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.

MF Global Trustee Leaves a Winner

Louis Freeh is stepping down from his role assisting in the liquidation of MF Global, but this is more of a celebratory “going out on top” type exit than getting out of a bad situation – with a federal bankruptcy judge recently approving a final liquidation plan for Corzine’s collapsed firm. And that means that most the remaining hurdles have finally been cleared, including one particularly important detail (emphasis ours):

The plan could not go into effect until certain conditions were met or waived, one of which was that the estate had enough cash to pay its claims, according to court papers filed in February.

The other trustee who was brought on to help unwind the broker-dealer portion of MF Global, James Giddens, still has some work to do, mainly resolving the final dispute of the global settlement with J.P. Morgan. Giddens is not only tasked with returning all the misappropriated funds, but also getting a bankruptcy and federal judge to approve this settlement. The plan includes a full payout for former customers, while J.P. Morgan is slated to receive 76 percent of its total claim and uninsured creditors will receive 34 percent. Giddens will seek the final approval for that plan next month.

In the meantime, the new board in charge of liquidating MF Global’s assets is supposed to have that wrapped up after a two year term. This, plus last week’s news that the CFTC is going after US Bank in the in the PFG case, makes us hopeful the customers in these cases will be made whole eventually – and in this case late is always better than never.

Now, moving forward… it would obviously be better if this type of thing never happened, and never happens again. And along those lines, we’re still pushing for regulatory changes, such as account insurance for futures accounts, to add to the extra customer protections already put in place since this time last year. All in all, things are looking up.

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: 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.