The idea that money kept in a customer segregated fund as required by the CFTC is a mirage. Funds kept with any trading entity are never safe from complete loss. I have been there before and I can tell you that this is a fact.
Refco Account Security
- Thread starter Htrader
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And yes, based on what the general public knows at this time the futures division of REFCO LLC., has been UNAFFECTED.- - - Just ask the NYMEX, CME, CBOT, etc., who monitor the funds in segregated futures accounts on a DAILY and REAL-TIME basis.
As for your statement that I have been defending REFCO here on ET, please show me one post where I have defended or made excuses for the tremendously despicable behavior of Bennett or Maggio.
Agreed.
The segregated accounts can indeed be pooled together in order to meet the obligation (debt) of a very large trading blowup.
hey, you can only report what your told. my contact is on the futures side - be interested to hear what you find out
Quote from 2cents:
dude -- and its only taken you until the 50th page on this thread to acknowledge this 'minor' risk at Refco LLC??!)))))))))))
anyway, guess what really matters now is to determine the true financial situation of each & every entity of the group... that'll take a good few weeks...
Perhaps it's on the 50th page because it wasn't the problem at Refco. The problem did not have to do with trading losses. It had to do with fraud at the holding company level.
There are all kinds of risks pertaining to futures trading....but not all are applicable in this particular situation.
OldTrader
OldTrader you're right (apologies for slightly 'editing yr post'), however what wld happen if for instance RCM happens to be a segregated acct holder at Refco LLC, directly or via yet another hegde fund, and holds huge losing pozzies there on CME (eFX or other) contracts, or anything like that? all v.hypothetical indeed, but the currently uncovered fraud is related to hiding irrecoverable debts caused by trading losses incurred way back, as far as i understand. what else is there, and who is to say thats all there is to be found? all i know is that if i wait to learn about it from Bloomberg, i am taking a risk. what is the reward for that risk? in any case, my practical problem was having personal & clients' monies with RCM affiliates (FXCM & ACM) but its no longer an issue since those monies have now been withdrawn and some clients have already confirmed the wires have now hit their bk accts. now i believe you guys if you say there is much less reason to worry at Refco LLC's segregated accts level, i don't trade CME products yet therefore not v.familiar with CME protection mechanisms, however if i did, i v.much think i wld have acted conservately and done just the same, i.e. close / move my accts while i cld, and shld there be even worse news ahead, watch it from the sidelines like everybody else...
Quote from Apex Capital:
Quote from 2cents:
Quote from Oldtrader:
What makes you think that fraudsters and embezzlers will confine their misconduct to a holding company, rather than inflict it upon related companies also under their control? If you placed a piece of meat in front of a dog, would you not expect the dog to eat it?
If money is stolen from segregated customer funds, on deposit with a futures broker, it has the same effect as trading losses. The result is that the segregated customer funds of all the customers are pooled and seized in order to cover the loss. The customers only receive, pro rata, what is left over after the loss is covered. This can mean getting back pennies on the dollar, or even nothing. It doesn't matter if the loss is due to trading or to theft. Why do you think it matters? Do you think that the exchange, or Alan Greenspan, or President Bush, or FEMA, or Santa Claus, or your fairy godmother, or God or Allah will say, "OK, your money disappeared because of theft, rather than trading losses, so I guess we'll cut you a check to make you whole"? Where will the money come from?
Insurance on deposits with banks and securities firms is a great safety net, but it seems that you are so accustomed to reliance on that safety net, that you are ignoring its very grave limitations. It seems that your risk aversion muscles have somewhat atrophied, due to the disuse enabled by our society's extensive reliance upon deposit insurance. You forget that deposit insurance is the exception to the rule, not the rule. We are talking about futures accounts. THE SAFETY NET DOESN'T EXIST FOR FUTURES ACCOUNTS. NO GUARANTOR IS OBLIGATED TO CUT A CHECK TO COVER LOSSES DUE TO trading OR theft OF SEGREGATED CUSTOMER FUNDS IN FUTURES ACCOUNTS.
I would also submit that there is no basis for your view that this fraud had nothing to do with trading losses. We don't know what happened or why it happened. Students of fraud know that frauds often result from losses incurred in trading or other business activity. Most people would not ordinarily commit fraud, but when they are faced with trading or business failures, fraud often becomes a last resort to conceal failure. If they are lucky, this buys them time, until a bad trade moves favorably, or a business recovers, the loss can be repaired, and the secretly "borrowed" funds returned. But sometimes, bad trades become worse trades, so that the money can never be returned. Remember Barings Bank, for example? If this fraud had its origins in the need to conceal huge trading losses in the futures brokerage, or if this company controls trading risks no more effectively than it safeguards against embezzlement of segregated customer funds (for which the Refco futures brokerage Refco, L.L.C. was fined years ago by the CFTC), then segregated customer funds could be seized to cover losses from trading or embezzlement.
