New Directors Push for Vote on Lifetime Ban for Corzine.

[ by Howard Haykin ]

When the Board of the National Futures Association Board meets on Thursday, 2/21/13, a trio of managers from Chicago-based futures firms will begin their terms as NFA Directors.  Up until now, the regulator's board meetings have attracted little or no media attention.  Then again, very little news from or about the NFA is picked up on the other 360 days in the year. 

But that's about to change very quickly, thanks to 3 newly-elected directors who plan on introducing a resolution calling for a lifetime ban from the futures industry on former MF Global Chief Executive Jon Corzine.  We're not aware if the full board of directors will actually vote on the resolution at Thursday's meeting.  A lifetime ban would carry many implications for Mr. Corzine - and might prevent him from his plans to run a hedge fund.  For further details on that story, go to:   [ C-I What Went Wrong, 2/20/13 posting ] .

James Koutoulas, John Roe and Jeff Malec, all managers with Chicago-based futures firms, were elected to the board of the National Futures Association, replacing standing directors after campaigning to change the culture of the agency.  This trio of so-called dissident candidates were elected to the board of a critical U.S. futures-market regulator, swept in by a push to tighten oversight of the industry following two high-profile brokerage failures in less than a year.  Of course the reference is to the failures of MF Global and Peregrine Financial Group.   Presumably, the introduction of tightened oversight would include replacing or tightening up the industry's concept of self-regulation.

An estimated $1.6 billion of client funds went unaccounted for in the October 2011 implosion of MF Global.  Another $215 million in customer funds was lost in a long-running fraud perpetrated by Peregrine's chief executive that came to light in July 2012.

Mr. Malec said in an interview, "the public still needs some measure of accountability."  Apparently the public's need is shared by industry brokers and investors.  And yet, those words cannot begin to reflect the anger that's harbored by industry participants - anger and frustration by the fact that both failed firms breached a long-standing, central tenet of the futures business: protecting investors' money.  And both violated the trust of their customers without being detected,

The NFA , an industry-funded regulator based in Chicago, was responsible for inspecting Peregrine and drew sharp critiques after the fraud came to light.  Exchange operator CME Group Inc. ( CME ) had overseen MF Global.

Profiles of New Directors.  

Mr. Malec is CEO of Attain Capital Management, a Chicago-based futures brokerage that was caught up in the collapse of Peregrine, because Peregrine handled trades on behalf of Attain's customers.  Mr. Malec holds the NFA largely responsible for the collapse of Peregrine, which has left its customers and creditors facing an estimated $190 million shortfall in funds. Last summer, Attain called for Congress to investigate the NFA's practices.

Mr. Koutoulas is with Typhon Capital Management LLC, and it too had clients who did business with both MF Global and Peregrine.  Mr. Koutoulas said in an interview that the NFA needs stiffer punishments for wrongdoers and hold big firms to the same account as smaller ones, particularly when it comes to dealing penalties.

Mr. Roe is principal of BTR Trading Group Inc., whose clients also relied on MF Global to do business.

Mr. Koutoulas and Mr. Roe, who represent commodity-fund managers on the NFA board, were actively involved in the MF Global proceedings following that firm's collapse on 10/31/11.  They and others formed an ad hoc group in 2011 to help support and argue for MF Global customers in the bankruptcy proceedings of that firm.

Other Proposals from New Directors.   All three new directors said they also will urge the NFA to further strengthen its auditing practices, which was the brunt of heavy criticism after Peregrine CEO Russell Wasendorf Sr. was found to have misled authorities by faking bank account documents for many years.  While the NFA already has beefed up automated reviews of futures account balances, Mr. Malec said the agency needs higher standards for hiring auditors, and Mr. Roe said in an interview that NFA examiners "need to focus on where money is being held rather than [firms'] sales practices."

The NFA Board is composed of 27 Directors - representing exchanges, trade-clearing firms, fund managers, brokers and public directors. The elections of the new directors fill three of the six seats dedicated to funds and brokers.

For further details, go to:   [ Dow Jones Business News, 1/23/13 ].