Corzine at Fault… Again (We Know!)

Another missive on MF Global that we can drop straight into the “things we already knew” file: a new report from trustee Louis Freeh alleges that Jon Corzine was largely responsible for the downfall of the company. Not exactly shocking material, and quite a bit of it is simply a re-hash of other reports on the subject, but it does contribute to the mountains of damning evidence against Corzine.

Although none of the reports thus far have gone so far as to allege criminal misconduct for the “honorable” Mr. Corzine, it’s quite clear at this point that his hands-on approach and penchant for big trades were too much for a firm that lacked even the most basic of risk controls. From the report:

When Corzine’s vision was implemented, the Company’s deficiencies were exposed in a number of ways:

(1) there was no efficient, concise way for anyone at the Company to have an accurate and complete real-time snapshot of the Company’s most basic financial information, including liquidity;

(2) inefficient and outdated control systems were inundated as trading increased, crippling the settlement and clearing of trades, which became a decisive threat to MFGI’s ability to function during the last week of October 2011; and

(3) the inability to forecast and track financial information accurately on a real-time basis resulted in executive management reacting too late and too slowly to the growing liquidity pressures placed on the Company by the Euro RTMs and Corzine’s new trading desks.

As early as May 2010, Corzine and Steenkamp knew that MF Global’s control architecture was flawed. Gaps between approved risk and control policies and current practices were documented, distributed to management, and presented to the Board. Repeated warnings about the Company’s control systems put management on notice that the Company did not have the appropriate systems in place to support the expanded trading Corzine envisioned when he joined the Company.

Much of it is a recap of information that has already been outlined in previous reports, but you can check out some of the reactions to the report here and here. Coincidentally, Judge Glenn of the Manhattan Bankruptcy Court approved a final liquidation plan for MF Global Holdings today, confirming that the vast majority of customer money will be recouped. Corzine getting the blame (although sadly no jail time) and customers getting most of their money back… all things considered, not the worst ending to this tale we could have imagined back in October 2011.

Even if news like this doesn’t put Corzine behind bars, it will certainly aid the civil case against him. Of course Corzine’s defenders (yes, they exist) dismiss these autopsies as “Monday morning quarterbacking,” and like to point out that if MF Global hadn’t been sunk by margin calls and liquidity problems, those bit bets on European debt would have paid off. But that’s the rub – “I would have been right” doesn’t count for much, and even less so when you bankrupt a company and risk other people’s money with your recklessness.

PFGBest Update: Paying the Bills

The unwinding of the mess that Russ Wasendorf left behind has surely been a daunting task, but we haven’t exactly been impressed with its execution. There was the long wait for an initial distribution – and the confusion over how it was to be handled (remember when they had planned on doing two different distributions based on account size?). Then there was the ill-advised decision to auction off former PFG accounts to the highest bidder no matter what regulatory black marks they had on their record. And don’t forget the lackluster handling of a motion to have the FX and Metals case dismissed.

And now? The bill:

The trustee unwinding Peregrine Financial Group is seeking $3.7 million as payment for his eight months of work to return money to former customers of the failed broker, court documents show.

Ira Bodenstein, the court-appointed bankruptcy trustee and a lawyer in Chicago, said he is claiming roughly three percent of the $123.3 million he has returned to former Peregrine customers, as allowed under the U.S. bankruptcy code.

James Koutoulas of the Commodity Customer Coalition quickly pointed out how disconcerting it is to see “him bill the statutory max to fraud victims who stand to lose half their assets,” but we have a bigger problem with all of this. That $123.3 million of which Mr. Bodenstein is paying himself 3%? That is all money that was confirmed in segregated bank accounts on the day of the bankruptcy. Jeffries was holding $125 million of customer money when the CFTC froze PFG.

Why on Earth should Ira Bodenstein be paid almost $4 million for the recovery of the money that he did nothing to discover or recover? That money was already there, and the trustee actually delayed getting it back to customers. This cries out for amendments to the Commodity Exchange Act and bankruptcy code protecting customer assets from the bankruptcy attorney sharks.  There is no reason they should be rewarded for returning money to customers that was correctly held in segregated accounts. The CFTC should be protecting those funds from the bankruptcy proceeding in line with the laws stating they are not part of the assets of the failed firm.

