This article originally appeared in Futures Magazine.

BY ALANNA BYRNE

A group of Peregrine Financial Group (PFG) forex and metals account holders prepared to file a motion asking a judge to order Trustee Ira Bodenstein to return these accounts to customers, arguing that they should not be considered assets of the estate.

The motion asserts that the estate has no equitable interest in the accounts, as customers were purportedly assured by PFG Best that customers funds were “to remain the property of the customer” and would be “held segregated from other funds at independent bank counterparties.”

“The forex accounts were set up originally to be typically wire-transferred to JP Morgan and held in a separate account that was not part of the general assets of PFG,” says Rick Medley, a PFG forex account holder who helped establish the PFG Forex Metals Legal Account to pursue these claims. “As far as we know, all of the money that was stolen from Peregrine was stolen out of futures accounts and no money was taken from forex accounts, [so] forex account moneys should not be part of the bankruptcy because they weren’t an asset of Peregrine.”

Forex and metals customers also dispute Bodenstein’s earlier assertion that they are not considered “customers” under U.S. Bankruptcy Code and the Part 190 rules, as their claims do not involve commodity contracts. “Given the current broad inclusion of retail forex within the scope of the [Commodity Exchange Act], [Commodity Futures Trading Commission] Regulations and [National Futures Association] Rules…it defies logic to deny retail customers who trade [forex] contracts the same statutory protections now afforded to all other market participants, including institutional dealers in cleared currency swaps and options,” the motion, that was withdrawn on procedutal grounds, reads.

On Sept. 20, U.S. District Court Judge Carol Doyle approved Bodenstein’s plan to distribute a first wave of funds to PFG customers with accounts totaling less than $50,000. Approximately 30% of 4d and delivery customers were to have their account balances satisfied by the distribution, while roughly 40% of 30.7 customer accounts were to be satisfied. On Oct. 4, Bodenstein announced that these accounts will be part of a bulk transfer of $123 million to Vision Financial Markets, which will ideally expedite the distribution of those funds.

Forex and over-the-counter metals customers, however, were excluded from this distribution. At the time, Bodenstein simply said that those customer accounts “will be addressed separately as part of the case.” Inan Oct. 3 letter, the trustee told forex and metals customers that, even after the interim distribution, there would be enough funds to satisfy their accounts. “If the Bankruptcy Court concludes that payment in full to forex and metals customers is appropriate, there are sufficient funds to accomplish that outcome,” the statement reads. “If the Bankruptcy Court reaches a different conclusion, there are sufficient funds to address whatever treatment of these claims that the Bankruptcy Court orders.”

In total, there are 7,000 clients with forex and metals accounts at PFG, but Medley says the impact of the case could be much broader. “We feel like this is a precedent-setting case with respect to the rights of forex and metals account holders, and how it relates to the CFTC regulations.”

John Roe, a co-founder of the Commodity Customer Coalition, says, “We don’t want the precedent to be that the commodity regs have no teeth, that once the money comes out of segregation it has lost its character and it is gone, we also don’t want to have the decision be that even though the money was stolen from commodity customers, everyone else is screwed.”

Roe says the CCC has not made a decision on how to argue this but adds, “The important thing once this is all said and done is that we don’t have a precedent at PFG that once someone steals something out of segregation, it doesn’t matter. That would mean segregation protection is completely meaningless,” he says. “The NFA said in its brief in the MF Global case that the intent of Congress was not to have to trace funds when the music stopped. If they aren’t there and there is a hole, you have to replace those with substitute assets. In this case, the substitute asset is FX customers’ money.”

But Medley seems skeptical of the idea that customers with unsecured accounts should have to cover a shortfall in other customer money. He uses the analogy of a bank robbery in which funds were stolen from individual customers’ safety deposit boxes. “If someone goes in and investigates afterwards, and says ‘Yep, there was a break-in here. Let’s open up these other safety deposit boxes that weren’t stolen from—we’ll break those open, and we’ll give it to the people who had money taken out of their safety deposit boxes,’ that just doesn’t sound right,” he says.