In the fall of 2011, commodity brokerage MF Global went belly up. The firm’s demise was remarkable because some $1.6 billion of segregated customer funds – much provided by farmers and ranchers – went missing after being illegally accessed as the brokerage brass attempted to ameliorate bad investments.
Close to three years later, MF Global executives -- including Jon Corzine, a former New Jersey senator and governor – are now in bankruptcy court.
How have the firm’s customers and creditors fared?
In late May, Delta Farm Press spoke with John Roe, principal at BTR Trading Group, and co-founder of the Commodity Customer Coalition, a group that has worked to ensure MF Global customers are made whole and needed trading reforms put in place.
Where do things stand with the MFG case? Have customers been made whole?
“The customers are in the process of being made whole. The last objection regarding that was overruled and the trustee has begun the process of issuing the final true-up payments to 100 percent for all FCM (futures commission merchants) customers and all classes.
“So, over the course of the next several months, distribution will be on a rolling basis and folks should see checks in the mail. By the end of the second (business) quarter, I think you’ll see all MFG customers fully recover the assets in their accounts.”
What about creditors?
“Several months back, the trustees of the holding company went through the process of a liquidation agreement. In that, they established reasons for recoveries for each class of creditor. We know, ball park, what those figures will be. The remaining classes of customers will receive rolling distributions as those charged with liquidation goes through those accounts. We anticipate that will take a number of years.
“If you look through the holding company’s liquidation plan you’ll see a wide range between the classes of creditors. Some of the quotes are wide enough to drive a truck through – 35 to 75 percent. Some are a bit tighter…
“There are also additional recoveries that remain available in the rest of the litigation that’s ongoing against Mr. Corzine, et al. So, you have a class action lawsuit for the customers that have been consolidated with a number of other class action suits. You also have the CFTC suit against Corzine. Those could raise recoveries for both customers and creditors.
“It will be a very long time before we see the end of this. Last year, as an example, a friend of mine got a check from a bankruptcy that started in 2005.
“The MFG customers got the best of the deal. We were able to push the needle and speed up the process. They recovered 72 percent of their property three months after the bankruptcy. They were able to improve that to 100 percent a bit over two years following the bankruptcy. We’re very happy about that.”
A surprise to you that the customers were made whole?
“It would have been a travesty of justice if that hadn’t happened.
“Last December, I told Bloomberg the customers would get 100 percent. It was just a matter of time. Our entire goal was to shrink the usual seven year process.
“The reality is that the FCMs do not have an ownership interest in a customer’s account. That’s the customer’s money. The fact that MF Global -- depending on who you believe, through complete negligence or through malfeasance -- broke that wall down and took that money for something else is an enormous crime.
“Money doesn’t vaporize, it isn’t a volatile chemical that changes to a gas when exposed to air. It goes somewhere, to someone. I knew it was a matter of converting it back to customer funds. There were many pressures from many places not wanting to do that at the start. That included the trustee holding company that placed an enormous claim on the MFG customer property pool as means of litigation tactics.
“It doesn’t surprise me that the customers got their funds back. It surprises me the extent that people had to go to in order to pressure the people in power to do the right thing. The cost and length of bankruptcy also surprises me. It should have been much quicker and never should have been a situation where customer funds were withheld for so long.
“We’re now in the process of trying to change the regulations and statutes that can draw out bankruptcies. This should never happen again.”
What should our readers be calling their lawmakers demanding?
“A bill has come out of the House Agriculture Committee that would reauthorize the Commodity Future Trade Commission. That has a number of elements that would help with customer protection. We’re supportive of that bill but don’t believe it goes far enough.
“The key to protecting customers, in my mind, is making sure when there’s a bankruptcy that customer funds are sacrosanct. Those funds must not be used by an FCM for any purpose and cleared from litigation as soon as possible.”
“It’s very difficult to do that without going into the bankruptcy code and making changes. No one on Capitol Hill wants to get into that because the last time it was addressed every lobbyist flocked to Congress. It became a ridiculous process.
“We think there’s a way around that in the Commodities Exchange Act by subordinating the FCM’s claim to the customer pool. … That’s in draft bill form, floating around the Hill. We’re trying to get that put into place with the reauthorization bill. We’ll see what happens and we’re also working with the Senate.”
A warning that it could happen again…
“Right now, an MFG situation could happen again. If it did, the customers would be no better protected and their best bet for getting money back is through the bankruptcy process. That simply isn’t acceptable.
“Additionally, we’re also looking at an insurance fund – especially for farmers, ranchers, small hedgers and retail customers. Obviously, institutional customers, the big boys, don’t want that fund because it’s expensive and they don’t see the need for it. But the one sure way to make sure no one can steal a certain amount of your money is to have it insured. And there’s currently no product that even covers that.
“Your readers should talk to their congressmen about helping customers in bankruptcies and strengthening the protections afforded to customers in bankruptcy.”