INTL FCStone 2013 Annual Report Download - page 45

INTLFCSTONEINC.Form10K24
PART I
ITEM 3Legal Proceedings
disclosures included in FCStone’s scal year 2008 public lings.
Speci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 November 3, 2008 related to losses it
expected to incur arising primarily from a customer energy trading
account. FCStone and the named ocers moved to dismiss
the action. e parties to the litigation reached an agreement
in principle to settle this matter during May 2012, which was
approved by order of the court on July 23, 2013. e settlement
was at no cost to us after consideration of insurance coverage.
In August 2008, shareholders led a derivative action against
FCStone and certain directors of FCStone in the Circuit Court
of Platte County, Missouri, alleging breaches of duciary duties,
waste of corporate assets and unjust enrichment. Shareholders
subsequently led an amended complaint was subsequently led
in May 2009 to add claims based upon the losses sustained by
FCStone arising out of a customer’s energy trading account. In
July 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.
In July 2009, plaintis led a purported shareholder class action
complaint 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
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 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 our behalf against certain of FCStone’s current and former
directors and ocers and directly against the same individuals.
We, 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 our incurrence
of 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 we
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 us with a
Wells notice, indicating the Sta’s intention to recommend that
the CFTC bring certain charges against FCStone, LLC. We led
our Wells submission with the Sta in October 2012. On May
29, 2013, we reached a settlement with the CFTC in this matter.
e CFTC’s ndings, neither admitted nor denied by us, 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 we have made sucient
modications to our risk controls since 2008.
We paid the ne of $1.5 million in full in scal 2013. Also,
we have appointed an independent third party to conduct the
aforementioned review of policies and procedures, and that
review is currently in process.
Sentinel Litigation
Our 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