Company Quick10K Filing
Quick10K
Global Macro Trust
S-1 2019-02-13 Public Filing
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
ITT ITT 5,470
PB Prosperity Bancshares 5,060
PUMP Propetro Holding 2,440
CERS Cerus 835
RWGE Regalwood Global Energy 380
RMNI Rimini Street 335
VTVT VTV Therapeutics 63
HSDT Helius Medical Technologies 62
NAUH National American University Holdings 0
ABVN ABV Consulting 0
C765 2019-02-13
Note 1.Organization and Summary of Significant Accounting Policies
Note 2.Deposits with Brokers
Note 3.Investments in Sponsored Funds and Other Funds
Note 4.Fair Value
Note 5.Related Party Transactions
Note 6.Investing Activities and Related Risks
Note 7.Derivative Contracts
Note 8.Lease Commitments
Note 9.Indemnifications
Note 10.Employee Benefit Plan
Note 11.Commitments and Contingencies
Note 12.Subsequent Events
Note 1.Organization and Summary of Significant Accounting Policies
Note 2.Deposits with Brokers
Note 3.Investments in Sponsored Funds and Other Funds
Note 4.Fair Value
Note 5.Related Party Transactions
Note 6.Investing Activities and Related Risks
Note 7.Derivative Contracts
Note 8.Lease Commitment
Note 9.Indemnifications
Note 10.Employee Benefit Plan
Note 11.Subsequent Events
Part II
Item 13. Other Expenses of Issuance and Distribution.
Item 14. Indemnification of Directors and Officers.
Item 15. Recent Sales of Unregistered Securities.
Item 16. Exhibits and Financial Statement Schedules.
Item 17. Undertakings.
EX-1.01 s116064_ex1-01.htm
EX-5.01 s116064_ex5-01.htm
EX-8.01 s116064_ex8-01.htm
EX-10.02 s116064_ex10-02.htm
EX-23.02 s116064_ex23-02.htm
EX-23.03 s116064_ex23-03.htm

Global Macro Trust Filing 2019-02-13

C765 Filing


S-1 1 s116064_s1.htm FORM S-1

 

As Filed with the Securities and Exchange Commission on February 13, 2019

Registration No. 333-[     ]

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

GLOBAL MACRO TRUST

(Exact name of registrant as specified in its charter)

  

Delaware
(State or other jurisdiction of incorporation or organization)
6221
(Primary Standard Industrial
Classification Code Number)
36-7362830
(I.R.S. Employer
Identification Number)

 

c/o Millburn Ridgefield Corporation
1270 Avenue of the Americas, 11th Floor
New York, NY 10020

212/332-7300
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

 

Steven M. Felsenthal

Millburn Ridgefield Corporation

1270 Avenue of the Americas, 11th Floor
New York, NY 10020

212/332-7300
(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

 

 

Copies to:
James B. Biery
Daniel F. Spies

Sidley Austin LLP
One South Dearborn Street

Chicago, Illinois 60603

 

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company o
Emerging growth company o  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. o

 

CALCULATION OF REGISTRATION FEE

Title of each class of 
securities to be registered
  Proposed maximum
aggregate offering price(1)
  Amount of additional
registration fee(2)
 
Units of Beneficial Interest   $ 128,344,189   $ 0  

 

(1) To be allocated between Series on the basis of subscriber demand.

(2) Pursuant to Rule 457(o). As of the date hereof, Registrant registers pursuant to this Registration Statement on Form S-1 (Registration No. 333-[             ]) $128,344,189 of Units.  Upon the filing of this Registration Statement on Form S-1, Registrant carries forward and registers, pursuant to Rule 415(a)(6), $128,344,189 of registered but unsold Units from Registrant’s previous Registration Statement on Form S-1 (Registration No. 333-209445) for which Registrant has paid $17,506.15 in registration fees to the Securities and Exchange Commission.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 

 

GLOBAL MACRO TRUST

$128,344,189

Units of Beneficial Interest

 

The Trust

 

Global Macro Trust is a Delaware statutory trust organized to seek profit opportunities in global fixed-income instruments, currencies, stock indices and commodities.

 

The primary objective of the Trust is substantial appreciation of its assets over time.

 

An investment in the Trust may provide valuable diversification to a traditional portfolio of stocks and bonds.

 

The Managing Owner

 

Millburn Ridgefield Corporation, a professional futures trading advisor, is the Managing Owner and trading advisor of the Trust.

 

The Units

 

The Selling Agents are now offering the Trust’s Units in three Series, including Series 3 Units, Series 4 Units and Series 5 Units. Series 3 Units and Series 4 Units are offered at their Net Asset Value as of the beginning of each month. As of November 30, 2018, the Net Asset Value of a Series 3 Unit that sold for $1,180.91 as of September 1, 2009, when Series 3 Units were first issued, was $1,627.24. As of November 30, 2018, the Net Asset Value of a Series 4 Unit that sold for $1,315.33 as of November 1, 2010, when Series 4 Units were first issued, was $2,028.22. Series 5 Units, which sold for $1,500 as of April 1, 2018 when Series 5 Units were first issued, was $1,566.61.

 

Series 3 Units are available to investors participating in a registered investment adviser’s asset-based fee or fixed fee advisory program through which an investment adviser recommends a portfolio allocation to the Trust. Series 4 Units are available to employees and former employees of the Managing Owner.

 

The Selling Agents and brokers will use their best efforts to sell the Units but are not required to sell any specific number or dollar amount of Units of any Series.

 

If the total amount of Units offered pursuant to this Prospectus is sold, the proceeds to the Trust will be $128,344,189.

 

There is no scheduled termination date for the offering of Units. No escrow account will be used in connection with this offering.

 

The minimum initial investment is $5,000; $2,000 for employee benefit plans and IRAs.

 

The Risks

 

These are speculative securities. Read this Prospectus before you decide to invest. See “The Risks You Face” beginning on page 12.

 

·The Trust is speculative. You may lose all or substantially all of your investment in the Trust. Past performance is not necessarily indicative of future results.
·The Trust is leveraged. The Trust acquires positions with an aggregate face amount of as much as eight to ten times or more of its total equity. Leverage magnifies the impact of both profit and loss.
·The performance of the Trust is expected to be volatile. In the last five years, monthly returns for the Series 1 Units, adjusted to reflect the cost/fee structure of the Series 5 Units, the highest fee paying Units currently offered, ranged from up 6.32% to down 8.11%.
·The Trust charges high fees. You will sustain losses if the Trust is unable to generate sufficient trading profits and interest income to offset its fees and expenses.
·The Units are not liquid. No secondary market exists for the Units and you may redeem Units only as of a month-end. Additionally, there are restrictions on transferring Units in the Trust.
·A lack of liquidity in the markets in which the Trust trades could make it impossible for the Trust to realize profits or limit losses.
·A substantial portion of the trades executed for the Trust takes place on foreign exchanges. No United States (“U.S.”) regulatory authority or exchange has the power to compel the enforcement of the rules of a foreign board of trade or any applicable foreign laws.

 

To purchase Units, you will be required to represent and warrant, among other things, that you have received a copy of this Prospectus and that you satisfy the minimum net worth and income standards for a resident of your state to invest in the Trust. You are encouraged to discuss your investment decision with your financial, tax and legal advisors.

 

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.

 

This Prospectus is in two parts: a Disclosure Document and a Statement of Additional Information. These parts are bound together and may not be distributed separately.

 

THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED UPON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.

 

The date of this Prospectus is [ ], 2019.

 

 

 

 

COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT

 

YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL.

 

FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGES 48 TO 52 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 9.

 

THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGES 12 TO 19.

 

YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED.

 

SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK, COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND OPERATIONAL RISK.

 

HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE LIQUIDITY RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR.

 

IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE COMMODITY POOL OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE POOL’S OBLIGATIONS OR THE POOL’S EXPOSURE TO THE RISKS ASSOCIATED WITH A TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION DATE.

 

 

 

Please see the important Privacy Policy on page 106.

 

 

 

2

 

 

This Prospectus does not include all of the information or exhibits in the Trust’s Registration Statement which is filed electronically with the SEC. The Trust also electronically files quarterly and annual reports with the SEC. The Trust’s Registration Statement and its quarterly and annual reports are available on the website maintained by the SEC at http://www.sec.gov.

 

MILLBURN RIDGEFIELD CORPORATION
1270 Avenue of the Americas, 11th Floor

New York, NY 10020
(212) 322-7300
MANAGING OWNER

 

3

 

 

GLOBAL MACRO TRUST
TABLE OF CONTENTS

 

Part One
Disclosure Document  
Summary 5
The Risks You Face 12
You Could Lose Your Entire Investment in the Trust 12
Past Performance Is Not Necessarily Indicative of Future Results 12
The Trust Is a Highly Leveraged Investment 12
The Performance of the Trust Will Be Volatile 12
The Trust’s Expenses Will Cause Losses Unless Offset by Profits and Interest Income 12
An Investment in the Trust Is Not Liquid 12
The Timing of Your Investment and Redemption Decisions Will Affect the Profitability of Your Investment 12
The Managing Owner Alone Directs the Trust’s Trading 12
The Managing Owner Is Primarily a Technical Trader and May Not Always Analyze Economic Factors External to Market Price 12
Lack of Price Trends May Cause Losses; There Have Been Sustained Periods With Insufficient Price Trends That Prevented the Trust From Trading Profitably. The Managing Owner Expects That There May Be Similar Periods in the Future 13
Lack of Market Liquidity Could Make It Impossible for the Trust to Realize Profits or Limit Losses 13
Speculative Position Limits May Alter Investment Decisions for the Trust 13
The Managing Owner’s Trading Systems Have Been Developed Over Time and Are Subject to Change 13
The Managing Owner May Manage Accounts for Other Clients of the Managing Owner and Its Affiliates 13
Trading on Foreign Exchanges Presents Greater Risk Than Trading on U.S. Exchanges 14
The Managing Owner Anticipates the Trust’s Performance to Be Non-Correlated to Stocks and Bonds, Not Negatively Correlated 14
The Trust May Be Subject to Profit Shares Despite Certain Units Having Declined in Value 14
The Managing Owner’s Increased Equity Under Management Could Lead to Lower Returns for Investors 15
Increased Competition Among Trend-Following Traders Could Reduce the Managing Owner’s Profitability 15
The Trust is Subject to Conflicts of Interest 15
The Managing Owner Has Not Established Formal Procedures to Resolve Conflicts of Interest 15
You Will Be Taxed Each Year on Your Share of Trust Profits 15
You Will Be Taxed on the Trust’s Interest Income Even if the Trust Suffers Trading Losses 16
No Deduction for “Investment Advisory Fees” 16
The IRS Could Audit Both the Trust and Individual Unitholders 16
Accounting for Uncertain Tax Positions 16
The Bankruptcy of a Clearing Broker or Currency Dealer Could Cause Losses 16
The Trust Is Not Regulated as an Investment Company or Mutual Fund 16
Certain Special Considerations Related to Forward and Spot Trading 17
Regulation of Swap Trading Is Evolving and May Involve Counterparty Risk 17
Forwards, Swaps and Other Derivatives Are Subject to Varying CFTC Regulation 17
Trading in Options Requires an Assessment of Market Volatility as Well as Direction 18
Inaccurate or Incomplete Third-Party Data Could Affect Trust Profitability 18
The Failure of Computer Systems Could Result in Losses for the Trust 18
Investment Factors 19
Performance Of The Trust 22
Quantitative And Qualitative Disclosures About Market Risk 37
The Managing Owner 41
Use Of Proceeds 47
Charges 48
Redemptions; Net Asset Value 52
The Clearing Brokers and Swap Dealers 53
Conflicts Of Interest 90
The Trust And The Trustee 92
Federal Income Tax Aspects 94
Purchases By Employee Benefit Plans 97
Plan Of Distribution 99
Legal Matters 105
Experts 106
Reports 106
Privacy Policy 106
Part Two
Statement Of Additional Information  
The Futures, Forward and Spot Markets 107
Supplemental Performance Information 109
Index to Financial Statements F-1
Exhibit A—Fifth Amended and Restated  
Declaration of Trust and Trust Agreement TA-1
Exhibit B—Subscription Requirements SR-1
Exhibit C—Subscription Agreement SA-1

 

The execution copy of the Subscription Agreement accompanies this Prospectus.

 

4

 

 

GLOBAL MACRO TRUST

 

Summary

 

General

 

Global Macro Trust seeks profit opportunities in global fixed-income instruments, currencies, stock indices and various commodity products. Millburn Ridgefield Corporation, a Delaware corporation operating in New York, New York, serves as the Trust’s Managing Owner and trading advisor. The Managing Owner uses its proprietary quantitative, systematic trading method to trade in futures, forward and spot contracts, and may trade in swap and options contracts, for the Trust. In addition, positions held by the Trust may be either long, that is, contracts to buy, or short, that is, contracts to sell. The ability to take both long and short positions provides the Trust with the flexibility to capitalize on opportunities in both rising and falling markets.

 

The Trust began trading July 1, 2002.

 

The date of this Prospectus is [ ], 2019.

 

Overview

 

The Managing Owner trades the Trust’s assets in the markets that make up the Managing Owner’s Diversified Portfolio and uses the same trading strategies it uses in trading the Diversified Portfolio. The Diversified Portfolio itself is not a distinct trading strategy. Rather, it is a grouping of separate futures, forward and swap markets, featuring a variety of global fixed-income instruments, currencies, stock indices, agricultural commodities, energy products and precious and industrial metals, to which the Managing Owner applies its trading method.

 

The Trust’s primary objective is to achieve substantial capital appreciation over time with controlled volatility. The Trust also offers investors the advantages of limited liability in a leveraged trading vehicle and the convenience of professional management.

 

The performance of the Trust is not dependent upon any single nation’s economy or currency. On the contrary, periods of economic uncertainty can augment the profit potential of the Trust by increasing the likelihood of significant movements in global interest and exchange rates, and stock and commodity prices.

 

Additionally, because the Trust can take short positions as easily as long positions, the Trust is as likely to be profitable or unprofitable in falling markets as in rising markets.

 

If the Trust is successful, of which there can be no assurance, it can provide valuable diversification to traditional portfolios of stocks and bonds due to the Trust’s performance being generally unrelated to the general stock and bond markets. The Trust may also incur losses.

 

Approximately 90% or more of the Trust’s assets are invested in U.S. Treasury securities and other highly rated and liquid instruments, some of which will be deposited as collateral or margin in connection with the Trust’s trading. Accordingly, in addition to its potential to profit from its trading, the Trust earns interest on approximately 90% or more of its assets.

 

The principal office of the Trust is located at the office of the Managing Owner, which is temporarily situated at 1270 Avenue of the Americas, 11th Floor, New York, New York 10020 and expects to relocate in mid-February 2019 to 55 West 46th Street, 31st Floor, New York, New York 10036. The contact phone number for the Trust and the Managing Owner is (212) 332-7300.

 

The Offering — Series of Units

 

The Trust’s selling agents (the “Selling Agents”) are currently offering the Trust’s Units in three Series — Series 3 Units, Series 4 Units and Series 5 Units. The only differences between the Units of each Series are the applicable fees and expenses described below. Otherwise, the Units of each Series are identical to the Units of the other Series and share pro rata in the profits and losses of the Trust.

 

Previously offered Series 1 Units and Series 2 Units are no longer being offered by the Trust, and as of August 31, 2017, all Series 2 Units issued by the Trust have been redeemed.

 

Units of all Series are referred to collectively in this Prospectus as “Units,” and holders of Units are referred to collectively in this Prospectus as “Unitholders.”

 

Series 3, Series 4 and Series 5 Units are offered at the Net Asset Value per Unit of such Series as of the first business day of each calendar month.

 

Series 3 Units are available only to investors participating in a registered investment adviser’s asset-based fee or fixed fee advisory program through which an investment adviser recommends a portfolio allocation to the Trust.

 

Series 4 Units are available only to employees and former employees of the Managing Owner and its affiliates who purchase their Units through the Managing Owner’s 401(k) and Profit Sharing Plan.

 

5

 

 

The Managing Owner may, from time to time, also permit intra-month closings.

 

The Net Asset Value per Unit of a Series is determined by dividing the Trust’s assets attributable to that Series minus its liabilities attributable to that Series by the number of Units of that Series outstanding on the date the calculation is being performed. A Series’ Net Assets in aggregate are the Trust’s assets attributable to that Series minus its liabilities attributable to that Series. The Trust’s Net Assets in aggregate are its total assets minus its total liabilities.

 

The minimum investment in the Trust is $5,000; $2,000 for trustees or custodians of eligible employee benefit plans and individual retirement accounts (“IRAs”). Units will be sold in fractions calculated to three decimal places.

 

To subscribe, you must complete and sign the Subscription Agreement Signature Page which accompanies this Prospectus and deliver it to your Selling Agent or broker. See Exhibit B — Subscription Requirements and Exhibit C — Subscription Agreement. You should review this entire Prospectus carefully before deciding whether to invest in the Units.

 

Major Risks of the Trust

 

The Trust is speculative. You may lose all or substantially all of your investment in the Trust.

 

The past performance of the Trust and the Managing Owner’s Diversified Portfolio are not necessarily indicative of the future results of the Trust.

 

The Trust is leveraged. The Trust acquires positions with an aggregate face amount of as much as eight to ten times or more of its total equity. Leverage magnifies the impact of both profit and loss.

 

The performance of the Trust is expected to be volatile. In the last five years, monthly returns for the Series 1 Units, adjusted to reflect the cost/fee structure of the Series 5 Units, the highest fee paying Units currently offered, have ranged from up 6.32% to down 8.11%.

 

To be profitable, the Trust’s fees and expenses must be offset by trading profits and interest income.

 

The Units are not liquid. No secondary market exists for the Units, and the Units may be redeemed only as of a month-end.

 

Investment Considerations

 

The Managing Owner has been managing client funds in the futures and forward markets for over 40 years. As of December 1, 2018, the Managing Owner was directing the trading of $6.2 billion of client and proprietary capital in the futures and forward markets; and had $6.4 billion total assets under management. Of these amounts, the Managing Owner was managing approximately $3.7 billion pursuant to the Diversified Portfolio, the trading portfolio traded on behalf of the Trust, including assets of accounts trading the Diversified Portfolio at lower target volatilities (as reduced to reflect a uniform target volatility) and the balance of which is attributable to other trading portfolios managed by the Managing Owner.

 

As of December 1, 2018, the net asset value of the Managing Owner’s interest in the Trust equaled $3.8 million. As of December 1, 2018, the investments of the Managing Owner, its principals, affiliates, employees and former employees and their family members in accounts managed pursuant to the Diversified Portfolio exceeded $79 million.

 

The Managing Owner makes trading decisions pursuant to its investment and trading methods, which include technical trend analysis and certain non-traditional technical systems (i.e., systems falling outside of traditional technical trend analysis). The Managing Owner may, however, from time to time, exercise discretion with respect to its technical trend analysis to adjust position sizes and will, over time, change the markets represented in the Diversified Portfolio. The Managing Owner’s trend-following trading approach seeks to identify and profit from sustained market trends while limiting losses in trendless markets.

 

The Managing Owner has the ability to shift capital readily among different international economies and markets. As of December 1, 2018, the composition of the Managing Owner’s Diversified Portfolio, as well as the Trust, was approximately as follows:

 

 

 

6

 

 

As illustrated by the correlation matrix below, the returns of the Trust from July 2002 through November 2018 have not been significantly correlated with traditional portfolio components such as stocks and bonds.

 

   Trust(1) 
Trust(1)   1.00 
S&P 500   (0.03)
NASDAQ   (0.01)
MSCI World   0.02 
Bonds   0.20 
Hedge Funds   0.20 

 

 

(1) Reflecting the cost/fee structure applicable to the Series 5 Units, the highest fee paying Units currently offered. Statistically, investments with a correlation of 1.00 make or lose money at the same time, and investments with a correlation of -1.00 always move in the opposite direction. See “Supplemental Performance Information” and the notes thereto in Part Two of this Prospectus.

 

An investment in the Trust can, but only if the Trust itself is successful, improve the reward/risk profile of a traditional portfolio of stocks and bonds.

 

Redemptions

 

You may redeem your Units as of the end of any calendar month, upon 10 days’ prior written notice to the Managing Owner.

 

Charges

 

The Trust’s expenses must be offset by trading gains and interest income to avoid depletion of the Trust’s assets.

 

Series 3 Units. The Trust will pay the Managing Owner a management fee of 1.75% per year of the Trust’s Net Assets attributable to Series 3 Units (“Series 3 Management Fee”). Series 3 Units will also be charged for their pro rata share of the Trust’s actual trade execution and clearing costs, including electronic platform trading costs, estimated at approximately 0.30% of the Trust’s average month-end Net Assets per year attributable to the Series 3 Units.

