INTL FCStone 2013 Annual Report Download - page 110

INTLFCSTONEINC.Form10K 89
PART II
ITEM 8Financial Statements and Supplementary Data
Company. is complaint was subsequently consolidated with the
complaint led in the Circuit Court of Platte County, Missouri.
e plaintis subsequently led an amended consolidated
complaint which does not assert any claims against the Company.
is complaint purports to be led derivatively on FCStone’s and
the Company’s behalf and against certain of FCStone’s current
and former directors and ocers and directly against the same
individuals. e Company, FCStone, and the defendants led
motions to dismiss on multiple grounds. e parties to the
litigation have reached an agreement in principle to settle this
matter. is agreement was provisionally approved by the court
on December 4, 2013, and is expected to be nally approved
on March 19, 2014. e agreement, if nally approved, would
result in the Company incurring a legal cost of $265,000 after
consideration of expected insurance coverage.
In November 2011, the Commodity Futures Trading Commission
(“CFTC”) Division of Enforcement Sta (“Sta”) requested the
Company to voluntarily produce specied documents to theSta
in connection with its then informal investigation of the losses
that occurred in 2008 and 2009 in the customer energy trading
account of FCStone, LLC. In September 2012, the Sta provided
the Company with a Wells notice, indicating the Sta’s intention
to recommend that the CFTC bring certain charges against
FCStone, LLC. e Company led its Wells submission with
the Sta in October 2012. On May 29, 2013, the Company
reached a settlement with the CFTC in this matter. e CFTC’s
ndings, neither admitted nor denied by the Company, were
that FCStone, LLC violated CFTC Regulation 166.3 in that it
failed to diligently supervise its ocers’ and employees’ activities
relating to risks associated with its customers’ accounts, and in
particular one account controlled by two of FCStone’s customers
who traded in natural gas futures, swaps and option contracts.
e settlement, with appropriate waivers and consents, required
FCStone, LLC to:
•cease and desist from violating CFTC Regulation 166.3;
•pay $1.5 million to the CFTC; and
• appoint an independent third party reviewer to review and
evaluate FCStone, LLC’s existing policies and procedures
relating to certain risks, to ensure that the Company has made
sucient modications to its risk controls since 2008.
e ne of $1.5 million was paid in full in scal 2013. Also, the
Company has appointed an independent third party to conduct
the aforementioned review of policies and procedures, and that
review is currently in process.
Sentinel Litigation
e Company’s subsidiary, FCStone, LLC, had a portion of
its excess segregated funds invested with Sentinel Management
Group Inc. (“Sentinel”), a registered FCM and an Illinois-based
money manager that provided cash management services to other
FCMs. In August 2007, Sentinel halted redemptions to customers
and sold certain of the assets it managed to an unaliated third
party at a signicant discount. On August 17, 2007, subsequent
to Sentinel’s sale of certain assets, Sentinel led for bankruptcy
protection and $15.5 million of FCStone, LLC’s $21.9 million
in invested funds were returned to it.
In August 2008, the bankruptcy trustee of Sentinel led adversary
proceedings against FCStone, LLC, and a number of other FCMs
in the Bankruptcy Court for the Northern District of Illinois.
e case was subsequently reassigned to the United States District
Court, for the Northern District of Illinois. In the complaint, the
trustee is seeking avoidance of alleged transfers or withdrawals
of funds received by FCStone, LLC and other FCMs within 90
days prior to the ling of the Sentinel bankruptcy petition, as
well as avoidance of post-petition distributions and disallowance
of the proof of claim led by FCStone, LLC. e trustee seeks
recovery of pre- and post-petition transfers totaling approximately
$15.5million. In April 2009, the trustee led an amended
complaint adding a claim for unjust enrichment. FCStone, LLC
answered the complaints and all parties entered into the discovery
phase of the litigation. In January 2011, the trustee led a motion
for summary judgment on various counts in the adversary
proceedings led in August 2008 against FCStone, LLC and a
number of other FCMs. In January 2012, FCStone, LLC led
a motion for summary judgment in its favor with respect to the
transfer of approximately $1.1 million to its customer segregated
account on August 17, 2007, pursuant to the “safe harbor”
provisions of Section 546(e) of the U.S. Bankruptcy Code. In April
2012, FCStone, LLC led a motion to dismiss a portion of the
trustee’s claims set forth in its amended complaint. e trial of
this matter took place, as a test case, during October 2012. e
trial court entered a judgment against FCStone, LLC on January
4, 2013. On January 17, 2013, the trial court entered an agreed
order, staying execution and enforcement, pending an appeal
of the judgment. By agreement, FCStone, LLC was required
to post an appeal cash deposit of $8.0 million with the court,
which was deposited on January 18, 2013. e oral arguments
in the appeal were heard on December 10, 2013. Based on the
merits of the Company’s appeal, management believes a loss
is not probable, and thus has not recorded a provision for this
matter. e Company believes that if the appeal is unsuccessful,
the resulting pre-tax loss to FCStone, LLC would be in the range
of $4 million to $6 million.
Contractual Commitments
Contingent Liabilities - Acquisitions
Under the terms of the purchase agreements, related to the
acquisitions listed below, the Company has obligations to pay
additional consideration if specic conditions and earnings
targets are met. In accordance with the Business Combinations
Topic of the ASC, the fair value of the additional consideration
is recognized as a contingent liability as of the acquisition date.
e contingent liability for these estimated additional purchase
price considerations of $9.6 million and $14.8 million are