Will PFGBest Customers Get Stiffed?

The futures broker PFGBest filed to liquidate its assets under Chapter 7 of the bankruptcy code. Chapter 11 bankruptcy allows firm to re-organize themselves so they can continue in business. By filing under Chapter 7 the firm is saying it does not want to continue in business. So everything the firm has will be distributed to its creditors - in due time.

What about the customers whose money has been "missing"? About $215 million has been missing and none of it has been found yet. That money should have been held in segregated customer accounts, but it wasn't.

You should read the Q & A published in the Wall Street Journal about all this. (Click HERE.) While it points out that that any money that is found could be distributed right away, it also notes that such money still must be identified by the trustee appointed by the court to oversee the Chapter 7 liquidation.

 But if customer money was held in segregated accounts, and each customer had a clear title to the exact amount of money that he or she held in their account - which is what is supposed to occur with segregated accounts - why should there be any sort of search or attempt to find the customer money? Shouldn't the money be clearly "marked" in some way?

Let's say you have a brokerage account and you want to make a trade. If you call your broker and there's cash in your account, the trade gets done immediately. If you have an online account and there's cash in the account to make a trade, you push a couple of keys on your laptop and the trade goes through - in seconds.

How about if you need cash? The process is similar. If there's cash in the account, you get your money sent to you right away, don't you? If you need to sell some securities to raise the cash necessary, that may take a few days, but you still get the cash sent to you immediately once the trades are settled and the cash is in your account (your segregated account, by the way).

Has your personal broker, or your online brokerage firm (e.g., Schwab, Fidelity, eTrade, etc.) ever come back to you and said they couldn't "find" your cash? Have they ever said that a search would have to be conducted to find your cash?

What would you think if they did? Wouldn't you become upset, even infuriated, and demand some sort of explanation? And wouldn't you think that - unless some sort of computer glitch occurred that was resolved in a few minutes - that perhaps someone had stolen your money? What else could you think?

So getting back to PFGBest, isn't it clear that this isn't some sort of computer glitch at this point? Isn't it pretty clear that customer money is missing and must therefore be presumed stolen? It's not like the money was like water in a bucket and dripped out of a hole in the bucket. Someone had to go into these accounts and take the money out. And if that someone was anyone other than the customer whose funds were clearly identifiable, then that someone has stolen the customer's money.

The Q & A will, I think, prove to be interesting reading. For example, at one point it mentions that regulators are trying to locate customer funds. That's interesting, isn't it? The regulators whose job it is to protect customers not only didn't do their job properly, but now they're "trying" to locate customer funds. Trying? How about they try harder?

In any case, you'll notice there's no discussion of this idea that customer money must have been stolen. It's like no one wants to talk much about that.

And let's not forget that the money stolen from customer accounts when MF Global collapsed hasn't been found. Oh, the Q & A mentions that customers have received "80% of their U.S.-based funds." But I believe most of the missing $1.6 billion was not U.S.-based, but held offshore. Interesting how the Q & A glosses over this.

Now I'm thinking about the fact that any brokerage account is a segregated account. And if you keep reading about all this you have to wonder why maybe we shouldn't have at least some level of concern about any brokerage account out there. After all, if regulators can't seem to protect that money from being stolen, and can't seem to find it after it's stolen and - worse - don't seem to even have any suspects in either the MF Global situation of the latest PFGBest incident, should we continue to have confidence that the money that looks like it's in our brokerage accounts every time we read our statements is really there? 

I"m sure the customers of MF Global and PFGBest saw money in their accounts when they looked at their statements. Look what's happening to them. Maybe I wouldn't be getting nervous if it were only MF Global, but now with this new round, it's got me wondering.

Maybe it's not only the customer of PFGBest who will get stiffed.

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