INTL FCStone 2011 Annual Report Download - page 96

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INTL FCSTONE INC.Form10K82
PART II
ITEM 8 Consolidated Financial Statements and Supplementary Data
against certain types of claims, up to the policy limits of our
insurance. During the year ended September30,2011, loss
contingency accruals, not having a material impact on the
consolidated nancial statements, have been recorded. In the
opinion of management, possible exposure in these matters in
excess of the amounts accrued, is not material to the Company’s
earnings, nancial position, or liquidity.
e following is a summary of signifi cant legal matters involving
the Company.
Securities Litigation
FCStone and certain offi cers of FCStone were named as defendants
in an action fi led in the UnitedStates District Court for the Western
District of Missouri on July15,2008. A consolidated amended
complaint (“CAC”) was subsequently fi led on September25,2009.
As alleged in the CAC, the action purports to be brought as a class
action on behalf of purchasers of FCStone common stock between
November15,2007 and February24,2009. e CAC seeks to
hold defendants liable under Section 10(b) and Section 20(a) of the
Securities Exchange Act of 1934 and concerns disclosures included
in FCStone’s fi scal year2008 public fi lings. Specifi cally, the CAC
relates to FCStone’s public disclosures regarding an interest rate
hedge, a bad debt expense arising from unprecedented events in
the cotton trading market, and certain disclosures beginning on
November3,2008 related to losses it expected to incur arising
primarily from a customer energy trading account. FCStone and
the named offi cers moved to dismiss the action. Although the
Court denied that motion on November16,2010, it limited the
action to the public disclosures made on November3,2008 and
November4,2008 related to the energy trading account. As a
result of the Court’s order and lead plaintiff s’ decision not to amend
their complaint, the lead plaintiff s lost standing to prosecute the
action because they were not shareholders at the relevant time.
Counsel for lead plaintiff s have since added named plaintiff s who
purport to possess standing. Motion practice with respect to class
certifi cation is currently pending before the Court pursuant to
which plaintiff s seek to certify a class on behalf of purchasers of
FCStone stock between April14,2008 and February24,2009.
e Company and the FCStone defendants continue to believe
the action is meritless, and intend to defend the action vigorously.
In August,2008, a shareholder derivative action was fi led against
FCStone and certain directors of FCStone in the Circuit Court
of Platte County, Missouri, alleging breaches of fi duciary duties,
waste of corporate assets and unjust enrichment. An amended
complaint was subsequently fi led in May,2009 to add claims
based upon the losses sustained by FCStone arising out of a
customer’s energy trading account. On July7,2009, the same
plaintiff fi 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 fi 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 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 in a principal amount of
$3.7million of the Company’s senior subordinated convertible
notes due 2011 (the “Notes”), Portside Growth and Opportunity
Fund (“Portside”), managed by Ramius LLC, 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