Commitments and Contingencies

Legal Proceedings

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss had been incurred at the date of the financial statements and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Neither accrual nor disclosure is required for loss contingencies that are deemed remote. The Company accrues legal fees related to contingent liabilities as they are incurred.

In addition to the matters discussed below, from time to time and in the ordinary course of business, the Company is involved in various legal actions and proceedings, including tort claims, contractual disputes, employment matters, workers’ compensation claims and collections. The Company carries insurance that provides protection against certain types of claims, up to the policy limits of the insurance.

As of September 30, 2013 and 2012, the consolidated balance sheets include loss contingency accruals, recorded during and prior to these fiscal years then ended, which are not material, individually or in the aggregate, to the Company’s financial position or liquidity. In the opinion of management, possible exposure from loss contingencies in excess of the amounts accrued, and in addition to the possible losses discussed below, is not likely to be material to the Company’s earnings, financial position or liquidity.

The following is a summary of significant legal matters involving the Company.

Securities Litigation and Regulatory Proceedings

FCStone and certain officers of FCStone were defendants in an action filed in the United States District Court for the Western District of Missouri in July 2008. Plaintiffs subsequently filed a consolidated amended complaint (“CAC”) in September 2009. As alleged in the CAC, the action purports to be brought as a class action on behalf of purchasers of FCStone common stock between November 15, 2007 and February 24, 2009. The CAC seeks to hold defendants liable under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and concerns disclosures included in FCStone’s fiscal year 2008 public filings. Specifically, 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 officers moved to dismiss the action. The 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. The settlement was at no cost to the Company after consideration of insurance.

In August 2008, shareholders filed a derivative action against FCStone and certain directors of FCStone in the Circuit Court of Platte County, Missouri, alleging breaches of fiduciary duties, waste of corporate assets and unjust enrichment. Shareholders subsequently filed an amended complaint in May 2009 to add claims based upon the losses sustained by FCStone arising out of a customer energy trading account. In July 2009, the same plaintiff filed 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, plaintiffs filed a purported shareholder class action complaint against FCStone and its directors, as well as the Company in the Circuit Court of Clay County, Missouri. The complaint alleged that FCStone and its directors breached their fiduciary duties by failing to maximize stockholder value in connection with the contemplated acquisition of FCStone by the Company. This complaint was subsequently consolidated with the complaint filed in the Circuit Court of Platte County, Missouri. The plaintiffs subsequently filed an amended consolidated complaint which does not assert any claims against the Company. This complaint purports to be filed derivatively on FCStone’s and the Company’s behalf and against certain of FCStone’s current and former directors and officers and directly against the same individuals. The Company, FCStone, and the defendants filed motions to dismiss on multiple grounds. The parties to the litigation have reached an agreement in principle to settle this matter. This agreement was provisionally approved by the court on December 4, 2013, and is expected to be finally approved on March 19, 2014. The agreement, if finally 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 Staff (“Staff”) requested the Company to voluntarily produce specified documents to the Staff 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 Staff provided the Company with a Wells notice, indicating the Staff’s intention to recommend that the CFTC bring certain charges against FCStone, LLC. The Company filed its Wells submission with the Staff in October 2012. On May 29, 2013, the Company reached a settlement with the CFTC in this matter. The CFTC’s findings, neither admitted nor denied by the Company, were that FCStone, LLC violated CFTC Regulation 166.3 in that it failed to diligently supervise its officers’ 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.

The 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 sufficient modifications to its risk controls since 2008.

The fine of $1.5 million was paid in full in fiscal 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

The 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 unaffiliated third party at a significant discount. On August 17, 2007, subsequent to Sentinel’s sale of certain assets, Sentinel filed 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 filed adversary proceedings against FCStone, LLC, and a number of other FCMs in the Bankruptcy Court for the Northern District of Illinois. The 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 filing of the Sentinel bankruptcy petition, as well as avoidance of post-petition distributions and disallowance of the proof of claim filed by FCStone, LLC. The trustee seeks recovery of pre- and post-petition transfers totaling approximately $15.5 million. In April 2009, the trustee filed 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 filed a motion for summary judgment on various counts in the adversary proceedings filed in August 2008 against FCStone, LLC and a number of other FCMs. In January 2012, FCStone, LLC filed 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 filed a motion to dismiss a portion of the trustee’s claims set forth in its amended complaint. The trial of this matter took place, as a test case, during October 2012. The 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. The 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. The 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 specific 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. The contingent liability for these estimated additional purchase price considerations of $9.6 million and $14.8 million are included in ‘accounts payable and other accrued liabilities’ in the consolidated balance sheets as of September 30, 2013 and 2012, respectively. The acquisition date fair value of additional consideration is remeasured to its fair value each reporting period, with changes in fair value recorded in current earnings. The change in fair value during the years ended September 30, 2013, 2012 and 2011 were increases of $2.6 million, $2.0 million and $3.1 million, respectively, and are included in ‘other’ in the consolidated income statements.

The Company recorded an estimated contingent liability as of the acquisition date, which was also the estimated total purchase price, of $5.6 million, relating to the December 2012 acquisition of the accounts of Tradewire Securities, LLC, as described in Note 19. The Company expects to make cash payments of $0.9 million, $2.0 million and $5.5 million in fiscal 2014, 2015, and 2016, respectively, related to this contingent liability. The change in fair value during the year ended September 30, 2013 was an increase of $0.7 million, included in ‘other’ in the consolidated income statement. The present value of the estimated total purchase price, including contingent consideration, is $6.3 million as of September 30, 2013, which remains outstanding and is included in ‘accounts payable and other accrued liabilities’ in the consolidated balance sheet.