 

If the Series 3 Units in the aggregate earn net trading profits for any year in excess of the highest amount of net trading profits earned in all previous years, the Trust will allocate 20% of those “new” net trading profits to the Managing Owner as the Managing Owner’s Series 3 Profit Share (as defined below).

 

Series 4 Units. Series 4 Units will be charged for their pro rata share of the Trust’s actual trade execution and clearing costs, including electronic platform trading costs, estimated at approximately 0.30% of the Trust’s average month-end Net Assets per year attributable to the Series 4 Units.

 

Series 5 Units. The Trust will pay the Managing Owner a management fee of 2.50% per year of the Trust’s Net Assets attributable to Series 5 Units (the “Series 5 Management Fee”). From this amount and subject to the applicable cap on Selling Agent compensation as described below, the Managing Owner will pay up to 0.75% per year of the Trust’s Net Assets attributable to Series 5 Units to the Selling Agents.

 

If the Series 5 Units in the aggregate earn net trading profits for any year in excess of the highest amount of net trading profits earned in all previous years, the Trust will allocate 20% of those “new” net trading profits to the Managing Owner as the Managing Owner’s Series 5 Profit Share (as defined below).

 

Series 5 Units will also be charged for their pro rata share of the Trust’s actual trade execution and clearing costs, including electronic platform trading costs, estimated at approximately 0.30% of the Trust’s average month-end Net Assets per year attributable to the Series 5 Units.

 

To the extent set forth in the Subscription Agreement and subject to the applicable cap on Selling Agent compensation, an investor acquiring Series 5 Units through certain Selling Agents may be required to pay to such Selling Agents an upfront selling commission of up to 3% of the amount intended to be invested in Series 5 Units. Any such upfront selling commission will be deducted by the Selling Agent directly from the investor’s investment account maintained by the Selling Agent and will not be considered in calculating the Series 5 Profit Share described below.

 

In this Prospectus, the Series 3 Management Fee and the Series 5 Management Fee are collectively referred to as “Management Fees.”

 

The Trust pays its own offering costs, including, without limitation: costs associated with the offering and sale of the Units (such as printing and postage costs associated with producing and distributing this Prospectus and related sales literature to the Selling Agents, as well as payments to administrators for processing subscription agreements); professional fees and expenses (including legal and accounting) in connection with the update of the Trust’s offering documents, constitutional documents and other relevant documents; communication expenses with respect to investor services and all expenses relating to Unitholder meetings, if any; and costs of preparing, printing, filing, registering and distributing this Prospectus as well as financial and other reports, forms, proxies and similar documents. Ongoing offering costs will not exceed 1% of the gross offering proceeds of the Units sold pursuant to this Prospectus.

 

7

 

 

The Trust also pays its own operating costs, including, but not limited to: (i) the Management Fees payable to the Managing Owner (ii) direct and indirect investment expenses (such as, but not limited to, brokerage commissions and other transaction-execution costs; dealer spreads, give-up fees; NFA fees; exchange-related fees, externally incurred costs of establishing and utilizing electronic trading, computer, software and systems connections directly or indirectly with the Trust’s brokers and counterparties or with third parties to facilitate electronic trading with the Trust’s brokers and counterparties; costs relating to the use of trading algorithms; clearing fees; valuation and portfolio pricing; interest charges; custodial fees and charges and financing charges; and applicable withholding and other taxes); (iii) all expenses related to the purchase, sale, transmittal or custody of trading assets and related items; (iv) costs and expenses associated with or deriving from obtaining and maintaining exchange memberships and credit ratings; (v) any taxes and duties payable in any jurisdiction in connection with the Trust’s operations; (vi) compliance costs of regulatory and governmental inquiries, subpoenas and proceedings (in each case, to the extent involving the Trust or the Managing Owner in its capacity as managing owner, CPO or CTA of the Trust); (vii) costs associated with possible reorganizations or restructurings of the Trust; and (viii) costs of any litigation or investigation involving Trust activities and any indemnification payments, if any; (ix) legal, financial and tax accounting, auditing and other professional fees and expenses, including consulting and appraisal fees and expenses pertaining to the Trust; (x) administrative expenses (including, if applicable, the fees and out-of-pocket expenses of an administrator unaffiliated with the Managing Owner (and its agents) which the Managing Owner may select for the Trust); (xi) establishing computer and systems connectivity with administrators and other third-party service providers; (xii) paying agency, transfer agency, accounting verification (if any) and/or investor registrar services and the costs of middle-office and back-office support as provided by the Managing Owner or administrators, as applicable; (xiii) due diligence expenses, including due diligence relating to anti-money laundering, know your customer and other inquiries; (xiv) costs of maintaining the services of Wilmington Trust Company (the “Trustee”) and SS&C (USA) Inc. (the “Verification Agent”) in Delaware or in any other applicable jurisdiction (viii) legal, compliance, tax, accounting and audit costs, fees and expenses (including interest charges) relating to the Trust’s regulatory and self-regulatory filings, registrations, memberships and reporting (including, but not limited to, expenses incurred in connection with complying with applicable U.S. reporting obligations, such as those required by the SEC, the CFTC or other regional counterparts, as well as out-of-pocket costs of preparing regulatory filings related to the Trust or the Managing Owner with respect to the Trust); (xv) the costs and fees attributable to any third-party proxy voting or class actions service or consultant; (xvi) the Trust’s insurance costs, including without limitations, errors and omissions insurance and directors and officers insurance, if any; and any other operating or administrative expenses related to accounting, research, third-party consultants, and reporting.

 

The Managing Owner expects that the operating costs listed above, but excluding those expenses relating to the Management Fees and trade execution and clearing costs (each as described separately in “Charges” below), assuming Trust assets of $175,000,000, and, when aggregated with ongoing offering costs described above, are not expected to exceed 0.60% per annum of the Trust’s average month-end Net Assets.

 

The Trust itself could be subject to taxes or could incur extraordinary charges incidental to its trading, but the Managing Owner believes that neither situation is likely. There are no other charges borne by investors or the Trust.

 

The Managing Owner paid, without reimbursement, the Trust’s initial organizational costs. You will not bear any part of those costs.

 

The Managing Owner will pay any Selling Agent compensation due in connection with the sale of Series 3 Units from its own funds but not to exceed 9.5% of the gross offering proceeds from the sale of the Series 3 Units. In addition to any upfront selling commissions paid directly to Selling Agents by Series 5 Unitholders and the installment selling commissions paid to Selling Agents by the Managing Owner from the Series 5 Management Fee, the Managing Owner will pay, from its own funds, any other compensation due to Selling Agents or wholesalers in connection with the sale of Series 5 Units. Cumulative compensation to Selling Agents with respect to the Series 5 Units will not exceed 9.5% of the gross offering proceeds from the sale of the Series 5 Units. Once the maximum threshold is reached with respect to a Series 5 Unit, the Selling Agent to which any selling compensation was payable will receive no future payment of such compensation, and the up to 0.75% amount that would otherwise be paid to the Selling Agent for that Series 5 Unit will instead be rebated to the Trust for the benefit of all Series 5 Unitholders.

 

Series 4 Units are not subject to any sales charges.

 

8

 

 

Please refer to “Charges” for a more detailed discussion of the expenses applicable to the Trust and the “Selling Agent Compensation Table” and “Items of Compensation Chart” for a more detailed discussion of the compensation paid to Selling Agents.

 

Breakeven Tables

 

The following Breakeven Tables indicate the approximate amount of trading profit the Trust must earn with respect to a Series of Units, during the first twelve months after a Unit is sold, to offset the costs applicable to that Series of Units.

 

Series 3

 

ROUTINE
EXPENSES
  Percentage
Return
Required First
Twelve
Months of
Investment
   Dollar Return
Required ($5,000
Initial
Investment)
First Twelve
Months
of Investment
 
         
Management Fee   1.75%  $87.50 
Trade Execution and Clearing Costs*   0.30%  $15.00 
Administrative and Offering Expenses*   0.60%  $30.00 
Profit Share*   0.00%  $0.00 
Less Interest Income*   (2.21)%  $(110.50)
Twelve-month “breakeven”   0.44%  $22.00 

 

 

* See Notes to Breakeven Tables below.

 

Series 5

 

ROUTINE
EXPENSES
  Percentage
Return
Required First
Twelve
Months of
Investment
   Dollar Return
Required ($5,000
Initial
Investment*)
First Twelve
Months
of Investment
 
         
Management Fee   2.50%  $125.00 
Trade Execution and Clearing Costs*   0.30%  $15.00 
Administrative and Offering Expenses*   0.60%  $30.00 
Profit Share*   0.00%  $0.00 
Less Interest Income*   (2.21)%  $(110.50)
Twelve-month “breakeven”   1.19%  $59.50 

 

 

* See Notes to Breakeven Tables below.

 

Notes to Breakeven Tables. *Estimated. Administrative and offering expenses in aggregate are estimated at 0.60% per annum of the Trust’s average month-end Net Assets. Management Fees and Trade Execution and Clearing Costs, including electronic platform trading costs and ongoing offering and administrative expenses must be offset by trading profits before a Profit Share is allocated to the Managing Owner. Accordingly, the Profit Share is shown as $0.00 because none would be payable at the “break-even” point equal to the initial amount invested in the Trust. Interest income is assumed to be 90% of the 91-day Treasury bill rate determined as of January 8, 2019.

 

Series 5 Units sold through certain Selling Agents may additionally be subject to an upfront selling commission of up to 3% of the intended investment amount, with any such selling commission to be deducted directly by the Selling Agent from the investor’s account maintained with such Selling Agent. For example, assuming an upfront selling commission of 3%, in addition to a subscription amount of $5,000 to be delivered to the Trust, the Selling Agent would deduct $150 from the investor’s account maintained with the Selling Agent. In order to offset these upfront selling commissions, the Trust would need to earn, in addition to the breakeven amount set forth in the Series 5 Breakeven Table, trading profits and interest income equal to the amount of such upfront selling commissions plus the Profit Share realized on such trading profits.

 

The Breakeven Tables assume an investment with a constant $5,000 Net Asset Value and a breakeven year. See “Charges.”

 

Series 4 Units. Employees and former employees of the Managing Owner and its affiliates may purchase Series 4 Units through the Managing Owner’s 401(k) and Profit Sharing Plan. Assuming a $2,000 investment, estimated trade execution and clearing costs at 0.30% per annum ($6.00), estimated administrative and offering expenses at 0.60% per annum ($12.00) and estimated interest income at 2.21% per annum (less $44.20), no trading profit would need to be earned by the Trust to offset such costs, assuming a constant $2,000 Net Asset Value and a breakeven year. Series 4 Units are not subject to a Profit Share. See “Charges.”

 

Federal Income Tax Aspects

 

The Trust will be treated as a partnership for federal income tax purposes. Thus, you will be taxed each year on your share of the Trust’s income whether or not you redeem Units from the Trust or receive distributions from the Trust.

 

40% of any trading profits on certain U.S. exchange-traded futures contracts and certain foreign currency forward contracts are taxed as short-term capital gains at ordinary income rates (unless offset by capital losses), while 60% of any such trading profits are taxed as long-term capital gains at a lower maximum rate for individuals. 100% of any trading profits from certain bank forward contracts or foreign currency futures contracts traded on a non-U.S. exchange are “marked-to-market” at the end of each year and taxed as short-term capital gains at ordinary income rates (unless offset by capital losses). The Trust’s trading gains from other contracts will be primarily short-term capital gains. This tax treatment applies regardless of how long an investor holds Units. Interest income is taxed at ordinary income rates.

 

9

 

 

Capital losses on the Units may be deducted against capital gains. However, capital losses in excess of capital gains may only be deducted by a non-corporate taxpayer against ordinary income to the extent of $3,000 per year. Consequently, you could pay tax on the Trust’s interest income even though you have lost money on your Units.

 

The Futures, Forward and Swap Markets

 

Futures contracts are generally traded on exchanges and call for the future delivery of various commodities or are settled in cash.

 

Forward currency contracts and swap contracts are generally traded off-exchange through banks or dealers.

 

Futures, forward and swap trading is a “zero-sum,” risk transfer economic activity. For every gain realized by a futures, forward or swap trader, there is an equal and offsetting loss suffered by another. In this respect, an investment in the Trust is different from other securities investments where one expects consistent yields, in the case of bonds, or participation in overall economic growth as in the case of stocks.

 

Is the Trust a Suitable Investment for You?

 

You should consider investing in the Trust if you are interested in its potential to produce returns that are generally unrelated to those of stocks and bonds and you are prepared to risk significant losses.

 

The Trust is a diversification opportunity for an investment portfolio, not a complete investment program.

 

You should consider an investment in the Trust to be a 3 to 5 year commitment.

 

To invest, you must, at a minimum, have either (i) a net worth of at least $250,000, exclusive of home, furnishings and automobiles, or (ii) a net worth, similarly calculated, of at least $70,000 and an annual gross income of at least $70,000. A number of States in which the Units are offered impose higher suitability standards. These standards are regulatory minimums only, and just because you meet the standard does not necessarily mean the Units are a suitable investment for you.

 

You should not invest more than 10% of your net worth (exclusive of home, furnishings and automobiles) in the Trust.

 

These are speculative securities. You may lose all or substantially all of your investment in the Trust.

 

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

 

10

 

 

Organizational Chart

 

 

 

None of the entities indicated in this organizational chart, other than the Trust, are related to the Managing Owner. See “Conflicts of Interest.” Descriptions of the dealings between the Managing Owner and the Trust are set forth under “Charges.”

 

11

 

 

The Risks You Face

 

Set forth below are the principal risks associated with an investment in the Trust. You should consider these risks when making your investment decision.

 

You Could Lose Your Entire Investment in the Trust

 

An investment in the Trust is a speculative investment. You will be relying on the Managing Owner to trade profitably for the Trust and profitability is not assured. You could lose all or substantially all of your investment in the Trust.

 

Past Performance Is Not Necessarily Indicative of Future Results

 

The Trust began trading July 1, 2002 and has traded in both rising and falling markets. Nevertheless, the past performance of the Trust is not necessarily indicative of the Trust’s future results, and the Trust may sustain losses in the future under market conditions in which it achieved gains in the past.

 

The Trust Is a Highly Leveraged Investment

 

The Trust acquires positions with an aggregate face value of as much as eight to ten times or more of its total equity. Consequently, small adverse movements in the prices of the Trust’s open positions can cause significant losses.

 

The Performance of the Trust Will Be Volatile

 

The Managing Owner expects that the performance of the Trust will be volatile. The Trust may suffer sudden and substantial losses from time to time and the day-to-day value of the Units will be variable and uncertain. The Net Asset Value per Unit may change materially between the date on which you subscribe for Units and the date the Units are issued or the date you request a redemption and the month-end redemption date. In the last five years, monthly returns for the Series 1 Units, adjusted to reflect the cost/fee structure of the Series 5 Units, the highest fee paying Units currently offered, have ranged from up 6.32% to down 8.11%.

 

The Trust’s Expenses Will Cause Losses Unless Offset by Profits and Interest Income

 

The Trust pays annual expenses of up to approximately 2.65%, 0.90% and 3.40% of its average month-end Net Assets attributable to Series 3 Units, Series 4 Units and Series 5 Units, respectively. The Trust must earn trading profits and interest income allocable to each Series at least equal to these expenses to avoid losses. To the extent the Trust’s Net Assets decline, fixed costs of the Trust will constitute a greater percentage of the Trust’s Net Assets.

 

Series 5 Units sold through certain Selling Agents may be subject to upfront selling commissions paid directly to the Selling Agents by investors. To offset these upfront selling commissions, the Trust would need to earn, in addition to the amount described above, trading profits and interest income equal to the amount of any such upfront selling commission plus the Profit Share realized on such trading profits.

 

An Investment in the Trust Is Not Liquid

 

There is no secondary market for the Units. You may redeem your Units only as of the close of business on the last day of a calendar month, and you must give the Trust at least 10 days’ prior written notice of your intent to redeem.

 

The Timing of Your Investment and Redemption Decisions Will Affect the Profitability of Your Investment

 

The Managing Owner expects that a majority of the Trust’s trades will result in small profits only or in losses. The majority of any profits earned by the Trust will most likely come from a small number of trades each year. Accordingly, you will not know when is a good time to invest in the Trust or to redeem your Units, and the timing of your investment and redemption decisions will affect the amount of profit or loss you experience as an investor in the Trust.

 

The Managing Owner Alone Directs the Trust’s Trading

 

The Trust is a single-advisor fund. The use of a single advisor trading one program involves a greater risk of loss than the diversified, multi-advisor approach employed by many futures funds. In addition, if the management services of the Managing Owner were to become unavailable for any reason, the Trust would terminate. Furthermore, were the Managing Owner to lose the services of its key principals, the Managing Owner could decide to dissolve the Trust, subject to Unitholder approval, possibly causing it to realize losses.

 

The Managing Owner Is Primarily a Technical Trader and May Not Always Analyze Economic Factors External to Market Price

 

The Managing Owner’s systematic strategies are developed on the basis of, among other factors, a statistical analysis of market prices. Consequently, any factor external to the market itself that dominates prices may cause major losses to these strategies. For example, a pending political or economic event may be very likely to cause a major price movement, but certain of the Managing Owner’s traditional strategies may continue to maintain positions indicated by its trading method that would incur major losses if the event proved to be adverse.

 

12

 

 

The Managing Owner’s systematic strategies retain certain discretionary aspects. Decisions, for example, to adjust the size of the positions indicated by the systematic strategies, which contracts to trade and method of order entry require judgmental input from the Managing Owner’s principals. Additionally, the Managing Owner may determine not to enter a new position indicated by its strategies if the Managing Owner determines prevailing market conditions to be unusual, for example, significantly more volatile than the expected volatility factored into the design of the strategies. The Managing Owner does, however, exit positions when its trading strategies indicate that it should do so. Discretionary decision-making may result in the Managing Owner making unprofitable trades when a more wholly systematic approach would not have done so.

 

Lack of Price Trends May Cause Losses; There Have Been Sustained Periods With Insufficient Price Trends That Prevented the Trust From Trading Profitably. The Managing Owner Expects That There May Be Similar Periods in the Future

 

The Trust is less likely to trade profitably when there are no major price trends in at least some of the markets it trades. Moreover, the price trends must be of a type the Managing Owner’s systems are designed to identify. In the past there have been sustained periods with few trending markets where gains from trading those markets were insufficient to offset losses from trades in non-trending markets. The Managing Owner expects that there may be similar periods in the future.

 

Markets in which prices move rapidly and then reverse and then do so again may cause losses. In such “whipsaw” market conditions, the Managing Owner may establish positions for the Trust on the basis of incorrectly identifying the rapid movement or the reversal as a trend.

 

Lack of Market Liquidity Could Make It Impossible for the Trust to Realize Profits or Limit Losses

 

In illiquid markets, the Trust could be unable to close out positions to limit losses or to take positions in order to follow trends. There are too many different factors that can contribute to market illiquidity to predict when or where illiquid markets may occur.

 

Unexpected market illiquidity has caused major losses for some traders in recent years in such market sectors as emerging markets and mortgage-backed securities. There can be no assurance that the same will not happen in the markets traded by the Trust. In addition, the large size of the positions the Trust may take increases the risk of illiquidity by both making its positions more difficult to liquidate and increasing the losses incurred while trying to do so.

 

U.S. commodity exchanges impose limits on the amount the price of some, but not all, futures contracts may change on a single day. Once a futures contract has reached its daily limit, it may be impossible for the Trust to liquidate a position in that contract, if the market has moved adversely to the Trust, until the limit is either raised by the exchange or the contract begins to trade away from the limit price.

 

Speculative Position Limits May Alter Investment Decisions for the Trust

 

The Commodity Futures Trading Commission (the “CFTC”) has established limits on the maximum net long or net short positions which any person may hold or control in certain futures contracts. The CFTC has also proposed, but not yet adopted, additional position limit rules covering energy, metals and agricultural derivative contracts. All accounts controlled by the Managing Owner, including the account of the Trust, are likely to be combined for speculative position limit purposes. The Managing Owner could be required to liquidate positions it holds for the Trust, or may not be able to fully implement trading instructions generated by its trading models, in order to comply with such limits. Any such liquidation or limited implementation could result in substantial costs to the Trust. It is as yet unclear whether the rules will have an adverse effect on the Trust.

 

The Managing Owner’s Trading Systems Have Been Developed Over Time and Are Subject to Change

 

In executing its trading method, the Managing Owner uses combinations of trading systems to generate buy and sell signals in the various markets traded. The Managing Owner has developed, modified, retained and discarded numerous systems over more than 47 years. Consequently, some of the trading systems and combinations of systems currently being used to trade accounts pursuant to the Diversified Portfolio, as the Trust is so traded, are not identical to those used 1, 5, 10, 15, 20 or more years ago.

