. 17 As summarised in the General Estate Administrator's notice to clients and creditors dated 5 June 2014 (the "Notice", at tabs [14] and [15]), in order to enable the CMP to close it was necessary to: 3 EU W _ACTIV E:\ \4\

4 (a) (b) (c) (d) (e) resolve the value of the CMP's tracing and other claims into the General Estate, which arise from failures by the firm to segregate sufficient client money; sell or otherwise realise all of the CMP's remaining non-cash assets; resolve the value that the CMP must pay towards the costs of the two estates from 1 May 2014 to closure of the CMP; resolve the question of how to deal with clients who are shown in MFGUK's records as having client money claims, but who have not submitted claims for payment; and resolve all outstanding claims against the CMP. 18 Also as set out in the Notice, the Settlement can be broadly summarised as follows: (a) (b) (c) (d) (e) the General Estate will pay $31,029,303 to the CMP in discharge of all tracing and other claims against the General Estate; the General Estate will pay $29,865,662 for an assignment of all outstanding receivables due to the CMP; the General Estate will be given credit of $12,842,406 for the netting of a CMP liability against a General Estate asset in a proposed settlement with a third party; the CMP will pay $6,815,535 towards the costs of the two estates for the period from 1 May 2014 to the closure of the CMP, even if the CMP closes later than 30 November The CMP will not pay anything to compensate the General Estate for the fact that costs would no longer be split between the two estates following the closure of the CMP; and on a net basis, taking account of all of the above, the General Estate will make a payment of $41,237,024 to the CMP in full and final settlement of all claims between the two estates and in exchange for the CMP's outstanding receivables. 19 I explain below why I. believe the CMP is justified in entering into the Settlement in respect of each of the items listed at paragraphs 18(a) to (d) above. (i) DISCHARGE OF TRACING AND OTHER CLAIMS 20 In the estates' without prejudice position papers it was common ground that: (a) MFGUK was required but failed to treat a number of clients of MFGUK as clients entitled to the protection of CASS 7; and (b) MFGUK was required, but failed, to segregate money received from or on behalf of those clients and, instead, treated them as creditors. 21 I am advised that MFGUK's breach of CASS 7 gives rise to two possible claims by the CMP against MFGUK: 4 EUW ACTIVE:\ \

5 (a) (b) a proprietary claim to any client money received by MFGUK from or on behalf of those clients which remains identifiable in any MFGUK house account and/or to its traceable proceeds; and a personal claim to compensate the CMP for MFGUK's breaches as trustee of client money. Proprietary claim 22 I am advised that the proprietary (or tracing) claim faces immense practical difficulties. Preliminary investigations undertaken by my team revealed that a substantial amount of work would have been required in order, firstly, to identify payments of money into the firm's accounts (for example margin calls, or receipts from an exchange, clearing house or intermediary in relation to the clients' transactions) which represented client money and, secondly, to work out whether such money remained identifiable in the firm's accounts as at the PPE. To illustrate the difficulties involved, in the 11 days prior to the PPE there were approximately ten thousand receipts and payment instructions in respect of MFGUK's 259 house bank accounts with an aggregate value of over 30 billion. 23 Once that investigation work was completed, a number of complex legal issues would likely arise. In particular, where trust money is paid into an account, but the balance on that account is subsequently reduced below the level of the payment in, the question arises whether it is possible to treat any later increased balance on that account (where the increase is not the result of a further receipt of trust money) as trust property, and whether the answer to that question may be different if there are numerous accounts with the relevant credit institution. I am advised that these legal issues would require determination by the court and, in all likelihood, an appeal to the Court of Appeal and potentially the Supreme Cou rt. I understand that the question of aggregating accounts with the same credit institution was raised but not resolved in relation to the Lehman estate. 24 In these circumstances, and without spending considerable further sums on investigating the facts, it is very difficult to estimate with any accuracy the value of the CMP's proprietary claim against MFGUK. Personal claim for breach of trust 25 I am also advised that MFGUK's failure to segregate client money and positions gives rise to a personal claim against MFGUK for compensation for breach of trust. The amount of compensation that may be recovered is to be measured by the extent to which the shortfall in client money in the CMP was caused by the breach of trust. 26 Such a claim for compensation for breach of trust could be mounted either by each of the clients who suffered a shortfall in their client money recoveries as a consequence of MFGUK's breach of trust (referred to as "Shortfall Claims" in the order of this Court dated 16 August 2013 the "Shortfall Order", at tab [2]), or by a trustee of the CMP acting on behalf of the trust itself. Whoever brought the claim, it would be an unsecured claim in the special administration of MFGUK. 5 EUW ACTIVE;\ \4\

