Are IB accounts protected from fraud and unauthorized access?

[rcanfiel]

Quote from jimrockford:

and any customer property at a futures broker, can be seized to cover losses caused by other customers OR by embezzlement or fraud.

I think that is a completely false statement. Futures accounts at a brokerage are held by a bank (usually Harris in the USA). It is not considered property of the broker. That is one main advantage of trading futures. That is what SEGREGATED means.

In the Refco case, only the futures accounts fared relatively well.

 

[jimrockford]

Quote from rcanfiel:

I think that is a completely false statement. Futures accounts at a brokerage are held by a bank (usually Harris in the USA). It is not considered property of the broker. That is one main advantage of trading futures. That is what SEGREGATED means.

In the Refco case, only the futures accounts fared relatively well.

You are wrong on all counts.

It is federal law that when a futures broker goes bankrupt, customer property will be seized to cover the uncovered losses created by other customers, leaving the customers with partial or total losses. I have battled over this point many times on ET. Many times I have posted links to the CME and CFTC and NFA websites proving that I am right. Every single time, the people I was fighting with eventually had to admit I was right.

You are wrong about what SEGREGATED means. It means that customer property cannot be used to pay the bills of the futures broker generally, but there is a special exception for uncovered losses generated in the accounts of other customers. The property in your futures account is pooled with the property of other customers at your broker, to form a pool of customer assets which is SEGREGATED from the broker's assets. This pool of customer assets is called SEGREGATED because it cannot legally be used to pay the broker's debts, although the broker can still choose to break the law, use the money to pay its debts, and leave its customers with losses (Refco did this). If the broker obeys the law, and does not touch the SEGREGATED customer funds, you can still lose it all. If other customers in your pool generate uncovered losses exceeding the broker's capital, then the assets of non-defaulting customers in the same pool will be seized to cover the pool's deficit, leaving you with a partial or total loss. If you don't believe me, then research the law, research the websites of the CFTC, the CME, and the NFA. Maybe I'll even try to dig out the old links I used to post, if I am in the mood to spend my time helping people who aren't motivated to do their own research.

Third, Refco futures customers lost a billion dollars of money they deposited into SEGREGATED customer acconts, when the broker collapsed. Refco claimed that these customers had authorized Refco to borrow the money, and that the bankruptcy left Refco unable to pay the money back into the SEGREGATED accounts. Months later, they still didn't know that they would get anything back; and I haven't seen anything to confirm what kind of compensation they received from Refco's bankruptcy estate. What are you going to do if your broker goes bankrupt, and then claims you authorized it to borrow money from your SEGREGATED futures account?

 

[thrunner]

Quote from jimrockford:

Third, Refco futures customers lost a billion dollars of money they deposited into SEGREGATED customer acconts, when the broker collapsed.

Not sure where you got this above quote, but http://www.fxfutures.com/content/spot/index.php?show=all

Quote from fxfutures.com:FX Futures: The futures industry is regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). A fee for every trade ranging from $.02 to $.04 per trade funds these overseeing entities. When trading futures, customer assets are held in “true” segregated accounts that are legally separate from firm assets. These rules were specifically created to protect futures traders from firm bankruptcies and since their inception, there has been no documented record of a futures customer ever losing funds as a result of a firm bankruptcy.

....
The bankruptcy of the now disgraced broker Refco has brought this dark reality to light:

Customers holding accounts with the regulated Futures division were minimally impacted by the failure of Refco. The Futures division was quickly purchased by Man Financial and no futures customer lost any of their capital due to the firm’s failure. However, the Refco FX customers have a very different story to tell. The courts concluded that the customer deposits in the unregulated FX trading division were assets of Refco, not the customers. Therefore, customers were required to get in line with all other creditors and attempt to have their funds or portion of their funds returned to them. A resolution was finally reached in regard to Refco FX customers assets. According to a Reuters report on September 14th, 2006, customers have had no ability to redeem their assets since Refco’s failure and the Refco FX settlement provides only 23 to 37.5 cents on the dollar to be paid to each customer.

View the full Refco FX bankruptcy settlement article here.

 

[jimrockford]

Quote from thrunner (quoting futures industry propaganda):

These rules were specifically created to protect futures traders from firm bankruptcies and since their inception, there has been no documented record of a futures customer ever losing funds as a result of a firm bankruptcy.

This is untrue.

The CFTC began operations in 1975. The National Futures Association, a futures industry regulator, tells us that futures broker customers subsequently lost a total of $11,085,000 in segregated funds in futures broker bankruptcies between 1975 and 1989. See http://www.sec.gov/rules/proposed/s71701/sexton1.htm#P78_11411. A billion dollars of segregated futures customer funds were lost in the Refco collapse. See http://www.thestreet.com/markets/hedgefunds/10249291.html. Some or most of those Refco losses were eventually recovered and returned, but only after extensive litigation, and only because the customers were lucky that the recovered funds could be recovered.

Jim Rogers' Funds Sue Refco


By Matthew Goldstein
Wall Street Editor
10/25/2005 9:42 AM EDT



Investing guru Jim Rogers' main commodity funds are charging Refco (RFXCQ - news - Cramer's Take) with "wrongfully and fraudulently'' handling $362 million of their assets.

In a lawsuit filed late Monday, the management company for Rogers' commodity-tracking index funds claims that Refco, which filed for Chapter 11 bankruptcy protection last week, deliberately failed to follow its instructions.

The lawsuit, filed in conjunction with the bankruptcy proceeding, seeks the immediate return of the $362 million held by the Rogers Raw Materials Fund and the Rogers International Raw Materials Fund. The funds claims the assets should never have been included in the Refco bankruptcy filing.

