Views on improving the integrity of global capital markets
07 November 2011

MF Global: CFA Charterholder Feeling Bamboozled

I know someone who got his hat handed to him in the MF Global scandal: You’re looking at him. As head of the Standards and Financial Market Integrity Division at CFA Institute, it pains me greatly to admit I have been hornswoggled by one of our industry’s own. What’s at stake? Less than my life savings, but more than the cost of covering some college expenses. My first reaction: What sort of “MF” deal is this? (The abbreviation “MF” could stand for several things, but I retain hope that it’s not “monstrous fraud.”)

However, as the rather-convoluted details continue to leak out those hopes, at best, are waning. Whether client funds were illegally comingled with proprietary trading accounts, the extent of regulators’ knowledge that the MF house was built of cards, and the degree to which client funds can be rescued all remain faint details.

My first action was to ring the trading desk handling my account. After waiting for my call to be answered in the order received, I finally was able to voice my deep MF concerns. “There is no further information on the status of accounts at this time,” the representative informed me. “In that case,” I said half-jokingly, “sell MF Global at the market.” “Too late” was the smug reply. Since then, several calls have gone poorly. In one, I was offered the option of ordering a check to be sent for the account balance.

While I make light of these circumstances, it is purely a defense mechanism. How could this happen to me, of all people? After all, I am supposed to know the difference between an ethical operator and not. The truth is, it often is very difficult to tell them apart. Over the two decades I’ve been with MF Global and its predecessor firms, nothing in particular tipped me off that something was amiss. That makes protective regulation and effective regulators all the more important.  For fans of proprietary trading being permitted at firms whose primary function is client business and accounts, former Fed Chairman Paul Volcker has some ideas. Moreover, for pundits in support of further starving government budgets for regulatory monitoring and enforcement, this should give pause.

The timing of something like MF Global is always bad. But given that the financial services profession is last on everyone’s list for trust and ethics, the moment could hardly be worse. Maybe it is only wishful thinking to expect someone at MF Global to have stood up and shouted from the roof tops.  As a loyal client for over 20 years and an observer of ethical practice for even longer, I don’t think so. I’m reminded of the mantra, “If you see something, say something,” — which is a good starting point for this industry.

I will keep you advised of my MF odyssey. Nothing arrived in today’s mail. But I did see this unabashed statement today, still posted on the company website:

Segregation of Customer Funds: Probably the cardinal safeguard of both futures and securities customers’ funds required by the relevant provisions of the Commodity Exchange Act, the Securities Exchange Act of 1934 and the rules and regulations of the CFTC and the SEC is that they be segregated from the funds of the FCM/broker-dealer and may not be used to meet any obligations of the FCM/broker-dealer. A brief description of these provisions is set forth below.

I wonder, cold comfort or glimmer of hope? Probably time to update the website. 

Please comment on the MF Global situation.

About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is the Senior Head, Advocacy Advisor, Capital Markets Policy at CFA Institute, where he oversees advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

8 thoughts on “MF Global: CFA Charterholder Feeling Bamboozled”

  1. Bret Moore says:

    My story could be yours. Same feelings and thoughts, too. Also sounds like I’m out an equivalent amount of equity, with apparently no answers for its return in sight.

    1. pchepucavage says:

      Kurt- Perhaps you missed the constant stories about Corzine’s big bets on europe paired with the equally constant stories on a Greek default-But the regulators also seemed to have missed them.Could the Institute possibly bring itself to criticize the regulatory failure here.?There is always a first time.

  2. Ed Norton says:

    I hope Corzine is held accountable and faces charges for his responsibility. There are hundreds of bankers still pulling in huge paychecks (many of which were paid for by the bailout) who engaged in fraud and should be in jail. We laugh at presumed voter fraud and money scandals in other countries, but we are actually the worst.

  3. Rosemary says:

    My story is the same. MF Global was an FCM. Only a few hundred equity accounts, and thousands of futures brokerage accounts.

    Yet the CFTC gave this over to the SEC, who threw it to the SIPC, who gave it to a bankruptcy court-appointed Trustee. Who happens to be the same law firm milking the Lehman remains. And the Trustee has destroyed the futures markets, exchanges and thousands of clients by freezing funds.

    It was sickening to watch him on TV saying that customer “accounts” are being transferred. Only under margined positions were transferred. And exchanges demanded margin to be coughed up. But client funds are frozen by the Trustee.

    Oh, and guess what? JP Morgan just got itself onto the recovery committee. They will work hard to convince the judge that your TITLED AND SEGREGATED funds were not segregated and not deserving of treatment as required under the Commodity Exchange Act.

    You and I have been had. The courts are even breaking federal laws under this treatment. The regulators are allowing it. They no longer have a purpose.

    And our Congress watches this unfold. Doing nothing. What kind of country are we living in?

  4. AF says:

    It is difficult to understand how anyone can say that there were no signs of this firm’s demise. MF Global has been in a slow death spiral since the rouge trading incident of 2008. The irony is that it was the punitive risk, credit, and compliance controls established in response to the 2008 trading incident that initiated a systematic and relentless departure of their best talent. It was a feedback loop of eroding revenue and departing talent necessitating more desperate measures by the executive to turnaround a failing business. There was no vision, no coherent business plan, just a progressive deterioration of respect for the hard working and committed employees of the firm and a general erosion of corporate morale. In the end the CEO resorted to taking a flyer in a futile attempt to save his own reputation at the expense of the clients and employees in one last demonstration of the self serving attitude of MF Global management. It turns out that even the best risk controls cannot stop the rogue traders on the executive committee.

  5. The customer reserve calculation should be done independently of the broker dealer under the control of the regulator. The broker dealer should then be required to send a screen shot of the bank statement to the regulator.

    See ideal state of regulation

  6. KS says:

    At least you didn’t have all of your nest eggs in one basket. As an industry, we tell our clients to be diversified, but try to get 100% of private client wallet share for our own firms. Smart clients spread their money around several different managers/broker. We should remind people of that.

  7. Eric says:

    I don’t understand how the money could be lost. Doesn’t the SIPC provide up to $250k in insurance? Can you explain why that doesn’t cover your funds?

    Can you tell us what other brokers we should look out for? What brokers have no risk of this kind of failure because their don’t do proprietary trading?

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