Andrew Abraham

andy-0101 My name in Andrew Abraham. I have been investing in commodities and managed futures since 1994. I adhere to the philosophy of trend following. Trend following stresses a disciplined approach to commodity/ futures trading. Successful trend following and commodity futures investing requires patience, discipline and actively managing the risk. What sets me apart from other traders is that I am not only concerned about the return on investment but how much risk I will have to tolerate to achieve my goals.

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Futures and commodity trading involve substantial risk. The evaluations of futures and commodities may fluctuate and as a result, clients may lose more than their original investment. In no event should the content of this website be construed as an express or an implied promise, guarantee or implication by, that you will profit, or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Information provided on this website is intended solely for informative purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible, where projections of future conditions are attempted.



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Background, Impacts & Solutions to MF Global’s Demise

Please spread this around. Send to your Congressman/women as well as Senators

Background, Impacts & Solutions to MF Global’s Demise
By John L. Roe & James L. Koutoulas, Esq.
November 10, 2011
The failure of MF Global has wide ranging consequences for the American economy and its bankruptcy is being handled
in a manner that is making these consequences much worse than they need to be. The freezing of customer segregated
funds is having a chilling effect on global financial markets. It also has a less obvious but significant impact on the dayto-
day operations of farmers, mining operators, ranchers, and other commodity consumers and producers.
The failure of MF Global directly contributed to the loss of approximately 2,800 jobs or more during this period of
already high unemployment. But, the unnecessarily slow speed of this bankruptcy process will cause the loss of even
more jobs as it directly damages other brokerage firms, investment advisors, and commodity consumers and producers. In
fact, the only person served by the current bankruptcy process is the Trustee who has already submitted bills to the MF
Global estate at $891/hour for his time and an average of approximately $500/hour for his staff. This is the same Trustee
that spent 3 years working on the Lehman bankruptcy and billed the estate over $160 million dollars despite not returning
any customer funds.
If this bankruptcy is managed the same way as Lehman’s, it will be the end of the United States as a viable jurisdiction for
commodity trading. Congress should use whatever power it has to prevent this from happening.
What MF Global Was:
MF Global, Inc. was a commodities and securities brokerage firm dealing primarily in commodity contracts responsible
for holding clients’ cash and collateral.
Who MF Global Clients Are:
They represent a cross-section of people across America and the world, from farmers and ranchers who hedge their crops
and herds, to oil producers and miners who use futures to lock-in prices and take delivery of physical commodities, to
retirees who invest in futures to diversify their portfolios. For example, farmers who have crops in the field need to sell
futures in commodity markets so they can lock in prices for their future yields today, instead of taking on market risk as
they would otherwise be exposed to volatile price swings. Large corporations like Coca-Cola who make money in foreign
markets do not want to lose money when they repatriate revenue earned in foreign currency. They have to be able to
forecast future expenses and profits accurately in the currency of their domicile and hedge that currency price risk in
futures markets accordingly. Speculators add volume and liquidity to these markets which allow for better, more efficient
pricing of commodities. This allows for stability in prices of commodities and predictability of future profit and loss,
which in turn allows for stability in producer and consumer prices. These commodities include everything from grains
like corn and wheat, to energy like oil and natural gas, to softs like cotton and sugar, to currencies like the US dollar and
Euro, to financial instruments like bonds and stock indexes. Simply put, trading in commodity futures markets is one of
the backbones of the American economic engine.
Circumstances Surrounding the Bankruptcy:
MF Global was a 230 year old firm that principally acted as a clearing broker for commodities trades. Jon Corzine took
over as CEO of MF Global in March 2010 with the intent of turning MF Global into an investment bank that makes bets
with the firm’s own capital. FINRA (the securities self-regulatory organization) gave Corzine a waiver, after he had not
been in the industry for 12 years, which allowed him to be the head of MF Global without a license– a license that every
other person in the industry must have to even speak one word to a client. Since commodity brokers make most of their
money on interest earned by holding customers’ collateral for trading, the low interest rate environment since the financial
crisis of 2008 has been tough on many brokers. This has lead some like MF Global to seek higher yields using more
aggressive strategies. Corzine took on too much risk in seeking greater yields and on October 25, 2011 MF Global
reported a large quarterly loss due to a 40:1 leveraged exposure to European sovereign debt. Fears over this leveraged
exposure crushed MF Global’s stock, caused its bonds to trade at distressed levels and led it to max out company lines of
credit. MF Global sought Chapter 11 bankruptcy protection on October 31, 2011 after an acquisition by Interactive
Brokers fell through. The acquisition collapsed because of a discrepancy of $633 million dollars in customer funds (out
of a total of $5.45B, or 11.6%) that were supposed to be fully segregated from the firm’s capital but could not be
immediately accounted for.
Segregated Funds- Cornerstone of the Commodities Industry:
One of the big differences between commodities brokers and securities (stocks and bonds) brokers is that commodity
brokers have an obligation to keep customer funds completely segregated from the firm’s own assets. This is to ensure
that clients are completely protected from losses sustained by the firms’ trading and operations. Many industry groups and
regulators have loudly heralded the fact that because of this segregated account protection, no client has ever lost a penny
from a segregated account as the result of a broker bankruptcy. So whereas securities clients are afforded various
insurance in the event of a broker bankruptcy, commodities clients are afforded none since their funds cannot be
comingled with a broker’s assets and cannot be used to pay creditors in a bankruptcy. Segregated funds are accounted for
daily to the National Futures Association (NFA) and to the Commodity Futures Trading Commission (CFTC) through the
broker’s designated self-regulatory organization (DSRO), which in MF Global’s case was the Chicago Mercantile
Exchange (CME).
Compromise of the Segregated Accounts System
Industry groups and regulators argue that the commodities trading industry is able to function with lighter regulations than
securities trading because customer accounts are segregated from firm assets. However, in the MF Global case, there is
$633M in these segregated client funds that are unaccounted for, either due to sloppy accounting or nefarious activity
conducted by the firm. This has resulted in a compromise of the integrity of the segregated accounts system, and a
complication of the bankruptcy proceeding by involving a number of parties with little to no experience in commodities.
The Bankruptcy Process and its Flaws
The bankruptcy process has been delegated to SIPC, the securities insurance regulator, after it petitioned the bankruptcy
court to begin a liquidation proceeding of MF Global’s broker-dealer. SIPC stands for “Securities Investor Protection
Corporation.” It was created by the Securities Investment Protection Act of 1970 and was designed to protect owners of
securities in a similar way to how the FDIC protects bank depositors. However, the vast majority of customer assets
affected by this bankruptcy are NOT securities, rather they are cash and commodity futures contracts, and SIPC’s
attorneys have limited experience with commodity futures contracts. Despite the fact that about 11.6% of the segregated
funds have yet to be accounted for, 88.4% have been. There is no reason, whatsoever, that these funds should not be
immediately released to their rightful owners.
The Trustee intends to put these segregated funds through the same claims process common to securities assets in
bankruptcy. If that happens, the process will take months to reach fruition, perhaps years which is unprecedented in the
commodities industry. The most recent bankruptcy of a major commodities clearing firm, Refco, Inc., involved no
freezing of assets and no cessation of trading for any customer.
There is no discernible reason to put commodity futures customers of MF Global through such a process, when the
rightful owners are already known and 88.4% of the funds are accounted for. During this convoluted claims process, the
Trustee will continue to amass millions of dollars in administrative fees which will further deplete customer segregated
funds. If customers do not have additional collateral to post for trading purposes, they too will face bankruptcy as they are
unable to do business. For example, farmers whose collateral is locked up may have to sell their land and equipment to
post new collateral so they can hedge their crops or face financial ruin through exposure to volatile price swings in the
market. While this collateral is locked up, those price swings will become worse as volume dries up in smaller markets–
which is already happening:
Even worse, the Trustee is already putting it out in the media that customers of MF Global may have to share in the loss of
segregated funds pro-rata with other creditors. By subordinating customers with collateral in segregated funds to creditors
of MF Global’s estate, the Trustee is essentially making the creditors the beneficiary of a criminal act. If MF Global
comingled segregated funds with corporate assets, it was a criminal act. Paying such a creditor’s claim with a portion of
those comingled funds would make them a beneficiary of that crime. Paying JP Morgan with an Iowa farmer’s money is
not only morally and legally wrong, it risks the future of the American economic model. Who would want to hold a
commodities account in the United States ever again? Considering the MF Global’s clients have no representation on the
creditors committee, but the big banks do (like JP Morgan and Bank of America), that is exactly what will happen without

