The Headlines of the Alternative Space

Performance:

CTAs should not be written off – (COO Connect)

Man Group’s M&A Strategy May Boost Scale, Diversification – (Reuters)

Education:

The 1256 Contract explained – (Forbes)

Futures Trading on Tax Day – (Attain Capital)

Index Pulse – a new market blog with commentary, video and educational resources covering the futures and commodities markets every day. – (Marketwatch)

Regulation:

National Futures Association (NFA) Issues Notice Regarding Changes to Form PQR and Form PR – (National Law Review)

PFGBEST:

American Greed: An Exclusive Confession of a $200 million scam — (CNBC)

Wasendorf will get the attention he so desperately craved — (Futures Magazine)

AlphaMetrix:

It’s a Company, Not a Piggy Bank – (Courthouse News Service)

Futures and Miscellaneous:

Corn and Soybeans Off To Good Start – (Farm Futures)

Weekend Reads – September 6, 2013

Despite weaker than expected job growth, unemployment dipped slightly this week, matching levels last seen in December of 2008. However the news is not all good as the dip appears to have come from many Americans giving up on looking for a job altogether. Meanwhile, the Department of Labor also revised the June and July job growth numbers lower by a total of 74,000 jobs.

Traders have reacted positively amid optimism that the weaker than expected job growth will lead the Federal Reserve to once again delay its decision to begin tapering its stimulus program…so much for all that talk about rising interest rates.

  • Stocks May Move To The Upside Following Jobs Report – U.S. Commentary – (Nasdaq.com)
  • NonFarm Payroll & Taper & Fed, Oh, My! – (The Big Picture)

Also in trading news this week, China re-launched trade of its treasury bond futures, 18 years after banning it following a multi-billion-yuan trading scandal. The trading was halted in 1995 because of an illegal trading scandal, which led to multi-billion-yuan losses and bankruptcy of the nation’s largest brokerage. – (Economic Times)

Finally, the PFG bankruptcy has taken on a new twist after a judge ruled Friday that Russell Wasendorf Sr. can face questions from his son and US Bank – (Wall St. Journal)

Just for Fun

  • Company Offers Fantasy Football Insurance – (CBS)
  • Khan Academy: The future of education? (CBS News)
  • Man Captures The Moment He Was Struck By Lightning On Video (YouTube)
  • Elon Musk Shows Off His Crazy Iron Man-Inspired 3D Modeling Setup – (TechCrunch)
  • Bitcoin Mania Grips China (Bloomberg)

 

CFTC Catching the Minnow, Ignoring the Juicy Walleye

It’s full steam ahead for the CFTC, sending a CTA to prison for lying to customers. Yes you heard it right; the CFTC is holding someone accountable for wrongdoing in the industry. Upon reading the press release, we were shocked to gain knowledge that Josh Wallace of System Capital had misrepresented to clients the company’s wealth of prior experience in trading futures, accumulating $29 Million assets under management.

After an audit by the CFTC, they discovered there wasn’t much experience for Mr. Wallace to go by. CFTC went after Wallace to the full letter of the law, resulting with the quest to revoke registrations for Mr. Wallace and a 27 month prison sentence for committing criminal commodity fraud.

This is exactly what the CFTC should have their focus on.  In the last two months, the CFTC has filed charges against U.S. bank over the PFG Fraud, filing civil charges against Corzine in the MF Global scandal, and now throwing a CTA in prison for fraud.

While it only took them almost two years to get their act together on the two biggest scandals in the managed futures history, we are left scratching our heads as to how and why they were able to successfully convict a CTA for inventing a history of prior experience, and yet unable to find and build a criminal case again Corzine. If you were to ask anyone in the industry, it would not be difficult to discover evidence of how Corzine violated a portion of the Commodity Exchange Act. Yet it took federal investigators two years to announcement there will be no criminal charges against him?

Congrats, CFTC! We’re glad you caught this guy, and you pursued him. These instances are true attempts at restoring confidence in the system, because what’s the point of rules and regulations, if nobody is held accountable?  Now if only you could one up yourself, and reconsider criminal charges against Corzine…. We can only hope.

PFGBest One Year Later: Where’s my Money?

For those who had accounts at PFG – the overriding questions beyond what happened, what has changed, and all the politics and drama surrounding those items – is when am I going to get more of my money back, and how much of my money will I be getting back?

We provided our estimates of possible recovery amounts given varying circumstances either going for or against customers here (PFGBest Update: Recovery Scenarios/Percentages), and covered what exciting news the CFTC Suing US Bank was for the possibility of recovery is beyond that (the full missing amount of $200 million is only about 1% of US Bank’s annual revenue).  But there remains a lot of confusion on what the time-frames are for all of this. To tackle that, we talked with the PFG Bankruptcy trustee Ira Bodenstein recently and have summarized the conversation below:

1. The main delay in processing further customer distributions at this point is the verification of all of the claims which have been submitted. There were over 3 times the number of claims expected with many people submitting multiple claim forms, and the trustee is now going through the process of verifying the amounts, objecting to duplicates, and objecting to claims which are invalid.  His goal is to have the claim reconciliation done and a second distribution made before the end of the year.

2.  The forex lawsuit (the trustee says the forex funds were not required to be segregated and thus should go to the benefit of futures customers, the forex customers have filed suit crying foul) should not hold up a second distribution, meaning a third distribution would likely be made upon the successful outcome – for futures customers – of the lawsuit. The lawsuit itself is progressing at a snail’s pace, with discovery to be completed by Sept. 30, 2013 and trial dates to be set around that time. We expect this suit to last through this time next year.