 

The Managing Owner May Manage Accounts for Other Clients of the Managing Owner and Its Affiliates

 

The Managing Owner manages futures and forward accounts other than the Trust, including accounts in which the Managing Owner and its current and former principals and employees and their family members have significant investments. The Managing Owner and its affiliates may manage additional accounts in the future. It is possible that such accounts may be in competition with the Trust for the same or similar positions in the futures, forward and spot markets. The Managing Owner intends generally to use similar trading methods for the Trust and all other systematic accounts the Managing Owner and its affiliates manage. The Managing Owner will not knowingly or deliberately use systems for any account that are inferior to systems employed for any other account or favor any account over any other account.

 

13

 

 

In addition, the Managing Owner employs a neutral allocation system such that the portfolio of market positions, or portfolio, pursuant to which an account is traded will be allocated positions in financial instruments on a fair and equitable basis in comparison to the other portfolios offered by the Managing Owner. Certain portfolios, however, may receive larger allocations of positions on account of the specialized nature of such portfolios. For example, a portfolio concentrated in the commodities markets may receive a larger portion of commodity based financial instruments than the allocations received by portfolios trading a more diverse set of markets. Further, some portfolios, as traded on behalf of certain client accounts, may or may not be allocated positions in financial instruments, or may be allocated such positions at a reduced rate because of instructions received by a client and/or the size or nature of the client account. For example, if trading in certain markets constitutes a de minimis portion of the trading performed on behalf of a large account, the Managing Owner may decide not to trade in such markets on behalf of that account even though such market would otherwise be traded in the portfolio applicable to such account. As a result, certain portfolios and accounts may receive increased allocations to the detriment of other portfolios and accounts. No assurance is given that the results of the Trust’s trading will be similar to that of other accounts concurrently managed by the Managing Owner or its affiliates.

 

Trading on Foreign Exchanges Presents Greater Risk Than Trading on U.S. Exchanges

 

The Trust will trade on commodity exchanges outside the U.S. Trading on foreign exchanges is not regulated by any U.S. governmental agency and may involve certain risks that do not arise when trading on U.S. exchanges. For example, some foreign exchanges are “principals’ markets” in which performance is the responsibility only of the individual member with whom the Trust has traded, not of the exchange or a clearing facility. In such cases, the Trust will be subject to a risk that the member with whom the Trust has traded is unable or unwilling to perform its obligations under the transaction. Additionally, an adverse change in the exchange rate between the U.S. dollar and the currency in which a non-U.S. futures contract is denominated would reduce the profit or increase the loss on a trade in that contract.

 

Trading on foreign exchanges also presents risks of loss due to: (1) the possible imposition of exchange controls, which could make it difficult or impossible for the Trust to repatriate some or all of its assets held by non-U.S. counterparties; (2) possible government confiscation of assets; (3) taxation; (4) possible government disruptions, which could result in market closures and thus an inability to exit positions and repatriate Trust assets for sustained periods of time, or even permanently; and (5) limited rights in the event of the bankruptcy or insolvency of a foreign broker or exchange resulting in a different and possibly less favorable distribution of the bankrupt’s assets than would occur in the U.S.

 

The Managing Owner Anticipates the Trust’s Performance to Be Non-Correlated to Stocks and Bonds, Not Negatively Correlated

 

The performance of the Trust has been generally non-correlated to the performance of the stock and bond markets, as represented by the S&P 500 Stock Index and the Barclays Long-Term Treasury Index. Non-correlation means that there is no statistically valid relationship between two asset classes and should not be confused with negative correlation, where the performance of two asset classes would be opposite. Because of this non-correlation, you should not expect the Trust to be automatically profitable during unfavorable periods for the stock and/or bond markets, or vice versa.

 

If the Trust does not perform in a manner non-correlated with the general financial markets or does not perform successfully, you will obtain little or no diversification benefits by investing in the Units and the Trust may have no gains to offset your losses from other investments.

 

The Trust May Be Subject to Profit Shares Despite Certain Units Having Declined in Value

 

Investors will purchase Units at different times and will, accordingly, recognize different amounts of profit and loss on their investments. Profit Shares are accrued, or the accruals are reversed to reflect losses, on a monthly basis so that Units are not sold with an embedded Profit Share liability. However, Series 3 Profit Shares and Series 5 Profit Shares are each ultimately calculated on the basis of the net trading profits, if any, recognized by the Series 3 Units as a whole and the Series 5 Units as a whole, respectively, and not on the profits recognized by any particular Unit or Units. Consequently, the Managing Owner may still be allocated a Profit Share even though certain Units have lost value since the date they were purchased.

 

14

 

 

Conversely, Units purchased at a Net Asset Value reduced by accrued Profit Shares will benefit from any reversal of such accruals, and the benefit of such reversals to Units outstanding at the time of such purchase will be diluted. Similarly, Units may incur losses generating a loss carryforward for purposes of calculating subsequent Profit Shares. The benefit of any such loss carryforward will, in the case of Series 3 Units and Series 5 Units be diluted by the sale of additional Series 3 Units and Series 5 Units, respectively.

 

Further, with respect to Series 5 Units subject to upfront selling commissions, Profit Shares may be payable even though the trading profits attributable to such Series 5 Units do not fully offset the costs of the upfront selling commissions charged directly by a Selling Agent.

 

The Managing Owner’s Increased Equity Under Management Could Lead to Lower Returns for Investors

 

The Managing Owner has not agreed to limit the amount of money it may manage and is actively seeking additional accounts. The more money the Managing Owner manages, the more difficult it may become for the Managing Owner to trade profitably for the Trust because of the difficulty of trading larger positions without negatively affecting prices and performance.

 

Increased Competition Among Trend-Following Traders Could Reduce the Managing Owner’s Profitability

 

A substantial number CTAs use technical trading systems, particularly trend-following systems, that may be similar to a portion of the Managing Owner’s systems. As the amount of money under the management of such systems increases, competition for the same positions increases, making the positions more costly and more difficult to acquire.

 

The Trust is Subject to Conflicts of Interest

 

The Trust is subject to numerous actual and potential conflicts of interest, including: (1) the compensation that the Selling Agents receive gives them an incentive to promote the sale of Units as well as to discourage redemptions; (2) the brokerage commissions that Selling Agents receive if they also serve as clearing brokers for the Trust gives an additional incentive to promote the sale of Units as well as to discourage redemptions; (3) the Managing Owner has significant financial incentives both to promote the sale of the Units and to discourage their redemption; and (4) the Managing Owner of the Trust will not select any other trading advisor even if doing so would be in the best interests of the Trust. See “Conflicts of Interest.”

 

The Managing Owner Has Not Established Formal Procedures to Resolve Conflicts of Interest

 

Because the Managing Owner has not established any formal procedures for resolving conflicts of interest, you will be dependent on the good faith of the parties with conflicts to resolve the conflicts equitably. The Managing Owner cannot assure that conflicts of interest will not result in losses for the Trust.

 

You Will Be Taxed Each Year on Your Share of Trust Profits

 

If you are an individual or entity subject to U.S. taxes (e.g., not a tax-exempt entity such as an IRA or pension plan), you will be taxed on your share of Trust income or gain each year, whether or not you redeem Units or receive distributions from the Trust.

 

Because a substantial portion of the Trust’s open positions are “marked-to-market” at the end of each year, some of your tax liability will be based on unrealized gains which the Trust may, in fact, never realize.

 

40% of any trading profits on certain U.S. exchange-traded futures contracts and certain foreign currency forward contracts are taxed as short-term capital gains at ordinary income rates (unless offset by capital losses), while 60% of any such trading profits are taxed as long-term capital gains at a lower maximum rate for individuals. 100% of any trading profits from certain bank forward contracts or foreign currency futures contracts traded on a non-U.S. exchange are “marked-to-market” at the end of each year and taxed as short-term capital gains at ordinary income rates (unless offset by capital losses). These rates apply regardless of how long the Trust holds a contract, or an investor his or her Units.

 

Due to the different tax rates for long-term and short-term capital gains and limitations on the deductibility of capital losses, and depending on the tax character of income and loss you receive on other investments in your portfolio, it is possible for you to have a pre-tax economic gain on your investment in the Trust but an after-tax loss.

 

All performance information included in this Prospectus is presented on a pre-tax basis; the investors who experienced such performance had to pay the related taxes from other sources.

 

Over time, the compounding effects of the annual taxation of the Trust’s income are material to the economic consequences of investing in the Trust. For example, a 10% compound annual rate of return over five years would result in an initial $10,000 investment compounding to $16,105. However, if one factors in a 30% tax rate each year, the result would be $14,025.

 

15

 

 

You Will Be Taxed on the Trust’s Interest Income Even if the Trust Suffers Trading Losses

 

Losses on the Trust’s trading are almost exclusively capital losses. Non-corporate investors may use net capital losses to offset up to $3,000 of ordinary income each year. So, for example, if your share of the Trust’s trading (i.e., capital) loss was $10,000 in a given fiscal year and your share of interest income was $5,000, you would incur a net loss in the Net Asset Value of your Units equal to $5,000, but would nevertheless recognize taxable income of $2,000.

 

No Deduction for “Investment Advisory Fees”

 

The Managing Owner does not intend to treat the ordinary expenses of the Trust as “investment advisory fees” for federal income tax purposes. The Managing Owner believes that this is the position adopted by virtually all U.S. futures fund sponsors. However, were the ordinary expenses of the Trust characterized as “investment advisory fees,” non-corporate taxpayers would be unable to deduct those expenses, would pay increased taxes in respect of an investment in the Trust and could actually recognize taxable income despite having incurred a financial loss.

 

The IRS Could Audit Both the Trust and Individual Unitholders

 

The Internal Revenue Service (the “IRS”) could audit the Trust’s tax returns and require the Trust to adjust such returns. If an audit results in an adjustment, you could be audited and required to pay additional taxes, plus interest and possibly penalties.

 

Absent an election by the Trust under rules to be finalized by the IRS, the Trust will be required to determine and pay any imputed underpayment of tax (including interest and penalties) resulting from an adjustment of the Trust’s items of income, gain, loss, deduction or credit at the Trust level without the benefit of Unitholder-level tax items that could otherwise reduce tax due on any adjustment and, where the adjustment reallocates any such item from one Unitholder to another, without the benefit of any decrease in any item of income or gain (or increase in any item of deduction, loss or credit). Absent this election, the cost of such imputed underpayment (including interest and penalties) will be borne by Unitholders in the year of adjustment, without any Trust or Unitholder-level tax deduction or credit for the Trust’s payments, rather than by those who were Unitholders in the taxable year to which the adjustment relates.

 

Accounting for Uncertain Tax Positions

 

Financial Accounting Standards Board Accounting Standards Codification Topic No. 740, “Income Taxes” (“ASC 740,” in part formerly known as “FIN 48”), provides guidance on the recognition of uncertain tax positions.  ASC 740 prescribes the minimum recognition threshold that a tax position is required to meet before being recognized in an entity’s financial statements.  It also provides guidance on recognition, measurement, classification, interest and penalties with respect to tax positions.  A prospective investor should be aware that, among other things, ASC 740 could have a material adverse effect on the periodic calculations of the Net Assets of the Trust, including reducing the Net Assets of the Trust to reflect reserves for income or other taxes, such as foreign withholding taxes, that may be payable by the Trust.  This could cause benefits or detriments to certain Unitholders, depending upon the timing of their subscriptions and withdrawals from the Trust.

 

The Bankruptcy of a Clearing Broker or Currency Dealer Could Cause Losses

 

The Managing Owner must assess the credit-worthiness of the clearing brokers and foreign currency counterparties it selects for the Trust. If one of the Trust’s clearing brokers or foreign currency counterparties becomes bankrupt, the Trust will be limited to recovering none or only its pro rata share, of all available customer funds segregated by the clearing broker or counterparty. In some jurisdictions, the Trust may only be an unsecured creditor of its broker in the event of bankruptcy or administration of such brokers. The Managing Owner attempts to mitigate this risk by selecting only well capitalized, major financial institutions as clearing brokers and foreign currency counterparties, but there can be no assurance that even a well capitalized, major institution will not become bankrupt, and recent events have demonstrated that even major financial institutions of the type with which the Trust may deal in the financial markets can and do fail.

 

The Trust Is Not Regulated as an Investment Company or Mutual Fund

 

Although the Managing Owner is subject to regulation by the CFTC and the Trust itself is subject to reporting requirements and other regulation applicable to public companies in the U.S., the Trust is not an investment company or mutual fund registered under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Accordingly, investors in the Trust are not accorded the protections of such legislation.

 

16

 

 

Certain Special Considerations Related to Forward and Spot Trading

 

The Trust will conduct all or substantially all of its currency forward and related options trading in lightly regulated markets rather than on futures exchanges or through “retail” foreign exchange markets that are subject to more rigorous regulation of the CFTC or other regulatory bodies. In such markets, a counterparty may not settle a transaction with the Trust in accordance with its terms because the counterparty is either unwilling or unable to do so (for example, because of a credit or liquidity problem affecting the counterparty), potentially resulting in significant loss. In addition, counterparties generally have the right to terminate trades under a number of circumstances, including, for example, declines in the Trust’s Net Assets and certain “key person” events. Any premature termination of the Trust’s currency forward trades could result in material losses for the Trust, as the Trust may be unable to quickly re-establish those trades and may only be able to do so at disadvantageous prices.

 

Trust funds on deposit with the currency forward and spot counterparties with which the Trust trades are not protected by the same segregation requirements imposed on CFTC-regulated commodity brokers in respect of customer funds deposited with them. Although the Trust deals only with major financial institutions as currency forward and spot counterparties, the insolvency or bankruptcy of a currency forward or spot counterparty could subject the Trust to the loss of its entire deposit with such counterparty. The forward and spot markets are well established. However, it is impossible to predict how, given certain unusual market scenarios, the evolving regulatory environment for these markets might affect the Trust, and the events underlying the bankruptcies of various counterparties have underscored, among other things, the risks of maintaining capital at unregulated entities. Further, as demonstrated by the insolvency and liquidation of MF Global Inc., customer funds held by a broker in bankruptcy may not be distributed promptly and may be subject to a lengthy claims process. Commodity broker bankruptcies are not insured by any governmental agency, and investors would not have the benefit of any protection such as that afforded customers of bankrupt securities broker-dealers by the Securities Investors Protection Corporation.

 

Various national governments have expressed concern regarding the disruptive effects of speculative trading in the currency markets and the need to regulate the “derivatives” markets in general. Future regulatory changes may limit the Trust’s ability to trade in certain markets. Furthermore, the inter-bank currency markets may in the future become subject to increased regulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”), a development which may entail increased costs and result in burdensome requirements. The imposition of credit controls by governmental authorities or the implementation of regulations pursuant to the Reform Act might limit such forward trading to less than that which the Managing Owner would otherwise recommend, to the possible detriment of the Trust.

 

Regulation of Swap Trading Is Evolving and May Involve Counterparty Risk

 

The Trust may engage in trading commodity swaps.  Swaps involve many of the same risks as those described above with respect to forward contracts.  Many swap contracts are not currently required to be cleared by a centralized clearinghouse; rather, banks and dealers act as principals in much of the swap market.  As a result, the Trust may be subject to the risk of the inability or refusal to perform with respect to such contracts on the part of the counterparties with which the Trust trades.  The Managing Owner intends to enter into swaps on behalf of the Trust only with highly creditworthy banks and dealers, but there can be no assurance that even highly creditworthy banks and dealers will have the ability to, or will not refuse to, perform with respect to such contracts. Regulation of the swap market is evolving, both in the U.S. and internationally. The CFTC has, for example, adopted various regulations which may restrict the Trust’s ability to utilize swaps or may make swap contracts more costly to trade with respect to certain non-security based swaps.  Finally, swaps may be illiquid and participants in the swap market are not required to make continuous markets in the swap contracts they trade.

 

Forwards, Swaps and Other Derivatives Are Subject to Varying CFTC Regulation

 

The Reform Act mandates that a substantial portion of over-the-counter (“OTC”) derivatives must be executed in regulated markets and be submitted for clearing to regulated clearinghouses, subject to margin requirements. The CFTC has broad discretion to impose margin requirements on non-cleared OTC derivatives. OTC derivative dealers also are required to post margin to the clearinghouses through which they clear their customers’ trades instead of using such margin in their operations, as was widely permitted before the Reform Act. This has increased and will continue to increase the dealers’ costs, which costs are generally passed through to other market participants in the form of new and higher fees, including clearing account maintenance fees, and less favorable dealer marks.

 

The CFTC also requires certain derivative transactions that were previously executed on a bi-lateral basis in the OTC markets to be executed through a regulated futures exchange or swap execution facility. Such requirements may make it more difficult and costly for investment funds, including the Trust, to enter into highly tailored or customized transactions.

 

17

 

 

OTC derivative dealers are required to register with the CFTC and will ultimately be required to register with the SEC. Registration and the attendant regulatory requirements further increase the overall costs for OTC derivative dealers, which may be passed along to market participants as market changes continue to be implemented.

 

Although the Reform Act requires many OTC derivative transactions previously entered into on a principal-to-principal basis to be submitted for clearing by a regulated clearinghouse, certain of the derivatives that may be traded by the Trust may remain principal-to-principal or OTC contracts between the Trust and third parties entered into privately. The risk of counterparty nonperformance can be significant in the case of these OTC instruments, and “bid-ask” spreads may be unusually wide in these heretofore substantially unregulated markets. While the Reform Act is intended in part to reduce these risks, its success in this respect may not be evident for some time after the Reform Act is fully implemented. To the extent not mitigated by implementation of the Reform Act, if at all, the risks posed by such instruments and techniques, which can be extremely complex and may involve leveraging of the Trust’s assets, include: (1) credit risks (the exposure to the possibility of loss resulting from a counterparty’s failure to meet its financial obligations); (2) market risk (adverse movements in the price of a financial asset or commodity); (3) legal risks (the characterization of a transaction or a party’s legal capacity to enter into it could render the financial contract unenforceable, and the insolvency or bankruptcy of a counterparty could preempt otherwise enforceable contract rights); (4) operational risk (inadequate controls, deficient procedures, human error, system failure or fraud); (5) documentation risk (exposure to losses resulting from inadequate documentation); (6) liquidity risk (exposure to losses created by inability to prematurely terminate the derivative); (7) systemic risk (the risk that financial difficulties in one institution or a major market disruption will cause uncontrollable financial harm to the financial system); (8) concentration risk (exposure to losses from the concentration of closely related risks such as exposure to a particular industry or exposure linked to a particular entity); and (9) settlement risk (the risk faced when one party to a transaction has performed its obligations under a contract but has not yet received value from its counterparty).

 

Trading in Options Requires an Assessment of Market Volatility as Well as Direction

 

The Managing Owner may trade futures and forward options on behalf of the Trust.  Although successful options trading requires many of the same skills as successful futures and forward trading, the risks involved are somewhat different.  For example, the assessment of near-term market volatility — which is directly reflected in the price of outstanding options — can be of much greater significance in trading options than it is in many long-term futures strategies.  The use of options can be extremely expensive if market volatility is incorrectly predicted.

 

Inaccurate or Incomplete Third-Party Data Could Affect Trust Profitability

 

The strategies of the Managing Owner are dependent to a significant degree on the receipt of timely and accurate market data from third parties including, but not limited to, exchanges and clearing houses, futures commission merchants, prime brokers and other market counterparties and service providers. The receipt of inaccurate data or the failure to receive data in a timely manner could disrupt the Trust’s trading and cause the Trust to experience significant trading losses or miss opportunities for profitable trading.

 

The Failure of Computer Systems Could Result in Losses for the Trust

 

The Managing Owner relies heavily on computer hardware and software, online services and other computer-related or electronic technology and equipment to facilitate the Trust’s investment activities and may trade financial instruments through electronic trading or order routing systems. Electronic trading exposes the Trust to the risk of system or component failure. Should events beyond the Managing Owner’s control cause a disruption in the operation of any technology or equipment, the Trust’s investment program may be severely impaired, causing it to experience substantial losses or other adverse effects.

 

Additionally, the computer systems, networks and devices used by the Managing Owner, the Trust and service providers that carry out routine business operations employ a variety of protections designed to prevent damage or interruption from computer viruses, network failures, computer and telecommunication failures, infiltration by unauthorized persons and security breaches. Cybersecurity breaches can include unauthorized access to systems, networks or devices; infection from computer viruses or other malicious software code; and attacks that shut down, disable, slow or otherwise disrupt operations, business processes or website access and/or functionality.

