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 payback the innocent traders and customers of Klein. NYBOT’s decisioncame not long after the New York Mercantile Exchange and 15 of itsmembers filed a class action complaint against NYBOT, New YorkClearing Corp. (NYCC) and Klein, alleging that NYBOT improperlyused funds of Klein customers who also traded Nymex energy, oil andmetals contracts to satisfy obligations of an unrelated Kleincustomer on the New York Futures Exchange, 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, alleges thatNYBOT and the NYCC acted in bad faith because they knew the fundsbelonged to innocent, non-defaulting customers. Further, thelawsuit alleges that NYBOT’s board of directors represent otherclearing members who could otherwise be assessed to make up theshortfall. According to the lawsuit, “they are acting for their ownself interest or other ulterior motive to the detriment of thepublic, including plaintiffs; and their conduct in this regard,which is their sole and dominant motive, is unrelated to andcontrary to proper regulatory concern.”
The Nymex lawsuit requests 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 may 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.”
Carolyn Davis, Houston
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