A lawyer for creditors of the brokerage’s bankrupt parent company uses an “erroneous interpretation of the law” that would privilege creditors over customers of the failed operating unit, MF Global Inc., the CFTC said in a letter filed in Manhattan bankruptcy court yesterday. Customers are seeking the return of an estimated $1.2 billion in funds missing from segregated accounts since the futures broker failed on Oct.31.

“The trustee shall distribute customer property ratably to customers on the basis and to the extent of such customers’ allowed net equity claims, and in priority to all other claims,” Robert Schwartz, a lawyer for the commodities regulator wrote, citing CFTC regulations.

MF Global Holdings, once run by former New Jersey Governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, filed the eighth-largest U.S. bankruptcy after a wrong-way $6.3 billion trade on its own behalf on bonds of some of Europe’s most indebted nations.

Customer Distributions

While it filed for Chapter 11 bankruptcy to apportion returns to creditors, including bondholders and lenders such as JPMorgan Chase & Co., a trustee appointed under the Securities Investor Protection Act, James Giddens, is overseeing distributions to customers at MF Global Inc.

Martin Bienenstock, a lawyer for a committee of unsecured creditors of MF Global Holdings, had said in a letter to Judge Martin Glenn on Dec. 21 that rules governing the commodity industry conflict with the bankruptcy code, and “move general property into customer property beyond the extent” permitted by bankruptcy law.

Bienenstock also said that some rules regulating commodities exchanges wouldn’t apply to MF Global Inc. because the brokerage doesn’t qualify as a Chapter 7 debtor under bankruptcy law.

The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).