 

18

 

 

Despite the various protections utilized to protect against cybersecurity threats, systems, networks and/or devices potentially can be breached. Such cybersecurity breaches may cause disruptions and impact business operations, potentially resulting in financial losses to the Trust and Unitholders; interference with the Managing Owner’s ability to calculate the value of an investment; impediments to trading; the inability of the Trust and its service providers to transact business; violations of applicable privacy and other laws; regulatory fines, penalties, reputational damage, reimbursement or other compensation costs or additional compliance costs; as well as the inadvertent release of confidential information.

 

Similar adverse consequences could result from cybersecurity breaches affecting counterparties with which the Trust engages in transactions; governmental and other regulatory authorities; exchange and other financial market operators, banks, brokers, dealers, insurance companies and other financial institutions; and other parties. In addition, substantial costs may be incurred by these entities in order to prevent any cybersecurity breaches in the future.

 

Investment Factors

 

Although there can be no assurance that the Managing Owner will trade successfully on behalf of the Trust or that the Trust will avoid substantial losses, if the Trust is successful, an investment in the Trust offers investors the following potential advantages.

 

Access to the Diversified Portfolio

 

The Trust offers you access to the Managing Owner’s oldest and most successful trading portfolio. The Managing Owner has been managing investment funds pursuant to its Diversified Portfolio since February 1977. The composite compound annual return for the Diversified Portfolio from February 1977 through November 2018, adjusted to reflect the cost/fee structure of the Series 5 Units, the highest fee paying Units currently offered, is approximately 15%. Past performance is not, however, necessarily indicative of future results.

 

Millburn Ridgefield Corporation

 

The Managing Owner and its principals have extensive experience in designing, sponsoring, marketing and administering futures funds. The Managing Owner, together with its predecessors, is one of the longest operating of all futures money managers and was a pioneer in developing systematic trading technologies. The Managing Owner’s trading experience, together with its predecessors, spans more than 47 years. The Trust provides you the opportunity to place capital under the management of a trading advisor with one of the longest continuous trading records of any active manager.

 

Investment Diversification

 

If you are not prepared to spend substantial time trading in the futures, forward, spot and swap markets, you may nevertheless participate through investing in the Trust. An investment in the Trust can provide valuable diversification to a traditional portfolio of stocks and bonds. The Managing Owner believes that the profit potential of the Trust does not depend upon favorable general economic conditions and that the Trust is just as likely to be profitable or unprofitable during periods of declining stock and bond markets as at any other time.

 

Allocating a small portion of your investment portfolio to a managed futures investment, such as the Trust, can potentially enhance the performance of the portfolio. Modern portfolio theory suggests that a diverse portfolio with positively performing assets that have little or no correlation with each other should have higher returns and lower risk, as measured by variability of returns, than a less diversified portfolio: the Nobel Prize for Economics in 1990 was awarded to Dr. Harry Markowitz for demonstrating that the total return can increase, and/or risks can be reduced, when portfolios have positively performing asset categories that are essentially non-correlated.

 

Historically, managed futures investments have had very little correlation to the stock and bond markets. Non-correlated performance is not, however, negatively correlated performance. Non-correlation means only that the performance of managed futures likely has no relation to the performance of stocks and bonds. The performance of the Trust has exhibited a substantial degree of non-correlation with the general equity and debt markets.

 

Non-correlation will not provide diversification advantages beyond, perhaps, lowering a portfolio’s overall volatility unless the non-correlated assets are performing positively. There can be no assurance that the Trust will perform positively or avoid losses.

 

Market Diversification

 

The Trust trades in more than 90 markets, though not necessarily in all markets at all times.

 

The diversification of the Trust permits investors to participate in markets that would otherwise not be included in their portfolios, thereby both potentially diversifying risk and increasing profit opportunities.

 

19

 

 

The markets traded by the Trust change from time to time. Currently these markets include:

 

Currencies  
   
U.S. $ Crosses  
   
Australian Dollar Mexican Peso
Brazilian Real New Zealand Dollar
British Pound Norwegian Krone

Canadian Dollar

Chilean Peso

Polish Zloty

Russian Ruble

Colombian Peso Singapore Dollar
Euro Currency South African Rand
Indian Rupee Swedish Krona
Israeli Shekel Swiss Franc
Japanese Yen Turkish Lira
Korean Won  
   
Non-U.S. $ Crosses  
   

Euro-Norwegian Krone

Euro-Polish Zloty

Euro-Swedish Krona

 

   
Interest Rates  
   
Australian Treasury 3-yr and 10-yr Bonds Italian 10-yr Bond
Canadian Government Bond Euro Bobl Japanese Government Bonds
Euro Bund Sterling Rates
Euro Buxl US Treasury 2-yr Note
Euro Dollar US Treasury 5-yr Note
Euro Schatz US Treasury 10-yr Note
French 10-yr Bond US Treasury 30-yr Bond
Gilts

US Ultra Bond
   
Stock Indices  
   
All Shares (South Africa) Mini Russell 2000 (U.S.)
Amsterdam (Netherlands) Mini MSCI EAFE
CAC 40 (France) Mini MSCI Emerging Market
CBOE VIX (U.S.) OMX Stockholm (Sweden)
China A50 (China) S&P MIB 30 (Italy)
DAX (Germany) S&P Midcap 400 (U.S.)
DJ Euro Stoxx 50 (Euro Zone) S&P TSE 60 (Canada)
E-Mini NASDAQ 100(U.S.) SIMEX Nikkei (Japan)
E-Mini S&P 500 (U.S.) SIMEX (Singapore)
FTSE (United Kingdom) SIMEX Taiwan (Taiwan)
H-Shares (Hong Kong) SPI 200 (Australia)
Hang Seng (Hong Kong) TOPIX (Japan)
IBEX 35 (Spain) VStoxx Mini (Euro Zone)
KOSPI (Korea)  
Mini DJIA (U.S.)  
   
Energy  
   
Brent Crude Oil

Heating Oil

London Gas Oil

Natural Gas

Crude Oil
Gasoline RBOB
 
Agricultural Commodities  
   
Cocoa Soy Meal
Coffee Soybean
Corn Soybean Oil
Cotton Sugar
Kansas City Wheat Wheat
   
Metals  
   
Copper London Nickel
Gold London Zinc
London Aluminum Platinum (NYMEX)
London Copper Silver
London Lead  
   
Livestock  
   
Lean Hogs Live Cattle

 

Opportunity to Profit in Rising as Well as in Declining Markets

 

The Trust may realize positive or negative returns in both rising and declining markets as the Trust’s trading positions may be established on either the long or the short side of a market. Unlike short selling in the securities markets, establishing short positions in futures or forwards or through swaps in anticipation of a drop in price can be accomplished without additional restrictions or special margin requirements.

 

It is potentially advantageous for investors to own investments that can appreciate during a period of generally declining prices, financial disruption or economic instability.

 

Investors must realize, however, that the Trust is not specifically designed to appreciate in declining markets. Rather, it is designed to perform independent of the direction of stocks and bonds and the general economy. The Trust’s capital traded pursuant to the Managing Owner’s trend-following trading systems will only increase in value to the extent that such systems are able to identify market trends and the Trust is able to trade those trends profitably.

 

Interest on Trust Assets

 

The Trust will receive all of the interest income earned on its assets. Approximately 90% of the Trust’s assets are invested in deposit accounts, short-term money market funds and U.S. Treasury bills or notes. The interest earned on the Trust’s assets can offset a portion, though it may not offset all, of its routine costs. Given historically low interest rates on U.S. Treasury bills and notes, any interest earned by the Trust may be nominal. In addition, the Trust’s interest income is subject to the risk of trading losses.

 

20

 

 

Small Minimum Investment

 

The Managing Owner typically manages individual accounts only of substantial size — $5,000,000 or more. You may gain access to the Managing Owner for a minimum investment of only $5,000; $2,000 in the case of trustees or custodians of eligible employee benefit plans and IRAs.

 

Limited Liability

 

If you open an individual futures account, you will be generally liable for all losses incurred in the account, and may lose substantially more than you committed to the account. However, as an investor in the Trust, you cannot lose more than your investment plus undistributed profits.

 

Administrative Convenience

 

The Managing Owner is responsible for all aspects of the Trust’s operation. You will receive monthly unaudited and annual audited financial reports as well as information necessary for you to complete your federal income tax returns. The approximate daily Net Asset Value per Unit is available by calling representatives of the Managing Owner at (212) 332-7300 (ask for Investor Services).

 

21

 

 

Performance Of The Trust

 

GLOBAL MACRO TRUST
(Reflecting Series 1 Unit Expenses)
(January 1, 2013 – November 30, 2018)

 

Type of Pool: Single-Advisor/Publicly-Offered/No Principal Protection
Inception of Trust Trading: July 2002
Inception of Series 1 Trading: July 2002
Total Net Asset Value of the Trust: $173,379,162

Total Net Asset Value of Series 1: $133,724,6971

Largest % Monthly Drawdown: (8.40)% (05/13)

Worst Peak-to-Valley Drawdown: (32.38)% (04/11 - 01/14)

Aggregate Trust Subscriptions from Inception: $1,463,654,234

Aggregate Series 1 Subscriptions from Inception: $1,381,707,8602

 

Month  2018   2017   2016   2015   2014   2013 
January   (2.52)%   (0.74)%   5.50%   1.14%   (2.85)%   1.11%
February   (6.36)%   2.86%   3.19%   (0.02)%   4.07%   (1.17)%
March   2.16%   0.77%   (0.37)%   4.35%   (0.49)%   1.49%
April   0.18%   1.15%   (3.04)%   (4.05)%   2.79%   2.19%
May   (0.30)%   (1.08)%   1.06%   (1.34)%   2.79%   (8.40)%
June   0.72%   (5.29)%   7.51%   (3.43)%   1.74%   (3.85)%
July   (2.93)%   0.33%   1.04%   5.48%   (1.38)%   (0.30)%
August   3.59%   4.26%   (1.96)%   (3.92)%   2.64%   (2.68)%
September   0.88%   (2.19)%   0.90%   3.36%   0.27%   0.76%
October   (0.23)%   3.68%   (3.70)%   (2.98)%   2.36%   1.92%
November   1.01%   (0.94)%   (1.46)%   3.81%   1.57%   0.53%
December        (0.58)%   1.08%   0.10%   (1.48)%   (1.77)%
Compound Rate of Return   (4.09)%   1.85%   9.55%   1.87%   12.44%   (10.19)%
    (11 mos.)                          

 

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

 

“Largest % Monthly Drawdown” is the largest negative monthly rate of return experienced by Series 1.

 

“Worst Peak-to-Valley Drawdown” is the greatest percentage decline in Net Asset Value of a Series 1 Unit without such Net Asset Value being subsequently equaled or exceeded during the period shown. For example, if the value of a Unit dropped by 1% in each of January and February, rose 1% in March and dropped again by 2% in April, a “peak-to-valley drawdown” would be still continuing at the end of April in the amount of approximately (3)%, whereas if the value of the Unit had risen by approximately 2% or more in March, the drawdown would have ended as of the end of February at the (2)% level.

 

Monthly Rate of Return for the Trust is the actual monthly rate of return recognized by an initial $1,000 investment for Series 1 Units which are subject to (i) a 7% annual brokerage fee (“Series 1 Brokerage Fees”), paid as a monthly fee of 0.5833 of 1% of the Trust’s month-end Net Assets attributable to Series 1 Units before accruals for unpaid Series 1 Brokerage Fees or applicable Profit Shares and (ii) an annual Profit Share equal to 20% of any New Trading Profit attributable to Series 1 Units, excluding interest income and after reduction for Series 1 Brokerage Fees and ongoing offering and administrative costs. The Managing Owner, and not the Trust, pays with respect to the Series 1 Units all the routine costs of executing and clearing the Trust’s trades and all selling commissions due to the applicable Selling Agents.

 

The performance information for Series 1 Units is calculated on an accrual basis in accordance with generally accepted accounting principles and is provided to disclose the performance of the Series of Units issued by the Trust, prior to the date of this Prospectus, that bears the highest level of fees and expenses of any Series of Units. Series 1 Units are no longer being offered for investment.

 

 

1 Includes net asset value of Managing Owner interest of $3,803,314.

2 Includes Managing Owner subscriptions from inception of $5,812,500.

 

22

 

 

GLOBAL MACRO TRUST
(Reflecting Series 3 Unit Expenses)
(January 1, 2013 – November 30, 2018)

 

Type of Pool: Single-Advisor/Publicly-Offered/No Principal Protection
Inception of Trust Trading: July 2002
Inception of Series 3 Trading: September 2009
Total Net Asset Value of the Trust: $173,379,162

Total Net Asset Value of Series 3: $31,406,674

Largest % Monthly Drawdown: (8.07)% (05/13)

Worst Peak-to-Valley Drawdown: (22.72)% (04/11 - 08/13)

Aggregate Trust Subscriptions from Inception: $1,463,654,234

Aggregate Series 3 Subscriptions from Inception: $75,079,712

 

Month  2018   2017   2016   2015   2014   2013 
January   (2.15)%   (0.38)%   4.72%   1.21%   (2.49)%   1.50%
February   (6.01)%   2.69%   2.89%   0.28%   4.46%   (0.81)%
March   2.55%   0.92%   0.00%   3.80%   (0.11)%   1.87%
April   0.57%   1.23%   (2.19)%   (2.99)%   3.18%   2.57%
May   0.08%   (0.57)%   1.16%   (0.78)%   3.18%   (8.07)%
June   1.10%   (4.18)%   6.42%   (2.78)%   2.12%   (3.49)%
July   (2.55)%   0.70%   1.17%   5.03%   (1.01)%   0.08%
August   3.99%   3.79%   (1.31)%   (2.88)%   3.03%   (2.32)%
September   1.27%   (1.47)%   1.05%   3.00%   0.64%   1.13%
October   0.15%   3.29%   (2.74)%   (2.11)%   2.22%   2.30%
November   1.39%   (0.44)%   (0.88)%   3.37%   1.56%   0.91%
December        (0.15)%   1.19%   0.38%   (0.90)%   (1.41)%
Compound Rate of Return   0.00%   5.31%   11.67%   5.19%   16.80%   (6.09)%
    (11 mos.)                          

 

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

 

“Largest % Monthly Drawdown” is the largest negative monthly rate of return experienced by Series 3.

 

“Worst Peak-to-Valley Drawdown” is the greatest percentage decline in Net Asset Value of a Series 3 Unit without such Net Asset Value being subsequently equaled or exceeded during the period shown. For example, if the value of a Unit dropped by 1% in each of January and February, rose 1% in March and dropped again by 2% in April, a “peak-to-valley drawdown” would be still continuing at the end of April in the amount of approximately (3)%, whereas if the value of the Unit had risen by approximately 2% or more in March, the drawdown would have ended as of the end of February at the (2)% level.

 

Monthly Rate of Return for the Trust is the actual monthly rate of return recognized by an initial $1,000 investment in a Series 3 Unit.

 

Performance information is calculated on an accrual basis in accordance with generally accepted accounting principles.

 

23

 

 

GLOBAL MACRO TRUST
(Reflecting Series 4 Unit Expenses)
(January 1, 2013 – November 30, 2018)

 

Type of Pool: Single-Advisor/Publicly-Offered/No Principal Protection
Inception of Trust Trading: July 2002
Inception of Series 4 Trading: November 2010
Total Net Asset Value of the Trust: $173,379,162

Total Net Asset Value of Series 4: $7,331,333

Largest % Monthly Drawdown: (7.92)% (05/13)

Worst Peak-to-Valley Drawdown: (19.86)% (04/11 - 08/13)

Aggregate Trust Subscriptions from Inception: $1,463,654,234

Aggregate Series 4 Subscriptions from Inception: $5,618,953

 

Month  2018   2017   2016   2015   2014   2013 
January   (2.01)%   (0.21)%   6.07%   1.68%   (2.32)%   1.67%
February   (5.87)%   3.41%   3.74%   0.51%   4.63%   (0.64)%
March   2.70%   1.31%   0.16%   4.90%   0.05%   2.04%
April   0.71%   1.69%   (2.53)%   (3.54)%   3.35%   2.74%
May   0.23%   (0.56)%   1.60%   (0.81)%   3.35%   (7.92)%
June   1.25%   (4.79)%   8.08%   (2.92)%   2.30%   (3.33)%
July   (2.41)%   0.87%   1.58%   6.05%   (0.84)%   0.25%
August   4.14%   4.81%   (1.43)%   (3.42)%   3.20%   (2.16)%
September   1.42%   (1.67)%   1.44%   3.92%   0.81%   1.30%
October   0.29%   4.23%   (3.18)%   (2.46)%   2.89%   2.47%
November   1.54%   (0.42)%   (0.93)%   4.37%   2.12%   1.08%
December        (0.06)%   1.62%   0.63%   (0.96)%   (1.25)%
Compound Rate of Return   1.62%   8.53%   16.78%   8.59%   19.93%   (4.19)%
    (11 mos.)                          

 

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

 

“Largest % Monthly Drawdown” is the largest negative monthly rate of return experienced by Series 4.

 

“Worst Peak-to-Valley Drawdown” is the greatest percentage decline in Net Asset Value of a Series 4 Unit without such Net Asset Value being subsequently equaled or exceeded during the period shown. For example, if the value of a Unit dropped by 1% in each of January and February, rose 1% in March and dropped again by 2% in April, a “peak-to-valley drawdown” would be still continuing at the end of April in the amount of approximately (3)%, whereas if the value of the Unit had risen by approximately 2% or more in March, the drawdown would have ended as of the end of February at the (2)% level.

 

Monthly Rate of Return for the Trust is the actual monthly rate of return recognized by an initial $1,000 investment in a Series 4 Unit.

 

Performance information is calculated on an accrual basis in accordance with generally accepted accounting principles.

 

24

 

  

GLOBAL MACRO TRUST
(Reflecting Series 5 Unit Expenses)
(April 1, 2018 – November 30, 2018)

 

Type of Pool: Single-Advisor/Publicly-Offered/No Principal Protection

Inception of Trust Trading: July 2002

Inception of Series 5 Trading: April 2018

Total Net Asset Value of the Trust: $173,379,162

Total Net Asset Value of Series 5: $916,458

Largest % Monthly Drawdown: (2.44)% (07/18)

Worst Peak-to-Valley Drawdown: (2.44)% (06/18 - 07/18)

Aggregate Trust Subscriptions from Inception: $1,463,654,234

Aggregate Series 5 Subscriptions from Inception: $883,179

 

Month  2018 
January     
February     
March     
April   0.43%
May   0.04%
June   0.86%
July   (2.44)%
August   3.36%
September   1.00%
October   0.10%
November   1.10%
December     
Compound Rate of Return   4.44%
    (8 mos.) 

 

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

 

“Largest % Monthly Drawdown” is the largest negative monthly rate of return experienced by Series 5.

 

“Worst Peak-to-Valley Drawdown” is the greatest percentage decline in Net Asset Value of a Series 5 Unit without such Net Asset Value being subsequently equaled or exceeded during the period shown. For example, if the value of a Unit dropped by 1% in each of January and February, rose 1% in March and dropped again by 2% in April, a “peak-to-valley drawdown” would be still continuing at the end of April in the amount of approximately (3)%, whereas if the value of the Unit had risen by approximately 2% or more in March, the drawdown would have ended as of the end of February at the (2)% level.

 

Monthly Rate of Return for the Trust is the actual monthly rate of return recognized by an initial $1,000 investment in a Series 5 Unit.

 

Performance information is calculated on an accrual basis in accordance with generally accepted accounting principles.

 

25

 

 

Selected Financial Information

 

The Selected Financial Information for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 is taken from the audited financial statements of the Trust.

