Some MFGI customers left out in cold

“I will probably close everything out once this is all settled and never open a futures account again,” says Jason Skole, a former MF Global customer and part of a group of customers who don’t appear to be getting money back anytime soon.

The MFGI bankruptcy trustee filed a motion today that would return up to 60% to those former MFGI customers that had only cash in their accounts as of the commencement of the liquidation on Oct. 31. This would apply to approximately 21,000 customers with a total of more than $869 million.

The trustee has orchestrated a massive transfer of customer accounts, completed last week, that moved positions of 17,000 accounts and a portion of the margin used to hold those positions, roughly $1.55 billion, to other brokers.

Since many participants complained that, among other things, customers who had closed out positions prior to the bankruptcy filing (or at the time had no positions) had all their money in cash or cash equivalents that was completely frozen. Those customers got nothing and faced a drawn out — even if expedited — claims process. Today’s motion would provide some relief for these customers.

However, Skole, and many customers like him, had large cash holdings at MFGI with only a minimal position on and will get no relief. Skole fully funded a $200,000 minimum account with a commodity trading advisor (CTA). On Oct. 31 he had $185,000 in the account, $7,000 of which was posted to margin small agricultural market positions. That account was transferred to ADM Investor Services and his CTA subsequently liquidated the position. So he was returned $7,000 but the remainder of his $185,000 is frozen and because he was not in cash only, he will not get any of the proposed distribution.

This inequity was further detailed in a letter sent by UK customer Anthony Garner to Hughes Hubbard & Reed LLP, the law firm in which trustee James W Giddens is a partner.

It states, “You propose to make a distribution to “cash only customers” of 60% of the cash in their accounts. There are however a large group of customers who held a small number of positions in their accounts and held a great deal of excess cash. These customers received only a very small portion of their net account equity by way of a transfer of margin money to their new FCM and yet seem to be excluded from receiving any of their excess cash back under your proposed motion.

Garner held a mere two open positions in his account which were transferred to RJ O’ Brien along with 5% of his net account equity.

It highlights a complaint made by many of the trustee, which is a lack of understanding of how futures margining works.

Skole believes the trustee set this at 60% because the trustee thinks that is what other customers received instead of what they did receive, which was 60% of the money held at the CME clearinghouse. He thinks they got 60% of their money back. I truly think he doesn’t understand this,” Skole says.

Garner added in his letter, “We have only received the return of approximately 5% of the net equity in our account. Cash Only Customers are about to receive 60% of their cash back.”

The motion on the expedited claims process will be heard toady and the motion on the distribution to “cash only” customers will be heard tomorrow.

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