Sold Out: How A Private Meeting Between Regulators Gave Away MF Global Segregated Account ProtectionsBy Mark Melin
(Note: This is the first of three articles that details questionable, behind the scenes meetings and special treatment that negatively impacted investor protections.¬† This first article details a critical meeting where core investor protections were jeopardized.¬† The second article details tampering of critical MF Global documents at the SEC.¬† The third article provides names, dates and topics of critical meetings that took place between government regulators and Mr. Corzine that likely influenced the outcome of regulatory action.)
In Closed Door Meeting Preceding Bankruptcy Filing, JP Morgan and Goldman Sachs Granted Superiority over MF Global Segregated Accounts
Move Jeopardized Integrity of Futures Markets while Top CFTC Officials Acted As Idle Bystander
(Chicago) It seems ironic that after all is said and done, it was a hasty conference call between government regulators on October 31, 2011 that sealed the fate of MF Global segregated account protections ‚Äď and plaaced in jeopardy the integrity of the futures markets.
A key legal protection providing security to the account segregation process appears to have been given away in a closed door meeting between the Commodity Futures Exchange Commission (CFTC) and Securities and Exchange Commission (SEC).¬† Early in the MF Global bankruptcy process, before even the first court filing, decisions were made that resulted in weakening the core integrity of the futures markets at its most fundamental level.
It was here a little discussed legal technicality usurped the common bankruptcy code, which has very specific language in it protecting MF Global segregated account holders.¬† The common bankruptcy code has the iron clad protections for segregated accounts built in. It is upon this very foundation that the integrity of the futures markets and its ‚Äúsegregated account comes before all else‚ÄĚ claim rests.
This core protection was given away in a closed door meeting between the SEC and CFTC. This article provides details of the closed door meeting, including meeting participants and the profound impact the meeting has on the very integrity of the futures markets.
In this meeting, which is said to have taken place via conference call early on the morning of October 31, an SEC official made the discretionary decision to engage in what is known as a SIPA liquidation process written for the securities industry.¬† While it may seem absurd, this liquidation process wasn‚Äôt designed or written for a futures brokerage, which has very unique needs in a liquidation.¬† But here is where the technical detail becomes the devil:
In a SIPA liquidation creditors are afforded legal superiority over segregated accounts.
Mark H. Melin is currently writing his fourth book on uncorrelated investing. ¬†He is previous author / editor of three books, including High Performance Managed Futures (Wiley, 2010) and an adjunct instructor in managed futures at Northwestern University. ¬†He can be reached at markhmelin (at) gmail.com
Risk Disclosure: Managed futures can be a volatile investment and is not appropriate for all investors. ¬†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.