INTL FCStone 2011 Annual Report Download - page 37

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INTL FCSTONE INC.Form10K 23
PARTI
ITEM 3 Legal Proceedings
based upon the losses sustained by FCStone arising out of a
customer’s energy trading account. On July7,2009, the same
plainti led a motion for leave to amend the existing case to
add a purported class action claim on behalf of the holders of
FCStone common stock.
On July8,2009, a purported shareholder class action complaint
was led against FCStone and its directors, as well as the Company
in the Circuit Court of Clay County, Missouri. e complaint
alleged that FCStone and its directors breached their fi duciary
duties by failing to maximize stockholder value in connection with
the contemplated acquisition of FCStone by the Company. is
complaint was subsequently consolidated with the complaint fi led
in the Circuit Court of Platte County, Missouri. e plaintiff s
subsequently fi led an amended consolidated complaint which
does not assert any claims against the Company. is complaint
purports to be fi led derivatively on FCStone and the Company’s
behalf and against certain of FCStone’s current and former
directors and offi cers and directly against the same individuals.
e Company, FCStone, and the defendants fi led motions to
dismiss on multiple grounds. at motion is fully briefed and
pending decision.
e staff of the Fort Worth Regional Offi ce of the SEC is
conducting a formal investigation of FCStone’s disclosures
and accounting for losses associated with the energy trading
account, which occurred prior to the Company’s acquisition of
FCStone on September30,2009. During the quarters ended
March31,2011 and June30,2011, certain employees of the
Company testifi ed before the SEC in connection with this
investigation. e Company is cooperating fully with the SEC
staff in its investigation, but cannot predict the scope, duration
or outcome of the matter, including monetary penalties or
fi nes, if any.
e Company has also received a request from the CFTC for
certain information relating to the energy trading account
matter. e Company is cooperating fully with the staff of the
CFTC, and cannot predict the scope, duration or outcome of
the CFTC’s review, including monetary penalties or fi nes, if any.
On February24,2011, the Company’s Board of Directors formed
a special committee to conduct an independent investigation of
FCStone’s disclosures and accounting for losses associated with
the energy trading account. e Company’s Board of Directors
determined that it would be appropriate and consistent with
its governance and oversight responsibilities to form the special
committee to investigate these matters as they pertain to the
private litigation and the SEC investigation described above.
e special committee, which is comprised solely of independent
directors of the Company who were not formerly directors of
FCStone, retained an independent law fi rm to represent and
assist it in its investigation.
Convertible Note Holder Litigation
In November,2009, an investor holding $3.7million in principal
amount of the Company’s senior subordinated convertible notes
due 2011 (the “Notes”), Portside Growth and Opportunity
Fund (“Portside”), managed by RamiusLLC, served a notice of
motion for summary judgment on the Company, claiming that
the FCStone transaction resulted in a change of control as defi ned
in the Notes; and that, as a result, the Company should have
aff orded Portside the opportunity to have the Notes redeemed
at a 15% premium. Portside also claimed default interest at
the rate of 15% per annum established in the Notes. Portside’s
motion was denied in March,2010. Portside fi led an amended
complaint in April,2010. e remaining three holders of the
Notes, Highbridge InternationalLLC (“Highbridge”), LBI
GroupInc. and Iroquois Master Fund Ltd. (“Iroquois”), holding
Notes in an aggregate amount of $13.0million, fi led a similar
lawsuit on the Company on October20,2010.
On December14,2010, Portside delivered a Conversion Notice
to the Company in compliance with the terms of the relevant
agreement. e full remaining principal amount and accrued
interest converted into 173,966shares of common stock of the
Company. Portside fi led a notice of discontinuance thereafter.
On April21,2011, the Company’s motion to dismiss the
investors’ lawsuit was denied. Prior to April21,2011, one of the
investors, Iroquois, converted $3.0million of its $4.0million
investment in principal amount of the Notes, and accrued interest,
into 139,136shares of common stock of the Company. On
April25,2011, Iroquois converted the remaining $1.0million of
its original $4.0million investment in the Notes into 46,133shares
of common stock of the Company.
During July,2011, LBI GroupInc. sold its entire $5.0million
investment in principal amount of the Notes to Leucadia
National Corporation (the holder of approximately 8% of the
outstanding common stock of the Company), fi led a stipulation
of discontinuance in the aforementioned lawsuit and released
the Company from any further claims in connection with its
prior investment in the Notes.
During September,2011, Highbridge and Leucadia National
Corporation converted the remaining $9.0million of the Notes,
and accrued interest, into 419,468shares of common stock of
the Company.
Highbridge and Iroquois, each a holder of $4.0million in
principal amount of the Notes as of September30,2009, persist
in their claim against the Company. e Company intends to
defend the claim vigorously. e matter is expected to go to trial
during the summer of 2012.