3.  The trustee has met with the CFTC to discuss how their lawsuit against US Bank impacts the actions of the trustee, and following the CFTC suit requested and received an extension of the stay (delay) of the class action lawsuit through August of 2014. Interpretation – the class action lawsuit likely won’t go anywhere until the CFTC has finished their suit, and the CFTC suit is at the very least more than a full year away from any sort of resolution.

PFGBest One Year Later: a Chat with James Koutoulas

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.

PFGBest One Year Later: New Rules

We’re dedicating today to PFG coverage on the 1 year anniversary (what do you call an anniversary you don’t want – a noniversary?), and we’ll start with the thoughts of Jeff Malec, CEO and founding partner of Attain Capital who says:

“Without hesitation, the futures industry is much improved and much safer in terms of customer funds protection than it was one year ago. But beyond new rules and policies designed to protect customers, the real change has been in the attitude of those in the industry – who simply refuse to let something like PFG happen again. There are people fighting day in and day out for more protection, for criminal charges against those who violate those protections, and for pre-emptive measures to find fraud before it happens. It is those people who have made the industry a safer place.”

But beyond talk about the hard work people have been doing – more than a few former PFG (and MF Global clients, too) want to know what exactly has been put in place since the PFG fraud to move the industry forward. Without further ado, the most important new rules and changes we’ve seen in the past year:

  • Electronic, 3rd Party Verification of Bank Statements during Audits – Six months after the PFGBest scandal, all clearing firms (FCMs)  were forced to comply with Electronic Balance Checking as part of their annual audits. It is pure simplicity itself, with the NFA enlisting a 3rd party firm to verify the FCM bank account balances reported to auditors in the field during their annual onsite audits.
  • Daily Balance Reporting by Banks Holding Customer Funds – Going live February 15th, 2013 – this new rule would have stopped Wasendorf dead in his tracks – requiring FCMs that hold customer segregated funds, secured funds, and cleared swaps (collectively “customer segregated funds”) to instruct the banks they use to hold these funds to report the balances in any accounts on a daily basis to a third party designated by NFA (the NFA selected AlphaMetrix  360.) The rule also states that any bank which wishes to be an acceptable depository for customer segregated funds. CME Group, Inc. has adopted similar requirements for its FCM clearing members.
  • The Berkeley Report, NFA, and 21 Recommendations: There was no louder voice than Attain in calling for changes at the NFA, and whether it was people in the NFA listening to our rants or realists there knowing NFA had made mistakes – the NFA enlisted the Berkeley Research Group to do an audit of the audits of PFG by NFA. The result – 21 specific recommendations (covering things from hiring and training to supervision and understanding of an FCMs business and financial health) to improve NFA’s audit program, which the NFA Board voted to fully implement in January of 2013, and which are currently being implemented. See the full recommendations here: http://www.nfa.futures.org/news/BRG/final_recommendations_report.pdf
  • Customer Advocates Elected to NFA Board of Directors:  For those who believe a change in attitude and culture was needed in addition to new rules, the elections of three rather outspoken customer advocates to the futures regulator board of directors was welcome news. James Koutoulas and John Roe, founders of the Commodity Customer Coalition which fought tirelessly for MF Global customers and then PFG customers, and Attain’s own Jeff Malec were all voted in through contested elections (a rare thing for the NFA Board) on platforms of change, and have been working hard on the board for better customer protections.

And Two Rules implemented before PFG (after MF Global)

  • The MF Rule -  In the wake of the MF Global bankruptcy when it appeared for a minute that customer losses were due to MF Global investing customer funds in foreign sovereign debt, the NFA and CFTC amended rule 1.25 to protect against such behavior in the future, restricting the investments FCMs can make with customer funds to essentially  just U.S. Treasuries.
  • The Corzine Rule - Under this new rule, should an FCM choose to withdraw more than 25% of the funds the FCM deposits in the customer segregated bank account as a safety cushion of sorts, the CEO or another designated top officer will have to sign off on the withdrawal, rendering them liable for any wrongdoing associated with such movements. This eliminates the possibility of plausible deniability as a defense against fraud in the future.

There is more work to be done, such as SIPC like insurance for futures accounts, and changes to the bankruptcy code to further protect futures customers in the wake of an FCM bankruptcy. But for a system which was very solid to begin with, and which now has all of the new rules and changes listed above – there is no doubt in our minds things are much better than they were one year ago.

PFGBest One Year Anniversary Linkfest:

Not all anniversaries are pleasant. Today is one of those days in the futures industry, marking the 1 year anniversary since the PFG scandal was exposed to the world.  We have fought tooth and nail on behalf of customers to recover funds, repair the regulatory landscape, and more over the past year (with work still to be done), and thank all those who have stood by us during that time. For all those who like to slow down and look at car crashes on the other side of the highway – here’s a linkfest with the bulk of our coverage of the PFG fraud over the past year. For those who don’t like guts and gore, turn away:

PFG Broken Promises, Shattered Trust

PFGBest Update: Interpreting the Distribution Motion

PFGBest- The Movie

Owning a Slice of PFGBest

PFGBest Update: Justice Delivered

PFGBest Update: What’s at Stake in the FX and Metals Case

PFGBest Update: Recovery Scenarios/Percentages

PFGBest Update: Special IRS ruling on PFG Losses

PFGBest Update: Trustee is Being Paid too Much

CFTC Sues US Bank over PFG Fraud