Congress needs to use all means at its disposal to affect change in the process underway to return MF Global’s clients
assets as quickly as is possible. Additionally, Congress needs to examine the culpable players involved in this quagmire
(Corzine, James Giddens, CFTC, CME, NFA, etc.) and shed some light on how their actions are affecting your
constituents. We believe the following to be potential solutions to the problem:
 Order Trustee to release 88.4% of client assets to their rightful owners immediately to prevent further damages,
bankruptcies and loss of business for MF Global clients. The remaining 11.6% can go through the claims process,
so long as it is understood that these assets must be returned as quickly as possible;
 Align incentives for the Trustee with clients’ to ensure a speedy distribution of the remainder of assets. This can
be done by limiting the Trustee to a flat fee or a fixed percentage of the assets of the estate (NOT the customer
segregated funds);
 Assign a representative for MF Global clients to the creditor’s committee to ensure customers have an advocate
alongside major creditors like JP Morgan and Bank of America;
 Demand the Chicago Mercantile Exchange setup a temporary fund of $633M so clients can be paid out
immediately, then take over on clients’ behalves in bankruptcy court and/or assess a special fee to all trades that
executed on the CME to repay the fund.
 Regulate leverage used by brokerage firms on a daily basis, rather than on one specific day in a quarter (earnings);
 Limit brokerage firms’ investment of customer segregated funds to US treasury securities;
 Impose severe criminal penalties for any officer or director of a publicly traded financial institution who
comingles client segregated funds with firm assets.
Please contact either John Roe or James Koutoulas for references or additional information.
 CME:
 SIPA Trustee:
 NFA:
 MF Global:–client-notices
John Roe- Partner James L. Koutoulas, Esq.- CEO
BTR Trading Group, Inc. Typhon Capital Management, LLC
125 S. Wacker Dr., Suite 300 190 S. LaSalle St., Suite 3000
Chicago, IL 60606 Chicago, IL 60603
Tel: 312.933.6564 Tel: 312.836.1180
Fax: 312.212.4073 Fax: 888.391.8179

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Andrew Abraham
Abraham Investment Management

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