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The law that could save suits by MF Global customers

Posted: January 11, 2012
By: Alison Frankel
Source: Thompson Reuters
Practice Areas: Commercial Litigation, Commodities and Options

If there's one thing the law teaches, it's that there's almost nothing new under the sun. Take MF Global's alleged misuse of its customers' brokerage accounts -- and the related disappearance of $1.2 billion of customer money -- in the run-up to MF's bankruptcy last fall. Shocking, yes, but you only have to look back a few years, to the 2005 collapse of the brokerage conglomerate Refco, to find the same alleged failure to segregate customer money.

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In class actions in Chicago and Manhattan federal courts, after all, they've made parallel allegations about MF misusing their account holdings for its own trading. But according to New York solo Roger Bernstein, who's co-counsel with Berger & Montague on a just-filed Manhattan federal court class action there's a key difference between the Refco and MF Global customer suits: the Refco customers made claims under federal securities laws, while the MF Global cases are based on the Commodity Exchange Act. And the commodities law, Bernstein told me, is very clear about how futures brokerages may -- and may not -- use their customers' money. (An Illinois class action on behalf of MF Global customers is also based on the CEA.)

"The CEA ensures the safety of client funds and fosters confidence within the marketplace by mandating that customer funds be segregated and not commingled or used by the firm itself, absent certain stringent restrictions," said the Jan. 10 New York MF Global complaint, which adds that commodities investors don't have an equivalent of the Securities Investors Protection Corp. to backstop their losses. "[MF Global] failed to segregate the funds and/or improperly and in violation of the law borrowed, pledged, repledged, transferred, hypothecated, rehypothecated, loaned, or investedcustomer funds." MF's violation of the commodities law was so egregious, according to the New York complaint, that it topped Lehman and Refco, which left their commodities brokerage customer accounts alone as they spiraled into bankruptcy. (The Refco cases dismissed by the Second Circuit Tuesday, remember, involved customer accounts at the securities brokerage.)

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