When Refco filed for bankruptcy protection last week, it listed the two Rogers fund among its biggest unsecured creditors. The filing automatically put a freeze on any investor redemptions.

However, Beeland Management, the manager of the Rogers funds, contends that it would still be able to withdraw those assets if Refco had done as it instructed.

The Rogers fund says Refco was supposed to have deposited those assets into a segregated customer account at Refco LLC, the derivatives brokerage's futures business, which is not part of the bankruptcy filing. Instead, the money was put into accounts at Refco Capital Markets, the broker's offshore prime brokerage, which is covered by the bankruptcy filing.

"As a result of Refco's scheme to brazenly violate the funds' instructions and deceitfully divert the funds' assets to an insolvent, unregulated entity ... the funds have suffered and will suffer irreparable harm absent return of the assets,'' the lawsuit charges.

Last week, Beeland Management sent a letter to its investors informing them they probably will not be able to get their money out anytime soon.

 

[thrunner]

It is true that the 'no loses' mention should have been qualified as "since 1989" and/or (other than)"...customer defaults based on large trading losses".
From your own source above :
http://www.sec.gov/rules/proposed/s71701/sexton1.htm#P78_11411

One of NFA's first actions after it began operations on October 1, 1982 was to take a Member Responsibility Action to suspend an FCM that had used most of its customer funds for its own purposes.15 Since then, there have been no insolvency losses due to fraud by an FCM, its principals, or its employees. The few insolvency losses did occur were all due to customer defaults based on large trading losses. In fact, there have been no insolvency losses in funds required to be segregated since 1989 - over a decade ago.16

The article you cited from the rather dated thestreet.com article does not mention any thing about "A billion dollars of segregated customer funds were lost in the Refco collapse."
If indeed Jim Rogers' fund was deposited in a segregated account with Refco, in all likelihood, they will get a lot of those back. There is no mention of new development in that case:
http://www.secinfo.com/drjtj.u2v2.htm
http://www.refcosecuritieslitigation.com/html/settlements.html
We will stay tune with this case, but I don't think you can flat out state that there have been

"A billion dollars of segregated customer funds were lost in the Refco collapse."

I would also like to know if there is ANY trader with a futures segregated account with Refco that has lost money in the bankruptcy. Please post your experience. Thanks.

 

[jimrockford]

My comment about the billion dollars of futures customer segregated funds, lost in the Refco collapse, is something that you could verify if you made the effort to do some research. You could also verify that some or most of the billion dollars have been recovered, but this was only after delay and uncertainty, and only because the customers were lucky that assets could be recovered and lucky that litigation went their way. Customers might very well not be so lucky next time. I really don't have time to track down proofs and spoonfeed you, so if nobody else spoonfeeds you either, perhaps you would benefit from doing your own research instead of just making optimistic assumptions.

 

[thrunner]

Quote from jimrockford:

I really don't have time to track down proofs and spoonfeed you, so if nobody else spoonfeeds you either, perhaps you would benefit from doing your own research instead of just making optimistic assumptions.

It is unfortunate that members with thousands of posts under their belt cannot put together a cogent and definitive argument based on facts. The research I have done is posted URL above, with the 10K filings and others. Those customers that could show that their deposits were made into Refco's segregated futures account have no problems getting out. That is the only point I am trying to make. Whether you can prove the "one billion dollar lost" figure is irrelevant to me.

 

[jimrockford]

Quote from thrunner:

It is unfortunate that members with thousands of posts under their belt cannot put together a cogent and definitive argument based on facts. The research I have done is posted URL above, with the 10K filings and others. Those customers that could show that their deposits were made into Refco's segregated futures account have no problems getting out. That is the only point I am trying to make. Whether you can prove the "one billion dollar lost" figure is irrelevant to me.

I already did put together detailed arguments, based on facts, over and over again. You can verify this by searching and reading my past postings, but I'm sure you won't do so, because this would require you to spend time and effort. I am weary of proving the same things over and over again, for the benefit of people who are ungrateful and unwilling to make substantial efforts to do their own research. It is obvious to me that your efforts to research this matter were not substantial efforts. If you made substantial efforts, then you would see that Jim Rogers and other Refco futures customers, who deposited a billion dollars into Refco futures accounts, had extreme difficulty getting their money back, did not get 100% of it back, and got it back only after a lengthy period of litigation, delay, and uncertainty. It isn't my job to prove this to you. It is your job to do your own research so as to protect yourself. If you choose not to do so, then that is fine with me. I think it is silly for you to complain about my unwillingness to spoonfeed you. You should be grateful that I made this much effort to help you to protect yourself from yourself.

 

[thrunner]

Quote from jimrockford:

I already did put together detailed arguments, based on facts, over and over again. .. It isn't my job to prove this to you. ... I think it is silly for you to complain about my unwillingness to spoonfeed you.

This spoonfeed bit is getting old. I have already stated previously that your ability or inability to prove this point about the one billion dollar loss is irrelevant to me (yes, that means no spoon feed please). I see no evidence that a properly set up segregated futures account is risky but if you see a one billion dollar loss, so be it.

 

[ybfjax]

I was speaking to a broker at infinity futures about 2 weeks ago who used to be an introducing brokerage for Refco. I mentioned the Refco incident and he said that when Refco went under, ALL of his clients were transferred over to his other IB connections (mostly Collins). The transfer averaged about 2-3 days for most clients, but took a week for others.

He told me that the segregated acct is the CLIENT's acct only and has nothing to do with the futures firm.

I don't think he was even doing fx via refco. Only futures.

If the money is in a segregated acct, I don't see how a firms losses would have anything to do with the funds.

Unless the money wasn't really being placed in segregated acct.