MF Global All Over Again?
Another futures broker stole client money. This is big news. The name of the firm is PFGBest. I hope you don't have any money with them.
When MF Global "lost" client money after it collapsed last fall, I wondered about the integrity of the futures markets. Futures brokerage firms traditionally kept client money segregated from the firm's funds. In fact, the client's money that was not invested was traditionally held in US Treasuries. In fact, such money was theoretically safer than money you had in a regular brokerage firm, even than money you had in FDIC insured bank accounts. It was safer because US Treasuries were absolutely the safest securities on earth, and your money was held in an account with your name on it, and no one could touch the money but you. At least that's how it was supposed to work.
When MF Global collapsed, for a few days the feeling was that the client money that was seemingly "lost" would just show up when a proper accounting was done. The way it was presented in the media reports went something like this: the bankruptcy was abrupt and chaotic; the money's there; in a few days, when things settle down, the client money will be found.
But quickly it became apparent that the client money was not going to be found. Worse, the clients were told that the firm had misappropriated their money. Worse still, clients were not made whole. They still don't have their money.
So the natural progression of thought that occurs to a reasonable person is that we've got a situation where client money that has always - ALWAYS - been absolutely 100% safe, no doubt about it, turned into a situation where for the first time in the history of U.S. markets, client money that was segregated was stolen - and no one has been prosecuted or even held accountable.
(When I say "for the first time," I recognize that there have been situations where client money was stolen before. Think "Madoff." There have been other Ponzi schemes. But in a Ponzi scheme, the money was never held in segregated client accounts. There have been hedge fund managers who've skipped town with client money. But they were quickly pursued and prosecuted.)
Naturally, one then thinks about other kinds of brokerage accounts - like, for example, even money that the public holds with big "respectable" firms like Fidelity and Schwab. They all claim to segregate client funds. Indeed, when catastrophe hit Lehman Brothers - a very respectable firm in its day - and the firm collapsed, segregated client investment accounts were safe and sound. Clients - after a period of time - got all their money back.
But - again, being a rational person who tries to think things through - it kept gnawing at me that client money was lost, really stolen. Indeed, a woman named Ann Barnhardt who ran a futures brokerage firm very publicly closed her business. She posted her reasons on her blog. She claims that no accounts are safe anymore. I did all the reading and research I could handle at the time. I wondered whether she was right. In the end, I concluded that maybe her reaction was extreme.
But pretty soon you saw that no one was really being held accountable. Sure, there's a trustee out there poking around under the supervision of bankruptcy court. But it's now been over six months and clients don't have their money plus no one's really been held accountable.
I wrote about all this and the fact that Jon Corzine - head of the firm, former head of Goldman Sachs, former Governor of New Jersey, former Senator from New Jersey - should, but probably wouldn't be prosecuted. (You can read those comments by clicking HERE.)
So now I'm back to wondering. Barnhardt said then that other brokerages would collapse - and probably do the same thing, i.e., steal client money. Now we've got PFGBest.
If you want to read a couple of today's media reports, you can find the one HERE and one HERE. I suggest you do read them. I suggest you engage with this. What I mean by that is don't just read the articles and move on to the next thing on your "To Do" list. Think about what you're reading and use your reason and common sense to figure out whether this signals something is seriously wrong, at least in the futures brokerage world.
But you need to do more than that. Try to think this through and consider whether this latest incident means that you need to really be concerned about your brokerage accounts - even your bank accounts.
The response of the authorities to this incident will be very important. Will they respond in the lackluster fashion they have in the MF Global situation? Will the rule of law be relentlessly pursued here?
As for me, it looks like I'll have to reconsider all this again. I may post more on this too. Frankly, it's worrisome. It's not something to just gloss over.
When MF Global "lost" client money after it collapsed last fall, I wondered about the integrity of the futures markets. Futures brokerage firms traditionally kept client money segregated from the firm's funds. In fact, the client's money that was not invested was traditionally held in US Treasuries. In fact, such money was theoretically safer than money you had in a regular brokerage firm, even than money you had in FDIC insured bank accounts. It was safer because US Treasuries were absolutely the safest securities on earth, and your money was held in an account with your name on it, and no one could touch the money but you. At least that's how it was supposed to work.
When MF Global collapsed, for a few days the feeling was that the client money that was seemingly "lost" would just show up when a proper accounting was done. The way it was presented in the media reports went something like this: the bankruptcy was abrupt and chaotic; the money's there; in a few days, when things settle down, the client money will be found.
But quickly it became apparent that the client money was not going to be found. Worse, the clients were told that the firm had misappropriated their money. Worse still, clients were not made whole. They still don't have their money.
So the natural progression of thought that occurs to a reasonable person is that we've got a situation where client money that has always - ALWAYS - been absolutely 100% safe, no doubt about it, turned into a situation where for the first time in the history of U.S. markets, client money that was segregated was stolen - and no one has been prosecuted or even held accountable.
(When I say "for the first time," I recognize that there have been situations where client money was stolen before. Think "Madoff." There have been other Ponzi schemes. But in a Ponzi scheme, the money was never held in segregated client accounts. There have been hedge fund managers who've skipped town with client money. But they were quickly pursued and prosecuted.)
Naturally, one then thinks about other kinds of brokerage accounts - like, for example, even money that the public holds with big "respectable" firms like Fidelity and Schwab. They all claim to segregate client funds. Indeed, when catastrophe hit Lehman Brothers - a very respectable firm in its day - and the firm collapsed, segregated client investment accounts were safe and sound. Clients - after a period of time - got all their money back.
But - again, being a rational person who tries to think things through - it kept gnawing at me that client money was lost, really stolen. Indeed, a woman named Ann Barnhardt who ran a futures brokerage firm very publicly closed her business. She posted her reasons on her blog. She claims that no accounts are safe anymore. I did all the reading and research I could handle at the time. I wondered whether she was right. In the end, I concluded that maybe her reaction was extreme.
But pretty soon you saw that no one was really being held accountable. Sure, there's a trustee out there poking around under the supervision of bankruptcy court. But it's now been over six months and clients don't have their money plus no one's really been held accountable.
I wrote about all this and the fact that Jon Corzine - head of the firm, former head of Goldman Sachs, former Governor of New Jersey, former Senator from New Jersey - should, but probably wouldn't be prosecuted. (You can read those comments by clicking HERE.)
So now I'm back to wondering. Barnhardt said then that other brokerages would collapse - and probably do the same thing, i.e., steal client money. Now we've got PFGBest.
If you want to read a couple of today's media reports, you can find the one HERE and one HERE. I suggest you do read them. I suggest you engage with this. What I mean by that is don't just read the articles and move on to the next thing on your "To Do" list. Think about what you're reading and use your reason and common sense to figure out whether this signals something is seriously wrong, at least in the futures brokerage world.
But you need to do more than that. Try to think this through and consider whether this latest incident means that you need to really be concerned about your brokerage accounts - even your bank accounts.
The response of the authorities to this incident will be very important. Will they respond in the lackluster fashion they have in the MF Global situation? Will the rule of law be relentlessly pursued here?
As for me, it looks like I'll have to reconsider all this again. I may post more on this too. Frankly, it's worrisome. It's not something to just gloss over.
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