Monthly Archives: November 2011

J.P. Morgan Chase & Co. and MF Global Holdings once were tight knit business associates; now the two entities are butting heads as regulators search for answers in the case of the $600 million missing from MF Global client accounts.

The discovery of the missing client funds effectively put an end to a potential deal to sell MF Global to Interactive Brokers Group. Instead, MF Global filed for bankruptcy protection last week.

As a result, MF customers are now finding themselves in an unforeseen situation. As reported Nov. 8 by the Wall Street Journal, Ken Morrison is one of many MF Global customers unable to withdraw any cash from his account. Morrison doesn’t know how much he will eventually get back, or when, according to the WSJ article.

But it isn’t just Morrison’s cash at stake, it’s also his trading. Morrison’s account was one of 17,000 accounts that were moved to rivals of MF Global, but the trustee liquidating the MF Global has retained $1 billion in those accounts for the time being to pay any potential claims. On Nov. 7, Morrison had to sell corn and wheat trades in order to come up with the cash necessary to back up his remaining trades, the Wall Street Journal says.

Meanwhile, MF Global says J.P. Morgan dragged its feet when it came to settling trades made by MF Global during the time it tried sell various assets. Execs at MF Global believe the supposed slow-down complicated the company’s efforts to find a buyer and may have even caused the $600 million gap in customer accounts.

The allure has rapidly faded for once-hot real estate investments known as TICs, or tenant-in-common exchanges. Between 2004 and 2008, investors bought $13 billion worth of TICs, according to OMNI Real Estate Services. But TICs, also called 1031 exchanges, are complex, high-fee deals and, as in many deals orchestrated by Wall Street, the products have increasingly left countless investors high and dry.

Case in point: Mary Boston, 70, of Dunlap, Tennessee. In 2007, Boston and her husband sold their local theater for $1.2 million, net of debt, according to an Oct. 29 article by the Wall Street Journal. Their tax preparer suggested a financial adviser might be able to help them arrange a 1031 exchange.

After paying the advisor, who was from ING Financial Partners, a 7% commission fee, the couple ended up putting $1.2 million – their entire liquid net worth – into two TICs. In return, they received a stake in two apartment complexes, the Sequoia at Stonebriar in Texas and The Retreat at Stonecrest in Georgia. The offering documents projected an annual yield of 6.5%.

But the Bostons had zero prior investing experience; Mrs. Boston says she told the advisor that she and her husband had a “conservative and moderate” risk tolerance, and that income was their primary investment objective.

After the deals closed, the Bostons had to come up with more money when one of the properties became involved in various lawsuits. Between the capital added and legal fees, the couple has sunk roughly $70,000 more into the property, the Wall Street Journal said.

Meanwhile, the monthly income on the Boston’s investment has plummeted from about $5,000 to $300 – and is projected by the property manager to dry up altogether this month.

The bottom line: TICs are considered a private placement, which is a highly complex and risky investment. The products, in fact, are listed as one of the top 2011 Investor Traps by the North American Securities Administrators Association.

MF Global, which bills itself as a “leading cash and derivatives broker/dealer,” is now the subject of a federal investigation after regulators discovered hundreds of millions of dollars in customer money allegedly missing from the company. The story was first reported on Oct. 31 by the New York Times.

According to the article, the missing money came to light just as MF Global was preparing to sell a major stake of its firm to a rival brokerage. Instead, the deal went south, and MF Global filed for bankruptcy.

Among other things, regulators want to know whether MF Global diverted some customer funds to support its own high-risk trades.

MF Global is run by Jon S. Corzine, a former governor and senator from New Jersey. On Friday, Nov. 4, Corzine resigned from his CEO post.

The investigation into the unaccounted-for cash is in its earliest stages. Several reports put the missing cash between $700 to $950 million. In any case, the situation is troubling to say the least.

On Nov. 4, the New York Times’ Deal Book blog writes that “months before MF Global teetered on the brink, federal regulators were seeking to rein in the types of risky trades that contributed to the firm’s collapse. But they faced opposition from an influential opponent: Jon S. Corzine, the head of the then little-known brokerage firm. … While other financial firms employed teams of lobbyists to fight the new regulation, MF Global’s chief executive in meetings over the last year personally pressed regulators to halt their plans.

And now, remaining members of the MF Global’s board are apparently under close scrutiny by regulators and angry former customers. Also, as the Wall Street Journal’s Bankruptcy Beat blog reports, “the trustee overseeing the liquidation of MF Global’s brokerage business is subpoenaing the company’s top brass, including Corzine, in connection with a wide-ranging probe [of the] broker/dealer’s collapse.”

A proposal to expand private placement offerings via the Internet has state regulators up in arms. Specifically, a bill pending in Congress would use social networking as a way to sell online private placement offerings to more investors. Critics say the concept, known as crowd funding, is a dangerous one, with the potential to victimize investors.

Last week, the House Financial Services committee backed legislation that would make it possible for small businesses to use crowd funding to raise money from investors in exchange for equity stakes. The legislation is expected to go to the House floor for a vote later this week. The measure also would have to pass the Senate and already is facing opposition from state regulators.

Among other things, critics of the crowd-funding legislation say it’s likely to breed fraud and place countless number of unsophisticated investors in financial risk.

“It’s dangerous,” said Heath Abshure, the commissioner of the Arkansas Securities Department, in a Nov. 1 article in Barrons. “Successful investors in small businesses tend to be savvy investors with deep knowledge of a business and its market. Mom and Pop investors on the Internet don’t have the ability to make the right kinds of assessments.”

“This is tailor-made for Internet fraud,” said Mercer Bullard, a law professor at the University of Mississippi, in the same Barrons article. “The measure would allow someone living solely on Social Security to invest $1,500 in an unregistered offering sold through a website that wasn’t subject to regulation as a broker.”

Indeed, using the Internet for crowd-funded deals would affect current protections under which private placements are sold. Currently, those protections do not allow public solicitation and limit the amounts sold to non-accredited investors. That would be eliminated under the proposed crowd-funding plan.