The Company has a contingent liability relating to the November 2011 acquisition of Coffee Network, LLC, subsequently reorganized as a division of FCStone, LLC, which may result in the payment of additional purchase price consideration, see Note 19 for discussion of the acquisition. The acquisition date fair value of additional consideration was estimated to be $0.1 million. The present value of the estimated contingent liability recorded of $0.1 million as of September 30, 2013 represents the fair value of the expected consideration to be paid, based on the forecasted adjusted pre-tax net earnings for the third fiscal year following the closing of the acquisition, plus an additional final contingent payment.

The Company has a contingent liability relating to the October 2010 acquisition of Hencorp Becstone Futures, L.C., subsequently reorganized as a division of FCStone, LLC, (“Hencorp Futures”), which may result in the payment of additional purchase price consideration, see Note 19 for discussion of the acquisition. The acquisition date fair value of additional consideration was estimated to be $2.3 million. The contingent liability recorded as of September 30, 2013 represents an estimated contingent payment of $0.7 million based on adjusted pre-tax net earnings of Hencorp Futures for fiscal 2013 and the fair value of the expected consideration to be paid, based on the forecasted adjusted pre-tax net earnings during the fourth fiscal year following the closing of the acquisition, plus an additional final estimated contingent payment and a discount rate being applied to those future payments. The Company expects to make remaining cash payments of $0.7 million and $2.8 million in fiscal 2014 and 2015, respectively, related to this contingent liability. The change in fair value during the years ended September 30, 2013 and 2012 were increases of $1.0 million and $0.1 million, respectively, and are included in ‘other’ in the consolidated income statements. The present value of the estimated total purchase price, including contingent consideration, is $7.5 million as of September 30, 2013, of which $3.2 million has not been paid and is included in ‘accounts payable and other accrued liabilities’ in the consolidated balance sheet.

In July 2013, the Company paid $10.0 million, representing the final payment relating to the July 2010 acquisition of the Hanley Companies, which was reflected as a contingent liability in ‘accounts payable and other liabilities’ in the previous consolidated balance sheet. The change in fair value, related to that contingent liability, for the years ended September 30, 2013 and 2012 were increases of $0.7 million and $2.0 million, respectively, and are included in ‘other’ in the consolidated income statements.

In May 2013, the Company paid $3.1 million, representing the final payment relating to the April 2010 acquisition of the RMI Companies, subsequently reorganized as divisions of FCStone, LLC, which was reflected as a contingent liability in ‘accounts payable and other liabilities’ in the previous consolidated balance sheet. The change in fair value, related to that contingent liability, for the fiscal years ended September 30, 2013 and 2012 were an increase of $0.2 million and decrease of $28 thousand, respectively, and are included in ‘other’ in the consolidated income statements.

The Company had a contingent liability relating to the February 2008 acquisition of Globecot, Inc. Under the terms of the purchase agreement, the Company had an obligation to pay additional consideration if specific conditions and earnings targets were met in the twelve-month period ending January 31, 2013. As a result of the Company’s acquisition of FCStone Group, Inc. and subsidiaries (the “FCStone transaction”), effective September 30, 2009, any additional consideration paid as a result of this acquisition would be considered an adjustment to a pre-acquisition contingency, made after the end of the allocation period, and included in earnings in the current period. The final pre-acquisition contingency expense of $0.4 million was recorded during fiscal year ended September 30, 2013 and there are no further contingent payments relating to the Globecot acquisition.

Operating Leases

The Company is obligated under various noncancelable operating leases for the rental of office facilities, aircraft, automobiles, service obligations and certain office equipment, and accounts for these lease obligations on a straight line basis. The expense associated with operating leases amounted to $9.2 million, $8.9 million and $7.2 million, for fiscal years ended 2013, 2012 and 2011, respectively. The expenses associated with the operating leases and service obligations are reported in the consolidated income statements in ‘occupancy and equipment rental’, ‘transaction-based clearing expenses’ and ‘other’ expenses.

Future aggregate minimum lease payments under noncancelable operating leases as of September 30, 2013 are as follows:



(in millions)
Year ending September 30,
2014	$	6.7
2015	5.8
2016	4.5
2017	4.0
2018	3.7
Thereafter	10.2
	$	34.9

Purchase Commitments

The Company determines an estimate of contractual purchase commitments in the ordinary course of business primarily for the purchase of precious metals. Unpriced contract commitments have been estimated using September 30, 2013 fair values. The purchase commitments and other obligations as of September 30, 2013 for less than one year, one to three years and three to five years were $298.7 million, $6.8 million and $3.4 million, respectively. There were $1.6 million purchase commitments and other obligations after five years as of September 30, 2013. The purchase commitments for less than one year will be partially offset by corresponding sales commitments of $216.6 million.

Exchange Member Guarantees

The Company is a member of various exchanges that trade and clear futures and option contracts. Associated with its memberships, the Company may be required to pay a proportionate share of the financial obligations of another member who may default on its obligations to the exchanges. While the rules governing different exchange memberships vary, in general the Company’s guarantee obligations would arise only if the exchange had previously exhausted its resources. In addition, any such guarantee obligation would be apportioned among the other non-defaulting members of the exchange. Any potential contingent liability under these membership agreements cannot be estimated. The Company has not recorded any contingent liability in the consolidated financial statements for these agreements and believes that any potential requirement to make payments under these agreements is remote.