| Illustration by Shout |
It has been compared with every financial disaster in recent memory from Lehman Brothers to Refco to Enron, but once-high-flying futures brokerage MF Global Holdings has proved that every bankruptcy is unhappy in its own way. Thousands of hedge fund managers were locked out of their trading accounts when the brokerage arm of MF Global went under, and they watched helplessly as their assets were dragged into bankruptcy proceedings — the first time this has happened in more than 150 years of futures trading. Because MF Global is the first known broker to have violated customers’ accounts before going bankrupt, there is no legal structure to address the managers’ plight. Enter James Koutoulas, 30-year-old head of Typhon Capital Management, a Chicago commodities hedge fund with $55 million of its $70 million under management tied up in the MF Global quagmire.
A portfolio manager by profession and a lawyer by training, Koutoulas has emerged as an unlikely mouthpiece for the MF Global victims, who are facing more powerful players at the creditors’ table, such as J.P. Morgan, Bank of America and Paul Singer’s $17.6 billion hedge fund, Elliott Management Corp.
Since MF Global filed for bankruptcy on October 31 — one day before it was discovered that the brokerage may have improperly used hundreds of millions of customer money as it fought to stay liquid — Koutoulas has amassed more than 8,000 followers as part of the Commodity Customer Coalition, a group he founded with John Roe, a fellow Chicagoan, futures market participant and son of Tennessee Republican Congressman Phil Roe. So far, the group has used the power of its numbers to wrest an agreement from MF Global’s bankruptcy trustee to restore as much as two-thirds of frozen customer assets — a distribution of up to $2.1 billion.
“We are just hugely glad someone is trying to get to the bottom of all this,” said one New York hedge fund trader who’s still missing $1 million and recently joined Koutoulas’s small but powerful group (joining is free). “Right now many of us don’t have time to get organized. We are just trying to survive.”
By law, account assets must be segregated at all times from company funds. That did not happen with MF Global. This discovery prompted the immediate involvement of federal prosecutors, as well as the Securities Investor Protection Corporation, the Commodity Futures Trading Commission, the Securities and Exchange Commission and the U.S. Justice Department. (The rub: Securities accounts are insured by SIPC, whereas futures accounts are not.)
In its bankruptcy filing, MF Global listed assets of $41 billion against debts of $39.7 billion, marking one of the largest bankruptcies in U.S. history. But the tab to customers continues to grow. MF Global’s chief executive, former New Jersey governor and ex-Goldman Sachs Group co-chairman Jon Corzine, resigned, hiring white-collar criminal defense attorney Andrew Levander. That hasn’t shielded him from being called to Washington to explain what became of the missing customer funds.
—Leah McGrath Goodman
