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The United States has carved out a well-earned reputation for being a safe and secure nation in which to conduct business of any kind, with a refined business culture, high ethical standards and comprehensive customer protection policies which are especially effective with regard to safeguarding the buying public’s hard-earned dollars.
National financial regulatory authorities in the United States are no exception, and offer great peace of mind to investors across many sectors, with a specific regulator, often headed by a team of senior government-level lawyers, ensuring that should a mishap occur, customers are not exposed and the matter is rectified via a judiciary process.
Two of the most high profile examples of this in recent years can be found in the regulatory and legislative handling of the demise of MF Global and Peregrine Financial Group (PFG), both of which collapsed along with several million dollars worth of client assets.
The National Futures Association (NFA) along with the Commodity Futures Trading Commission (CFTC) embarked on a lengthy pursuit of those responsible, and have vowed to provide restitution, with several very severe fines having been issued to the firms, and litigation ongoing against directors of MF Global in particular.
Part of the United States’ ability to implement very effective regulatory action is attributable to the 2010 Dodd Frank Wall Street Reform Act, which contains several new rulings aimed at preventing firm failures such as high capital adequacy requirements and full disclosure of transactions, prices and client money handling, but also due to the lobbying efforts of consumer organizations.
Today, LeapRate has been provided with a letter to the NFA Chairman Christopher K Hehmeyer, in response to his rebuttal of allegations which were brought about from within the regulatory environment recently.
The letter was written to the NFA by James Koutoulas, President and Co-Founder of the Commodity Customer Coalition, a non-profit customer advocacy organization formed in response to the MF Global bankruptcy. The CCC has 10,000+ members and works with regulators, Congress, and industry leaders to better protect commodities customers.
Mr. Koutoulas is also the CEO of Typhon Capital Management, a CTA/CPO which operates the Arion Financials Program, Chiron Currency Program, Plutus Grain Strategy, and Tauros Livestock Strategy. Typhon also manages the Hydra Multi-Strategy Agricultural Fund, LP.
In 2011, shortly after the demise of MF Global, Mr. Koutoulas led the charge to recover $1 billion for customers, devoting a substantial amount of pro bono time toward these efforts.
He also works closely with the regulator, sitting on the NFA’s board of directors, and has been in receipt of a response to his accusations at the end of last year that the NFA has engaged in a cover up and conspiracy, tall claims indeed.
Mr. Koutoulis’ allegations, as published by the NFA on December 30, are indeed grave. The NFA states that Mr. Koutoulis has publicly accused the Executive Committee and others of improprieties in regard to the January 2014 Executive Committee meeting and the Board’s subsequent February 2014 election of public representatives. The Executive Committee has authorized the Chairman of the Board of the NFA, Christopher K Hehmeyer to assure the public that these allegations are false and that the NFA denies each and every allegation.
NFA’s Executive Committee is particularly troubled by Mr. Koutoulas’s recent public allegations given the fact that prior to the election of public directors by the Board in February 2014, and at the specific request of Mr. Koutoulas, Chairman Hehmeyer engaged outside counsel to review Mr. Koutoulas’s stated claims related to the 2014 nomination process. At the Board’s February 2014 meeting, before the election of the public directors, outside counsel reported that it had concluded that the public representatives were validly nominated in accordance with NFA’s Articles of Incorporation.
Mr. Koutoulas has now responded to this, with a concise reply to the Chairman’s letter.
Mr. Koutoulas’ response commences “You may have read the Chairman of NFA’s letter denying the accusations I raised about improprieties committed by NFA’s Management and Executive Committee. I respect the Chairman, and have no doubt he felt he had no choice but to support Management.”
He asserts that “You elected me to the Board of NFA because you believed that after my thousands of hours of pro bono service on behalf of MF Global and PFG customers, I would serve on your behalf with integrity. I do not like or welcome conflict, but I felt my fiduciary duty required me to raise this issue.”
“In this case, it would have been far easier for me to just say nothing, acted like a member of the Club, and put my affiliated business partners first—many of whom do not necessarily agree with my own personal views about NFA. But, you did not elect me to serve my personal interests, you elected me to stand up for what is right, and to ensure that our regulator follows its own rules, and works to protect our industry” he continued.
“I re-iterate that everything I said is true and has been reported to the CFTC with documentary support, which I trust will be made public at some point. Additionally, the Chairman’s letter to you is incorrect in several instances” stated Mr. Koutoulas.
