In a microcosm of what’s wrong with this country, NFA management has restructured the Board and set up this election to eliminate 50% of the representatives that were actually elected by you. This will result in even less oversight of a management team that has seen four major frauds happen on their watch recently. Their version of accountability for this has been giving themselves large pay increases while placing restrictions on Directors from criticizing the organization and making it easier to kick us off the Board. They also strongly pushed the opening of a loophole on behalf of one of the largest NFA members allowing CPOs to borrow money from commodity pools they manage if it's under the pretense of becoming self-clearing.
All four candidates for these seats have similar positions and I can wholeheartedly attest that their hearts are in the right place. While John and I greatly appreciate Messrs. Bry and Jaffarian’s service and wish we could continue working with them, we believe that the culture of running NFA for the benefit of a select few can only be changed by rocking the boat. While Messrs. Bry and Jaffarian might be more institutional than John and I, and we have more direct compliance, internal control, and technology experience than they do, the biggest difference between us is not what we want to change at NFA, it’s how.
It takes a special type of person to go toe-to-toe with the management of his own regulator, and deal with the consequences that result in questioning authority (ask John about the two simultaneous audits he had over Thanksgiving weekend this year, right after he was left off the Board ballot). Messrs. Bry and Jaffarian generally have aggressively raised issues, then demurred to try and preserve consensus. John and I have dug in our heels over issues like internal controls when liquidating a Member firm (and likely stopped the theft of up to $900M in the process), restrictions on the new ‘CPO borrowing from their pool customers’ loophole, the incredible rate of growth of executive compensation, and accountability for management misconduct surrounding the re-election of the only Directors allowed to serve on the compensation committee.
While I have been accused of fabricating the latter, Mr. Bry was actually the first to report the incident to the Chairman internally before later backing down in the interest of consensus.
Mr. Bry also was upset enough with NFA’s governance practices that he wrote a draft appeal to the CFTC that was about 190 pages including 18 appendices, but backed down and didn’t send it after NFA management took issue with sharing internal communications that validated his arguments.
Messrs. Bry and Jaffarian were also elected to the Board while John and I litigated MF Global, pro bono, and they published a memo about the need for NFA to take action in the MF Global bankruptcy. This memo also detailed some of things that John and I did on behalf of customers during just the first three months after the bankruptcy:
“At a minimum one would have expected the CME as the Designated Self-Regulatory Organization (DSRO), as well as NFA and the CFTC to have appeared on behalf of customers, as NFA did as the DSRO in the Sentinel Case. However, it was not until over two weeks later on November 16th that James Koutoulas, a CTA and principal of Typhon Capital Management (NFA ID 398233) appeared in bankruptcy court on behalf of his clients, and in the process has ended up representing over 8,000 MF Global customers on a pro bono basis through the Commodity Customer Coalition (CCC).
In a true David v. Goliath undertaking, up against some of the world’s most powerful law firms representing JP Morgan (JPM) and other creditors, relying on donations, and with little prior litigation and no bankruptcy experience, Mr. Koutoulas, with the help of the law firm of Barnes & Thornburg assisting at discounted rates, has:
limited JPM’s requested use of ‘cash collateral’ and blocked an attempt by JPM to receive a super priority over customer funds”...
- “submitted a brief that (i) customer funds retain their character and can be clawed back regardless of their locus, and (ii) outlined recommended classification of funds that left MFG as statutory or constructive trusts
- requested that NFA and CFTC submit amicus briefs on the issue of The Allocation and Distribution of Customer Property
- brought to light the conflicts of interest of JPM (CNBC Video Gallery)”...
- “authored many of the questions used by Congress in the Financial Services and Senate Agriculture Committee hearings
- received a formal request from Debbie Stabenow, Chairwoman of the Senate Committee on Agriculture, for ‘assistance and recommendations’ on market safety and customer protections
- objected to the Bankruptcy Trustee’s original plan to return 60% of customer funds beginning in July 2012, and instead, with the help of the CME, won a court ordered distribution to customers of 72% of their US Seg fund balances by the end of December 2011”
The great thing about democracy is that you get to choose the representation that you want. John and I do not relish the Herculean task of working towards reforming NFA, but we think it’s important work that needs doing, and we will do so at your service until you decide otherwise.
We will support whoever you elect, but the real question is: do you want representatives that have fought, and defeated, some of the most powerful and corrupt institutions on Earth without regard to the personal consequences, or do you want the guys who write memos about them then defer to Management in the name of consensus?
Either way, your vote in this election will have a lot more impact on your business and daily life than your vote in the 2016 presidential election, so make sure you track down your ballot in your holiday mail and send it in.
I wish you the happiest of holidays!