MF Global Clients Fear for What They Left
About 150,000 accounts — from investors big and small — were left in limbo in the firm’s rapid demise. Regulators are in the midst of trying to transfer about a third of the accounts to other commodities brokers and securities firms. That usually takes place in a matter of days or weeks.
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By PAUL SULLIVAN
04 November 2011
Igor Gavrylov of Kiev, Ukraine, had about $100,000 at MF Global when it collapsed on Monday, although he managed to pull out $150,000 last week.
James Koutoulas, chief executive of Typhon Capital Management in Chicago, said 85 percent of his clients’ money was tied up in MF Global, about $55 million.
About 150,000 accounts — from investors big and small — were left in limbo in the firm’s rapid demise. Regulators are in the midst of trying to transfer about a third of the accounts to other commodities brokers and securities firms. That usually takes place in a matter of days or weeks.
But, as in any bankruptcy filing, there are complications. Regulators say they are looking for roughly $600 million in client funds that they believe are missing. Before clients can get full access to their funds, the regulators are first going to have to determine where that money is and, then, seek to recover it.
Also unresolved is whether the money in some clients’ accounts was mixed in with the firm’s money, as regulators have contended. That could lead to further litigation over the ownership of money in the accounts.
And then there is the fact that most of the firm’s investments were not in securities, where the dollar value of an investment is clear, but in commodities, where investors put up what is essentially a down payment on what a commodity will be worth on a future date. Sorting out who is owed what will also take time.
While MF Global may not have been a household name, it was respected in the commodities and futures markets. It provided the essential service of holding money and clearing trades.
The firm’s brand name was why smaller clients said they did not worry whether their money would be safe. Mark Tucker, who lives in the English seaside village of West Runton, population 1,633, manages rental properties by day. But he said he had been trading options for the last 18 years and had $50,000 with MF Global (and another $50,000 with another clearinghouse).
He has not had access to his account since Monday and was worried about some of the options he bought before the firm’s bankruptcy filing. They are bets that the prices of crude oil, coffee and sugar will fall. “It’s not a comfortable position,” he said. “By definition, the potential for losses on short options is limitless.”
Like many clients, he is trying to separate rumor from reality. He had heard that his account would be moved to another broker. He said his broker had been “trying to reassure me the only reason it hasn’t happened is they have 50,000 of these accounts and it should move over in the next 24 to 48 hours, but that’s what they told me 24 to 48 hours ago.”
So do clients of other commodities clearinghouses need to worry about the safety of their money?
SITUATION James W. Giddens, a partner at Hughes Hubbard & Reed and the court-appointed trustee in the case, said his group was working closely with the Commodity Futures Trading Commission and the Securities Investor Protection Corporation to transfer accounts to other commodity brokers. He said clients would be notified “if and when their accounts have been transferred.”
The court has approved the transfer of 50,000 commodities accounts to other brokers because those are the easiest to move and the most likely to be picked up. A spokesman for the trustee said that the selection of which accounts would be moved was led by the CME Group, the giant exchange where MF Global did business. On Friday, the CME Group announced that 15,000 accounts had been moved.
But even the clients whose accounts are transferred will not get all their money back immediately. Given that some of the funds involved are contested, clients will have access to only about two-thirds of their accounts’ value. This is a common practice to ensure that there is some money left to pay claims against MF Global.
“If we’re able to find a brokerage firm that is ready and willing and able to take the accounts, the accounts can be transferred quickly,” he said. “The precedent is Lehman Brothers, where we were able to transfer the accounts within seven to 10 days.”
He added, “Failing that, the process can take a few months.”
SIPC offers protection on securities accounts up to $500,000, though it could take years for claims to be paid. There is no equivalent backstop for commodities accounts.
Mr. Gavrylov, chief financial officer of a firm that trades actual commodities in Ukraine, said he had used MF Global for his personal commodity trading, in part, because he felt his money was safe there. “I thought this might happen to me here in Ukraine or in Russia, where the regulation is quite weak,” he said. “But I never thought this could happen with a big broker like MF Global.”
Some bigger money managers said they were confident that they would eventually get their money back, but they have the financial wherewithal to wait years and remain in business.
An investment adviser in Chicago who was not authorized to speak to the media said his firm, which manages about $400 million, had had over $5 million at MF Global but had been able to transfer most of it out last week.
“We got out because of word of mouth only,” he said. “No one knew anything specific. They just knew the run was on and we got out.”
PRECEDENT Jim Feltman, senior managing director at Mesirow Financial Consulting, said the collapse of MF Global may proceed along the lines of the 2007 bankruptcy of the Sentinel Management Group. Sentinel presented itself as a cash management firm that would keep money safe for commodity traders. But the company was using those funds as collateral to borrow money and invest in riskier securities. When those bets failed, the firm froze $1.6 billion in customer assets.
“In the Sentinel case, some funds were released quickly, but others were subject to cross claims and litigation,” said Mr. Feltman, who worked on the case for the court-appointed trustee. Four years later, he said, many people still do not have their money back.
He noted that recovering clients’ money was not as easy as presenting their account statement when client money may have been mixed in with the firm’s capital.
“If you think you have $1 million of ABC securities in your account, it may turn out that there are $1 million of those securities in your account. But it could also turn out that that $1 million of securities weren’t in your account the day before but in someone else’s account,” Mr. Feltman said. “What’s going on right now is the sorting out that gives rise to ownership.”
Sean O’Malley, a partner in the capital markets division at the law firm White & Case, said that protections were not as strong as investors thought when something went wrong. While there has been much talk about segregating assets, he said, assets are really held in one big pool, and it is only through accounting that they are assigned to a particular account.
“You’re really relying on the operational strength and integrity of the broker dealer,” he said. “So if the back office at MF Global isn’t properly segregating the assets, I don’t know if the customers can do anything about it.”
“The situation is bad,” he said. The regulators, he added, “should put up a temporary fund and deal with the accounting later. They need to make sure that clients feel safe in segregated accounts.”
Michael Shore, a spokesman for the CME Group, would not comment on the feasibility of doing this.
A spokesman for the Commodity Futures Trading Commission would not comment on the issue of the segregated accounts and referred all inquiries to the MF Global page on its Web site.
One small hedge fund has essentially gone out of business as a result of MF Global’s collapse. A woman who until this week worked as the office administrator at the hedge fund said all of the fund’s $30 million was at MF Global.
“By Tuesday, everyone was just staring at screens,” said the woman, who wanted to be identified only as Sandy L. for fear of upsetting her former boss. “He said, ‘We can’t access money; I can’t even give you a final pay check.’ “
She was let go on Thursday. “Some of the traders are sticking it out,” she said. “Everyone we call at MF Global picks up the phone. They answer, but they have nothing to say.”