Mr. Koutoulas continued his response by detailing several points that were raised, along with his answers as follows:
The Report Produced by Outside Counsel was in No Way “Independent” and was Not Issued as a Formal Legal Opinion
· The Attorney that conducted the “Outside Counsel Review” was engaged at that time by NFA on another, related matter.
· Said Attorney was a witness to the Executive Committee Meeting, and thus could not conduct an “Independent” review.
· Said Attorney did not interview me, or any other witnesses, to my knowledge.
· Said Attorney disclaimed his report as “Not Constituting a Formal Legal Opinion of Counsel.”
· During the MF Global bankruptcy litigation, I personally objected to said Attorney’s firm’s fee application for making false statements to the Judge.
The Alleged Nominations were Contested at Length Internally
· This situation has been contested internally since February, it is not just, as the Chairman stated, “campaign nonsense.”
· I was not the first Executive Committee member to dispute the correspondence presented to the Board which claimed that an Executive Committee member had nominated certain Public Directors at the January 2014 Executive Committee meeting. Another Executive Committee member initially raised the issue to NFA Management, in writing, while a third Executive Committee member verbally agreed that no nominations were made.
· I objected to the veracity of the content of the email in question, and to Management’s representations that the alleged nominations were made, in front of the entire Board at our February 2014 meeting.
· Following my objections, the Director in question refused to confirm that he made his alleged statements to the Board.
· Four other Directors joined me in dissenting from the vote to confirm the alleged nominations.
Instead of Taking Action on this Issue, the Board Passed a “Gag Order”
In August, Management recommended that the Board pass a “Gag Order” removing Directors’ rights to publicly dissent from Board votes, to criticize NFA or other Directors, and to tell our constituents how we voted. Management also incorrectly represented to the Board that this “Gag Order” was required by a Director’s Duty of Loyalty under Delaware Law. Instead of holding parties accountable, Management moved to silence the Directors that you elected to reform the organization.
Why this Matters
· The world looks to the US Futures markets to manage its risk. Our industry has already suffered credibility issues following Sentinel, MF Global, PFG, and AlphaMetrix. It needs a strong, honest regulator to protect the integrity of our markets.
· The tone at the top influences the entire organization. This is not the first instance where NFA Management has made a mistake, and instead of admitting it and fixing it, or holding anyone accountable, they have downplayed and obfuscated it. That is the wrong way for a regulator to behave.
· An organization that is tasked with ensuring compliance with rules must follow its own, and not take shortcuts to rewrite history when it makes a mistake. I imagine NFA would not take kindly to a Member that made up documents after the fact to claim a fact in an audit.
· Public Directors are critically important to providing good corporate governance. For instance, they are the only Board members NFA allows on the compensation committee, other than the Vice Chairman. Historically, however, there has been little due diligence conducted on Public Directors.
Improving NFA Going Forward
· Sunlight is the best disinfectant, and NFA has a cold that only transparency can cure. I promise to continue to fight the good fight on behalf of market integrity. In light of this situation, I will work to change the following, either collaboratively with Management and the Board, or with the CFTC and Congress if necessary:
· In this day and age, there is no reason why we should be fighting over “who said what” at important Board and Executive Committee meetings. Any key meetings should be taped so there is no dispute as to what is said. Ideally, the tapes should be available for Members to listen to, with the exception of disciplinary matters.
· Public Directors need to be elected by the Members, or appointed by the CFTC, so that they can be truly independent. Conflict of interest standards also need to be enhanced- employees of trading firms or compliance consultants should not be considered “Independent.”
· The ratio of 18 sell-side to 5 buy-side firms on the Board needs to be equalized and the overall Board size should be reduced to diminish the culture of consensus.
· Implement the goal-driven executive compensation process proposed over a year ago.
· Improve disclosure to the Board and Executive Committee in situations where customer funds are at risk.
Indeed, with Mr. Koutoulas’ endeavors having won the support of 10,000 customers, and his close relationship with one of the world’s most recognized and most professional regulatory authorities, he has a diplomatic line to toe. It is indeed further testimony to the United States’ comprehensive overall duty to protect customers that such a discussion is possible.
For the full letter dated December 30, 2014 from Chairman of the Board of the NFA Christopher K Hehmeyer, click here.
Editorial note: Items in bold and the points listed below the bold subtitles which are punctuated by bullet points are the perspective of James Koutoulas and are in no way connected or representative of LeapRate’s view which is neutral.