Refco Lesson, Your Money is NOT Safe

June 6, 2006

Author: unclejesse

I wanted to share with everyone a very tough lesson that I am currently learning. It seems that currency trading and the brokers associated with it are not fully regulated as they are with stocks and other types of securities.

As most of you may know, Refco declared bankruptcy in October of 2005 after a scandal involving the CEO. At the time, Refco FX (the forex division) was perhaps the largest and most trusted forex broker around. They had dozens of offices worldwide and they were a publicly traded company.

Now that they are in bankruptcy court, the very smart lawyers who represent the large lending institutions (such as Bank of America) have convinced the court that Refco customers are “unsecured creditors” and that they should only be paid after the secured creditors (such as the banks) get their money back.

Refco customers (regular folks like you and me) were constantly told our money was safe and kept separate from other funds (we have documents to back this up). Even when Refco was in trouble and people wanted to withdrawal their accounts we were still told by Refco that our money was 100% safe. Now, it looks like we could loose a significant amount of our account balances.

Here is what I dont understand. Lending and investment groups realize (and account for) a certain degree of risk when lending or invensting in a company. Customers of brokerage firms assume (and were told) that their money was always 100% safe. It just doesn’t seem fair that lenders should get paid back before customers.

Thankfully I only had a little money in there, but, many people will loose their retirement money, college tuition money, etc. Very sad….

Two lessons here:
1. Your money is NOT 100% safe sitting in a brokerage account no matter what Forex broker you are using.

2. The big guys (ie: the banks) will always win.

You can follow this story more at the Yahoo group:
“RefcoFX Account Holders”

Here is a recent article in FUTURE magazine

Customers of Refco Capital Management (RCM) won a preliminary ruling
to convert RCMfs bankruptcy case from a Chapter 11 to a Chapter 7, a
so-called stockbrokers liquidation, giving preferential treatment to
customers ahead of other unsecured creditors. While that bodes well
for RCM customers, whether this will help the 17,000 RFX customers
remains to be seen because of important differences between the two
groups. While the majority of RFX customers are private individuals
with retail trading accounts, customers of RCM are institutional
traders and are represented by lawyers on the creditorsfcommittee
and in that courtroom, two distinct advantages that RFX customers, as
of yet, do not share. At the beginning of the bankruptcy process, J.
Gregory Milmoe, a lawyer from Skadden, Arps, Slate, Meagher & Flom,
the law firm representing Refco in the bankruptcy proceedings,
declared: gIt is Skadden Arpsfpreliminary view that these accounts
are not customer property and therefore people who have given us
money in the unregulated business are creditors.h By declaring
customers to be creditors, customer accounts have been frozen and
could be used by Refco to pay back secured and unsecured creditors,
despite marketing messages from Refco and reassurances from Refco
employees that the customer funds were safe. LaVigne is seeking to
change that by petitioning the United States Trustee, to appoint
counsel to represent the retail account holders. And while many Refco
FX account holders are discussing the possibility of filing a class
action suit, she says the difficulties are seemingly insurmountable
given the limited time available. gItfs pretty much an
impossibility, which is what the creditor committee is counting on,h
LaVigne says.gThe court, in recognizing that there are distinct
categories of creditors here, should appoint a legal team that, in
good faith and with their honest effort, should represent our best
interests. Because as it is right now, the creditor team is looking
out for Bank of America and the other big creditors.

Posted in Forex