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Opalesque Futures Intelligence

MF Global Customers See 100% Of Funds Returned

Thursday, November 21, 2013

By Mark Melin

When he was in court November 5, 2013 to hear the final ruling that MF Global customers would receive 100% of their money returned, James Koutoulas, pro-bono attorney for some 8,000 MF Global customers who initially lost their deposits in the 8th largest bankruptcy in US history, was thinking "I couldn't believe I was the only representation all these poor people had and how totally the regulators failed to stand up for them." In the Southern District of New York bankruptcy court, Koutoulas just heard court appointed trustee James Giddens say that initially in the MF Global bankruptcy it "seemed inconceivable that MF Global customers would ever get all their money back." But on this day all were in court to witness Judge Glenn order 100% of customer funds returned.

It was nearly two years ago when Koutoulas, appearing on CNBC's Santelli Exchange, was asked if he thought customers would get all their money returned. "Your damn right they will," he said in what would become known as his characteristically bold demeanor.

"What remained unsaid at the time was that Koutoulas and a small group of independent industry participants didn't have much chance as they were laughably fighting the most powerful forces on Wall Street without much, if any, institutional support."

Just after the bankruptcy was announced, the very notion MF Global customers would see all their assets returned was scoffed at, if not outright ridiculed by knowledgeable Wall Street observers. Early official communications from the bankruptcy trustee informed customers they might receive 60% of their assets returned nine months after the transfers occurred. Other official communication, delivered just before the holiday season to the press, set expectations customers were going to have to "share" their assets.

"Koutoulas discovered no one was defending MF Global customers and enforcing segregated account protections, and he became the accidental lawyer defending an industry and the honor of the segregated account."

Koutoulas would first appear in court on behalf of MF Global customers November 15, 2011 in arguably the most complex bankruptcy case in the history of financial services, yet he had only appeared in court once before, pro-bono work in an $8,000 small claims dispute where he represented a friend. In an old courthouse in lower Manhattan just off Wall Street near Battery Park, Koutoulas entered on that chilly morning and gazed at the intimidating wall of over-priced legal talent. It was at this moment he grasped the reality of the situation. "We weren't going to beat $800 per hour white shoe lawyers who knew the intricacies of the brokerage bankruptcy process. We had to win through public media pressure." With this Koutoulas discovered no one was defending MF Global customers and enforcing segregated account protections, and he became the accidental lawyer defending an industry and the honor of the segregated account.

Over-matched, under-financed and over-whelmed, MF Global justice fighters began a guerrilla operation to pressure the justice system to properly function without regard to the overwhelming political influence that surrounded Corzine, a former bank president, US Senator and Governor from New Jersey.

"Farmers, ranchers and small business people needed this money," said Koutoulas, who now sits on the National Futures Association board and runs the Commodity Trading Advisory Typhon Capital. "Many were facing the prospect of not just missing a Christmas season, but their farming and business livelihood was now in danger - as was the entire futures industry." With this as a backdrop, prospects at the time looked dim. Who would have blamed Wall Street observers for thinking Koutoulas was making an absurd prediction customers would get all their assets back two years ago? In the previous Wall Street bankruptcies of Lehman Brothers and Bear Stearns, powerful forces had their way in what was a bankruptcy gang free-for-all where no one stood up to defend the honor of the victim. No one stood up to powerful forces back then, why would the bankruptcy of a "third tier" futures brokerage be any different? And this time the proceedings involved MF Global's former CEO Jon Corzine, arguably the most politically powerful person to ever operate in the financial services sector, who was now facing a small group of independent industry participants who feared losing this fight and allowing justice to be so easily trampled would forever taint the regulated derivatives industry.

"The proceedings involved MF Global's former CEO Jon Corzine, arguably the most politically powerful person to ever operate in the financial services sector, who was now facing a small group of independent industry participants who feared losing this fight and allowing justice to be so easily trampled would forever taint the regulated derivatives industry."

Most Significant Accomplishment

While the recent confirmation that MF Global customers would receive all their deposit money returned is significant, Koutoulas says the biggest achievement was pressuring the trustee to return 72% of customer assets within 6 weeks of the bankruptcy. "They had the money," he said. "When MF Global declared bankruptcy their assets on the books exceeded liabilities. It was just a matter of pressuring the trustee to distribute 72% in December 2011 rather than 60% in July 2012."
As for the future, Koutoulas is currently working on a bill with US Congressman Grimm (R-NY) that would, among other things, force futures brokerage firms to enter into a subordination agreement with their affiliates and lenders confirming customer segregation rights precede that of creditors. "In four pages it does more to protect customers than in 500 pages of proposed new rules that the CFTC is proposing," he said. As to the bill's prospects for passage, Koutoulas notes powerful opposition from derivatives industry institutions, including Futures Industry Association and CMEGroup, as diminishing the potential for the bill to be passed. Koutoulas had testified October 2 regarding the need for enhanced customer protections.

Koutoulas says the biggest achievement was pressuring the trustee to return 72% of customer assets within 6 weeks of the bankruptcy.

For his part, Corzine recently issued statements saying a lawsuit filed against him was "filled with half truths" and proceeded to claim through a lawyer that the transfer of customer assets was "part of a new business plan," according to published reports. Both MF Global creditors and the CFTC have filed suit against Corzine. Corzine recently tried to have the cases dismissed but was denied. Corzine recently tried to have the cases dismissed but was denied, with U.S. District Judge Victor Marrero in Manhattan issuing rather harsh and frank statements regarding MF Global executives. "Defendants' contentions would suggest that ... perhaps the debacle must have been the fateful work of supernatural forces, or else that the explanation for a spectacular multi-billion dollar crash of a global corporate giant is simply that 'stuff happens.'"

Just days after this defeat for Corzine, the CFTC won a $1.2 million restitution case against MF Global. Most ominous for Corzine and MF Global senior executives are references to criminal evidence that may appear in the CFTC's upcoming trial of Corzine, including issues related to falsification of reports given to regulators after they were ordered not to transfer assets.



 
This article was published in Opalesque Futures Intelligence.
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