 

   December 31, 2017   December 31, 2016   December 31, 2015   December 31, 2014   December 31, 2013 
                     
Income Statement Data                         
                          
Investment income:                         
Interest income  $1,749,536   $941,571   $477,084   $289,332   $640,996 
                          
Expenses:                         
Total expenses  $13,739,445   $14,104,948   $14,324,410   $17,054,873   $26,300,358 
Net investment loss  $(11,989,909)  $(13,163,377)  $(13,847,326)  $(16,765,541)  $(25,659,362)
                          
Realized and unrealized gains (losses):                         
Net realized gain (losses) on closed positions:                         
Futures and forward currency contracts  $25,845,691   $34,149,842   $17,999,224   $54,277,805   $(16,102,920)
Foreign exchange translation  $511,894   $(300,159)  $(580,900)  $71,870   $(279,960)
Net change in unrealized:                         
Futures and forward currency contracts  $(8,095,337)  $805,212   $2,370,350   $(5,408,170)  $2,167,110 
Foreign exchange translation  $422,183   $(67,379)  $166,256   $(253,319)  $24,611 
Net gains (losses) from U.S. Treasury notes:                         
Realized  $(4,782)  $   $6,863   $7,946   $21,695 
Net change in unrealized  $(141,582)  $60,019   $(176,627)  $(30,279)  $(74,728)
Total net realized and unrealized gains (losses)*  $18,538,067   $34,647,535   $19,785,166   $48,665,853   $(14,244,192)
Net income (loss) before Profit Share to Managing Owner  $6,548,158   $21,484,158   $5,937,840   $31,900,312   $(39,903,554)
Less profit share to Managing Owner  $308,026   $551,582   $228,356   $119,598   $ 
Net income (loss) after Profit Share to Managing Owner  $6,240,132   $20,932,576   $5,709,484   $31,780,714   $(39,903,554)
Net income (loss) after profit share to Managing Owner per Series 1 Unit  $22.18   $104.24   $20.02   $118.61   $(108.10)
Net income (loss) after profit share to Managing Owner per Series 2 Unit**  $60.16   $156.98   $64.92   $184.35   $(75.35)
Net income (loss) after profit share to Managing Owner per Series 3 Unit  $81.99   $161.47   $68.28   $189.23   $(73.04)
Net income (loss) after profit share to Managing Owner per Series 4 Unit  $156.87   $264.30   $124.51   $240.96   $(52.90)
                          
Balance Sheet Data                         
Total Assets  $223,750,484   $230,758,101   $214,222,832   $246,891,692   $306,334,381 
Total Liabilities  $11,904,920   $7,593,373   $5,376,876   $6,302,486   $18,096,652 
Total Trust Capital  $211,845,564   $223,164,728   $208,845,956   $240,589,206   $288,237,729 
Net Asset Value per Series 1 Unit  $1,218.29   $1,196.11   $1,091.87   $1,071.85   $953.24 
Net Asset Value per Series 2 Unit**  $   $1,522.28   $1,365.30   $1,300.38   $1,116.03 
Net Asset Value per Series 3 Unit  $1,627.18   $1,545.19   $1,383.72   $1,315,44   $1,126.21 
Net Asset Value per Series 4 Unit  $1,995.85   $1,838.98   $1,574.68   $1,450.17   $1,209.21 

 

*From trading of futures, forward, and swap contracts, foreign exchange transactions and U.S. Treasury obligations.

 

** Series 1 Units and Series 2 Units are no longer available for investment, and, as of August 31, 2017, all of the Series 2 Units issued by the Trust have been redeemed.

 

Selected Quarterly Financial Data

 

The following summarized quarterly financial information presents the results of operations for the three month periods ended March 31, June 30, September 30, 2018, 2017 and 2016, and December 31, 2017 and 2016. This information has not been audited.

 

   Third Quarter
2018
   Second Quarter
2018
   First Quarter
2018
 
             
Interest Income:  $825,043   $714,975   $620,115 
Net Realized and Unrealized
Gains (Losses):
  $5,107,614   $3,837,420   $(11,416,628)
Expenses*:  $2,697,170   $2,805,567   $2,968,723 
Net Income (Loss):  $3,235,487   $1,746,828   $(13,765,236)
Increase (Decrease) in Net Asset Value per Series 1 Unit:  $16.56   $6.86   $(82.21)
Increase (Decrease) in Net
Asset Value per Series 3 Unit:
  $40.95   $26.99   $(92.50)
Increase (Decrease) in Net Asset Value per Series 4 Unit:  $59.37   $41.69   $(105.19)
Increase (Decrease) in Net Asset Value per Series 5 Unit**:  $28.10   $19.94   $ 

 

26

 

 

   Fourth Quarter
2017
   Third Quarter
2017
   Second Quarter
2017
   First Quarter
2017
 
                 
Interest Income:  $548,745   $460,756   $406,890   $333,145 
Net Realized and Unrealized
Gains (Losses):
  $8,159,865   $8,372,214   $(8,178,886)  $10,184,874 
Expenses*:  $3,701,980   $3,421,899   $3,224,764   $3,698,828 
Net Income (Loss):  $5,006,630   $5,411,071   $(10,996,760)  $6,819,191 
Increase (Decrease) in Net Asset Value per Series 1 Unit:  $25.19   $26.98   $(64.47)  $34.48 
Increase (Decrease) in Net
Asset Value per Series 2 Unit***:
  $0.00   $68.25   $(56.63)  $48.54 
Increase (Decrease) in Net
Asset Value per Series 3 Unit
  $42.59   $45.93   $(56.66)  $50.13 
Increase (Decrease) in Net Asset Value per Series 4 Unit:  $71.84   $73.07   $(71.60)  $83.56 

 

   Fourth Quarter
2016
   Third Quarter
2016
   Second Quarter
2016
   First Quarter
2016
 
                 
Interest Income:  $310,094   $268,884   $194,382   $168,211 
Net Realized and Unrealized
Gains (Losses):
  $(5,901,959)  $3,740,409   $15,259,938   $21,549,147 
Expenses*:  $3,344,116   $3,703,243   $3,712,798   $3,896,373 
Net Income (Loss):  $(8,935,981)  $306,050   $11,741,522   $17,820,985 
Increase (Decrease) in Net Asset Value per Series 1 Unit:  $(50.92)  $(0.59)  $63.25   $92.50 
Increase (Decrease) in Net
Asset Value per Series 2 Unit***:
  $(38.98)  $13.39   $77.21   $105.36 
Increase (Decrease) in Net
Asset Value per Series 3 Unit:
  $(38.86)  $14.03   $79.07   $107.23 
Increase (Decrease) in Net Asset Value per Series 4 Unit:  $(47.70)  $29.08   $112.04   $160.88 

 

*Expenses are inclusive of accruals and reversals of accruals of profit share to the Managing Owner.

 

**Series 5 Units were first issued on April 1, 2018.

 

*** Series 1 Units and Series 2 Units are no longer available for investment, and, as of August 31, 2017, all of the Series 2 Units issued by the Trust have been redeemed.

 

There were no extraordinary, unusual or infrequently occurring items recognized in any quarter reported above, and the Trust has not disposed of any segments of its business.

 

Managing Owner’s Discussion and Analysis of Financial Condition and Results of Operations

 

Results of Operations

 

General

 

The Trust’s success depends on the Managing Owner’s ability to recognize and capitalize on trends and other profit opportunities in different sectors of the global capital and commodity markets. The Managing Owner seeks to achieve this goal by developing and selecting trading systems to be used in each market traded and allocating portfolio risk among those markets. The Managing Owner’s trading methods do not generally aim to predict price movements, nor do they always rely on fundamental economic supply or demand analysis or on macroeconomic assessments of the relative strengths of different national economies or economic sectors. Instead, the systems generally apply proprietary computer models to analyzing price, price derivatives, fundamental and other quantitative data, and from this data attempt to determine whether market prices are trending or other types of non-trend or non-traditional opportunities exist.

 

The Managing Owner’s investment and trading decisions for the Trust are not determined by discretionary analysis of fundamental supply and demand factors, general economic factors or anticipated world events, but by systematic trading systems that seek to model price behavior using price, price derivatives, fundamental and other quantitative data as inputs, as well as the money management principles developed by the Managing Owner and its affiliates. The Managing Owner deploys a variety of trading systems, some of which involve quantitative trend analysis. The profitability of any trading system involving quantitative trend analysis depends upon the occurrence in the future of significant sustained price moves in at least some of the markets traded. Without such sustained price moves in at least some of the markets traded, the Managing Owner’s trend analysis systems are unlikely to produce profits. Similarly, during periods when market behavior is unsuitable for other types of models, such models are unlikely to produce profits.

 

27

 

 

If the Managing Owner’s trend-following models identify a trend, they signal positions which follow it. When these models identify the trend as having ended or reversed, these positions are either closed out or reversed. Due to their trend-following character, the Managing Owner’s trend-following systems do not predict either the commencement or the end of a price movement. Rather, their objective is to identify a trend early enough to profit from it and to detect its end or reversal in time to close out the Trust’s positions while retaining most of the profits made from following the trend.

 

In analyzing the performance of the Managing Owner’s trend-following systems, economic conditions, political events, weather factors, etc., are not directly relevant because the Managing Owner uses only market data in developing these systems. However, these factors may be relevant in analyzing the performance of the Managing Owner’s non-traditional models.

 

The performance summary set forth below is an outline description of how the Trust performed in the past trading in a wide variety of markets. The Trust’s futures and currency forward contract prices are marked-to-market every trading day, and the Trust’s trading accounts are credited or debited with its daily gains or losses. Accordingly, there is no material economic distinction between realized gains or losses on closed positions and unrealized gains or losses on open positions. The Trust’s past performance is not necessarily indicative of how it will perform in the future.

 

Performance Summary

 

2018 (9 months)

 

The Trust experienced net realized and unrealized losses of $2,471,594 from its trading operations (including foreign exchange translations and Treasury obligations). Brokerage and custodial fees of $7,668,787, administrative expenses of $843,842, custody fees and other expenses of $26,581 and management fees of $414,218 and an accrued profit share to the Managing Owner of $4,842 were incurred. Interest income of $2,160,133 and Managing Owner commission rebate to Unitholders of $486,810 partially offset the Trust's expenses, resulting in net loss after profit share to the Managing Owner of $8,782,921.

 

An analysis of the trading gain (loss) by sector is as follows:

 

Sector  % Gain (Loss) 
Currencies   (0.15)%
Energies   4.60%
Grains   0.64%
Interest rates   (1.25)%
Livestock   (0.02)%
Metals   (0.79)%
Softs   0.29%
Stock indices   (4.01)%
Total   (0.69)%

 

Three months ended September 30, 2018

 

The Trust was profitable during the third quarter due to profits from long equity and energy positions, and, to a lesser extent, from trading currency forwards and non-energy commodities. Meanwhile, trading of interest rate futures was unprofitable.

 

Although currency turmoil, trade concerns and worries about Chinese growth clouded market outlook, equity markets were underpinned by solid global growth, favorable business and consumer sentiment, positive news on North American Free Trade Agreement renegotiations and still accommodative monetary policy globally, despite some recent tightening. Notably, some investor rotation out of highly valued U.S. equity markets late in the quarter boosted returns from other markets. In addition to gains realized from NASDAQ equity futures, long positions in Japanese, European, Taiwanese and Australian equity futures were each profitable. A short VIX trade posted an attractive gain too. A short position in Korean futures early in the period and trading of Singaporean futures were also profitable. On the other hand trading of Chinese and Canadian equity futures were slightly unprofitable.

 

Energy prices rose from mid-August to end of September particularly following the resumption of Iranian sanctions and after the Organization of the Petroleum Exporting Countries (“OPEC”) / Non-OPEC group indicated that they would not increase production even though events in Iran, Venezuela and Libya continue to constrain supplies. Larger-than-expected declines in U.S. crude stockpiles also supported crude prices, while an interruption to RBOB gasoline supplies as a result of hurricane Florence underpinned RBOB gasoline prices. Long positions in Brent crude, WTI crude, RBOB gasoline and London gas oil were profitable.

 

The U.S. dollar, which had risen sharply from mid-April to end of June, vacillated at this higher level during the third quarter and results, though profitable overall, were mixed. The U.S. dollar was supported by solid U.S. growth and corporate profit reports and actual and anticipated interest rate increases by the U.S. Federal Reserve (the “Fed”). Idiosyncratic trade, current account deficit, fiscal deficit, foreign debt and political problems in a number of emerging economies, including Turkey, Brazil, India and Argentina among others, further buoyed the American dollar. The U.S. dollar did settle back somewhat after news of a potential U.S.-Mexico trade deal was reported. Long U.S. dollar trades against the Japanese yen, euro, Turkish lira, Brazilian real, and Indian rupee were profitable. A long euro/short Turkish lira position was profitable as well. Brexit worries led to profits from a short sterling position. Alternatively, long U.S. dollar positions versus the currencies of Switzerland, Norway, Sweden, Poland, Australia, Canada, South Africa and Singapore were unprofitable. A short euro/long Norway trade was also unprofitable.

 

28

 

 

Global central banks, led by the Fed’s third ¼% interest rate increase this year, raised official interest rates 25 times during the third quarter. In addition, the European Central Bank and the Bank of Japan have adjusted their quantitative easing policies toward less accommodation. Recent inflation data in many economies including that of the U.S., U.K., Canada and European Union have approached or exceeded targeted levels. Proposed budget deficit targets in Italy raised concerns with EU authorities. In this environment, long positions in German, French, Italian, British, Australian, Canadian, and Japanese note and bond futures and in U.S. long bond futures posted losses. Meanwhile, short positions in short-term Eurodollar futures and in U.S. 2-year, 5-year and 10-year note futures provided partially offsetting gains, especially late in the period.

 

Short positions in corn, wheat and soybeans were profitable as the existence of sizable inventories, record recent harvests and tariff influences outweighed worries about the impact of the European heat wave on future supplies, at least for now. A long soybean meal trade was unprofitable.

 

With interest rates rising to subdue global inflation levels with a strong U.S dollar, the fractional profit on a short gold trade outpaced small losses from trading silver, platinum and aluminum.

 

Trading of soft commodity futures was marginally profitable as gains from short sugar and coffee positions were greater than losses from long cocoa and cotton trades.

 

Three months ended June 30, 2018

 

The Trust was profitable during the quarter as gains from trading energy and grain futures, and to a lesser extent, currency forwards and soft commodity futures outweighed losses from trading stock index, metal and interest rate futures.

 

Global markets were rattled during the quarter by deepening and accelerating trade tensions between the U.S. on the one hand, and China, the European Union (“E.U.”), Canada and Mexico on the other; by divergent monetary policy trajectories among major central banks; by a strengthening U.S. dollar; by OPEC supply developments; and by numerous national political and geopolitical events.

 

With the OPEC/non-OPEC production control agreement, the U.S. decision to pull out of the Joint Comprehensive Plan of Action agreement with Iran, the implosion of the Venezuelan economy, Libyan production difficulties, and declining U.S. inventories all negatively impacting energy supplies, crude prices rose to four year highs during the quarter, with Brent crude climbing to nearly $80 per barrel on May 23 and WTI crude touching above $74 per barrel on June 29. Late in the period, OPEC and Russia announced a relaxation of their production restraint agreement, but the stated production increase disappointed market expectations, particularly in light of future potential supply cuts from Iran, Venezuela and Libya. For the quarter, long positions in Brent crude, WTI crude, London gas oil, heating oil and RBOB gasoline were profitable. Meanwhile, a short natural gas trade was slightly unprofitable, particularly in May.

 

A likely reduction in demand due to increased tariffs on grain combined with ample global supplies produced marked grain price decreases. Hence, short soybean and corn trades were profitable, most pronounced in June.

 

During the second quarter, the U.S. dollar advanced solidly with most of the gain occurring from mid-April to end-May when it rose about six per cent as measured by the Bloomberg dollar index. At first, the more hawkish stance by the Federal Reserve (“Fed”) relative to other major central banks underpinned the dollar advance. Next, capital flight from emerging markets, and then increased demand in the wake of the European political uncertainties, boosted the U.S. currency.

 

Long U.S. dollar trades versus the currencies of Brazil, Korea, Turkey, India, Israel, Chile, Sweden and the euro were profitable, with most of the larger gains coming in May. On the other hand, trading the U.S. dollar relative to the yen, Mexican peso, Canadian dollar, British pound, New Zealand dollar, South African rand, Australian dollar, Norwegian kroner, Russian ruble, and Swiss franc generated partially offsetting losses. Trading the euro versus a few other European currencies also produced small losses, especially during the political stresses in May.

 

A short coffee position was profitable, while other soft commodities were about flat.

 

29

 

 

Global trade tensions, tightening credit, a stronger U.S. dollar, and a slowing manufacturing sector in China buffeted metal prices. Consequently, trading of aluminum, copper, other industrial metals and silver was unprofitable.

 

Synchronized global growth underpinned equity markets early in the quarter. Later however, increasing trade tensions, a rising U.S. dollar, political uncertainties in Europe and emerging markets and worries about future global growth spooked market participants and triggered some spirited selling. Long positions in German, Chinese, Hong Kong, and Japanese equity futures, countries whose economies are heavily trade-dependent, were particularly unprofitable. Trading of Korean, emerging market, Spanish and large cap U.S. stock index futures also registered losses. On the other hand, long positions in French, Dutch, British, Canadian, Australian and NASDAQ equity futures produced partially offsetting gains.

 

The interest rate sector registered a slight loss, although futures prices and yields experienced wide swings during the quarter. The yield on U.S. 10-yr notes rose from 2.74% on March 30 to hit a 4-year high of 3.11% on May 17 due to solid global growth, incipient signs of increasing inflation and wages, especially in the U.S., and expectations of further Fed official rate increases.  As interest rates rose broadly, prices of interest rate futures declined and long positions in U.S., European, British, Canadian, Australian and Japanese interest rate futures were unprofitable.  Subsequently, however, these rising interest rates, a rising U.S. dollar, trade frictions and political uncertainties sparked tumult in emerging markets, including Turkey, Brazil Argentina, Mexico and Indonesia, triggering growth concerns and capital flight. In addition, there were worries that political turmoil in Italy and Spain could spread and impede European growth. Hence, a flight to safety drove interest rates sharply off their highs (except in Italy where rates shot up), and produced profits on long interest rates futures positions. The yield on the U.S. 10-yr note plunged to near 2.75% on May 28 before recovering to about 2.85% near quarter-end. Overall, losses on long positions in U.S., Canadian, Australian, and Italian notes and bonds—particularly in April and early May—slightly outweighed the gains on long positions in German, French and British notes and bonds in late May and June. A long Eurodollar futures trade was also unprofitable.

 

Three months ended March 31, 2018

 

The Trust was unprofitable during the quarter almost entirely due to losses from trading global stock index futures. Elsewhere, profits from trading interest rate, energy, soft commodity and livestock futures were largely offset by losses from trading currency forwards, and grain and metal futures.

 

Against a background of synchronized global growth and expanding corporate profits, stocks reached overbought levels during the sharp price run-up in early 2018. Subsequently, equity markets were weighed down by a series of worries including: reports suggesting an acceleration of U.S. wages and inflation combined with increased fiscal deficit spending could prompt the Federal Reserve (the “Fed”) to raise interest rates faster and further than previously anticipated; increased equity market volatility globally as the “central bank put” was removed from market psychology; the rising threat of a trade war; a first quarter slowdown in global growth momentum; and unsettled political conditions in the U.S., Germany and the U.K. Importantly, the tech sector, which has led the equity rally of recent years, was negatively impacted by the Facebook data breach, by the influence of the first autonomous car fatalities on the stock prices of Uber, Nvidia, and Tesla, by Moody’s downgrade of Tesla and by President Trump’s tweets about Amazon. As a result, equity markets fell sharply in volatile trading from their late January highs to the end of March. For example, the S&P 500 and EAFE equity indices fell nearly 10% from those peaks. Short VIX trades were the largest contributor to the Trust’s equity sector losses during the quarter as this market saw an historic spike in prices caused by the sudden February selloff in equity markets, the increase in volatility, and the resulting liquidation of two short volatility exchange traded notes. Long positions in European, British, Japanese, Australian, Canadian, and U.S equity futures also generated losses. There were also losses from countertrend short positions in U.S. equity futures that were triggered by short term trading systems during the rapid equity price gains in January. On the other hand, long positions in Chinese, Hong Kong and Taiwanese stock futures were slightly profitable.

 

Interest rate futures were buffeted by conflicting forces during the quarter. At the start of the year, signs of strengthening global growth, evidence of rising wages and inflation in the U.S., and indications that major central banks, including the Fed, the European Central Bank (the “ECB”), and Bank of Japan, were pulling back on monetary accommodation led to rising interest rates and falling prices of interest rate futures. Later in the quarter, however, the threat of a trade war, increased equity market volatility globally, subdued actual inflation statistics, and a first quarter slowdown in global growth momentum generated solid demand for government securities, contributing to rising futures prices. Strong demand from central banks, pension funds and insurance related buyers for high quality government debt with attractive yields added to the price rallies. Meanwhile, in Japan, the February reappointment of Hiroki Kuroda to a second term as Bank of Japan Governor underpinned demand for Japanese government bonds. Ultimately, long positions in German, French, Italian, Canadian and Japanese interest rate futures were profitable. Trading of U.S. interest rate futures, though mixed, was also profitable. Long U.S. 2- and 5-year note trades were unprofitable in January, while a long 10-year note position was profitable in March. Also, a short euro-dollar trade was quite profitable in January as rates rose, while a long euro-dollar trade posted a small gain in March as rates declined. Meanwhile trading of British interest rate futures was fractionally negative.