6 27 The view was taken, on behalf of the CMP, that it was in the interests of all clients that the question of compensation for breach of trust was best resolved by the CMP asserting (and seeking to resolve) that claim (on behalf of the trust, i.e. in substance on behalf of all clients) rather than leaving it to each client to pursue its Shortfall Claim by way of proof of debt against the General Estate. The additional costs which would be incurred by each client in taking on the burden of establishing the extent to which its shortfall was caused by breach of trust was alone sufficient reason for this to be dealt with at the level of the CMP. 28 Although a claim for breach of trust would be merely an unsecured claim, this was unlikely to be a significant disadvantage to clients in circumstances where the General Estate was likely to pay a dividend of somewhere between 90.2p/ and 100p/ (with a possibility of a small surplus), if a settlement was not agreed,' and would likely pay a greater dividend in the event of a settlement. Accordingly, and in view of the difficulties involved in establishing the quantum of the proprietary claim, the settlement negotiations focussed on the personal claim for breach of trust by the CMP. 29 Page 7 of the IFO shows that the CMP's claim against the General Estate of MFGUK for breach of trust was agreed at $31,029,303. This amount was agreed as follows: (a) (b) (e) (d) the breach of trust consisted primarily of MFGUK's failure to segregate positions (i.e. margined transactions) entered into on behalf of particular clients; it was accepted on behalf of the CMP that the loss caused by the failure to segregate those positions could not be greater than the value of the positions at the date at which they subsequently closed out (on the basis that it was the amount recovered from the relevant exchange, clearing house or intermediary on close out of the positions that would have fallen into the CMP); after preliminary discussions, in which I agreed (on behalf of the CMP Administrator) that certain elements of this claim should be revised down, the CMP's contention was that the maximum value of its claim for compensation for breach of trust against the General Estate was approximately $43,921,887, plus a further sum reflecting that part of the costs incurred by the Administrators on behalf of the CMP which could be said to have been caused by MFGUK's breach of trust. This amount had not been separately quantified but the Administrators are confident that it is no greater than approximately $1-2 million; the General Estate's primary position, on the other hand, was that there should have been a final reconciliation of client money as at the PPE, and that if such reconciliation had taken place, then the General Estate would have been required to pay $9,439,071 to the 1 See page 6 of the Administrators' financial summary of the settlement dated 5 June 2014 entitled "Indicative impact of the proposed settlement between the House Estate and the Client Money Pool, and the Illustrative Financial Outcome as at 31 March 2014" (the "IFO", at tab [16]). 6 E U W _ACT IV E:\ \4\

