Why you should be financially conservative

[Lurking]

Very sad story.



https://www.tampabay.com/business/i...losing-millons-of-his-clients-money-20181123/

Specifically with regards to this nugget you mentioned (from the article):

Many of Cordier's clients had qualified Individual Retirement Accounts at FCStone. Generally, money in such accounts is not supposed to be used for the risky type of trading that Cordier did on the clients' behalf.

How does it work if your IRA goes negative by more than the annual contribution? Can you add money to bring it back up to zero in any amount?
What happens if you can’t cover your losses? Aren’t IRAs somewhat protected from some judgements? What happens next for the investors, and who ends up taking the remaining losses?

 

[jazz4cash]

You can’t take a deduction for losses in an IRA.

 

[Lurking]

You can’t take a deduction for losses in an IRA.

I think I can clarify the first part of my question with some hypothetical numbers.

Suppose you had an IRA that had $250k invested in this leveraged hedge fund. Suddenly, after the spike in natural gas prices, you just lost $300,000. So your IRA balance is -$50,000.

That $300k is gone without even a tax write-off. But how do you get your IRA back to 0? Can you make a $50k contribution? What if you have already maxed out your $5500/6500 contribution?

Supposing you wanted to pay off your losses. Are you even allowed to?

 

[NW-Bound]

I have not watched the video, and only scanned through this thread.

Something is wrong here about people losing more than their IRA money on this naked option deal. IRA accounts cannot be invested in such ways that can lose more money than the principal. It is not legal.

This means no naked options in an IRA. Call options must be sold covered with actual shares. Put options must be sold covered with cash. One also cannot go on margin in an IRA. The above are strictly forbidden.

 

[Lurking]

I have not watched the video, and only scanned through this thread.

Something is wrong here about people losing more than their IRA money on this naked option deal. IRA accounts cannot be invested in such ways that can lose more money than the principal. It is not legal.

This means no naked options in an IRA. Call options must be sold covered with actual shares. Put options must be sold covered with cash. One also cannot go on margin in an IRA. The above are strictly forbidden.

That makes sense, and explains why I can’t find much information for this scenario. If they aren’t allowed to invest this way, it doesn’t look good for FCStone (who seems to have allowed it).

Looks likely OptionSellers.com goes bankrupt, investors are wiped out, and FCStone appears to be the only one left who can cover the losses above and beyond IRA balances.

They could sue OptionSellers, but I suspect they will just be one of many unfunded creditors. They could go after individuals for what they owe, but IRAs are generally exempt from judgement so any additional money in retirement accounts would be unreachable (taxable assets and anything left in this IRA account seem fair game). So the most likely outcome I see is FCStone gets a pile of negative press to go along with a decent loss themselves.

 

[JustCurious]

The only verification if ever seen is you sign and statement a check one of 3 boxes.

1. I have more than $1 million assets excluding my primary residents
2. I make more than 200K in the last 2 years
3. My spouse and I jointly make more than 300K in the last years and expect to make that much this year.

The Investopedia article cited by jazz4cash doesn't offer any specifics on what is required more than checking boxes. Following is a quote from the article...

The Due Diligence
As mentioned, no formal agency or institution confirms the accreditation of an investor, and no certification is issued. However, since September 2013, the SEC has required that anyone selling to accredited investors must take a number of different steps in order to verify this status. Simply telling a firm or checking a box that signals a person is qualified is no longer allowed.

Individuals who feel they qualify can visit a fund and ask for information about potential investments. At this time, the issuer of securities will give a questionnaire to determine whether a person qualifies as an “accredited investor.” The questionnaire will also likely require the attachment of financial statements and information of other accounts in order to verify the ownership of assets listed on a balance sheet like the one above. Companies will also likely evaluate a credit report in order to assess any debts held by a person seeking accredited status.

Individuals who base their qualifications on annual income will likely need to submit tax returns, W-2 forms and other documents that indicate wages. Individuals may also consider letters from reviews by CPAs, tax attorneys, investment brokers or advisors.


Notice that the article is not specific about what the requirements are and does not provide a citation, other than providing answers to a questionnaire. I also highlighted the words "likely" in bold...if something is likely that means it is not required.

 

[Bryan Barnfellow]

Strange video, to be sure. Others have suggested it had similarities to a hostage video. I kept looking for him to blink his eyes in morse code to spell out "TORTURE". Some may remember this from an American POW's video interview in Hanoi during the Vietnam war.

US Naval commander Jeremiah Denton, who died in 2014, used this clever technique to convey that he and other POWs were being subjected to torture.

https://www.warhistoryonline.com/war-articles/he-managed-to-convey-the-truth-by-blinking-torture-in-morse-code-during-the-vietnamwar.html

 

[bberris]

Could someone explain to me what happened? Sometimes I think I understand stuff and other times I think not so much.

I don't know how it happens, but did he lose all the money the clients' money and even more? How does that happen when he says he's diversified?

Sure makes me thankful to have learned from Mr. Bogle and Buffett.

I believe what they were doing was selling options on volatility of NG, not the price of NG. In essence, they are selling price insurance. When insurance companies sell insurance, they have large assets to back up claims. And most of the time, you can print money this way. When it goes bad, it goes really really bad.

This is reminiscent of the guys who were shorting VIX, either with XIV or by shorting the leveraged volatility notes. This was described as picking up nickels in front of a steamroller.