There’s no question that after the 1-2 punch of scandals involving PFG and MF Global, the managed futures community took it upon themselves to advocate for changes. Shortly after the MF Global incident, the Customer Commodity Coalition was formed to conceptualize the frustrations of the customers into visible results. Months later, the PFG scandal went down, only adding fuel to the fire of the CCC. It only seems fitting that on the 1 Year Anniversary of the PFG scandal, we sit down with friend and colleague, James Koutoulas of the CCC and chat.
Attain: James, thanks for spending the time with us today. First off, you are better known for the fight again Corzine and JP Morgan, but what have you and the CCC done for PFG victims?
James: “We’ve done all we can for PFG clients, but unfortunately PFG was a tougher case to be an advocate, because the money was stolen, not being held hostage by a bank. In the case of MF Global, we were able to get in there raise hell, and expedite things by a huge degree both in terms of the amounts released and the time of the release. In the case of PFG, we came in their aggressively and I think were able to expedite the first distribution by a couple of weeks. That helps a little, but the fact of the matter is you’ve got a $200 Million shortfall with no place to take it from, no bank holding it as collateral or margin. The money was just plain stolen, it’s not like we could claw it back from a bank like MF Global.”
Attain: Well there is a bank involved now, after the CFTC lawsuit against US Bank.
James: Absolutely. We think that the CFTC lawsuit against US bank could be a beneficial long term solution to customers getting back their money. Their complaint is pretty scathing, and I thought the CFTC did a great job laying out the story. However, this lawsuit could go on for years and clients will only have sight of the money after years of litigation. But customers have a real hope of getting a majority of this back if the CFTC is victorious.
Attain: What do you see as the CFTC’s odds of success?
James: The CFTC seems to have a pretty good track record, so good actually that I would rather see them lose more cases as that would mean they are taking more risk in pursuing wronging. But this case seems like a high likelihood of success to me, and knowing some of the people over at the CFTC, if they’re going to put in a complaint, it’s a pretty good indication they’ve got the evidence to back it up. Of course, I’m not privy to what evidence they do have, but U.S. Bank could be on the hook for the full $200 Million here.
Attain: We can’t help but notice that $200 Million is only about 1% of US Bank Corp’s annual revenues last year, so here’s hoping someone over there feels bad for what happened and just decides to take the minimal hit to the balance sheet.
James: Don’t hold your breath waiting for a banker to feel bad or part with their capital.
Attain: Moving one – what do you see as important changes for the better, since PFG happened?
James: PFG was a pretty big wake up call for the industry. The NFA has already required audit managers to get certified fraud examiner training. And while it is slow, you’re starting to see a cultural shift at the NFA to be preemptive instead of reactive when it comes to fraud. You’ve got the online confirmation of bank accounts which I think is a big step. You got NFA looking at ways to implement better controls at commodity pools, to make sure Commodity Pool Operators can’t pull the same scam. They are taking numerous steps to tighten the systems up. And what a lot of people forget is the system was very good to begin with. There was just one glaring unbelievable ball dropping which has set off these new initiatives.
Attain: What other measures are you working on to improve customer protections?
James: We’re (the CCC) working with congress to draft legislation to create a subordination provision in the Commodity Exchange Act, where all the creditors to FCM’s would have to subordinate their claims below segregated account holders. That would mean big banks like JP Morgan would have no right to offset against money due to customers. If we could get that passed, that would help speed any future bankruptcy distributions to customers because the bankruptcy trustee wouldn’t have to reserve assets against all the other creditor claims.
Attain: What’s the CCC still doing for futures customers in the meantime?
James: Now that we’re out of the crisis mode where we seemed to be in court every day, we’re trying to establish the CCC as a group that is here to stay, filling the void for customer advocacy for futures customers. The big players in the industry have their voice in the Futures Industry Association (FIA) and CME lobbyists, and more – but there really wasn’t a voice dedicated to the end customer until the CCC. We’ve created an advisory board and are laying out plans such as a membership model to support our continued efforts”
Attain: What about the NFA or FIA?
James: We like FIA , and we work with FIA a lot, but at the end of the end who’s really looking out for the customer? The NFA is there, but their different because goal is to combat fraud, and fight that aren’t compliant to the rules. However, the CCC is in place to actually go out and advocate for the customer, and to get laws passed. I think it’s good to have a group outside the regulator. It doesn’t take the CCC nine months of board meetings to make a proposal.
Attain: I know you won’t leave until we ask about Corzine – so let’s have it:
James: Simply, Corzine needs to go to jail. The laws we had two years ago were pretty damn good. You have a blanket provision of 10 years in prison and a felony charge for violating the commodity exchange act. That brings the issue back to enforcing the law. Gensler went before congress claiming there simply wasn’t enough money in the budget to fight rule breakers, and therefore they needed to shelve some enforcement actions. The next day, they pass over 400 pages of new rules. What’s the point of passing all these new rules, if you can’t enforce the existing ones? I’m in favor of having simple clear concise clear rules, where if you break them you have to enforce them. Otherwise, there’s no point in having them.
Attain: Do you think the public accountability of Corzine in jail would go a long way toward discouraging future frauds?
James: Absolutely, if people see the ex-Governor (Corzine) and friend of the president break the law and put him in jail, then I believe others are going to think twice about it. There’s a lot of money in this industry, and if big players with the money are left thinking – all I got to do to get out of jail is donate money to the President – then people won’t be afraid of breaking the law and injuring customers.
Attain: Finally, your compatriot John Roe would be upset if we didn’t ask about futures account Insurance. Where is the CCC on that initiative?
James: Mr. Roe put a very comprehensive plan together, and the FIA and NFA noticed and basically re-purposed it toward their study that’s been going on for what seems like forever. It’s not done, but should be around August of this year. But bottom line is we’ve been working on it a great deal, and the insurance companies and industry people we’ve been meeting with feel it could be put into place as an opt in plan, and be cost effective at the same time. So why not have it available to customers who want it There’s overwhelming support from customers to have this option available.
Attain: Thanks James, we’ll see you around town in those infamous white shoes.
Mr. Koutoulas and the CCC has emerged as a legit organization fighting for customers in the futures industry; working tirelessly (and essentially for free) to bring changes to the NFA, the Commodity Exchange Act, and the industry through initiatives such as futures account insurance. Here’s a link to the CCC membership page if you would like to become a member and help make impactful changes to the customer side of the futures industry.