7 CMP (alternatively that the calculation of loss caused by MFGUK's breach of trust should take into account, and offset, amounts which the General Estate would have been entitled to withdraw from the CMP for a variety of other reasons, and that taking such matters into account, the claim was only $9,439,071); (e) (f) (g) (h) (i) the delta between the positions of the two estates was therefore $34,482,816; 2 the CMP and General Estate agreed to compromise the breach of trust claim, by a payment from the General Estate to the CMP of, in addition to the amount which it accepted was owing ($9,439,071), a further sum of $21,590,231; this gave a final settlement amount of $31,029,303 in full and final settlement of all of the CMP's claims against MFGUK arising from its failure to segregate client monies; that amount is to be paid in full, even if the dividend payable by the General Estate to unsecured creditors is less than 100p in the ; and the final settlement amount was reached having taken into account legal advice from the solicitors and counsel instructed to advise the CMP, as to the merits of the CMP's claim for compensation for breach of trust am advised that a consequence of the full and final settlement of the breach of trust claims on behalf of the CMP is that the Shortfall Claims of individual clients are eliminated, because the CMP is to be treated as having received full value in compensation for the breach of trust, such that no further loss has been caused to individual clients. (ii) AFFILIATE RECEIVABLES 31 The face value of receivables due to the CMP from affiliates of MFGUK is $54,071,512, made up as follows: (a) $28,071,752 from affiliate A; (b) $18,547,369 from affiliate B; and (c) $7,452,391 from affiliate C. 32 Of these sums, $7,110,190 has already been received from affiliate C and an agreement in principle has been reached with affiliate A and affiliate B to set off an amount of $14,411,324 of client money claims due to those entities against the receivables due from them. 2 $43,921,887 less $9,439, EUW ACTIVE:\ \4\

8 33 The Settlement assumes that these sums will be set off, such that the total face v alue of the affiliate receivables still to be collected by MFGUK from the affiliates is $32,549, There are, however, risks and costs associated with the recovery of the receivables., including: (a) the risk of a less than full dividend being paid from certain of the affiliates' insolvent estates, because the dividend level is dependent upon certain litigation in those jurisdictions, the outcome of which is uncertain (for example, in one jurisdiction, it remains an open question whether a shortfall in client money recoveries can be claimed against the general estate); and (b) the risk of delay before final distributions can be made from those estates. 35 I agreed (on behalf of the CMP Administrator) to give credit to the General Estate Administrator in light of those risks and costs associated with the recovery of the full value of the affiliate receivables and therefore agreed a discount in the sum of $2,684,336 (approximately 8.75% of the total face value of the receivables). This provided a net sum payable by the General Estate of $29,864, I am satisfied that the CMP benefits from this aspect of the Settlement because it is now certain of recovering $29,864,662 and avoids: (a) the risk of receiving less than this amount in the event of a lower than anticipated dividend being paid in the insolvency of the affiliates; (b) delay in recovery; and (c) incurring further recovery costs. (iii) ACKNOWLEDGMENT OF SUMS OWING BY THE CMP TO THE GENERAL ESTATE 37 The CMP acknowledged, as part of the Settlement, that it owes to the General Estate a total of $12,842,406. I am satisfied that the CMP will be required to refund this amount to the General Estate because the CMP's liabilities will be discharged by this amount as part of an overall settlement reached with two clients in which an amount owed by one of those parties to the General Estate will also be extinguished. 38 The credits given to the General Estate in relation to the affiliate receivables (see above) and this further sum assumes that the necessary netting and / or settlement with the relevant third parties will be achieved by the time that payment under the settlement is to be made to the CMP. In the event there is no such netting or settlement, or a netting in a lesser amount, the General Estate will make a payment to the CMP to put the estates in the position they would have been in if no credit or a reduced credit (as appropriate) had been taken into account in the Settlement. 3 (iv) DIVISION OF COSTS 39 MFGUK's post-administration costs have been divided between the General Estate and the CMP by an apportionment based on the relative size of the assets in the two estates, agreed after consultation with the committee of creditors and clients. That apportionment requires the CMP to fund approximately 30% of MFGUK's total costs, with the General Estate funding the remaining approximate 70%. 3 See page 13 of the TFO. S EUW ACTIVE:\ \4\

