Washington, DC - The Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against FCStone LLC, a Futures Commission Merchant (FCM) headquartered in New York, New York, for failing to diligently supervise its officers and employees relating to its business as an FCM in violation of Commission Regulation 166.3, 17 C.F.R. § 166.3 (2008). FCStone failed to implement adequate customer credit and concentration risk policies and controls in 2008 and part of 2009, allowing one account (Account) to acquire a massive options position that it could not afford to maintain. Ultimately, FCStone was forced to take over the Account, and lost approximately $127 million. The CFTC Order requires FCStone to pay a civil monetary penalty of $1.5 million, retain an independent consultant to review its internal controls and procedures, and cease and desist from violating its supervisory obligations.

The Order finds that from January 1, 2008 through March 1, 2009, FCStone failed to diligently supervise its officers’ and employees’ activities relating to risks associated with its customers’ accounts, and with the Account, which was primarily controlled by two individuals who traded natural gas futures, swaps, and option contracts. Because FCStone did not have adequate credit and concentration risk policies and controls, the two Account owners accumulated a massive position -- more than 2.5 million relatively illiquid commodity option contracts, which the Account owners could not afford to maintain. After the value of the positions deteriorated over the course of 2008, the Account owners were unable to meet their financial obligations with respect to the Account. As FCMs are required to do in that situation, FCStone assumed the financial obligations to the clearing house that carried the positions. Unable to successfully manage the positions, FCStone ended up suffering $127 million in losses. The Commission found that FCStone violated Regulation 166.3 by failing to diligently supervise in a manner designed to mitigate risks associated with customer accounts, such as the risks arising from unsatisfied margin obligations, negative account balances, and the handling of large relatively illiquid positions.

David Meister, the CFTC’s Director of Enforcement stated, “The Commission’s supervision regulation helps ensure the financial integrity of the markets and safeguard customer funds. When an FCM’s financial risk controls are so lacking that they do virtually nothing to prevent an unchecked customer from taking grossly excessive trading risks as happened here, a harmful domino effect of financially dangerous consequences can follow, affecting not only the FCM but also potentially other customers and the market at large. This case should serve to remind FCMs to make sure that their risk controls are in order.”

The CFTC thanks and acknowledges the Securities and Exchange Commission for its assistance in this matter and the CME Group for its cooperation.

The CFTC Division of Enforcement staff responsible for this matter are Joan Manley, Allison Baker Shealy, Traci Rodriguez, George Malas and Paul Hayeck. CFTC staff from the Division of Clearing and Risk and the Division of Swap Dealer and Intermediary Oversight, including Thomas Bloom, Ryan Goodman, Kevin Piccoli and Jan Ripplinger, also provided assistance in this matter.

Last week I traveled to Washington DC and met with the leadership of the House and Senate and House Agriuculture Committees. It was immediately evident that no other victim of the OptionSellers/INT IFStone scandal has done so.

The most disturbing meeting was with the leadership of the House Agriuculture Committee. It is clear that no constituent has contacted them. Therefore we can expect expect no help at all in the House of Representatives.

In the Senate the reception was much better. However, this is only because of my long term close personal friendship with the Chairman of the Senate Agriuculture Committee and my more recent friendship with the former Chairwoman of that Committee. CFTC jurisdiction is within the Agriuculture Committees only because I drafted the law establishing the CFTC as the young Senate General Counsel of the Senate Agriuculture Committee in 1974. Otherwise it would be under the jurisdiction of the Energy and Commerce Committees and the regulatory agency would be the SEC (see my previous blog on the late John Dingle).

These visits confirmed my belief that other victims of OptionSellers  have not contacted their members of Congress. It has caused me to begin reaching out to class action law firms with experience in derivatives law. As a general rule, class action law firms have faced strong criticism because of “excessive fees” However, there is no reason  that a fair fee agreement cannot be reached, especially if we use American Bar Association guidelines.