We’re all for the trustee getting paid on money not already identified as customer property. Go ahead and pay him 3% of the money he gets from selling used computers, breaking leases, and converting the estate to money available to futures customers. Pay him 10% of money he can pry away from JP Morgan. Pay him 25% of money he can get in lawsuits against US Bank and others. Pay him 50% of money he finds hidden in Swiss bank accounts – we’re all for providing incentives for the trustee to get back as much money as possible.

But when they make money on customer assets that were already sitting there… well then the only incentive is to make it look like you are doing a lot of work. We’re sure it’s just a colossal coincidence that the fees charged happened to be the same as the statutory maximum… But come on. This is why bankruptcy trustees have such a poor reputation. Whether they’re charging more than $2 billion to unwind Lehman Brothers, or scooping up every available dime in small-time bankruptcy cases, watching attorneys line their pockets on the backs of other people’s suffering is never easy to stomach.

PFGBest Update: The Tax Man Cometh

It’s hard to believe, but today we can use the words “IRS,” “Taxes,” and “PFG Best” in the same sentence – and the result is good news. You see, the IRS has decided that former PFG Best customers who lost money to Wasendorf’s fraud will be allowed to claim those as losses due to theft on their taxes. The Commodity Customer Coalition deserves huge thanks for pushing for this clarification from the IRS, and their site has the full breakdown of what this means for clients, and links to the relevant documents for tax filing purposes.

A smaller tax bill (or a bigger tax refund check) is no substitute for clients getting their money back, but it’s better than nothing, and we’re grateful to the CCC for all the work that they’ve done to help make this a reality.

PFGBest Update: Good News for 30.7 Accounts

After receiving what feels like the 1,000th call from groups buying PFG claims, the trustee’s motion for 30.7 account holders’ money to be treated the as an individual class was approved today by the judge in the PFG case. What does it mean for recovery totals?

Well for one, it means that 30.7 account holders are likely to see almost all of their money, and possibly even 100% of it. For other account holders, it’s a bit more complicated. We have been poring over the PFG balance sheet reported by the trustee – in addition to getting on several calls with the trustee to clarify some points – and after all of that we have come up with the potential recovery levels below based on the assets on hand (i.e not including any additional money received by the estate via class action suits).

We’ve listed the best case recovery scenario at the top – where essentially all of the assets would end up benefiting customer’s 4d balances – and then using the balance sheet and items listed within to calculate how much less 4d customers would recover based on possible outcomes. We then do the same for 30.7 balances, although there are really just two outcomes there – it remains separate, or is combined with 4d and the 4d percentages apply (although slightly higher as the 30.7 balances would be added).

For 4d Balances

If all possible sources go to 4d accounts: 58.37%

Possible Complications:

  • If legal fees double: -1.31%
  • If FX & Metals succeed in getting priority for their funds: -9.49%
  • If 4d customers don’t get priority over the estate: -2.76%
  • If banks succeed in keeping set offs: -6.10%

Our Prediction:

  • FX & Metals don’t get priority
  • Legal fees remain at current pace
  • 4d given priority claim over estate
  • Banks succeed in retaining 50% of set offs

Result: 55.08% recovery

Best Case Scenario: 58.37%

Worst Case Scenario: 43.73%

*#4 & Worst Case assumes customers receive 44% of general estate (less $500k in creditor liabilities, $400k in customer payables)

A couple of things to note:

1. This is all an exercise in estimation and prediction – two highly unreliable fields, and as such should not be taken as official, legal, or any other such. It’s our best guess at this moment, that’s all, meaning the “worst case” scenarios above could still be worse than what we’ve listed.

2.  None of this includes potential recoveries via class action lawsuits, whose success is far from certain. This could substantially add to the recoverable amount if successful against the large banks.  Nor does it include the possibility of “finding” some of the stolen money, however remote. This is only based on money the trustee knows to exist and either has under his control or is working to get under his control.

And what about JP Morgan and the other banks’ efforts to keep the money they claim as a set off? JP Morgan has about $18 million of PFG customer money under dispute saying it is subject to set offs.  We don’t think this should be a very difficult question – after all, they are getting billions of dollars per year from federal handouts… this money is little more than a rounding error to them. Today JP Morgan settled with the MF Global trustee to relinquish their claim over customer funds, and would be nice to see them do the same for PFG customers, too.

