PFGBest Update: Why it All Comes Back to the NFA

This story gets more bizarre by the day. The headline this morning that everyone is talking about is the discovery of who, exactly, the independent auditor for PFGBest was- a one-person firm located in the Chicago suburbs. There’s been a lot of buzz over this issue, but, to be fair, the use of a smaller auditor isn’t necessarily a problem, and the woman’s work history shows no indication of prior incompetency or fraud. Realistically, a big name auditing firm means very little. The big 5 auditors were involved with Refco, Enron, Sentinel, and MF Global; bigger isn’t necessarily better. And the worst travesty of all is that it shouldn’t really matter who the independent auditor is, because of the very stringent (at least on paper) additional annual audits done by the NFA on FCMs.

Bottom line: A group of individuals knowingly colluded to defraud clients of funds, evading the regulators at every turn.

We’ve received emails and comments from some who argue that the industry should never have relied on the NFA to begin with, citing past problems with their oversight. Here’s the problem: there is no alternative. Let’s assume a world where we had access to those bank accounts at PFG – we could login on the bank website and look at the segregated account balance. We still wouldn’t know without talking to every firm and customer of the FCM how much is supposed to be in that account.  The FCM is the one who tells the world how much they have in customer funds, and the NFA is the only entity who can confirm that amount through the aggregation of customer balances reported to them by all of the registered brokers with customers at the FCM. There is zero ability for an individual firm in the industry to do this on their own; the NFA HAS to be relied on as the regulator who can force firms to report their customer assets.

They should know how much customer assets there are from three separate sources:

  • Aggregation of the brokerage firms clearing business through the FCM
  • Review of self-reported balances from the FCM
  • Direct verification of how much money is on deposit in the accounts marked and titled customer segregated accounts with the bank in question

Really, they can verify a portion of the customer assets via a fourth avenue – the CME and other clearing exchanges who have customer funds on deposit to margin positions- but that’s neither there nor here. The point is that, despite the available sources of data, no one at the NFA caught this until now. One phone call- one quick search on Google- would have shown that the P.O Box set up by PFGBest to receive the NFA’s bank verification paperwork on these balances did not belong to U.S. Bank- or anyone else, for that matter. This is basic stuff.

The NFA, in our opinion, needs a thorough investigation as far as their rules and practices are concerned, but in the meantime, there are clients hanging in the balance. At Attain, we have verified with our clearing firms that they are using the electronic bank account confirmation system that PFGBest balked at to ensure no similar fraud can take place moving forward, and urge all industry participants to do the same with any and all clearing firms out there. We attempted to verify with the NFA what percentage of firms have authorized this electronic confirmation system, but they would not supply the information, so it falls to us to do their job.

We would also like to see new regulations that would require FCMs to authorize their FCM to directly access the bank account balances with the banks in question at any time- not just at an annual review. If the rest of the world can login to their bank to see their balances whenever they want, doesn’t it make sense that the regulators in charge of insuring customer protection should be able to do the same on behalf of the investing public? This is 2012. The technology exists- let’s use it.

With just a few common sense safeguards put in place, things would return to normal – where an FCM running out of money doesn’t mean the customer is out of money. The law is clear on this: the money in customer segregated accounts belongs to the futures investors, and not the JPMorgans or stockholders of the world.  CFTC regulation 190.08(b) states:

“Allocation of property between customer classes. No portion of the customer estate may be allocated to pay non-public customer claims until all public customer claims have been satisfied in full. Any property segregated on behalf of non-public customers must be treated initially as part of the public customer estate and allocated under paragraph (c)(2) of this section.”

In other words, because PFGBest was an FCM, and not a securities firm as filing entity MFGH was in the MFGlobal case, futures clients should be first in line for PFGBest assets. Still, there are other issues that need to be addressed, which is why we’re standing here, waving our arms and yelling at the top of our lungs, trying to tell people- it’s time for some changes.


  1. MFGH was the holding company of a group of separate entities. MF Global, Inc., being one of the entities under the Holdings. It was the only one that earned anything.

    MFG, Inc, was registered as a securities brokerage and as an FCM. Those 318 securities accounts allowed the SEC to choose a SIPA proceeding, which was never designed for the over 38,000 futures accounts.

    The bankruptcy proceedings were broken into two: A chapter 11 (which is not permissible for a brokerage) for the Holdings and a SIPA for the FCM/BD because of those 318 accounts.

    This structure bordered legality and close inspection of it confirms it was created to benefit not only major creditors of the Holdings, but a massive bankruptcy industry. And it also gave many cover behind a convoluted bankruptcy structure.

    At the time of filing, MFGH attorneys testified to the federal Judge that all customer funds were accounted for. All regulators were present at the time.

    Like MFGH and MFGI, we can argue that there is regulator complicity through negligence for PFG. Fortunately, with PFG, customers WILL come first, even as all assets of PFG are sold off. And, unlike MFGH and MFGI, there was an immediate lock down and receivership.

    With MF Global regulators contributed to a second round of stealing by letting MFGH to operate and move funds around for almost two months before a Trustee was assigned to the Holdings. And futures customers were forced to become creditors in a bogus and costly bankruptcy structure.

    The CFTC was out to lunch the whole time.


  2. […] during the 2008 financial crisis. What’s interesting for me in the PFGBest case is the use of a small, one-woman shop as the auditor. PFG Best has a subsidiary that was registered with the SEC. As such they were required to use an […]

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