 

30

 

 

Energy prices were volatile during the quarter, but energy trading was marginally profitable. For example, Brent crude prices climbed over $70 per barrel in January as the Organization of the Petroleum Exporting Countries (“OPEC”)/non-OPEC production control agreement and rising global demand continued to drag down inventories. A weaker U.S. dollar early in 2018 also boosted energy prices. Then prices plunged to under $63/barrel in mid-February due to the depressive impacts from the shale revolution and some worries about a slowing in global growth. From then to quarter end the price ratcheted up above $70 per barrel again in response to rising geopolitical anxiety. The hawkish appointments by President Trump of Mike Pompeo as U.S. Secretary of State and John Bolton as National Security Advisor heightened concern about the continuation of the 2015 Iran Nuclear Deal, and hence, about supplies of Iranian oil to the global market. For the quarter, the profits on long positions in Brent and WTI crude slightly outweighed the losses on long positions in RBOB gasoline, heating oil, and London gas oil. A short natural gas position was also slightly negative as unusually severe winter weather underpinned natural gas prices.

 

A short sugar trade was profitable as prices declined as world sugar production hit record highs in the wake surging supplies from India and Thailand. A short coffee position was also profitable. Meanwhile, a short cocoa trade produced a partially offsetting loss as dry weather in western Africa and demand increases from Europe and Asia supported prices.

 

Currency trading was unprofitable during the quarter. The U.S. dollar index, after falling about 4% during January, was range-bound thereafter. Long U.S. dollar positions against the currencies of Japan, Switzerland, Australia, New Zealand and Norway posted losses as the U.S. dollar displayed surprising weakness in January. Deterioration in the political environment in the U.S. and relatively stronger growth abroad weighed on the U.S. dollar even as interest rates rose in America. Later in the quarter as the U.S. dollar bounced off its lows, short U.S. dollar trades against the Swedish krona, Turkish lira and Brazilian real posted small losses. A cut in the official interest rate by Brazil’s central bank, a persistently negative official short term rate in Sweden, and worsening inflation and trade balance data from Turkey also influenced these losses. Trading the Canadian dollar was also unprofitable. On the other hand, long positions in the Mexican peso, Columbian peso and euro were profitable as the U.S. dollar weakened early in the quarter. A short British pound trade was also profitable due to Brexit concerns.

 

Early in the period, drought concerns in Argentina and the U.S. pushed grain prices higher despite the persistence of large inventories. However, later in the quarter, worries about a trade war with China weighed heavily on grain prices. Overall, losses on short soybean, corn and wheat trades early on and from long soybean and corn trades late in the period fractionally outdistanced the profits from a long soybean meal trade in January and February and a short wheat trade in March.

 

Metal trading was marginally negative for the quarter as losses from trading copper and aluminum outweighed the profit from a short silver position.

 

2017

 

During 2017, the Trust achieved net realized and unrealized gains of $18,538,067 from its trading operations (including foreign exchange transactions and translations). Brokerage and custodial fees of $12,462,252, management fees of $541,502, administrative expenses of $1,440,217 and custody fees of $40,692 were paid or accrued. The Trust allocated $308,026 in profit share to the New Profits Memo Account for the benefit of the Managing Owner. Interest income of $1,749,536 and Managing Owner commission rebate to Unitholders of $745,218 partially offset the Trust expenses resulting in a net income after profit share to the Managing Owner of $6,240,132.

 

An analysis of the trading gain (loss) by sector is as follows:

 

Sector  % Gain (Loss) 
Currencies   (5.28)%
Energies   (1.27)%
Grains   (1.01)%
Interest rates   (0.83)%
Livestock   (0.17)%
Metals   (0.25)%
Softs   0.23%
Stock indices   16.82%
Total   8.24%

 

The Trust was profitable for the year primarily due to gains from long equity futures positions. Trading of soft, tropical commodities was fractionally profitable as well. On the other hand, losses were sustained from trading currency forwards and, to a lesser extent, energy, interest rate, metal, and agricultural commodity futures.

 

31

 

 

The Trust’s long equity futures positions produced broad-based gains largely on account of broadening and deepening global growth, increasing corporate profits, broadly accommodative global monetary policies, less extreme than feared election outcomes in Europe, signs that China is addressing its debt problems, and the passage of a business friendly tax plan in the U.S. These positive influences far outweighed the negative effects of North Korea’s belligerence, several terrorist attacks in Europe and the U.S., President Trump’s persistent threat to global free trade and the post-WWII international order, and several measured actions by major central banks to scale back the level of policy accommodation. Long positions in U.S., European, Canadian, Australian and Asian equity futures were profitable, as was a short VIX trade. Meanwhile, a long South African stock futures trade was slightly unprofitable due, in part, to political uncertainties, and a long Indian equity futures position produced a small loss largely due to the short term negative impacts from the implementation of the general sales tax and the reductions to currency in circulation.

 

The U.S. dollar, which had risen sharply into early 2017, declined markedly in an erratic saw-toothed pattern during the first 9 months of 2017, driving the Bloomberg U.S. dollar index to a nearly 33 month low on September 8th, down about 11% from the highs reached early in the year. Thereafter, trading was volatile but range-bound. As the year began, the U.S. dollar was underpinned by three factors: U.S. growth that was stronger than growth abroad; U.S. politics that seemed more certain than politics in Europe; and a Fed that was reducing monetary policy accommodation while authorities overseas were still engaged in monetary easing. However, as the year progressed these dollar supports eroded. Growth in Europe and Asia accelerated while growth in the U.S. remained modest. The difficult reality of governing diminished the election euphoria for the Trump administration and politics in the U.S. grew more toxic while the political outlook in Europe improved significantly as elections, particularly in the Netherlands and France, produced more moderate outcomes than feared. Finally, the European Central Bank (“ECB”), Bank of England, People’s Bank of China (“PBOC”), and Bank of Canada, among others, shifted toward a less accommodative policy stance. In this environment, U.S. dollar trades against a number of currencies including the Aussie dollar, New Zealand dollar, Canadian dollar, British pound, Japanese yen, euro, Swiss franc, Norwegian krone, Swedish krona, Polish zloty, Singapore dollar, Korean won, South African rand, and the Columbian and Chilean pesos were unprofitable. On the other hand, short U.S. dollar trades against the Indian rupee, Mexican peso, Russian ruble and Brazilian real posted small gains, as did a long dollar trade against the Turkish lira.

 

Interest rates were volatile throughout 2017 as central banks indicated with both words and actions that the time was at hand for 10 years of extraordinarily easy monetary policy to come to an end. The Fed increased official interest rates three times; the Bank of Canada raised rates twice; the Bank of England increased rates once; the ECB decided to scale back its QE purchase program beginning in January 2018; and the PBOC moved to scale back economy-wide leverage in China. Hence, even though numerous domestic political uncertainties, geopolitical tensions and terrorist events produced periodic flights of safety into government securities during 2017, interest rates did tend to rise during the second half of the year. Consequently, losses were sustained on long positions in German, British, Australian, Canadian and U.S. 2-, 5-, and 10-year notes and bonds. A long position in short-term sterling rates was unprofitable as well. While long positions in French, Italian, Japanese and U.S. bonds were profitable for the year, those gains were reduced over the last third of the year. Meanwhile, a short Eurodollar futures trade late in the year was fractionally profitable.

 

Energy prices displayed sharp swings within a broad range during 2017, falling to low points during the first half of the year and climbing sharply thereafter. In this unsettled environment, losses trading WTI crude, RBOB gasoline and natural gas outpaced the gains from long Brent crude, heating oil and London gas oil trades late in the year.

 

Trading of gold and aluminum were unprofitable. But, late in the year, strong global growth, increased demand from the nascent battery and electric vehicle industries, and the shutdown of some metal production capacity in China due to pollution concerns led to rising prices of industrial metals, allowing long positions in copper and zinc to provide partially offsetting gains. Short silver and platinum trades further reduced losses sustained from trading in this sector.

 

Trading of soybeans and soybean meal produced losses, especially in the May-September period. These losses were partially offset by profits from short corn and wheat positions during the August-October time frame, which occurred in the wake of reports that drought conditions early in the year had little impact on yields, bumper U.S. harvests of corn and soybeans were expected, and Russia was expecting record wheat and corn harvests.

 

Short coffee and sugar trades were profitable as ample inventories and production weighed on prices.

 

2016

 

During 2016, the Trust achieved net realized and unrealized gains of $34,647,535 from its trading operations (including foreign exchange transactions and translations). Brokerage and custodial fees of $13,188,987, management fees of $460,718, administrative expenses of $1,192,572 and custody fees of $40,333 were paid or accrued. The Trust allocated $551,582 in profit share to the New Profits Memo Account for the benefit of the Managing Owner. Interest income of $941,571 and Managing Owner commission rebate to Unitholders of $777,662 partially offset the Trust expenses resulting in a net income after profit share to the Managing Owner of $20,932,576.

 

32

 

 

An analysis of the trading gain (loss) by sector is as follows:

 

Sector  % Gain (Loss) 
Currencies   4.00%
Energies   (2.86)%
Grains   1.41%
Interest rates   7.54%
Livestock   0.11%
Metals   (0.45)%
Softs   (0.32)%
Stock indices   7.99%
Total   17.42%

 

The Trust was profitable for the year due to gains from trading financial markets—equity futures, interest rate futures, and currency forwards. Trading of commodity futures—especially energy— was unprofitable.

 

Recurring concerns about global growth that International Monetary Fund Managing Director Christine Lagarde described early in the year as “…too low, too fragile and facing increased risks to its durability…”; persistently low inflation; accommodative monetary policy worldwide, especially during the first three quarters of the year that saw easing moves by the Bank of Japan, the ECB, the PBOC, and Bank of England; and periodic flight to safety demand due to political developments and/or terrorist related events in China, Brazil, the U.K., Turkey, Belgium, France, Germany, Italy, the Middle East and the U.S. among others generated strong demand for government securities for much of 2016. Later, evidence that global growth and inflation were picking up; the prospect that the Trump administration’s fiscal, regulatory, trade and immigration initiatives could lead to bigger deficits, more growth and more inflation; and the Fed’s ¼% interest rate increase in December—after a year of on again-off again rhetoric—pushed interest rates up sharply from their summer lows. On balance, long positions in German, French, British, and Japanese note, bond and short-term interest rate futures were highly profitable. U.S. interest rate futures’ trading was fractionally profitable overall, although gains on long positions through July were largely offset by losses over the last five months of the year. Losses on long positions in Italian bond futures during the Banca Monte dei Paschi de Siena crisis late in the year outdistanced gains that had accrued earlier.

 

Against the background of broadly accommodative monetary policy worldwide; with actual growth improving modestly beginning in late summer; and with expected growth boosted by a surge in “animal spirits” due to the Trump administration’s plans, equity markets generally advanced during the year. Thus, despite some sharp broad based selloffs—in January-February on China and oil price concerns, in June around Brexit, and in October-November around the U.S. election—long positions in U.S., U.K., Canadian, Australian, German, French and Taiwanese equity futures were profitable, especially late in the year. A short VIX trade was also quite profitable. Short positions in Chinese, Hong Kong, Singaporean and Korean futures were profitable during the January decline. Short positions in Japanese equity futures registered gains in February and long positions were profitable at yearend. Finally, short positions in Spanish equity futures were profitable during the January and June selloffs, and a long trade posted a gain during the fourth quarter.

 

Foreign exchange rates were volatile during the year. The U.S. dollar opened 2016 on a strong note given a search for safety, declining oil prices and the Fed’s “relatively hawkish” policy position. Thereafter, through mid-year, the U.S. dollar weakened in volatile trading reflecting the Fed’s feckless delays in raising official interest rates that were underscored in June when Fed Chair Janet Yellen cited real concerns that the “temporary headwinds” that had blunted the Fed’s rate rise program might actually reflect Lawrence Summer’s “secular stagnation” rather than just passing concerns. However, following the surprise decision of the British electorate to leave the European Union, a flight to safety and quality prompted an upward U-turn for the U.S. dollar. After trading sideways for the remainder of the summer, the U.S. dollar moved higher from late September through yearend to a 14-year high as U.S. economic data improved, as the Trump triumph boosted sentiment and as the Fed finally decided to raise rates after a one year hiatus. A long U.S. dollar trade against the British pound was profitable, particularly given the surprise “Brexit” vote. A long U.S. position versus the Mexican peso was profitable in spite of several interest rate hikes by the Bank of Mexico. Long U.S. dollar positions relative to the currencies of Canada, Switzerland, the Czech Republic, Sweden, the Euro, Japan, Korea and Singapore posted gains, especially late in the year. The ousting of the Rousseff government in Brazil led to gains on a long real position against the U.S. dollar. Rising metal prices and high interest rates led to profits on long New Zealand dollar and South African rand trades against the U.S. unit. Trading versus the Turkish lira and Russian ruble was also profitable. On the other hand, trading the U.S. dollar against the currencies of Australia, Chile, Israel, Norway and Poland was unprofitable, as was Euro non-U.S. dollar cross rate trading.

 

33

 

 

With the International Energy Agency suggesting that the “…world could drown in [oil] oversupply…” ; with crude oil production at or near record levels in many countries—e.g. Saudi Arabia, Russia, the U.S., Iraq; with Iranian exports ramping up; and with global demand still sluggish, crude prices slumped to about $27 per barrel in January. Then, reports that Saudi Arabia, Russia and a number of other producers were discussing plans for a production freeze and would meet in Doha in April sparked an oil price rebound to about $40/barrel. Subsequently, WTI crude traded in a wide range between $40 and $50 per barrel until early December, with prices dropping whenever the reality of excess production and high inventories dominated the discussion, and prices spiking higher whenever OPEC threat reemerged. Then, on November 30, OPEC announced an agreement to cut group production by a larger than expected 1.2 million barrels a day and non- OPEC producers, led by Russia, followed in early December with a 600,000 barrel per day reduction. As a result crude prices, which had fallen sharply from early October to late November, spiked upward by 9-10%. In this environment, trading of Brent and WTI crude oil, RBOB gasoline, London gas oil, heating oil and natural gas were each unprofitable.

 

Industrial metals price volatility during the year reflected uncertain economic developments, especially in China, as well as U.S. dollar and energy prices volatility. Trading of copper, aluminum, lead, nickel, palladium, platinum and silver were each marginally unprofitable. One the other hand, a long gold trade in February, a short gold trade in May, and a long zinc position produced partially offsetting gains.

 

Long positions in soybeans and soybean meal were profitable during the second quarter as bad weather in Brazil and Argentina underpinned prices for most of the period. With corn inventories at 30-year highs and with worldwide grain production expected to increase 10% this year, short corn and wheat positions were profitable, particularly in June, July and August. Trading of soybean oil was slightly unprofitable.

 

Trading of soft and tropical commodities was fractionally unprofitable.

 

2015

 

During 2015, the Trust achieved net realized and unrealized gains of $19,785,166 from its trading operations (including foreign exchange transactions and translations). Brokerage and custodial fees of $13,566,738, management fees of $385,131, administrative expenses of $1,140,008 and custody fees of $50,353 were paid or accrued. The Trust allocated $228,356 in profit share to the New Profits Memo Account for the benefit of the Managing Owner. Interest income of $477,084 and Managing Owner commission rebate to unitholders of $817,820 partially offset the Trust expenses resulting in a net income after profit share to the Managing Owner of $5,709,484.

 

An analysis of the trading gain (loss) by sector is as follows:

 

Sector  % Gain (Loss) 
Currencies   0.08%
Energies   4.62%
Grains   (1.16)%
Interest rates   3.41%
Livestock   0.05%
Metals   2.57%
Softs   0.36%
Stock indices   (0.47)%
Total   9.46%

 

The Trust was profitable for the year largely due to gains from long interest rate futures positions, and short energy and metal future trades. Trading of stock index and agricultural commodity futures were unprofitable, while currency trading was flat as gains from trading the U.S. dollar were offset by losses from non-dollar cross rate trading.

 

Vacillating growth, inflation, monetary policy and political prospects worldwide led to volatile trading conditions in most markets throughout 2015. Uneven growth against the background of stubborn, below target price and wage inflation in the United States produced on again-off again Fed rate hike discussions that were only resolved in December. The quantitative easing, or QE, program of the ECB—started in the first quarter—seemed to put a floor under European growth, although the recovery has been sluggish and targeted inflation remains a distant hope. China’s policy makers continued to struggle with the transition away from export and manufacturing led growth to expansion driven by consumption and domestic demand; and from controlled to market based equity, foreign exchange and fixed income prices. Hence, even as the PBOC instituted numerous easing actions—including 6 official interest rate cuts in the past year—growth continued to ratchet lower. Finally, in Japan both growth and inflation continue to straddle the zero line. These large country problems spilled into smaller developed countries and into emerging markets as shrinking global trade hurt growth and as capital outflows pressured exchange rates and commodity producers. Throughout the year, markets were unsettled periodically by elections, politicking and political corruption that threatened the prevailing political structures in regions and countries such as: Europe (Greece, Turkey, Spain, Portugal, France, U.K., and Poland), South America (Brazil, Argentina, and Venezuela), South Africa, Asia (China, Malaysia, Thailand, Indonesia, Taiwan, Singapore, and Australia), Canada and the United States. Moreover, markets participants had to price in geopolitical ructions and terrorism that involved Syria, Iran, Iraq, Saudi Arabia, Yemen, Russia, Turkey, Ukraine, France and the United States.

 

34

 

 

Although energy prices were supported during the first half of 2015 by some apparent stabilization of the worldwide growth outlook amid aggressive easing of monetary policy from the ECB, PBOC and Bank of Japan, energy prices plunged again during the July-December period. The unrelenting production emanating especially from Saudi Arabia, Russia, the U.S., Iraq, and prospectively from Iran, and historically high inventories drove crude prices to 11 year lows. U.S. natural gas prices plunged to 17 year lows in response to ample supplies and to especially warm fall and winter weather. As a result, short positions in Brent crude, WTI crude, heating oil and London gas oil and natural gas were highly profitable.

 

Industrial metals prices followed a similar path to energy prices, stabilizing or rising early in the year before falling sharply thereafter. A lack of growth acceleration in the developed world; the persistent slowdown in China’s manufacturing and real estate sectors; and constrained growth in emerging markets, especially weighed down by the Russian and Brazilian recessions, crimped demand for metals. Also, supplies of industrial metals were abundant, although there were some successful efforts by international companies and China to close some mines and reduce production that did restrain the price declines. Short positions in copper, aluminum, nickel, zinc and palladium were profitable.

 

Long positions in U.S. note, bond and short term interest rate futures were profitable, especially early in the year when growth disappointed and the Fed dragged its feet on raising official rates, and again during late summer when Chinese stocks collapsed and the Fed delayed once more. At other times, particularly in the fourth quarter when the Fed finally did raise official rates, long positions were unprofitable and the gains for 2015 were reduced. A long position in Canadian bonds was profitable as the energy collapse and lack of inflation underpinned demand. Long positions in Japanese bonds and British note and short-rate futures were fractionally profitable as well. For much of the year, long positions in Continental—German, French and Italian—interest rate futures were profitable as the ECB’s implementation of QE spurred demand. However, interest rates, after reaching extraordinarily low levels, spiked higher in late spring amid signs that growth was accelerating and that the Greek crisis was deteriorating, leading to losses on long positions. Again in December, after the ECB’s extension of QE was viewed by market participants as inadequate, interest rates spiked higher, bringing losses. Overall, therefore, trading of Continental interest rate futures was only slightly profitable for 2015.

 

Against an uncertain economic and political background, trading of equity futures produced a fractional loss overall and was volatile throughout the year, especially during the Chinese stock collapse in June through August. Long positions in U.S. and Canadian stock index futures, and trading of Korean, Japanese, Taiwanese and South African equity futures registered losses. On the other hand, long positions in European equity futures were profitable in the wake of the ECB’s QE program. Also, long positions in Chinese and Hong Kong futures were profitable in the first half of the year, while short trades showed gains in the second half. A short VIX trade was profitable too.

 

The U.S. dollar, which was buffeted by a multitude of economic and political concerns, strengthened during the year although the path was uneven. Long U.S. dollar positions versus the Euro and Yen were profitable as the ECB introduced QE in the first quarter and as the Bank of Japan added to its accommodation. Later in the year, as emerging economies and commodity producing countries came under pressure, long U.S. dollar trades against the currencies of Canada, Russia, Mexico, Brazil, Colombia, Turkey and New Zealand generated gains. On the other hand, a long U.S. dollar/short Swiss franc trade sustained a large loss when the Swiss National Bank unexpectedly ended the franc’s peg to the euro and the franc soared by 15% on January 15. Trading the dollar against the currencies of Australia, Chile, Korea, India, Poland, the Czech Republic, Sweden and South Africa also produced losses. Finally, non-dollar cross rate trading was unprofitable largely due to trading the euro against a variety of currencies.

