This story appears in the December 15, 2013 issue of Forbes. Subscribe
James L. Koutoulas has never lacked for brains, determination--or swagger. At 15, with $10,000 he'd earned designing websites, he started trading tech stocks. He picked up
After breezing through the University of Florida on a full academic scholarship as a finance major (history minor), Koutoulas planned to manage money. But first he enrolled in Northwestern University law school because, he says, after a bad experience involving a traffic accident he was determined "not to get screwed" by the lawyers again.
That legal training has come in handy. On Halloween 2011
Within days of the MF Global filing, Koutoulas and Chicago commodities advisor John Roe had formed the Commodity Customer Coalition, a nonprofit group that came to represent thousands of customers, including retirees, farmers who couldn't buy seed and a single mom in danger of losing her house.
To that point Koutoulas' courtroom experience consisted of helping his sister get back a security deposit and an $8,000 pro bono case. He had never taken a bankruptcy class. But as president of CCC he began drafting motions and became a familiar face not only in bankruptcy court but also on CNBC. The 6-footer with the shock of dark hair and dark glasses was ready to say what grayer heads might not, calling early and often for the criminal prosecution of Jon S. Corzine, the former New Jersey governor, senator and Goldman Sachs chief who ran MF Global for its final 18 months. (Corzine has not been charged criminally and denies wrongdoing. He is fighting a Commodity Futures Trading Commission civil suit that alleges he is responsible for MF Global's illegal use of nearly $1 billion in customer funds to support its disastrous proprietary trading bets on European debt. The firm itself agreed in November to pay a $100 million fine to settle the case.)
Corzine wasn't Koutoulas' only big-name target. His criticism of ?JPMorgan was so blunt that the bank told him to take Typhon's banking business elsewhere. (In March the bank, which served as both custodian of MF Global customers' funds and its lender, agreed to return $546 million of customers' money it had frozen.)
Impolitic, perhaps, but Koutoulas and CCC got results. At the start of the case customers were told their money would be frozen for nine months, at which point they'd get 60% released. It was widely expected they'd never get all of it back. Instead, after six weeks they got 72% of their money, and the bankruptcy judge recently ordered 100% returned. (Corzine and other former MF Global execs have appealed that order.)
Koutoulas "was really offended by what occurred and got the quickest payback ever," says Sam Tenenbaum, a professor and head of the investor protection clinic at Northwestern Law, who has served as a mentor to Koutoulas. "No one else was representing customers early on, when it mattered most,'' says Hilary Till, principal with Premia Risk Consultancy in Chicago. "His proactive representation of futures customers has been just about the only bright spot in the whole sorry MF Global saga."
Koutoulas says he got his capacity for moral outrage from his accountant father, who talked at the dinner table of quitting a job rather than agreeing to cook the books and also about his own strict Greek upbringing. "I've learned the level of corruption in Washington and the financial system runs deeper than I ever thought,'' he says.
So these days Koutoulas is speeding along on a dual track--as both a money manager and an industry reformer. Last December he and Rowe won a successful insurgent campaign for seats on the board of the industry's self-regulatory group, the National Futures Association. How much they can change at the NFA remains to be seen; in February they lost a bid to impose a lifetime ban on Corzine. (The NFA's president argued it might interfere with federal probes.)
More significant for today's investors, however, is their campaign for an insurance fund to protect retail commodities and futures customers. The Securities Investor Protection Corp. insures stock investors for up to $500,000 apiece in losses from unsavory securities brokers like Bernie Madoff, and bank customers are protected by the FDIC for up to $250,000 per account. But there's no similar protection for commodities and futures investors.
Futures, options, currency contracts and swaps are handled through "future commission merchants," who are supposed to hold the customers' money safe in segregated accounts. Supposed to. After Peregrine Financial Group, an Iowa FCM, closed its doors in July 2012, ex-CEO Russell Wasendorf Sr. pleaded guilty to embezzling $215 million from customers' ?accounts over two decades.
CCC has taken up the fight for Peregrine customers, too. Their only hope to recover more than 50%, Koutoulas says, rests with a suit the CFTC filed in June against U.S. Bank that asserted it illegally allowed customers' funds to be used as security on loans to Wasendorf and also permitted him to improperly keep customer money in a commercial checking account that funded his private jet and divorce settlement, among other items. U.S. Bank denies any liability.
Without an insurance fund, customers of bankrupt FCMs must rely on the courts, where lawyers charge $450 to $1,000 an hour and long delays can result in losses from margin calls, Roe told the Senate Agricultural Committee last year. "We have to stop expecting the regulators to do their jobs and start offering customers protections when they do not,'' he testified.
A study released in November that was paid for by the NFA and other industry groups gave skeptical treatment to the notion of insurance. Koutoulas doesn't dispute that setting up an insurance fund could be complicated but argues that small investors in particular need protection from malfeasance. He also wants Congress to tweak the law to make clear that commodities and futures customers are first in line, before other creditors, in a bankruptcy--a position they had until a 1999 court decision.
But Koutoulas is incensed by a CFTC proposal to beef up customer protection by requiring those who trade on margin to post 20% of their positions, up from 10% now. The rule's intent is to protect customers from the risk that other customers won't make good on their margin calls. Perhaps, Koutoulas says, the 20% rule should be enforced on high-frequency traders, who "in a couple of minutes, with a rogue algorithm, can blow up an FCM,'' but not on farmers and other retail customers, who are being asked to "double down" on the money they have at risk at FCMs.
Indeed, Koutoulas paints an alarming picture of the business in which he now makes his living. There are, he says, "scummy" firms that take inordinate risks and then change their names and start again. He suggests investors should ask for both audited statements and reports that show how a firm's returns compare with benchmarks and how the risks it takes also compare. Among the risk ratios to look at: the five-year standard deviation compared with the S&P and the Sortino Ratio, which gauges downside risk. (FORBES tip: Go back further to see how the firm did in 2008.)
Koutoulas also wants the NFA to post disciplinary information about members online, the way Finra already does for securities brokers.
Typhon, for its part, deals only with what the CFTC calls "qualified eligible participants"--they must have a net worth of at least $2 million, including $1 million in stocks or $200,000 in futures or some combination thereof, such as $500,000 in stocks and $100,000 in futures. In 2008 Typhon smartly bet that interest rates would fall, then turned to trading livestock and grain futures on the Chicago exchange. Koutoulas calls his strategies conservative, and like those of other hedge funds, they don't come cheap; Typhon charges 2% a year as a management fee and takes 20% to 25% (depending upon the fund) of investor profits as an "incentive fee." Not a bad living. "We want to be the best in agricultural trading without cheating," Koutoulas says.