9 40 It has been agreed that this division of costs will continue from 1 May 2014 until the anticipated closure of the CMP in November The anticipated costs for this period are $18,442, % of that figure is $6,815,535 and, as part of the proposed Settlement, it has been agreed that this sum is payable by the CMP to the General Estate as costs properly attributable to the distribution of client money. 41 I am satisfied that this payment is justified. A significant amount of work between now and November 2014 will be incurred on behalf of the CMP, for example in agreeing the remainder of claims against the CMP and making a final distribution to all clients. Moreover, the CMP benefits from the fact that even if the closure of the CMP is delayed beyond the end of November 2014, its contribution to overall costs is fixed at $6,815,535. D SETTLEMENT BENEFITS 42 The financial impact of the Settlement on the CMP and the General Estate is summarised at page 6 of the IFO. It compares the likely return for clients and creditors in a Settlement and non-settlement scenario. 43 The precise benefit to the CMP from entering into the Settlement varies between the different aspects of the Settlement. 44 Thus, in relation to the sale of the affiliate receivables, the CMP benefits because although it is receiving less than the total face value of the receivables, it is avoiding the risks of recovering less, and avoiding cost and delay, arising from difficulties associated with the insolvencies of the affiliates. 45 In relation to the credit to be given to the General Estate arising from the netting of a CMP liability against a General Estate asset, there is no element of compromise as such; the CMP is merely acknowledging a debt which it undoubtedly owes to the General Estate. 46 In relation to costs, the Settlement involves less of a compromise of rights, and instead the continuation of a previously agreed division of costs between the two estates until closure of the CMP. Additionally, the CMP benefits from the certainty that the amount to be paid as its share of the future costs will not increase even if the closure of the CMP is extended beyond November The principal element of compromise within the Settlement relates to the claims for breach of trust against the General Estate. 48 As I mention above, on behalf of the CMP I have in agreeing to accept less than the full amount of its claims in this respect relied on legal advice as to the merits of those claims. I do not intend to waive privilege in the legal advice I have received. However, as a result of that advice I understand that the determination of the quantum 4Costs incurred up to 1 May 2014 (the date of the Order) will be finalised and paid separate to the proposed Settlement on the basis of this 30/70 division. 9 EU W _ACT IV E: \4\

10 of the breach of trust claim raises novel issues that would require to be litigated, and that there is at least a risk of recovering substantially less than the amount which is agreed as part of the Settlement. 49 In addition, I have taken into account a number of factors which demonstrate that the Settlement is one which ought to be entered into on behalf of the CMP irrespective of the strength of the claims. I set out those factors in the following sub-paragraphs: (a) (b) (e) (d) (e) the cost of resolving the legal issues between the estates would be substantial. Irrespective of which estate wins the legal debate, the burden of those costs would fall on all clients and creditors to some extent. In particular, even if the bulk of the costs were borne by the General Estate, the level of dividend payable to clients in respect of their Parallel Claims and Shortfall Claims against the General Estate would be reduced; the Administrators estimate that there would, at best, be an approximate two to three years' delay before these issues could be resolved, including the likelihood of appeals given the novelty of the issues raised. In that time the CMP would remain open. As such, it is likely that it would be required to bear, as it has done to date, a proportion of the overall administrative costs of the two estates (much of which cannot be separately apportioned to the General Estate or the CMP). Those overall costs are difficult to estimate with certainty, but are anticipated (following inclusion of a substantial contingency for uncertainties) to be in region of 23.5 million, of which the CMP's share would be in the region of 6.9 million (or approximately $11 million) as per schedule 3 of the General Estate's position paper (page [89}), These costs would reduce the level of distribution to clients; the discount which the CMP has given to the General Estate, in relation to its claims for breach of trust, is approximately $12.9 million (being the difference between its maximum claim of $43.9 million and the amount agreed to be paid in relation to the breach of trust claims of $31 million). As noted above, there is a significant saving in costs which would otherwise have been borne by the CMP, merely from the fact of its closure being delayed for a further two to three year period while the issues are litigated. That saving substantially off-sets the settlement discount given in relation to the breach of trust claim, and alone demonstrates the merit in settling the breach of trust claims; as noted above, the agreed settlement amount of the breach of trust claim will be paid in full, notwithstanding that the CMP's personal claim for breach of trust would only rank for payment of a dividend in the General Estate, which may be at a rate less than 100p/ ; and finally, the accelerated final distribution of client money and closure of the CMP will also be a substantial benefit to all clients because it will facilitate earlier payment not only of distributions from the CMP but also of further distributions to clients in respect of their claims against the General Estate. 10 EUW ACTIVE:\ \4\

