We've Seen the FTX Collapse Before

There are overwhelming similarities between the FTX and MF Global bankruptcies — and one big difference.

AccessTimeIconNov 10, 2023 at 10:09 p.m. UTC

Halloween marked the 12-year anniversary of the collapse of MF Global, the eighth largest bankruptcy in U.S. history, where a major political donor caused a multi-billion dollar shortfall of customer segregated funds by transferring them to cover losses on proprietary trading.

Sound familiar?

James Koutoulas is co-founder of the Commodity Customer Coalition and trustee of the LetsGoBrandon.com Foundation.

It should if you’ve been following the trial of FTX founder Sam Bankman-Fried, aka SBF, who was just convicted on seven counts of criminal charges and faces up to 110 years in prison. The federal criminal case was almost unprecedented in efficiency, resulting in a conviction less than a year after FTX collapsed and charges were brought.

Although SBF’s trial was as speedy as they come, his hundreds of thousands of potential victims will likely have to wait a long time for restitution. An estimated $8 billion worth of customer assets were lost in the FTX fraud. While the exchange’s current leadership — led by bankruptcy expert John J. Ray III, of Enron fame — has been slowly clawing back some of those funds, it is still an open question how much and when any assets will be returned to FTX users.

The quick criminal conviction of SBF stands in sharp contrast to a very similar case: MF Global.

MF Global was a 200-year-old commodity broker which installed former Goldman Sachs co-CEO Jon Corzine as CEO in an attempt to turn the sleepy broker into an investment bank. Corzine then risked virtually all of MF Global’s firm capital into risky distressed European Sovereign Debt — at 30:1 leverage.

Corzine used convoluted and offshore systems to hide this concentrated risk from credit rating agencies for 17 months waiting for his trade to hopefully come to fruition. But before that happened the risk was exposed, MF Global’s credit downgraded and the firm received a billion dollar margin call from its biggest lender, JPMorgan Chase.

Corzine then ordered the falsification of a segregated account statement to give himself plausible deniability to transfer customer customer funds to meet his margin call. This transfer was done on taped lines and resulted in the first shortfall in customer segregated funds in U.S. history. Approximately $1.6 billion was lost.

I was then a 30-year-old manager of hedge fund Typhon Capital Management and non-practicing attorney, but one who had never litigated nor taken a class in bankruptcy. Two of my customers had chosen to clear separately managed accounts with MF (then the world’s largest non-bank commodity broker), and so I did what I could to help by getting a temporary New York law license and filing an emergency motion on their behalf.

From a void of action to the New York Times profiling my three person firm, putting us on the first page of the business section, the story went viral and over 1,000 people a day began calling our office asking for help. At Typhon, my little sister Diana handled so many calls she heard phones ringing in her sleep for weeks.

One of those callers was John L. Roe, a commodity broker with 1,000 customer accounts at MF Global and a father in Congress, Phil Roe. John had the idea to start the Commodity Customer Coalition, a voluntary effort to coordinate resources, and wrote our white paper explaining the importance of the bankruptcy on the entire American economy.

Corzine took his customers’ money, and sent it to JPMorgan to meet margin calls ... which is exceedingly similar to SBF using FTX depositors’ funds to cover trading losses...

Before you know it, we were representing virtually all of the 38,000 customers pro bono with help from my Northwestern law professor, J. Samuel Tenenbaum, and Barnes and Thornburg lawyers Trace Schmelz and David Powlen, with Hillary Escadeja, Susan Osmanski and David Rosen rounding out our small but very capable team of volunteers.

As mentioned, MF Global collapsed after running a $1.6 billion shortfall resulting in the freezing of $6.7 billion in customer assets and trader customers being kicked off the trading floor by security since their accounts were completely inaccessible. However, Corzine, a former U.S. senator and governor of New Jersey, was only questioned by the FBI a year after the bankruptcy.

He was never even charged. In Obama’s last week in office, Corzine received a civil settlement with the U.S. Commodity Futures Trading Commission of only $5 million dollars despite the huge shortfall and his $300 million net worth.

