That would be from the regulated portion of the company. What about from the unregulated part of the company; ie, RefcoFX Associates, LLC and other unregulatd operating units?
Oh crap... everyone's worst nightmare. I got an email from a prop firm today inquiring if I wanted to sign up. When I mentioned REFCO, he let it slide -- after noting that their own clients were asking the same questions.
Gnome, Refco, L.L.C., the regulated futures brokerage (not the parent holding company or any other unregulated entity), back in the 1990s, embezzled well in excess of $100 million from segregated customer funds deposited in futures accounts. The CFTC found, in the 1990s, that Refco had repeatedly, on an almost daily basis, misused those funds to pay debts. Refco consented to the CFTC findings, without either admitting or denying wrongdoing, and was fined in excess of a million dollars. Refco was able to return the embezzled funds, because it was also able to cover its debts and to avoid bankruptcy. So there is a precedent for embezzlement from segregated customer funds deposited with a clearing broker. Also, it is likely that the only motivation powerful enough to cause such embezzlement was the need to avoid bankruptcy, and that Refco would have gone bankrupt if it had not embezzled those funds and temporarily used them to cover debts until other resources could be procured. Also, a more recent example of embezzlement is provided by the victim Jim Rogers, who paid hundreds of millions of dollars of other people's money over to Refco, for deposit into segregated customer fund accounts, but instead, Refco effectively embezzled the funds, by depositing them into non-segregated accounts, with the result that the money has disappeared in the bankruptcy of Refco's associated entities. The main flaw in your thinking is the idea that you can extrapolate from past worst case events, to establish that no substantial future risk exists. This is the type of mistake that led to Victor Neiderhoffer's two spectacular bankruptcies. Nothing has a precedent until it has happened for the first time. If you were never hit by a car, would it be reasonable to say that you will cross the street wearing a blindfold, because past experience indicates no substantial risk that you will be hit? No, you would reason that people get hit by cars all the time, so that you shouldn't act like a fool. You should similarly reason that men wearing expensive clothing suffer huge trading losses, go bankrupt, steal, defraud, and/or embezzle all the time, so that you shouldn't act like a fool.
Good points jimrockford. Segregation does not mean the account can not be accessed. Also there is no payoff for holding your money at Refco. If I had a $100k at Refco I wouldn't be waiting around to see what happens, its not like you get return on your money for keeping it there. Another point is what can the CFTC really enforce. I've dealt with the EPA, OSHA, and one time the CFTC on issues, and saw they can not handle the overload of issues coming their way and that's before you factor in corruption. We all saw how FMEA responded under fire. RefcoFX was using an offshore address and now has effectively "stolen" people's money legally.
If the CFTC were an effective regulator, it would have shut Refco down in 1994, when it caught Refco embezzling from segregated customer funds in "regulated" futures trading accounts. CFTC instead merely fined Refco one million dollars. This, for Refco, was just a trivial cost of doing business. Fogeddaboutit. The result was that a rank cesspool of embezzlement and fraud and corruption and lax risk control all continued and flourished at Refco. The CFTC's failure did far greater damage to people's lives, and to our economy and to our markets, than would have occurred if the cancer had been excised in 1994, before it could metastasize.
The FX business is unregulated for the most part even in the US. The CFTC losses even more power you factor in offshore addresses. Refco futures division would dip into regulated / segregated futures funds, then what do you think their FX division with an offshore address was doing ? Where you wire the funds to and where they end up at the end of the day could be different. Even if the funds show up at the correct account then who regulates that they stay there in an unregulated account ? I already uncovered what Interbank FX was doing. You send $ to the Bank of West to clear through for Interbank FX located in Utah, but your request for funds withdrawals goes to a NY, NY fax # when the Bank of West (Big bank out west) has no branches in NY,NY ??? If your going to deposit a large amount of $ in an FX broker and want 100:1 leverage I would do it through Gain Capital and opt for the following which is listed on their customer agreement: Customer Funds. At this time, GAIN offers Customerâs two alternatives for the management of their Excess Margin Deposit. Customer funds not required as Posted Margin for Open Positions may earn a money market rate of interest if they are maintained in a commingled account at a Standard & Poors rated financial institution having a rating of not less than A with total assets of, at least, $100 billion. Alternatively, Customer funds not required for open positions may be maintained in an individually segregated/FDIC insured account if Customer's opening Account Balance is in excess of US$25,000. There will be no interest income paid on Customer funds maintained in segregated account, which will be individually FDIC insured up to $100,000. Cash on deposit in such accounts will, at all times, be subject to the claims of GAIN Capital for amounts due by Customer, including Margin Calls, as described in Section 5 of the Customer Agreement. This should be the standard for the entire industry. I have enough of a challenge trading, I don't need one with just trying to protect my money.
I have bought Treasury Bills with the excess margin of my Refco account. Anyone know if this is any better protected than the monies in the segregated account? K
It would appear that GAIN Capital's arrangement is fraudulent. GAIN Capital is trying to make it sound like FDIC insurance will protect the customer against a GAIN Capital bankruptcy. The regulator, National Futures Association (NFA), says: See http://www.nfa.futures.org/investor/forex/forex.pdf#search=. The point is that, according to NFA, FDIC insurance only protects against bankruptcy of the FDIC-regulated bank in which GAIN deposits your funds. If GAIN itself goes bankrupt, then you must get in line with GAIN's other creditors, in order to get your money back, and FDIC insurance will have nothing to do with it. How can FDIC insure against a GAIN Capital bankruptcy, if FDIC lacks the power to regulate GAIN Capital so as to keep its creditworthiness and regulatory capital within the boundaries established for FDIC-regulated institutions? Note that the customer not only suffers the detriment of credit risk exposure to GAIN Capital, but GAIN Capital enjoys the beneift of using customer funds to enhance its own creditworthiness, against which it is better able to borrow and to profit, at the expense of customers exposed to this credit risk. And the kicker is that the customer receives NO INTEREST AT ALL in exchange for this credit risk. This arrangement gives GAIN Capital every incentive to take risks recklessly, enabling it to make tons of money, distributed to employees, management, and owners, until one day, the lax risk management results in a blow-up, and then you, the customers, are left holding the bag, because you financed the machine allowing the crooks to make their loot, which will have been removed from the company by the time of the blow-up, so that it will not be available to make you whole. These types of false claims are appearing all over the place. Apex Capital, for example, is in business with the Refco futures broker, and has peppered these boards with false claims that segregated customer funds, deposited with a clearing futures broker, are insured against bankruptcy of the clearing broker. This was part of his effort to defend Refco. He launches false personal attacks against people who try to debunk these false claims. Note that a black swan market event could trigger massive uncovered customer losses at GAIN, which would wipe out the funds held by the non-losing, non-defaulting customers.
Here is my opinion. Are you better protected against risk of default by the United States Government, as issuer of treasury bills, than against risk of default by the bank holding the clearing futures broker's segregated customer funds as cash? Yes. Are you better protected against risk of bankruptcy by the clearing futures broker? No. I believe that under the bankruptcy law governing FCM bankruptcies, your treasury bills will be liquidated, and the proceeds distributed pro rata to all customers in your pool, if there are uncovered customer losses due to trading or embezzlement. You may get cents on the dollar, or nothing, just the same as if you had cash on deposit.