Michael R. McLeod

Recently President Trump has continued to take shots at a true American hero who recently died of brain cancer. I find this especially distasteful for someone who managed to avoid the draft altogether.

Like many other young men of that  era I got my student deferment until I graduated from law school. I remember being called to the camp office while I was in my bunk bed one night to take a call . I was elated to learn that it was to tell me that I had passed the DC Bar examination. However, there was no time to celebrate. I had to complete my basic training at Fort Leonard Wood in Missouri.

When I started my job working as a lawyer in the office of Senator Talmadge, I was still obligated to serve my 6 year term as a member of the DC National Guard. Our government found it necessary to call up a large number of national guardsmen to serve in Vietnam. I was spared this fate because the race riots that came after the assassination of Martin Luther King Jr. on April 4, 1968.

My National Guard unit was call to active duty to protect the  city from the rioting and burning that went on for some months.

I have always felt fortunate and a little guilty that I never had to fight in Vietnam. Over 58,000 names are on the Vietnam Memorial Wall in our nation’s capital, which lists the names of our soldiers who died from wounds in Vietnam. These feelings have been reinforced by such movies as the 2002  Mel Gibson movie “We Were Soldiers Once”.

Later, I got to know  Max Cleland who served one term as a US Senator from Georgia. He lost both legs and one arm as a second lieutenant in the infantry in Vietnam.

When Senator McCain was the Republican nominee for President in 2012,  I volunteered for his campaign. I knew he did not have a good record on agricultural issues. Not only did I make the maximum personal contribution, I was a member of his Agriuculture Advisory Committee.

Unfortunately, McCain did not care for Agriuculture issues and managed to have farmers boo him when we had arranged to have him speak to a farm group in Texas. That was the end of his Agriuculture Advisory Committee.

While McCain lost in the general election, I do not regret trying to help him. Some issues are more important than short term personal interests.

Michael R. McLeod

As this new press release indicates,  INT FCStone continues to expand while leaving  behind a trail of defrauded investors. It is unclear what, if anything, the CFTC  is planning  to do for the unfortunate victims of the OptionSellers/INT FCStone case.

If this was under the jurisdiction of the SEC, corrective action would have already been taken. In the Bernie Madoff case of 10 years ago Madoff was sentenced to 150 years in jail.

I have encouraged the victims of the OptionSellers/INT FCStone fiasco to file a complaint with the CFTC and their members of Congress, especially if those members are on the  Committees of Jurisdiction,  the House and Senate Agriculture Committees. Moreover, I hope that at least one of these Committees will hold public hearings soon.

Press release showing company makes huge profit. 


The clearing firm INTL FCStone took great care to insulate itself from lawsuits that could be brought by investors. The following disclaimer accompanied every statement that was emailed to investors.

“It is understood and agreed that all futures and/or option transactions made by INTL FCStone Financial Inc (“FCM”) for your account are either hedges or contemplate actual delivery and receipt of the property and payment therefore, and all property sold for your account is sold upon the representation that you have the same in your possession actually or potentially. These transactions are made and subject to Federal and State laws.”

When one considers that INT FCStone had been subject to severe sanctions by the CFTC for its conduct since 2008, it is understandable that they would try to insulate themselves from more sanctions and legal actions.

The problem they have with this legal posturing is that it flies in the face of everything that OptionSellers has ever told its investors. In both their book “The Complete Guide to Option Selling” and their frequent newsletters and communications with their investors it was clear that none of the conditions of INT FCStone were ever met.

It was always abundantly clear that transactions made by  OptionSellers were not hedges and none of them “contemplated actual delivery and receipt of the property and payment therefor”. OptionSellers only sold and never bought options. If someone from INT FCStone denies this in a court of law, they will be committing perjury.

Since victims of this theft have the support of the victim specialist of the FBI, Department of Justice the case against INT FCStone is even stronger.

Michael R. McLeod