Like SBF who donated millions to political candidates, Corzine was one of President Obama’s largest donation bundlers and was also one of Hillary Clinton’s chief fundraisers. Notably, both Corzine and SBF were friends with Gary Gensler and had unprecedented access to him when Gensler chaired the CFTC and SEC, respectively.

MF Global’s clients eventually received 101 cents on the dollar thanks in large part to the volunteer efforts of the Commodity Customer Coalition, which designed an efficient interim claims process, hammered the pair of bankruptcy trustees both in and out of court and before Congress and successfully pressured JPMorgan Chase into returning $1 billion in customer funds to the bankruptcy estate that Corzine improperly sent to the bank.

It is my legal opinion that Corzine unquestionably committed fraud and violated federal laws in a regulated commodity broker that was publicly traded and also subject to regulations including Sarbanes-Oxley, which mandates a high level of internal controls (of which MF Global had virtually none).

Time and again, we have been told that the crypto industry needs regulation in order to prosecute wrongdoers.

Further, Corzine took his customers’ money, and sent it to JPMorgan to meet margin calls in MF Global’s name which is exceedingly similar to SBF using FTX depositors’ funds to cover trading losses at his proprietary trading firm, Alameda Research.

Corzine also likely committed perjury in congressional testimony. He said “I simply do not know where the money is” despite being on taped lines ordering the illicit transfers and abuse of customer liquidity to fund operations.

When the Department of Justice, which had primary jurisdiction over his many alleged crimes, did not charge Corzine, the CCC drafted an indictment and charging memo for felony theft under Tennessee state law and presented it to the state attorney general, who did not bring charges, either.

Time and again, we have been told that the crypto industry needs regulation in order to prosecute wrongdoers. When looking at the crypto industry and markets domiciled in the U.S., it is my sense that intellectually-honest advocates of good faith can disagree on whether a certain crypto token is a "security” or whether it must be traded on a registered exchange or broker, though since there are none, statutes and regulations need to be passed to provided for registered crypto exchanges.

In fact, these issues, and many others, are vigorously winding their way through our federal courts system today (including in my suit- Koutoulas vs. SEC in SDFL, which moves to quash an administrative subpoena issued on the non-security letsgobrandon.com meme coin).

The courts have already issued some important decisions; the federal appellate courts are being petitioned to weigh in, and like the graybeard case in SEC v. Howey (which essentially established securities regulations in the U.S. as known today), the U.S. Supreme Court will almost certainly be asked to make its mark.

And that is only the judicial branch, Congress has also passed piecemeal legislation and is contemplating more comprehensive legislation.

Crypto-haters howl that the industry is the Wild, Wild West claiming it has evaded U.S. financial regulation. MF Global is evidence “beyond a reasonable doubt” that the haters are delusional. Regulation is neither a cure-all nor preventative for crime. MF Global was a NYSE publicly-traded company registered with the SEC, CFTC, NFA, CME, FINRA and the Federal Reserve and none of those regulations prevented crime nor prosecuted it.

In the end, MF’s shareholders and its customers, whose segregated accounts were supposedly sacrosanct pursuant to federal law and regulation, were all left holding an empty bag. The regulators and prosecutors? Crickets.

While the lack of cryptocurrency statutes and regulation in the U.S. did push much of FTX’s fraud offshore, the U.S. still has sound anti-fraud laws that transcend regulatory regimes and are instead limited only by the will of prosecutors to bring cases against high-profile targets.

But, between these two multi-billion dollar fraud cases, it was the major political donor operating in an unregulated industry who has been convicted while the other donor subject to six regulators was never even charged. Many cynics thought SBF’s millions in political donations would help him escape justice, but pending sentencing, that doesn’t seem to be true.

So, does his conviction give us hope that the two-tier justice system in the U.S. isn’t as bad as we thought? Or was SBF’s criminality just too overwhelming to ignore?

One thing’s for certain, the rise and fall of FTX proves that regulation is not a precursor for criminal prosecution, and rubs salt in the wounds of the 38,000 MF Global victims for whom justice was never served — despite that firm being regulated by virtually every financial regulator in the U.S.

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James Koutoulas

James Koutoulas is the co-founder of the Commodity Customer Coalition and trustee of the LetsGoBrandon.com Foundation.