 

Trading of agricultural commodities was fractionally unprofitable. Trading of corn and wheat produced losses, especially during June and July when prices, after having drifted lower under the weight of large inventories and solid crop reports, spiked higher on spurious reports that China was aggressively buying grains and on a revised USDA forecast suggesting a less favorable crop outlook. Prices subsequently receded but positions had swung from short to long and losses were sustained on both sides. Trading of cotton was fractionally unprofitable. A short coffee trade was profitable as large supplies weighed on prices and a long sugar trade produced a gain late in the year, as did short livestock trades.

 

35

 

 

Liquidity and Capital Resources

 

Units may be offered for sale as of the beginning, and may be redeemed as of the end, of each month.

 

The amount of capital raised for the Trust should not have a significant impact on its operations, as the Trust has no significant capital expenditure or working capital requirements other than for monies to pay trading losses, brokerage commissions and charges. Within broad ranges of capitalization, the Managing Owner’s trading positions should increase or decrease in approximate proportion to the size of the Trust.

 

The Trust raises additional capital only through the sale of Units and capital is increased through trading profits (if any). The Trust does not engage in borrowing.

 

The Trust trades futures, forward and spot contracts, and may trade swap and options contracts, on interest rates, commodities, currencies, metals, energy and stock indices. Risk arises from changes in the value of these contracts (market risk) and the potential inability of counterparties or brokers to perform under the terms of their contracts (credit risk). Market risk is generally to be measured by the face amount of the futures positions acquired and the volatility of the markets traded. The credit risk from counterparty non-performance associated with these instruments is the net unrealized gain, if any, on these positions plus the value of the margin or collateral held by the counterparty. The risks associated with exchange-traded contracts are generally perceived to be less than those associated with OTC transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In most OTC transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may require margin or collateral in the OTC markets.

 

The Managing Owner has procedures in place to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. These procedures primarily focus on: (1) real time monitoring of open positions; (2) diversifying positions among various markets; (3) limiting the assets committed as margin or collateral, generally within a range of 5% to 35% of an account’s net assets at exchange, though the amount may at any time be substantially higher; and (4) prohibiting pyramiding – that is, using unrealized profits in a particular market as margin for additional positions in the same market. The Trust controls credit risk by dealing exclusively with large, well capitalized financial institutions as brokers and counterparties.

 

The financial instruments traded by the Trust contain varying degrees of off-balance sheet risk whereby changes in the market values of the futures, forward and spot contracts or the Trust’s satisfaction of the obligations may exceed the amount recognized in the Statement of Financial Condition of the Trust.

 

Due to the nature of the Trust’s business, substantially all its assets are represented by cash, cash equivalents and U.S. government obligations, while the Trust maintains its market exposure through open futures, forward and spot contract positions.

 

The Trust’s futures contracts are settled by offset and are cleared by the exchange clearinghouse function. Open futures positions are marked to market each trading day and the Trust’s trading accounts are debited or credited accordingly. Options on futures contracts are settled either by offset or by exercise. If an option on a future is exercised, the Trust is assigned a position in the underlying future which is then settled by offset. The Trust’s spot and forward currency transactions conducted in the interbank market are settled by netting offsetting positions or payment obligations and by cash payments.

 

The value of the Trust’s cash and financial instruments is not materially affected by inflation. Changes in interest rates, which are often associated with inflation, could cause the value of certain of the Trust’s debt securities to decline, but only to a limited extent. More important, changes in interest rates could cause periods of strong up or down market price trends, during which the Trust’s profit potential generally increases. However, inflation can also give rise to markets which have numerous short price trends followed by rapid reversals, markets in which the Trust is likely to suffer losses.

 

The Trust’s assets are generally held as cash or cash equivalents, including short-term U.S. government obligations, which are used to margin the Trust’s futures and forward currency positions and withdrawn, as necessary, to pay redemptions and expenses. Other than potential market-imposed limitations on liquidity, due, for example, to limited open interest in certain futures markets or to daily price fluctuation limits, which are inherent in the Trust’s futures and forward trading, the Trust’s assets are highly liquid and are expected to remain so. During 2017 and from the end of 2017 through December 2018, the Trust experienced no meaningful periods of illiquidity in any of the numerous markets traded by the Managing Owner.

 

36

 

 

Critical Accounting Estimates

 

The Trust records its transactions in futures, forward and spot currency contracts, including related income and expenses, on a trade date basis. Open futures contracts traded on an exchange are valued at fair value, which is based on the closing settlement price on the exchange where the futures contract is traded by the Trust on the day with respect to which Net Assets are being determined. Open swap contracts are recorded at fair value based on the closing settlement price for equivalent or similar futures positions that are traded on an exchange on the day with respect to which Net Assets are being determined. Open forward currency contracts are recorded at fair value, based on pricing models that consider the current market prices (“Spot Prices”) plus the time value of money (“Forward Points”) and contractual prices of the underlying financial instruments. The Spot Prices and Forward Points for open forward currency contracts are generally based on the 3:00 P.M. New York time prices provided by widely used quotation service providers on the day with respect to which Net Assets are being determined. The Forward Points from the quotation service providers are generally in periods of one month, two months, three months and six months forward while the contractual forward delivery dates for the foreign currency contracts traded by the Trust may be in between these periods.

 

The Managing Owner’s policy is to calculate the Forward Points for each contract being valued by determining the number of days from the date the forward currency contract is being valued to its maturity date and then using straight-line interpolation to calculate the valuation of Forward Points for the applicable forward currency contract. The Managing Owner will also compare the calculated price to the forward currency prices provided by dealers to determine whether the calculated price is fair and reasonable.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions, such as accrual of expenses, that affect the amounts and disclosures reported in the financial statements. Based on the nature of the business and operations of the Trust, the Managing Owner believes that the estimates utilized in preparing the Trust’s financial statements are appropriate and reasonable, however actual results could differ from these estimates. The estimates used do not provide a range of possible results that would require the exercise of subjective judgment. The Managing Owner further believes that, based on the nature of the business and operations of the Trust, no other reasonable assumptions relating to the application of the Trust’s critical accounting estimates other than those currently used would likely result in materially different amounts from those reported.

 

Off-Balance Sheet Arrangements

 

The Trust does not engage in off-balance sheet arrangements with other entities.

 

Contractual Obligations

 

The Trust does not enter into any contractual obligations or commercial commitments to make future payments of a type that would be typical for an operating company or that would affect its liquidity or capital resources. The Trust’s sole business is trading futures, forward and spot currency contracts, both long (contracts to buy) and short (contracts to sell). The Trust may also engage in trading swaps. All such contracts are settled by offset, not delivery. Substantially all such contacts are for settlement within four months of the trade date and substantially all such contracts are held by the Trust for less than four months before being offset or rolled over into new contracts with similar maturities. The Trust’s Financial Statements present a Condensed Schedule of Investments setting forth net unrealized appreciation (depreciation) of the Trust’s open future and forward currency contracts, both long and short, at September 30, 2018, December 31, 2017 and December 31, 2016.

 

Quantitative And Qualitative Disclosures About Market Risk

 

Introduction

 

Past Results Are Not Necessarily Indicative of Future Performance

 

The Trust is a speculative commodity pool. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Trust’s main line of business.

 

Market movements result in frequent changes in the fair market value of the Trust’s open positions and, consequently, in its earnings and cash flow. The Trust’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Trust’s open positions and the liquidity of the markets in which it trades.

 

The Trust can rapidly acquire and/or liquidate both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Trust’s past performance is not necessarily indicative of its future results.

 

37

 

 

Value at Risk is a measure of the maximum amount which the Trust could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Trust’s speculative trading and the recurrence in the markets traded by the Trust of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Trust’s experience to date (i.e., “risk of ruin”). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the inclusion of the quantification included in this section should not be considered to constitute any assurance or representation that the Trust’s losses in any market sector will be limited to Value at Risk or by the Trust’s attempts to manage its market risk.

 

Materiality, as used in this section “Quantitative and Qualitative Disclosures About Market Risk,” is based on an assessment of reasonably possible market movements and the potential losses caused by such movements, taking into account the leverage, optionality and multiplier features of the Trust’s market sensitive instruments.

 

Quantifying the Trust’s Trading Value at Risk

 

Quantitative Forward-Looking Statements

 

The following quantitative disclosures regarding the Trust’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.

 

The Trust’s risk exposure in the various market sectors traded by the Managing Owner is quantified below in terms of Value at Risk. Due to the Trust’s mark-to-market accounting, any loss in the fair value of the Trust’s open positions is directly reflected in the Trust’s earnings (realized or unrealized) and cash flow (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).

 

Exchange maintenance margin requirements have been used by the Trust as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed 95-99% of the maximum one day losses in the fair value of any given contract incurred during the time period over which historical price fluctuations are researched for purposes of establishing margin levels. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one day price fluctuation.

 

The Trust calculates Value at Risk for forward currency contracts that are not exchange traded using exchange maintenance margin requirements for equivalent or similar futures positions as the measure of Value at Risk.

 

In quantifying the Trust’s Value at Risk, 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have simply been aggregated to determine each trading category’s aggregate Value at Risk. The diversification effects resulting from the fact that the Trust’s positions are rarely, if ever, 100% positively correlated have not been reflected.

 

The Trust’s Trading Value at Risk in Different Market Sectors

 

The following tables indicate the average, highest and lowest amounts of trading Value at Risk associated with the Trust’s open positions by market category for the nine months ended September 30, 2018 and the fiscal year ended December 31, 2017. During the nine months ended September 30, 2018 and the fiscal year 2017, the Trust’s average total capitalization was approximately $191 million and $221 million, respectively.

 

    September 30, 2018      
Market Sector  Average
Value at
Risk
   % of Average
Capitalization
   Highest
Value
At Risk
   Lowest
Value
At Risk
 
                 
Currencies  $7.4    3.9%  $8.8   $4.4 
Energies  $2.2    1.2%  $2.3   $2.0 
Grains  $0.8    0.4%  $1.1   $0.4 
Interest Rates  $5.4    2.8%  $6.2   $4.8 
Livestock  $0.0    0.0%  $0.0   $0.0 
Metals  $0.8    0.4%  $1.0   $0.6 
Softs  $0.2    0.1%  $0.3   $0.2 
Stock Indices  $8.3    4.3%  $9.6   $7.2 
                     
 Total   $25.1    13.1%          

 

Average, highest and lowest Value at Risk amounts relate to the quarter-end amounts during the nine months ended September 30, 2018. Average capitalization is the average of the Trust’s approximate capitalization at the end of each month during the nine months ended September 30, 2018. Dollar amounts represent millions of dollars.

 

38

 

 

   Fiscal Year 2017        
Market Sector  Average
Value at
Risk
   % of Average
Capitalization
   Highest
Value
At Risk
   Lowest
Value
At Risk
 
                 
Currencies  $6.8    3.1%  $8.0   $5.0 
Energies  $2.5    1.1%  $3.4   $1.3 
Grains  $1.2    0.5%  $1.7   $0.8 
Interest Rates  $6.7    3.0%  $7.8   $5.9 
Livestock  $0.1    0.0%  $0.1   $0.0 
Metals  $1.3    0.6%  $2.4   $0.8 
Softs  $0.4    0.2%  $0.5   $0.3 
Stock Indices  $11.2    5.2%  $13.3   $9.0 
                     
Total  $30.2    13.7%          

 

Average, highest and lowest Value at Risk amounts relate to the quarter-end amounts during the fiscal year. Average capitalization is the average of the Trust’s approximate capitalization at the end of each month during the fiscal year 2017. Dollar amounts represent millions of dollars.

 

Material Limitations on Value at Risk as an Assessment of Market Risk

 

The face value of the market sector instruments held by the Trust is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally range between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Trust. The magnitude of the Trust’s open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions — unusual, but historically recurring from time to time — could cause the Trust to incur severe losses over a short period of time. The foregoing Value at Risk table — as well as the past performance of the Trust — give no indication of this “risk of ruin.”

 

Non-Trading Risk

 

The Trust has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as any market risk they represent) are immaterial.

 

The Trust also has non-trading cash flow risk as a result of holding a substantial portion (approximately 90%) of its assets in U.S. Treasury notes and other short-term debt instruments (as well as any market risk they represent) for margin and cash management purposes. Although the Managing Owner does not anticipate that, even in the case of major interest rate movements, the Trust would sustain a material mark-to-market loss on its securities positions, if short-term interest rates decline so will the Trust’s cash management income. The Trust also maintains a portion (approximately between 5% and 10%) of its assets in cash and in a U.S. government securities and related instruments money market fund. These cash balances are also subject (as well as any market risk they represent) to cash flow risk, which is not material.

 

Qualitative Disclosures Regarding Primary Trading Risk Exposures

 

The following qualitative disclosures regarding the Trust’s market risk exposures—except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Managing Owner manages the Trust’s primary market risk exposures—constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Trust’s primary market risk exposures as well as the strategies used and to be used by the Managing Owner for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Trust’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the Trust. There can be no assurance that the Trust’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of their investment in the Trust.

 

The following were the primary trading risk exposures of the Trust as of September 30, 2018, by market sector (see page 20 for a complete list of futures, forward and spot contracts traded).

 

Interest Rates. Interest rate movements directly affect the price of the sovereign bond futures positions held by the Trust and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries may materially impact the Trust’s profitability. The Trust’s primary interest rate exposure is to interest rate fluctuations in countries or regions including Australia, Canada, Japan, Switzerland, the U.K., the U.S. and the Eurozone. However, the Trust also may take positions in futures contracts on the government debt of other nations. The Managing Owner anticipates that interest rates in these industrialized countries or areas, both long-term and short-term, will remain the primary interest rate market exposure of the Trust for the foreseeable future.

 

39

 

 

Currencies. Exchange rate risk is a principal market exposure of the Trust. The Trust’s currency exposure is to exchange rate fluctuations, primarily fluctuations which disrupt the historical pricing relationships between different currencies and currency pairs. The fluctuations are influenced by interest rate changes as well as political and general economic conditions. The Trust trades in a large number of currencies, including cross-rates — e.g., positions between two currencies other than the U.S. dollar.

 

Stock Indices. The Trust’s equity exposure, through stock index futures, is to equity price risk in the major industrialized countries as well as other countries.

 

Metals. The Trust’s metals market exposure is to fluctuations in the price of aluminum, copper, gold, lead, nickel, palladium, platinum, silver, tin and zinc.

 

Agricultural. The Trust’s primary commodities exposure is to agricultural price movements, which are often directly affected by severe or unexpected weather conditions as well as supply and demand factors.

 

Energy. The Trust’s primary energy market exposure is to gas and oil price movements, often resulting from political developments in the Middle East and economic conditions worldwide. Energy prices are volatile and substantial profits and losses have been and are expected to continue to be experienced in this market.

 

Qualitative Disclosures Regarding Non-Trading Risk Exposure

 

The following were the non-trading risk exposures of the Trust as of December 31, 2017.

 

Foreign Currency Balances. The Trust’s primary foreign currency balances are in Australian Dollars, British Pounds, Canadian Dollars, Euros, Japanese Yen, Korean Won, Malaysian Ringgit, Swiss Francs and Thai Bhat. To the extent possible, the Trust controls the non-trading risk of these balances by regularly converting these balances back into U.S. dollars (no less frequently than twice a month).

 

Securities Positions. The Trust’s only market exposure in instruments held other than for trading is in its securities portfolio. The Trust holds only cash or interest-bearing, credit risk-free, short-term paper — typically U.S. Treasury instruments with durations no longer than 1 year. Violent fluctuations in prevailing interest rates could cause immaterial mark-to-market losses on the Trust’s securities, although substantially all of these short-term instruments are held to maturity.

 

Qualitative Disclosures Regarding Means of Managing Risk Exposure

 

The Managing Owner attempts to control risk through the systematic application of its trading method, which includes a multi-system approach to price trend recognition, an analysis of market volatility, the application of certain money management principles, which may be revised from time to time, and adjusting leverage or portfolio size. In addition, the Managing Owner limits its trading to markets which it believes are sufficiently liquid in respect of the amount of trading it contemplates conducting.

 

The goal of the Managing Owner’s research has been to develop and select a mix of systems in each market and to allocate risk across a wide array of markets, so as to contain overall portfolio risk within a targeted range while allowing exposure to profitable trend opportunities. Over more than 47 years, the Managing Owner has developed hundreds of trading systems. These trading systems generate buy or sell decisions in a particular market based on the direction of price movements in the market, some non-price information or a combination of both.

 

Of course, systems can be materially different — better in some periods and worse in others. The main distinguishing features are: the time frame over which systems work (intra-day to long-term); the granularity of data fed into them (tick data to daily, weekly or monthly frequencies); type (market or economic statistics); source (cash, futures or option markets-generated data or government and industry generated statistical information), and the objective of the system (profiting from momentum, mean reversion, trading ranges or volatility). No single approach will work all the time. Therefore, the Managing Owner’s objective is to have several approaches operating simultaneously.

 

When arriving at the portfolio allocation, the Managing Owner generally seeks maximum diversification subject to liquidity and sector concentration constraints, and each market is traded using a diversified (but generally not optimized for each particular market) set of trading systems. The markets traded and allocations are reviewed at least monthly, although changes may occur more or less frequently. The following factors, among others, are considered in constructing a universe of markets to trade for the Trust: profitability, liquidity of markets, professional judgment, desired diversification, transaction costs, exchange regulations and depth of market. The current allocation to any market in the Trust’s portfolio does not exceed 3% of total market exposure, measured by risk allocation.

 

40

 

 

Risk is a function of both price level and price volatility. The Managing Owner sizes the position in each market taking into account its measurement of risk based on price level and volatility in that market. Market exposure is then managed by the position-sizing models which measure the risk in the portfolio’s position in each market. In the event the model determines that the risk has changed beyond an acceptable threshold, it will signal a change in the position — a decrease in position size when risk increases and an increase in position size when risk decreases. The Managing Owner’s position-sizing models maintain overall portfolio risk and distribution of risk across markets within designated ranges. The position-sizing model manages the position traded by each of the (directional) trading systems discussed above. A secondary benefit of the position-sizing model can be timely profit taking. Because markets tend to become more volatile after a profitable trend has been long underway, the position-sizing model often signals position reductions before trend reversals.

 

In addition, the Managing Owner’s risk management focuses on money management principles applicable to the portfolio as a whole rather than to individual markets. The first principle is portfolio diversification, which attempts to improve the quality of profits by reducing volatility.

 

Additional money management principles applicable to the portfolio as a whole include: (1) limiting the assets committed as margin or collateral, generally within a range of 5% to 35% of an account’s net assets, though the amount may at any time be higher or lower and (2) prohibiting pyramiding — that is, using unrealized profits in a particular market as margin for additional positions solely in the same market.

 

Another important risk management function is the careful control of leverage or total portfolio exposure. Leverage levels are determined by simulating the entire portfolio — all markets, all systems, all risk control models, the exact weightings of the markets in the portfolio and the proposed level of leverage — over the past five or ten years to determine the portfolio’s simulated risk and return characteristics as well as the worst case experienced by the portfolio in the simulation period. The worst case, or peak-to-trough drawdown, is measured from a daily high in portfolio assets to the subsequent daily low whether that occurs days, weeks or months after the daily high. If the Managing Owner considers the drawdown too severe or the portfolio’s simulated volatility too high, it reduces the leverage or total portfolio exposure. There are, however, no restrictions on the amount of leverage the Trust may use at any given time.

 

The Managing Owner

 

Millburn Ridgefield Corporation

 

The Managing Owner, Millburn Ridgefield Corporation, is a Delaware corporation operating in New York, New York, organized in May 1982 to manage discretionary accounts in futures and forward markets. It is the corporate successor to a futures trading and advisory organization that has been continuously managing assets in the currency and futures markets using quantitative, systematic techniques since 1971. As of December 1, 2018, the Managing Owner, together with its affiliates, was managing approximately $6.3 billion in commodity and financial futures, currencies and other alternative strategies in non-proprietary accounts.

 

The value of the Managing Owner’s investment in the Trust as of December 1, 2018 was $3,803,314. As of the same date, the aggregate value of the Managing Owner’s principals’ and their family members’ investments in the Trust was $1,794,466.

