From the May 2013 issue of Futures Magazine • Subscribe!

Action is power

Editor's Note

The name Jon Corzine still puts the futures industry’s teeth on edge. And the reaction seems stronger than some other names that have roiled their spheres of influence: Bernie Madoff (securities) and Jeff Skilling (energy derivatives), to name two. Neither of these still seem to invoke the hatred, fury, disgust and righteous anger futures traders and investors have for Corzine. Perhaps one reason is, unlike Madoff and Skilling, Corzine still has his freedom. But perhaps it’s more than that. Maybe it’s because MF Global undermined the entire system by pillaging segregated funds that caused a cascade of monetary losses, business closures and regulatory headaches in the futures arena.

To determine to what extent professional traders were hurt by the MF Global and PFG failures and to see what steps have been taken to protect themselves going forward, Diane Mix Birnberg, founder and chairman of Horizon Cash Management, surveyed all registered commodity trading advisors (CTA) and pool operators (see “We’ve been wronged!”). With a 15% response rate, the findings are statistically significant, but as Birnberg told me, there is more there than the metrics: Many responses were heartfelt and angry. “I just felt so bad for these guys,” she said.

And the anger was palpable: Most respondents wanted Corzine to be in jail, and questioned why he already wasn’t incarcerated. A few even provided details of how he should be punished, the old fashioned way.

A similar reaction happened after we ran a guest blog on from Susan Gidel, who ran the marketing team for Lind-Waldock, MF Global’s retail arm. In the blog, Gidel related hearing a speaker who wasn’t in the industry declare during the speech that Corzine should be in jail. (see “In defense of Jon Corzine”). The upshot of the blog was to say that despite losing her job and her livelihood, Gidel had moved on and recommended those who had been stung by MF Global should do so as well. It was advice no one wanted to hear and almost all responses, sometimes eloquent and sometimes profane, disagreed with her.

I’ve said plenty of times in this note that we hoped Corzine and all those involved (including a hapless board) would end up in jail. But I’ve also said it’s still not clear if the segregated funds were pillaged purposely or done through an accounting error (a big one, I’ll grant you). If the government has evidence on him, I have no doubt he’ll be tried (I don’t believe in the conspiracy that because he was a former senator, governor and Goldman Sachs’ honcho that he’ll get a bye). And as the statute of limitations on the case draws closer, no doubt there will be actions taken.

That said, there still is a lot of hot anger. I think some of it stems from the industry — and trading community — being too complacent on every level: From the exchange and regulatory auditors to broker compliance people to traders watching their own business risk. A key phrase Birnberg used was “taking ownership,” meaning, the Horizon survey found some big holes in how professional money managers did their own due diligence. Even after the MF Global debacle, 50% of the CTAs were using three or less brokers to spread out their funds. And before the MF Global failure, 60% of the respondents never had done a risk assessment to determine the impact an FCM failure would have on their firms. Unfortunately, for many the first stress test was the MF Global or PFG failure, which because of missing segregated funds, was the worst case scenario and doubtful something a trader would have tested.

Birnberg concluded that this group truly needs to get up to speed on how to protect their businesses, perform due diligence regularly and understand where and how to get the right information on their FCMs and segregated funds. Classes would be a great start, but key to this plan are professional traders putting that knowledge into action.

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