MF Global Customers Finally See Funds Returned

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Customers who deposited their assets at the brokerage firm MF Global Holdings Ltd (OTCMKTS:MFGLQ) will receive all their money back after it was initially “lost.” After a nearly half year battle, the majority of the money was “found” in 2012, much of it at JPMorgan Chase & Co. (NYSE:JPM).

A trade that ultimately was a winner but starved the company of cash

MF Global Holdings Ltd (OTCMKTS:MFGLQ) was operated by former New Jersey US Senator and Governor Jon Corzine, who also was briefly president of Goldman Sachs Group Inc (NYSE:GS).

Corzine made a highly leveraged bet on sovereign debt at a time when the credibility of government debt was being called into question.  While the trade would have been highly successful if it was held to maturity, the liquidity demands of the trade were at issue.  When MF Global was in the middle of a cash crunch, MF Global customer assets are now known to have been used to satisfy ongoing business operations, violating the cardinal rule in the brokerage business and calling into question the security of funds in a segregated brokerage account.

In the past, cases that damaged the credibility of markets or involved market integrity received the highest priority to set a regulatory example for deterrence.  The issue has been raised that the actions of MF Global executives were so blatantly illegal — transferring customer assets to cover firm expenses after apparently receiving numerous warnings — that the issue could scar the industry.  For customers having their funds finally returned is some measure of justice, but questions remain.

Why did the “investigation” take so long to “find” only a handful of asset transfers?

The “search” for MF Global Holdings Ltd (OTCMKTS:MFGLQ)’s missing money was odd.  While official sources had informed their press contacts the money had simply “vaporized,” it was known at the time that only a handful of asset transfers mattered and they all went to one location.

“Official” sources were also hard at work informing the press that the case was cold, and not to expect criminal charges – all before the primary suspects had even been questioned.

Disgrace

“It’s a disgrace that the DoJ has abdicated its responsibility to prosecute blatant violations of the Commodity Exchange Act which are felonies punishable by 10 years in prison,” blasted James Koutoulas, founder of the Customer Commodity Collation and CEO of Typhon, a managed futures fund trading primarily in agricultural markets. Koutoulas was among a small group of market participants who banded together to pressure official sources to enforce existing rules and laws.  Ultimately more than 26,000 MF Global customers impacted by the event will be made whole.

US Bankruptcy Trustee James Giddens, who announced the return of customer assets, had previously expressed surprise that all MF Global Holdings Ltd (OTCMKTS:MFGLQ) customer assets would be returned to customers.



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com