MF Global

While some MF Global customers are slowly getting their money back, there appears to be a divide. According to The Wall Street Journal,  not all customers are created equal.

Andrew McCormick, a 27-old Seattle-based commodity-fund manager, had about $480,000 with MF Global at the time of its October implosion. His money was divided between U.S. and non-U.S. investments.

He has reclaimed $175,000 (or 72 percent) from his U.S. holdings but as for the balance, he said, “I haven’t seen a penny” from an account used to trade foreign contracts; it is currently frozen.

McCormick isn’t alone: approximately 1,700 MF Global clients with $700 million in combined funds face the same battle. With non-U.S. investments, there’s nothing to see from the investments. These customers represent a tiny fraction of MF Global’s U.S. brokerage unit that included 36,000 clients when the firm went down; however, they comprise almost half of the estimated $1.6 billion in missing funds.

How does this happen? It’s the difference been investors placing their money into non-U.S. holdings vs U.S. holdings; there’s a disadvantage if their brokerage firm goes belly up.

James Giddens, a trustee representing the U.S. brokerage unit of MF Global, feels the investors’ pain and says they should be allowed to gain control of $700 million now stuck outside the U.S. at a different unit overseen by auditing firm KPMG LLP. KPMG believes it can  right to disburse the money under U.K. law.

Kent Jarrell, a spokesman for Giddens said, “We certainly understand the frustration of customers. We’re doing everything we can and are pushing for an expedited process with the U.K. courts.”

Good luck: last week, the two sides began court proceedings in the U.K. legal system.

Regulatory Challenges

Obtaining the missing money isn’t the only item on the to-do list. Investigators are reviewing the regulatory discrepancies that allowed MF Global to utilize an “alternative” calculation when figuring out the amount of money to put aside for the protection of customers investing outside the U.S., according to The Wall Street Journal.

For U.S. accounts, MF Global had a requirement to segregate every dollar of customer money while for its non-U.S. accounts, it would segregate less: sometimes only 50 cents of each $1 of customer money. The balance could be used by MF Global for other investments.

But here’s what investors are looking at: the loophole that enabled MF Global to look healthier than it actually was prior to its bankruptcy. By using the aforementioned calculation for the non-U.S. accounts, the company held between $800 million and $1 billion less for the accounts during its last few days.

This calculation was legally acceptable but MF Global stood in the minority of brokerage firms to utilize it. The company transitioned  to the calculation after it gained some assets from Refco Inc. back in the middle of the 2000’s. Under former Chairman and Chief Executive Jon S. Corzine, the firm continued using it but it also utilized a conservative method.

CFTC Questions Calculations

After  the MF Global bankruptcy, a Commodity Futures Trading Commission official publicly questioned whether foreign-customer accounts and U.S. customers accounts should be calculated the same way. Change is supported by regulators and industry officials but when this will happen by the CFTC remains to be seen.

But last Friday, a CFTC official say that “substantial changes” to customer-account rules are coming in an effort for improved  protection of funds.

This just adds to the confusion for non-U.S. customers who held funds with MF Global from outside the U.S.  They were unaware that the firm had a right to have their assets kept separate from the firm’s own investments.

Customers with accounts segregated under U.K. law have captured about 26 cents on the dollar returned to them. For the customers whose funds hadn’t been segregated by MF Global and others, they’re termed “general creditors;” they haven’t received anything.

In April, KPMG said  it was looking at about 1,200 claims from clients outside the U.S.; they should have had their funds segregated but  they were classified as “nonsegregated” in the U.K. computer system.

Clients contacted MF Global prior to bankruptcy to confirm their accounts had been segregated. The response was the assets would be segregated, but that wasn’t always the case.

Hope exists for the return of funds from non-U.S. accounts. Giddens would like to give 10 cents for each $1 in accounts similar to  McCormick’s, which will come from money obtained by the trustee. For U.S. accounts, another round of payments is coming and will likely increase to 80 cents on the dollar vs. the 72 cents now.