11 E IMPACT OF THE SETTLEMENT ON DECREASED CLIENTS 50 All clients, save for some Decreased Clients 5, have parallel claims against the General Estate so that, to the extent they are not paid in full from the CMP, they can recover the difference from the General Estate. Given the anticipated high level of dividend from the General Estate, the Settlement has a minimal (if any) impact on most clients, since they are likely to recover substantially the full amount of their claim from one estate or the other, irrespective of the precise level at which the breach of trust claim is compromised. 51 Decreased Clients do not have Parallel Claims where the level of distribution from the CMP is such that they have already received the full value of their provable claim, based on the value of their claim as at the date of the close-out of their positions. 52 As noted above, a result of the Settlement is that the General Estate's payment to the CMP in respect of its breach o f trust would eliminate the Shortfall Claims of Decreased Clients, 6 who will therefore not be able to recover from the General Estate that part of the shortfall in payment on their client money entitlement which arose from MFGUK's breach of trust. 53 Decreased Clients will, however, receive an increased payment from the CMP as a result of the recovery by the CMP of compensation from the General Estate in respect of that same breach of trust. Even if the CMP litigated, and ultimately won in full, the breach of trust claim, for the reasons set out above it is unlikely that the CMP would be in a materially (if at all) better position than under the settlement once the costs of litigation and administrative costs of keeping the CMP open for the duration of the litigation were taken into account. It follows that the Decreased Clients would be unlikely to have had a significantly (if any) better rate of distribution from the CMP even if the litigation had been pursued and won. 54 If there had been no settlement of the breach of trust claim, then each Decreased Client could have separately claimed its Shortfall Claim as pa rt of its proof of debt against the General. Estate. That would have imposed a substantial costs burden upon the Decreased Clients, as well as the risk of even greater costs in the event that the Decreased Clients failed to establish all or part of their Shortfall Claim (e.g. because the General Estate was successful in showing that all or part of the shortfall claimed by those clients was not caused by MFGUK's breach of trust). In addition, there would have been a long delay before any Decreased Clients had seen any recovery in respect of its Shortfall Claim. F CONSULTATION WITH CLIENTS 55 Paragraphs 43 to 50 of Richard Heis' 14th witness statement and section (d) of Richard Heis' 15th witness statement detail the steps that the Administrators have taken to consult with clients. I agree with these statements. s As defined in the Shortfall Order. 6 As defined in the Shortfall Order. 11 EUW ACTIVE:\ \

12 56 In addition to those steps detailed at paragraph 55 above, on 29 May 2014 the Administrators sent a letter to clients and creditors which notified them that: (a) a Settlement had been agreed in principle; and (b) MFGUK's progress report for the period 31 October 2013 to 30 April 2014 (tab [12]) was available to view on KPMG's website, pages 5, 16 and 17 of which gave an overview of the Settlement. 57 On 4 June 2014, legal representatives for the General Estate Administrator and the CMP Administrator held a call with representatives of a Decreased Client with no Parallel Claim or other claim into the General Estate (a "Purely Decreased Client") in order to discuss the impact of the Settlement on them. No objection to the Settlement has been raised by that client. In addition, on 12 June 2014 I spoke to a representative of Attestor Value Master Fund LP ("Attestor"), who had represented Decreased Clients in the Shortfall Application, and who indicated that Attestor was content with the Settlement. 58 Finally, on 5 June 2014, the General Estate Administrator ed the Notice and IFO (tabs [14] and [15]) to all persons who have claims, or have asserted claims, as clients or creditors to inform them that the Settlement had been agreed. 59 In summary, the CMP Administrator's team has explained the Settlement to the largest Decreased Client by value, a Purely Decreased Client, an Increased Client and a number of other clients with a variety of different interests in the CMP and General Estate. G FCA MODIFICATION APPLICATION 60 The background to this issue is set out at paragraphs 29 to 34 of Richard Heis' 14th witness statement. 61 On 7 April 2014 the Administrators applied to the FCA for a modification to the terms of CASS 7A.2.4R which would enable MFGUK to cease to treat untraced clients as having claims on the CMP (the "Modification Application"). Untraced clients who then received no distributions from the CMP would, subject to the application of the terms of the Shortfall Order, have a Parallel Claim and/or Shortfall Claim into the General Estate. 62 On 18 June 2014, the FCA provided its written approval of the Modification Application (tab [19]). The effect of the FCA's approval is to modify the terms of the trust on which MFGUK is holding client money such that, in making the final distribution of client money, MFGUK can make the distribution "without regard to the client money entitlement of a client that has not submitted a client money proof but is shown in the firm's records (as at the time of that distribution) as having a client money entitlement 1.4". 63 In order to facilitate such a final distribution the Administrators will, at the Substantive Hearing on 3 July 2014, seek the Court's permission pursuant to Rule 11(2) of the Client Money Distribution Procedure to release the provisions for the Untraced clients in the CMP and to use the proceeds in the final distribution of client money to those clients who have agreed client money claims. l 2 E U W _ACT I V E:\ \

