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Wealth Matters

In Commodities World, Safe and Secure Sometimes Isn’t

THE scariest thing about MF Global’s bankruptcy four weeks ago is not that a venerable firm led by a former Goldman Sachs chief executive and New Jersey governor collapsed. It is that MF Global’s customers have not yet gotten all their money back. And with the report this week from the court-appointed trustee that as much as $1.2 billion appears to be missing, many customers are worried that they’ll ever see that money again.

It wasn’t supposed to work that way. Commodities firms are required to keep clients’ money separate from the firm’s capital.

In the commodities world, these segregated accounts had been seen as stronger than the deposit insurance offered by banks that are members of the Federal Deposit Insurance Corporation and the protection on securities, like stocks and bonds, given by the Securities Investor Protection Corporation.

But regulators suspect that MF Global did not keep its clients’ money separate in its chaotic waning days, using some customers’ money, they believe, to meet its own obligations. And if the firm violated the rule requiring segregated accounts, investors say they are now concerned about the viability of commodities trading as it has been conducted in the United States for more than a century.

“If they’re not going to uphold segregated funds, this can happen again tomorrow to anyone,” said Paula Pierce, a commodities lawyer in Virginia. “The question is whether anyone is going to do anything about it.”

R. David Gary, a spokesman for the Commodity Futures Trading Commission, which was MF Global’s main regulator, said the commission planned to review the rule governing segregated accounts at a meeting on Dec. 5. Michael Shore, a spokesman for the CME Group, which owns the main exchanges where MF Global traded, said: “It’s important to understand this was an unprecedented situation for our industry and that the shortfall in total customer segregated funds occurred at the firm level, not at the clearinghouse level.”

The regulators attribute some of the delay in returning clients’ money to what the court-appointed trustee has described as sloppy bookkeeping at MF Global, which has made it difficult to find what is left and where it is. But lawyers representing clients who have lost access to their money do not accept this argument. They say that segregated accounts are sacrosanct and that the money in them should have been immediately returned to their clients.

“It hasn’t worked out well for anyone yet, even the people who had positions move over early on,” said Timothy Butler, a partner at Tibbetts Keating & Butler in Darien, Conn., who represents 10 clients with accounts ranging from $6,000 to several million dollars. “I had one person who got no margin transferred and was virtually wiped out. He had a $250,000 gold position, and he only got back $50,000 after it was liquidated.”

Nor are the issues raised by the MF Global bankruptcy simply about the safety and security of money in segregated accounts at commodities brokerage houses. They also raise questions about the safety of investments at other types of firms.

ARE YOU PROTECTED? Just because there is protection in place does not mean you will have access to your money quickly — or that anyone will care if this poses a hardship.

Jerome Beazley, president of TimeTech Capital Management, a commodities trading adviser in Esmont, Va., had all of his clients’ money with MF Global. He may eventually get his clients’ money back, but until then he is out of business.

He declined to give the exact amount at issue but said he had put it all into cash a few weeks before MF Global collapsed. But because only money backing open futures positions has been transferred so far, he has no access to the money.

He said he was upset that the trustee did not immediately move the commodities accounts to another firm, as happened when other clearinghouses he used went bankrupt. “There is a wall between the creditors and the segregated funds,” he said. “That’s like vault money. When you touch it, you’ve destroyed the credibility of Wall Street.”

Jack Lucentini, a science writer, has also been hurt by what he considered a safe play — having extra cash in his MF Global account. “I had this obsession with never having to get a margin call,” he said. “I thought I’d be able to sleep like a baby by having so much money in there.”

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Jack Lucentini had $214,000 in his MF Global account. When the firm collapsed, he received about $12,000.Credit...Tina Fineberg for The New York Times

When the firm collapsed, he received about $12,000 of the $214,000 he had at MF Global. Even then, he had to put up an additional $7,000 to support his existing trades at the new firm. He hopes to get 60 percent of his money in early December, when the trustee said he would release some of the cash. Similar risks exist for investors who held cash in securities accounts. SIPC offers protection up to $500,000 for securities accounts, but it covers only $250,000 in cash, said Stephen Harbeck, president and chief executive.

Those who had money in MF Global’s securities accounts have not gotten it back. There are 400 securities accounts on top of the 38,000 commodities accounts. But after a month, they are still in limbo. “The trustee is still working on that,” Mr. Harbeck said. “We hope to get them to another broker.”

But there is no deadline for this, and account holders should not expect to collect money from SIPC any time soon. “If there is no viable account transfer, we’d reluctantly have to satisfy claims,” Mr. Harbeck said. “The protection would kick in at that time.”

Andrew Stoltmann, a securities lawyer in Chicago, said clients typically waited a long time to have any money returned to them. While some $92 billion at Lehman Brothers was moved in about a week to Barclays when the firm collapsed, Mr. Stoltmann said this was the exception. It took a decade for clients of Stratton Oakmont, a stock manipulator on Long Island, to receive any money back.

“There were thousands of investors who had lost tens of millions of dollars, and they thought they were protected,” he said. SIPC “said the majority of their losses were investment-related — in artificially inflated stocks. Arguably, they were correct, but the perception for the public was that SIPC would cover it.”

WHAT IS YOUR RECOURSE? There are always legal options but they will be costly and time-consuming. One common strategy is to sue the firm or person who introduced you to the brokerage firm that collapsed.

Mr. Lucentini said he was filing suit against Charles Schwab for introducing him to MF Global and for not transferring his money out quickly enough. Mr. Butler said he was bringing lawsuits against Schwab and E*Trade for the same reason.

“I have clients telling me that Schwab was the introducing broker, and they made arrangements to do transfers out and Schwab was slow to make the transfers,” Mr. Butler said.

Schwab contends that MF Global was a reputable firm when it recommended it to clients. “We made it clear that it was a separate company, that we did not provide futures trading,” said Greg Gable, a spokesman for Schwab. “We warned of the risks inherent in futures trading.”

Jaime Stein, a spokesperson for E*Trade, said: “This matter is currently in the hands of the bankruptcy trustee. We have retained outside counsel to assist us in advocating for the release of our customers’ remaining accounts and funds.”

WHERE IS IT SAFE? Mr. Stoltmann said he used to tell clients who were concerned about the safety of their money to use large firms like Bear Stearns and Lehman Brothers. While the accounts of most clients of those now-defunct brokerage houses were transferred to other firms, the process was not without stress.

Now he recommends extensive due diligence on every firm. “Post-2008, I don’t think any firms are fail-safe,” he said. “Certainly going with a Morgan Stanley, Merrill Lynch or a Goldman Sachs is a far better alternative than going with a firm you’ve never heard of.”

Even then, Ken Kamen, president of Mercadien Asset Management, said investors could take unintended risks by using leverage, or margin, in their accounts. “Anytime something is not fully paid for, you’re giving someone the right to attach collateral to it,” he said. “You should be on the lookout if a brokerage firm automatically signs you up for a margin account.”

As to commodities accounts, some MF Global clients now regret keeping more than the minimum amount of margin at the brokerage. Mr. Lucentini is one. “I should have kept it at a bank or under my mattress and sent money in when necessary,” he said.

While he and others may eventually get their money back, the lesson here is an old one: don’t put all your eggs in one basket.

A version of this article appears in print on  , Section B, Page 5 of the New York edition with the headline: In Commodities World, Safe and Secure Sometimes Isn’t. Order Reprints | Today’s Paper | Subscribe

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