PFGBest Update: Insuring the Future

Of all the reforms that were proposed following the MFG and PFG disasters, we have always thought that a SIPC-style insurance fund for segregated account holders was the single most important step needed to restore confidence in the industry. While a slew of other proposals have since become a reality, the insurance plan has yet to move beyond the stage of “under consideration.”

The good news is, we are making progress – the conversation is underway, and we’re hopeful that the people in position to make futures account insurance a reality will come around. But we can always do more to demonstrate our support to those weighing these decisions. We need to make it clear that this is what the industry and those who use futures markets to invest want – need – in order to continue investing and trading with confidence.

Right now, the CCC is conducting a survey to that end. Please consider aiding the cause by taking a few minutes to answer the survey, and help us show just how important insurance is to the customers and businesses that make up this industry:

PFGBest Update: The Remaining Pieces

It’s taken far longer than we would have liked, but the loose threads in the PFGBest fiasco are being wrapped up, one by one. Most of the assets have been auctioned off, the trustee is sorting out and verifying the many customer claims they received, and now we have a target date for the liquidation of the Cedar Falls headquarters. Via Bloomberg:

Peregrine Financial Group Inc.’s $20 million corporate headquarters and its 22-acre Cedar Falls, Iowa, site can put up for sale, a federal judge said.

U.S. District Judge Rebecca Pallmeyer in Chicago today granted, with no one opposed, a court-appointed receiver’s request to retain Woodland Hills, California-based GA Keen Realty Advisors LLC to help market the building…

While a sale price for the property hasn’t been established, the receiver proposed that GA Keen oversee an auction on or by May 31 and a court-approved closing by June 14.

Unfortunately, it’s hard to be very optimistic that this will make up for very much of the shortfall. The place may have cost $20 million to build in 2008, but Cedar Falls is not exactly on the pulse of global commerce, so it’s likely to sell for a fairly deep discount.  What’s more, the place still has a $6.3 million mortgage (held by US Bank, the same bank that was supposed to have held customers’ funds).

After the realty advisor takes their cut and the mortgage is factored in… well, every little bit helps, but it will probably leave very little to be added to the estate’s accounts. But more than making a contribution to making customers whole, we can view this as another step in unwinding the mess that Wasendorf left behind – and one more step on the path to leaving this all in the rearview mirror.

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

One of the delays in former PFG customers getting more money back stems from having to wait for the Forex and Metals customers lawsuit to end.  You see, Forex & Metals accounts were categorized as “unsecured” accounts rather than “30.7 secured” or “(4d) segregated.” This means they were not protected by the same parts of the bankruptcy laws as futures accounts. Indeed, we’ve warned about this characteristic of forex accounts in the past.

The wrinkle in the story stems from the fact that the money that Wasendorf stole came out of the futures accounts, and specifically the (4d) segregated funds, while the unsecured accounts were left untouched. However, according to the trustee’s interpretation of the bankruptcy laws (which we agree with and support on behalf of our futures customers), the unsecured accounts are not first in line to be made whole – domestic futures customers (4d) and secured customers (30.7) are ahead of them in line.

That would mean taking the money of the forex customers (which was not segregated and as such technically became part of the PFG asset base), and paying it to futures customers – something which definitely doesn’t sit well with said forex customers, leading to them suing the estate for certain rights and access to that money.

So what’s at stake here for futures customers?

Unfortunately, this isn’t big enough to make futures customers whole if the trustee wins on their behalf. We’re essentially talking about $30,026,000 (out of $220 million missing for 4d accounts). If the forex suit wins, that money goes to the Forex customers and we move on with disbursing the rest of the available money. If the forex/metals suit loses, that money goes into the estate and gets paid, in theory, to the futures customers who are first in line. How much more of a bump in recovery does that mean? Doing some quick back of the napkin calculations, it looks like a bump of about 8% in recovery ($30mm/$372mm).  Not a huge amount, but we’ll take all we can get at this point.

So where does the suit stand?  Nowhere really. The trustee filed a motion to have the case dismissed, but the judge in the case denied the bulk of that request. One count was denied because the trustee didn’t even put forth a reason for its dismissal (come on Ira, you can do better than that for the hundreds of thousands you’re billing the estate). But the judge’s dismissal doesn’t mean that the FX and Metals plaintiffs are necessarily going to win their case, it’s merely the judge ruling that there’s insufficient evidence to dismiss their suit without a full hearing. So the case moves on and this fight will drag on for a while longer, further delaying more distributions for futures customers.