PFGBest Update: 7 Takeaways from the CCC Bankruptcy Breakdown

Great piece out this morning by our friend John Roe at the Commodity Customer Coalition (CCC) regarding the PFGBest bankruptcy and some details of how things could unfold, though they are careful to say (and we want to reinforce) that it is informational only and does not constitute legal advice. You can read the full piece here, but the highlights are as follows:

1. PFGBest filed chapter 7 (pure liquidation) versus chapter 11 (reorganization with hopes of emerging), meaning the bankruptcy is handled by Chapter 7 law and relevant portions of the Commodity Exchange Act. Our read on this is that futures clients should take top priority in the disbursement of funds, with no exception.

2. PFGBest was a much simpler entity than MF Global, with PFGBest having a few wholly-owned subsidiaries owned by Wassendorf, whereas, in the MFGlobal case, we had to tackle a publicly traded holding company which owned many, many subsidiaries, financing arms, and so forth. Our read on this is that it should be simpler (and quicker) to indentify assets and unwind.

3. Because customer funds are missing, there wasn’t a bulk transfer of customer accounts to another FCM as happens in a “normal bankruptcy” when no customer funds are missing. As such, there can’t be a release of the verified customer funds ($125 million at this point) until the trustee can prepare final statements for customers and determine what assets are available for distribution and the payment of administrative costs – part of the reason they retained some PFGBest staff for 60 days. Our read here is that the customer should see at least 25% of their money within 60 days.  This was the first request Attain made of the CCC, to file a motion to release as much of the confirmed money as possible as soon as possible.

4. The trustee does have the right to pay administrative costs (the costs of unwinding the firm) out of customer funds if there are not enough corporate assets to cover those costs.  This was a point of confusion until now, so it’s good to be getting some clarity.

5. The CCC will advise the trustee to make the first distribution of money (what we believe to be 25% to 30%) as a bulk transfer versus a claims process. This bulk transfer of customer assets to the firm of customer choosing, instead of the more lengthy claims process, is something we’ve been rallying for.

6. Because PFGBest was a non-clearing FCM and used Jefferies to facilitate trades on foreign exchanges, the CCC feels it is unlikely that any money will be held up in foreign bankruptcy proceedings. Even better, they feel there is likely to be little distinction between normal customer segregated funds and so called 30.7 funds, which are the funds held to margin positions on foreign domiciled futures exchanges.  The fear was that foreign balances qualified as 30.7 funds are only “secured” funds (i.e. backed by firm assets) instead of “segregated” funds, which have top priority. Attain sent several inquiries and information to the CCC detailing how customers sending in money to PFGBEST in Euros, Yen, Aussie Dollars, and so on sent their money to a JP Morgan account labeled “customer segregated funds,” and were never told nor authorized the conversion of all of that money from such segregated status to secured status.

7. Because Wasendorf, Sr. made an outright confession that he committed fraud, the Trustee can use the clawback provision of the Bankruptcy code to retrieve money sent from Wasendorf to his son, recent bride, and so on.  They do not believe this would include customers who withdrew money from PFGBEST before the news hit.

We will continue to cover developments as they come out, but in the meantime, we urge you to consider signing our petition calling for Congress and the CFTC to launch a full investigation of the NFA. It only takes a few minutes, you do not have to publicly display your signature, and the significance of this effort cannot be understated. We’ve provided an in-depth explanation of how important a move this is, but please don’t hesitate to contact us directly with any questions. And of course, be sure to follow along with the blog for new information on the case as it hits.