New York Board of Trade reached an agreement last week to “makewhole” all floor operators whose funds were used to meet marginobligations of Klein and Co. Futures Inc.

NYBOT said it will pay back the innocent traders and customersof Klein. NYBOT’s decision came not long after the New YorkMercantile Exchange and 15 of its members filed a class actioncomplaint against NYBOT, New York Clearing Corp. (NYCC) and Klein,alleging that NYBOT improperly used funds of Klein customers whoalso traded Nymex energy, oil and metals contracts to satisfyobligations of an unrelated Klein customer on the New York FuturesExchange, a unit of NYBOT.

Last Tuesday, NYBOT halted trading of its cotton, coffee, cocoa,orange juice and sugar futures contracts for nearly an hour afterit revoked clearing privileges for Klein. NYBOT alleged that Kleinhad failed to meet the minimum financial requirements of the NYCC.Apparently, one of Klein’s customers failed to meet margin calls intransactions on the New York Futures Exchange, a unit of NYBOT.Klein allegedly lost between $40 million and $50 million.

The Nymex complaint, filed in U.S. District Court, alleged thatNYBOT and the NYCC acted in bad faith because they knew the fundsbelonged to innocent, non-defaulting customers. Further, thelawsuit said NYBOT’s board of directors represent other clearingmembers who could otherwise be assessed to make up the shortfall.According to the lawsuit, “they are acting for their own selfinterest or other ulterior motive to the detriment of the public,including plaintiffs; and their conduct in this regard, which istheir sole and dominant motive, is unrelated to and contrary toproper regulatory concern.”

The Nymex lawsuit requested a temporary restraining order andinjunctive relief to block NYBOT from using innocent, third-partycustomer funds to meet margin obligations.

Nymex said that the Commodity Futures Trading Commission “hasindicated a willingness” to support the lawsuit, and might considerfiling an amicus brief.

“As an exchange and a clearing organization, we are particularlydisturbed to see other such organizations threaten to and seizeidentifiable funds of individual customers to satisfy theobligations of a separate customer,” said R. Patrick Thompson,president of Nymex. “This is an amount which should be covered bythe Clearing Corp.’s guarantee fund, which is intended for suchpurposes. These actions not only impact traders who cleared throughKlein and Co. at our exchange, but taint the image and integrity ofthe entire futures industry.”

NYBOT President and CEO Mark Fichtel said Nymex was in aposition to monitor Klein’s activities as a Designated SelfRegulatory Organization, and he said that it had failed to makenote of Klein’s treatment of customer funds.

“I am especially surprised and disappointed that NYBOT has beenserved with a lawsuit by Nymex on behalf of its members who clearedthrough Klein,” Fichtel said. “Through conversations with theirsenior management, they were made aware of the valiant efforts ofour board to do the right thing. They are falsely looking like awrong party through this outright grandstanding.”

Fichtel said he is “pleased at the speed and sense of fairnesswith which the NYBOT board has moved in addressing this seriousissue. The board obviously has taken into account the concerns andbest interests of our members and the members of other exchangeswho cleared through Klein and Co. Futures Inc. by deciding to ‘makewhole’ the losses they incurred.”

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