Commodity Customer Coalition founder James Koutoulas is requesting that MF Global bankruptcy Judge Martin Glenn investigate three potential legal issues that are said to have occurred inÂ transferringÂ of MF Global assets. Â The key issues include the fact that JP Morgan was able to purchase MF Global bonds at a discount without any open bidding process and the assets were apparently sold without disclosure to or approval from the U.S. bankruptcy court or trustees. Â The third issue centers on JP Morgan seeking special favors from the Federal Reserve to receive priority treatment over investorÂ segregatedÂ fund accounts.
The first such non-transparent movement of assets occurred when JP Morgan is said to have purchased MF Globalâs Sovereign Debt at a significant discount without an open bidding process, paying $0.89 and later selling that debt to investor George Soros for $0.95. Â No one is going to complain about JP Morgan generating profit. Â However, purchasing assets of a bankrupt firm without an open bidding process or disclosure to the bankruptcy court and trustees is where JP Morgan may be in trouble, according to Mr. Koutoulas. Â This sale could be subject to clawback provisions, legal experts speculate. Â (On December 9, 2011 The Wall Street Journal reported the fact that bonds were moved to KPMG London office, which was the bankruptcy administrator, but at the time the article did not discuss sale details or approval through the bankruptcy process. Â See “Corzine’s Loss May Be Soros’s Gain” by Gregory Zuckerman and Dana Cimilluca.)
The key issue is that such transfers is the bonds were purchased at a discount without open bidding and the process was not disclosed to or authorized by the U.S. Bankruptcy Court, according to Mr. Koutoulas. Â âWho gave JP Morgan permission to purchase those bonds at a discount without open bidding?â
The second questionable movement of assets is said to have occurred when JP Morgan purchased MF Globalâs stake in the London Metals Exchange (LME) without proper disclosure. Â The event wasÂ widelyÂ reported at a basic level on November 28, 2011. Â The larger issue, however, appears to center on the fact that such a transaction was not approved by the U.S. bankruptcy court and trustee.
âWas this disclosed in court?â Mr. Koutoulas rhetorically asked. Â âNo.Â Was their trustee approval?Â No.â
The third issue occurred in congressional testimony Thursday, December 15, 2011 where it was discovered JP Morgan asked the Federal Reserve to write a letter claiming that the segregated funds should not be categorized as client money.
âHow many letters like this have they asked for in the past? Â I want all the statistics regarding the number and content of letters,â Koutoulas questioned.Â âJP Morgan wanted a âget out of jail free cardâ from the Fed.Â Guess what?Â That doesnât fly with me.â
âTheir hubris is so severe.Â They think we donât know the industry, like we are Occupy Wall StreetÂ radicalsÂ or something and donât have a clue or message,â Mr. Koutoulas said, noting that the CCC is comprised of experienced industry participants who understand the financial services industry from the inside.
Mr. Koutoulas seeks to solve the problem with JP Morgan without dragging the issue through court.Â In speaking to JP Morgan, Mr. Koutoulas said âListen, you are buying vulture MF Global claims at $0.86 Â˝ on the dollar. Â Â Why donât you pay a fair price of $0.97 Â˝ take the customers out of the bankruptcy and we will indemnify you from any class actions resulting from this.âÂ A vulture claim occurs when an MF Global claimant such as a farmer or small business person is in desperate need of cash and sells their claim to someone such as JP Morgan, who purchases the claim at a lower rate than the value at maturity. Â In this example if JP Morgan purchased the claim at $0.87 and all clients were eventually “made good” JP Morgan would receive the par value of $1.00. Â With the MF Global bankruptcy proceedings apparently moving along much quicker than expected, JP Morgan stands to potentially make a quick 13% return on such vulture claims.
Mr. Koutoulas reports that JP Morgan would not even discuss the issues.Â âI can see that you disagree with me,â said Mr. Koutoulas, whose organization represents over 7,000 MF Global clients, mostly professional investors.Â âThey wonât even meet with me and talk with me.â
Mr. Koutoulas is currently working Pro Bono and many of the lawyers are working at a highly discounted rates and requested that industry participants donate to help .Â âI need professional litigators and bankruptcy attorneys backing me up,â said Northwestern Law School grad Koutoulas who also operates Typhon Capital Management, which is an NFA-registered Commodity Trading Advisor and Commodity Pool Operator. Â ”We’ve had an outpouring of lawyers who want to help,” Mr. Koutoulas said, sitting with a young Yale Law School grad as we spoke.
In calling on MF GlobalÂ presiding bankruptcyÂ Judge Glenn to investigate these issues, Mr. Koutoulas is rallying the futures industry to boycott use of JP Morgan.Â âCall your FCM and if they are using JP Morgan say âWe wonât do business with you if you work with JP Morgan,ââ he said, requesting that industry participants get on Twitter and follow the #BoycottJPM hash tag.
For additional information on the Commodity Customer Coalition visit www.CommodityCustomerCoalition.org and on Twitter use hash tag #boycottJPM
For a related radio interview: http://bit.ly/vGsnh2
Mark H. Melin is author / editor of three books, including High Performance Managed Futures (Wiley, 2010) [http://amzn.to/vyonBA] and was an adjunct instructor in managed futures at Northwestern University. Â Follow him on Twitter @MarkMelin or visit www.Go2ManagedFutures.com for additional information.
Risk Disclosure: Managed futures can be a volatile investment and is not appropriate for all investors. Â Past performance is not indicative of future results.
The opinions expressed in this article are those of the author, may not have considered all risk factors and may not be appropriate for all investors.