13 H CLAIMED BUT NOT PAID CLIENT MONEY 64 The Client Money Distribution Procedure and the Modification Application address `allocated but unclaimed' clients, but do not address clients who have claimed client money but declined to collect their dividends. 65 A minor issue has arisen from the fact that about 35 clients, with aggregate claims of about $83,000.00' (the "claimed but not paid client money"), have lodged client money claims but have either not completed KYC cheeks or otherwise have not made it possible for the Administrators to pay them money. 66 The Administrators have set out the steps they have taken to attempt to contact these clients at tab [20]. Despite those attempts, there has been no response from these clients and the Administrators do not expect to be able to receive the necessary information and or confirmations to enable them to complete payment. 67 The Administrators have contacted the Insolvency Service (the "IS") in order to confirm whether it would receive and hold the claimed but not paid client money into the IS account with the Bank of England (the "IS Account"). 68 The IS has confirmed that it would be able to do so, subject to a direction to do so from the Court. The written exchanges between the Administrators' solicitors, Weil, Gotshal & Manges, and the IS are at tabs [ 17] and [ 18]. The Court will accordingly be requested, pursuant to the request for further or other relief in the Application, to direct that the Administrators may pay this sum into the IS Account. 69 If the Court makes the order sought, the Administrators propose paying the claimed but not paid client money into the IS Account as follows: (a) (b) on payment of the final dividend from the CMP, the Administrators will pay the claimed but not paid client money to the Insolvency Service Account in accordance with the Insolvency Service Regulations 1994 as amended by Insolvency (Amendment) Regulations 2008 (the "IS Regulations") and, at the same time, provide information to the IS about the claimed but not paid client money and those individuals entitled to it using Form CAU 104 (tab [21]). A fee of will be payable, and it is proposed that this fee is deducted from the total value of claimed but not paid client money; and if a client makes a valid claim to his claimed but not paid client money after MFGUK has been dissolved, the client will need to make a claim to the IS providing written evidence of his identity, address and entitlement. 7 The Administrators expect the client with the largest claim of $23, to provide the information necessary to enable his claim to be paid before the Substantive Hearing on 3 July EUW ACTIVE:\ \

14 70 I believe that the facts stated in this witness statement are true. Signed Richard Faulkner 19 June 2014 EU W_ACTIVE:\3B \4\

15 CMP Resolution Application No 9527 of 2011 IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION COMPANIES COURT IN THE MATTER OF MF GLOBAL UK LIMITED (in special administration) AND IN THE MATTER OF THE INVESTMENT BANK SPECIAL ADMINISTRATION REGULATIONS 2011 SECOND WITNESS STATEMENT OF RICHARD CHARLES FAULKNER Solicitors for the Administrators Well Gotshal & Manges 110 Fetter Lane London EC4A lay Tel: Fax: Ref: PB/LB/TL/ EUW ACTIVE:\ \4\M238,0003