The Refco futures operation, Refco, L.L.C., has already been fined by the CFTC for embezzling segregated customer funds, and then using them to cover debts. The funds were returned, as far as we know, but what if there is or was or will be additional, well-concealed embezzlement, which has not yet been detected, of segregated customer funds then irretrievably lost, so that they can never be returned? Segregated customer funds would be seized to cover the loss, with the result that customers would lose part or all of their deposits.
I would also submit that with a little bit of creativity, fraudsters and embezzlers can devise ways to drain segregated customer funds from a futures brokerage, while disguising their theft as customer trading losses.
The function of a clearing house is not to make customers whole against loss due to their own trading, or trading losses due to other customers in the same brokerage, or losses due to theft or fraud or mismanagement by their broker. The function of a clearing house is to protect against the risk of counterparties reneging on trades. If you entrust your futures account to embezzlers, and then it disappears, you are on your own. Our system relies on market discipline supplemented by CFTC regulation, not deposit insurance, to protect us against fraud or theft or mismanagement by futures brokers.
Question: what would have to happen, Oldtrader, and how bad would it have to get, and how many bells would have to ring, and how many red flags would have to be raised, before you finally became concerned that maybe it would not be a good idea to deposit funds with a particular futures brokerage? Would you just wait until the last possible moment, and then discover your funds were gone?
Quote from 2cents:
dude -- and its only taken you until the 50th page on this thread to acknowledge this 'minor' risk at Refco LLC??!
Quote from Oldtrader:
What makes you think that fraudsters and embezzlers will confine their misconduct to a holding company, rather than inflict it upon related companies also under their control? If you placed a piece of meat in front of a dog, would you not expect the dog to eat it?
If money is stolen from segregated customer funds, on deposit with a futures broker, it has the same effect as trading losses. The result is that the segregated customer funds of all the customers are pooled and seized in order to cover the loss. The customers only receive, pro rata, what is left over after the loss is covered. This can mean getting back pennies on the dollar, or even nothing. It doesn't matter if the loss is due to trading or to theft. Why do you think it matters? Do you think that the exchange, or Alan Greenspan, or President Bush, or FEMA, or Santa Claus, or your fairy godmother, or God or Allah will say, "OK, your money disappeared because of theft, rather than trading losses, so I guess we'll cut you a check to make you whole"? Where will the money come from?
Insurance on deposits with banks and securities firms is a great safety net, but it seems that you are so accustomed to reliance on that safety net, that you are ignoring its very grave limitations. It seems that your risk aversion muscles have somewhat atrophied, due to the disuse enabled by our society's extensive reliance upon deposit insurance. You forget that deposit insurance is the exception to the rule, not the rule. We are talking about futures accounts. THE SAFETY NET DOESN'T EXIST FOR FUTURES ACCOUNTS. NO GUARANTOR IS OBLIGATED TO CUT A CHECK TO COVER LOSSES DUE TO trading OR theft OF SEGREGATED CUSTOMER FUNDS IN FUTURES ACCOUNTS.
I would also submit that there is no basis for your view that this fraud had nothing to do with trading losses. We don't know what happened or why it happened. Students of fraud know that frauds often result from losses incurred in trading or other business activity. Most people would not ordinarily commit fraud, but when they are faced with trading or business failures, fraud often becomes a last resort to conceal failure. If they are lucky, this buys them time, until a bad trade moves favorably, or a business recovers, the loss can be repaired, and the secretly "borrowed" funds returned. But sometimes, bad trades become worse trades, so that the money can never be returned. Remember Barings Bank, for example? If this fraud had its origins in the need to conceal huge trading losses in the futures brokerage, or if this company controls trading risks no more effectively than it safeguards against embezzlement of segregated customer funds (for which the Refco futures brokerage Refco, L.L.C. was fined years ago by the CFTC), then segregated customer funds could be seized to cover losses from trading or embezzlement.
The Refco futures operation, Refco, L.L.C., has already been fined by the CFTC for embezzling segregated customer funds, and then using them to cover debts. The funds were returned, as far as we know, but what if there is or was or will be additional, well-concealed embezzlement, which has not yet been detected, of segregated customer funds then irretrievably lost, so that they can never be returned? Segregated customer funds would be seized to cover the loss, with the result that customers would lose part or all of their deposits.
I would also submit that with a little bit of creativity, fraudsters and embezzlers can devise ways to drain segregated customer funds from a futures brokerage, while disguising their theft as customer trading losses.
The function of a clearing house is not to make customers whole against loss due to their own trading, or trading losses due to other customers in the same brokerage, or losses due to theft or fraud or mismanagement by their broker. The function of a clearing house is to protect against the risk of counterparties reneging on trades. If you entrust your futures account to embezzlers, and then it disappears, you are on your own. Our system relies on market discipline supplemented by CFTC regulation, not deposit insurance, to protect us against fraud or theft or mismanagement by futures brokers.
Question: what would have to happen, Oldtrader, and how bad would it have to get, and how many bells would have to ring, and how many red flags would have to be raised, before you finally became concerned that maybe it would not be a good idea to deposit funds with a particular futures brokerage? Would you just wait until the last possible moment, and then discover your funds were gone?
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