 

Background and Management

 

The Managing Owner has been registered with the CFTC as a CPO since July 1, 1982 and as a CTA since September 13, 1984 and has been a member of the National Futures Association (“NFA”) since July 1, 1982.  The Managing Owner registered with the CFTC as a “swap member” effective December 26, 2012. The Managing Owner is the successor to the trading advisory and CPO functions of Millburn Partners and CommInVest Research Limited Partnership (“CommInVest”), each of which served as the general partners of various commodity pools. The Managing Owner is also the successor to The Millburn Corporation, a former affiliate of the Managing Owner that, prior to January 1, 2019, performed certain administrative and operating functions for the Managing Owner, including research, trade order entry, technology, operations, marketing, accounting, tax, legal, compliance, human resources and administration services.  On December 31, 2018, The Millburn Corporation merged with and into the Managing Owner which now performs for itself the functions formerly performed by The Millburn Corporation. Millburn International, LLC was formed on November 18, 2010, and Millburn Asia, LLC (together with Millburn International, LLC, “Millburn International Group”) was formed on November 3, 2014. Millburn International Group and their subsidiaries provide information regarding the Managing Owner and its strategies and certain investor services on behalf of the Managing Owner in connection with the Managing Owner’s international activities.  ShareInVest Research L.P. (“ShareInVest”), a former affiliate of the Managing Owner, managed U.S. small capitalization growth stock hedge funds and ceased operations as of December 31, 2007.  The registration of the Managing Owner with the CFTC must not be taken as an indication that such agency has recommended or approved either the Managing Owner or the Trust.

 

41

 

 

The core of the Managing Owner’s business centers on its Systematic Futures & Currency Investment Process (the “Investment Process”). The Investment Process is overseen by the Managing Owner’s Investment Committee, which includes four of the Managing Owner’s senior principals. The Investment Process includes, among other functions, system design, modeling, research, data management, system implementation, trade order entry, market intelligence and the Managing Owner’s risk management processes. This Investment Process is responsible for deploying portfolio risk across markets, strategies and models.

 

The Managing Owner was among the first systematic money managers to begin building a comprehensive in-house computerized database of cleaned and time-stamped pricing and market-related data pertaining to instruments traded by its portfolios. This database has been enhanced and updated continuously since its introduction in 1975, but includes data from several decades before that time. Over the years, with advancements in software and storage technology, the database has been expanded to include terabytes of tick and other data. The Managing Owner utilizes third-party software packages to collect this data efficiently and has developed several proprietary software tools that it believes enhance its ability to filter the data and generate simulations, trading signals and new trading models. Data robustness is supported by multiple data feeds from independent third-party vendors and by the continuous backup and redundancy of data between the two different geographical locations, a primary and a backup site, each with independent generators.

 

Other key components of the Managing Owner’s Investment Process include trade execution and market intelligence. Currently, most of the Managing Owner’s trades in the futures markets are executed electronically. The Managing Owner believes electronic trading has been instrumental in making the trading operation more efficient and cost effective. The Managing Owner’s experienced trading team provides meaningful feedback to the research team which is critical in the monitoring of markets (e.g., liquidity, credit, sovereign issues), the development of trading algorithms and/or utilization of brokers’ trading algorithms.

 

The Managing Owner’s back office infrastructure supports the Managing Owner’s Investment Process. The infrastructure consists of legal, compliance, fund accounting, tax, technology, marketing, human resources and administrative departments. The Managing Owner has a strong focus on internal controls and risk management, and ensures that all accounts are reconciled in a timely manner. Portfolios are priced using independent pricing sources, assets are safeguarded at independent counterparties and the Managing Owner strives to maintain adequate separation of duties among employees. A suite of risk management tools is used to monitor various items such as counterparty credit risk, liquidity in the markets traded, targeted risk levels, margin and performance attribution.

 

In addition to the back office infrastructure provided by the Managing Owner, the Trust has engaged SS&C (USA) Inc., a third-party asset servicing provider (the “Verification Agent”), to, among other things, independently price the Trust’s portfolio, or verify the Managing Owner’s valuations, verify the existence of assets, cash balances and counterparty balances, calculate counterparty exposures, verify the Managing Owner’s calculation of fees and allocations, verify the Managing Owner’s calculation of Net Assets and provide monthly reports related to the foregoing.  The agreement between the Trust and the Verification Agent may be terminated by either party for cause or upon 90 days notice. The Trust reimburses the Verification Agent for expenses that the Verification Agent incurs on the Trust’s behalf and pays the Verification Agent a monthly fee in arrears equal to the higher of: (1) 1/12 of 0.004% of the month-end Net Assets of the Trust and (2) $2,500. Such expenses and fees are considered a part of the routine legal, accounting, administrative, printing and similar costs associated with the Trust’s day-to-day operations, which in addition to ongoing offering costs, are not expected to exceed 0.60 of 1% of the Trust’s average month-end Net Assets in any given year, assuming Trust assets of $175,000,000.

 

Communication between the Managing Owner and the Trust’s investors is maintained primarily by the investor services department, which provides investors with insight into the trading methodology, current market conditions and performance of their investments.

 

The background of each of the principals and senior officers of the Managing Owner and its affiliates who perform services on the Managing Owner’s behalf is set forth below. The principals of the Managing Owner responsible for investment decisions and/or business operations on behalf of the Trust are Barry Goodman, Grant N. Smith, Gregg R. Buckbinder, Harvey Beker and George E. Crapple.

 

Barry A. Goodman, age 61. Mr. Goodman is Co-Chief Executive Officer and Executive Director of Trading of the Managing Owner, and serves as a member of the Managing Owner’s Investment Committee. Mr. Goodman plays an integral role in business and product development, and in the strategic direction of the firm as a whole. Mr. Goodman joined the Managing Owner (including its former affiliate The Millburn Corporation) and Millburn Partners in November 1982 as Assistant Director of Trading and thereafter served as Executive Vice President of the Managing Owner and The Millburn Corporation until November 1, 2015. Mr. Goodman has since served as Co-Chief Executive Officer and Executive Director of Trading of both entities with his affiliation with The Millburn Corporation ceasing on December 31, 2018 upon the merger of The Millburn Corporation into the Managing Owner. His responsibilities include overseeing the firm’s trading operations and managing its trading relationships, as well as the design and implementation of trading systems. From September 1980 through October 1982, he was a commodity trader at the brokerage firm of E. F. Hutton & Co., Inc. (“E.F. Hutton”). At E.F. Hutton, he also designed and maintained various technical indicators and coordinated research projects pertaining to the futures markets. Mr. Goodman graduated magna cum laude from Harpur College of the State University of New York in 1979 with a B.A. in economics. Mr. Goodman has also served as President and a Director of each entity in Millburn International Group since inception. Mr. Goodman became listed as a Principal and registered as an Associated Person and a Swap Associated Person of the Managing Owner effective December 19, 1991, May 23, 1989 and January 14, 2013, respectively. He became a partner in ShareInVest in January 1994. Mr. Goodman was a listed Principal of ShareInVest, effective May 19, 1999 until February 25, 2007.

 

42

 

 

Grant N. Smith, age 67. Mr. Smith is Co-Chief Executive Officer and Chief Investment Officer of the Managing Owner, and serves as a member of the Managing Owner’s Investment Committee. He is responsible for the design, testing and implementation of quantitative trading strategies, as well as for planning and overseeing the computerized decision-support systems of the firm. He received a B.S. degree from the Massachusetts Institute of Technology (“MIT”) in 1974 and an M.S. degree from MIT in 1975. While at MIT, he held several teaching and research positions in the computer science field and participated in various projects relating to database management. He joined the predecessor entity to The Millburn Corporation in June 1975, and has been continuously associated with the Managing Owner and its affiliates since that time. Mr. Smith served as the Executive Vice President of the Managing Owner and The Millburn Corporation until November 1, 2015 and as the Director of Research of both entities until May 31, 2016. He has since served as the Co-Chief Executive Officer and Chief Investment Officer of both entities with his affiliation with The Millburn Corporation ceasing on December 31, 2018 upon the merger of The Millburn Corporation into the Managing Owner. He has also served as a Director of each entity in Millburn International Group since inception, where he, along with the other Directors of each of those entities, is responsible for its overall management. Mr. Smith became listed as a Principal and registered as an Associated Person and a Swap Associated Person of the Managing Owner, effective December 19, 1991, April 15, 2009, and March 8, 2013, respectively. Mr. Smith also became a partner in ShareInVest in January 1994. He also was listed as a Principal of ShareInVest, effective May 19, 1999 until February 25, 2007. Mr. Smith’s affiliation with The Millburn Corporation ceased on December 31, 2018 upon its merger into the Managing Owner.

 

Gregg R. Buckbinder, age 60. Mr. Buckbinder is President and Chief Operating Officer of the Managing Owner and also serves as Chief Financial Officer of the Managing Owner. He joined the Managing Owner and The Millburn Corporation in January 1998 from Odyssey Partners, L.P., an investment management firm, where he was responsible for the operation, administration and accounting of the firm’s merchant banking and managed account businesses from July 1990 through December 1997. Mr. Buckbinder was employed by Tucker Anthony, a securities broker and dealer, from June 1985 to July 1990 where he was First Vice President and Controller, and from August 1983 to June 1984 where he designed and implemented various operations and accounting systems. He was with the public accounting firm of Ernst & Whinney from June 1984 to June 1985 as a manager in the tax department and from September 1980 to August 1983 as a senior auditor, with an emphasis on clients in the financial services business. Mr. Buckbinder graduated cum laude from Pace University (“Pace”) in 1980 with a B.B.A. in accounting and received an M.S. in taxation from Pace in 1988. He is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. Mr. Buckbinder served as Senior Vice President of the Managing Owner and The Millburn Corporation until November 1, 2015, and has since served as the Chief Financial Officer of the Managing Owner and the President and Chief Operating Officer of both entities with his affiliation with The Millburn Corporation ceasing on December 31, 2018 upon The Millburn Corporation’s merger into the Managing Owner. Mr. Buckbinder has also served as Senior Vice President, Chief Operating Officer and a Director of each entity in Millburn International Group since inception. Mr. Buckbinder became listed as a Principal of the Managing Owner effective February 5, 1999. Mr. Buckbinder became a partner in ShareInVest in January 2000. He was also listed as a Principal of ShareInVest effective February 28, 2001 until February 25, 2007.

 

Harvey Beker, age 65. Mr. Beker is Co-Chairman of the Managing Owner and serves as a member of the Managing Owner’s Investment Committee. He received a Bachelor of Arts degree in economics from New York University (“NYU”) in 1974 and a Master of Business Administration degree in finance from NYU in 1975. From June 1975 to July 1977, Mr. Beker was employed by the investment bank Loeb Rhoades, Inc. where he developed and traded silver arbitrage strategies. From July 1977 to June 1978, Mr. Beker was a futures trader at the commodities and securities brokerage firm of Clayton Brokerage Co. of St. Louis. Mr. Beker joined The Millburn Corporation in June 1978. He initially served as the Director of Operations for its affiliate, Millburn Partners, and most recently thereafter served as Co-Chief Executive Officer of the Managing Owner and Chairman and Chief Executive Officer of The Millburn Corporation until November 1, 2015. During his tenure at the Managing Owner (including its former affiliates, The Millburn Corporation, Millburn Partners and CommInVest), he has been instrumental in the development of the research, trading and operations areas. Mr. Beker became a principal of the firm in June 1982, and a partner in the predecessor to ShareInVest in April 1982. Mr. Beker became registered as an Associated Person and a Swap Associated Person of the Managing Owner effective November 25, 1986 and March 8, 2013, respectively. He was also listed as a Principal and registered as an Associated Person of ShareInVest effective February 20, 1986 until February 25, 2007. Mr. Beker has also served as Co-Chairman of each entity in Millburn International Group since inception.

 

43

 

 

George E. Crapple, age 74. Mr. Crapple is Co-Chairman of the Managing Owner and serves as a member of the Managing Owner’s Investment Committee. In 1966, he graduated with honors from the University of Wisconsin where his field of concentration was economics and he was elected to Phi Beta Kappa. In 1969, he graduated from Harvard Law School, magna cum laude, where he was an editor of the Harvard Law Review. He was a lawyer with the law firm of Sidley Austin LLP, Chicago, Illinois, from June 1969 until April 1, 1983, as a partner since July 1975, specializing in commodities, securities, corporate and tax law. He was first associated with the Managing Owner in June 1976 and joined the Managing Owner (including its affiliates, The Millburn Corporation, Millburn Partners and CommInVest) on April 1, 1983 on a full-time basis. Mr. Crapple ceased his employment with The Millburn Corporation effective May 31, 2011 and his position as Co-Chief Executive Officer of the Managing Owner as of November 1, 2015. He became a partner in ShareInVest in April 1984. Mr. Crapple is a past Director, Member of the Executive Committee, Chairman of the Appeals Committee and a former Chairman of the Eastern Regional Business Conduct Committee of the NFA, past Chairman of the hedge fund industry group, the Managed Funds Association (the “MFA”), a former member of the Global Markets Advisory Committee of the CFTC and a former member of the board of directors of the Futures Industry Association. Mr. Crapple has also served as the Co-Chairman of each entity in Millburn International Group since inception. Mr. Crapple became listed as a Principal and registered as an Associated Person and Swap Associated Person of the Managing Owner effective September 13, 1984, April 2, 1988 and December 26, 2012, respectively. He was also listed as a Principal and registered as an Associated Person of ShareInVest effective February 20, 1986 until February 25, 2007.

 

Michael W. Carter, age 49. Mr. Carter is a Vice President, Director of Operations and Principal Accounting Officer of the Managing Owner. He is responsible for overseeing operations and accounting for the firm’s commodity pools. Mr. Carter has served as Principal Accounting Officer of the Managing Owner since May 2014, and prior to the merger of The Millburn Corporation into the Managing Owner on December 31, 2018, also served as Vice President and Director of Operations of The Millburn Corporation since January 2011, maintaining responsibility for the entity’s operations. Mr. Carter previously held the positions of Fund Controller (February 2001 until February 2011) and Senior Accountant (March 2000 until February 2001) with The Millburn Corporation. He graduated from Rutgers, The State University of New Jersey – Newark in May 1997 with a B.S. in Accounting. Prior to joining the Managing Owner and its affiliates in March 2000, he was employed with the accounting firm Rothstein Kass & Company, P.C., as a fund accountant from March 1997 until September 1997 and as a staff auditor from September 1997 until June 1999, and then an equity analyst covering restaurants with the brokerage firm of Sidoti & Company, LLC, which conducts independent small-cap equity research for institutional investors, from June 1999 until February 2000. He is a Certified Public Accountant. Mr. Carter became listed as Principal of the Managing Owner effective April 22, 2014. Mr. Carter’s affiliation with The Millburn Corporation ceased on December 31, 2018 upon its merger into the Managing Owner.

 

Steven M. Felsenthal, age 49. Mr. Felsenthal is General Counsel and Chief Compliance Officer of the Managing Owner. Prior to joining the Managing Owner and its affiliates (including its former affiliate The Millburn Corporation) in January 2004, Mr. Felsenthal was a senior associate in the investment management group at the law firm of Schulte Roth & Zabel LLP (September 1999 to January 2004), where he represented and advised hedge funds, registered investment companies, investment advisers, broker-dealers and banks in connection with all facets of their asset management businesses, and a member of the tax department of the law firm of Kramer, Levin, Naftalis & Frankel LLP (October 1996 to September 1999). He graduated cum laude from Yeshiva University in 1991 with a B.A. in political science, and order of the coif from Fordham University School of Law in 1996, where he also served as an editor of the Fordham Environmental Law Journal. Mr. Felsenthal received an LL.M degree in taxation from NYU School of Law in 2001 and has written and been quoted in numerous published articles, and frequently speaks at conferences, on various topics related to investment management. Mr. Felsenthal is a member of the New York State Bar (since August 1997), a member of the NFA’s Compliance and Risk Committee (since May 2014), a member of MFA’s CTA, CPO and Futures Committee, serving as Chair (since April 2018) and Vice Chair (February 2017 to April 2018), a former member of the Steering Committee of the MFA’s Chief Compliance Officer Forum (June 2014 to December 2015), former Chairman of the MFA’s CPO/CTA Advisory Committee (November 2006 to June 2010) and former Co-Chairman of the Steering Committee of MFA’s CPO/CTA Forum (June 2010 to January 2013), is currently a member of the Editorial Boards of the Journal of Securities Operations & Custody (formerly known as the Journal of Securities Law, Regulation and Compliance) (since February 2007) and the Journal of Financial Compliance (since August 2017) and a regular lecturer for the Regulatory Compliance Association’s Chief Compliance Officer University (since May 2009). Mr. Felsenthal has also served as General Counsel, Chief Compliance Officer and Secretary of each entity in Millburn International Group since inception. Mr. Felsenthal became listed as a Principal of the Managing Owner effective June 24, 2004. Mr. Felsenthal also served as General Counsel and Chief Compliance Officer of ShareInVest. Mr. Felsenthal’s affiliation with The Millburn Corporation ceased on December 31, 2018 upon its merger into the Managing Owner.

 

44

 

 

Mark B. Fitzsimmons, age 71. Mr. Fitzsimmons is a Senior Vice President of the Managing Owner. His responsibilities mainly involve business development. He joined the Managing Owner and its affiliates (including its former affiliate The Millburn Corporation) in January 1990 from the brokerage firm of Morgan Stanley & Co. Incorporated, a global financial services firm, where he was a Principal and Manager of institutional foreign exchange sales and was involved in strategic trading for the firm from October 1987 until January 1990. From September 1977 to October 1987, he was with the financial institution Chemical Bank New York Corporation (“Chemical”), first as a Senior Economist in Chemical’s Foreign Exchange Advisory Service and later as a Vice-President and Manager of Chemical’s Corporate Trading Group. While at Chemical he also traded both foreign exchange and fixed income products. From September 1973 to September 1977, Mr. Fitzsimmons was employed by the Federal Reserve Bank of New York, dividing his time between the International Research Department and the Foreign Exchange Department. He graduated summa cum laude from the University of Bridgeport, Connecticut in 1970 with a B.S. degree in economics. His graduate work was done at the University of Virginia, where he received a certificate of candidacy for a Ph.D. in economics in 1973. Mr. Fitzsimmons became listed as a Principal and registered as an Associated Person and a Swap Associated Person of the Managing Owner effective July 2, 1993, April 15, 2009, and March 8, 2013, respectively. Mr. Fitzsimmons was a partner in ShareInVest beginning in January 2000. He was also a listed Principal of ShareInVest effective May 19, 1999 until February 25, 2007. Mr. Fitzsimmons also served as a Senior Vice President of The Millburn Corporation until December 31, 2011 with his main responsibilities including business development and investment strategy.

 

The Managing Owner shares with its affiliates a staff of over 50, including the above-named individuals.

 

Past performance of the Units is set forth on pages 22-25 hereof.

 

Trading Strategies in General

 

Futures and forward trading methods may generally be classified as either systematic or discretionary. A systematic method will generally rely to some degree on judgmental decisions concerning, for example, which markets to follow and trade, when to liquidate a position in a contract that is about to expire and how heavy a weighting a particular market should have in a portfolio. However, although these judgmental decisions may have a substantial effect on performance, the method relies primarily on the use of trading programs or models that generate trading signals. The systems used to generate trading signals themselves may be changed from time to time, but the trading instructions generated by the systems are followed without significant additional analysis or interpretation. Discretionary methods on the other hand — while they may use market charts, computer programs and compilations of quantifiable information to assist in making investment decisions — rely on human traders to make investment decisions on the basis of their own judgment and trading instinct, not on the basis of trading signals generated by any program or model.

 

The Managing Owner relies heavily on systematic methods with respect to its futures and forward trading.

 

In addition to being distinguished from one another on the basis of whether they are systematic or discretionary, trading methods can also be distinguished by their reliance on either technical or fundamental analysis, or on a combination of the two.

 

Technical analysis is not based on the anticipated supply and demand of a particular commodity, currency or financial instrument. Instead, it is based on the theory that the study of the markets themselves will provide a means of anticipating the external factors that affect the supply and demand for a particular commodity, currency or financial instrument in order to predict future prices. Technical analysis operates on the theory that market prices at any given point in time reflect all known factors affecting supply and demand for a particular commodity, currency or financial instrument.

 

45

 

 

Fundamental analysis, in contrast, is based on the study of factors external to the trading markets that affect the supply and demand of a particular commodity, currency or financial instrument in an attempt to predict future prices. Such factors might include the economy of a particular country, government policies, domestic and foreign political and economic events, and changing trade prospects. Fundamental analysis theorizes that by monitoring relevant supply and demand factors for a particular commodity, currency or financial instrument, a state of current or potential disequilibrium of market conditions may be identified that has yet to be reflected in the price level of that instrument. Fundamental analysis assumes that the markets are imperfect, that information is not instantaneously assimilated or disseminated and that econometric models can be constructed that generate equilibrium prices that may indicate that current prices are inconsistent with underlying economic conditions and will, accordingly, change in the future.

 

The Managing Owner employs some models that analyze only technical data, but a majority of its models analyze both technical and fundamental data simultaneously. Each model type is systematic in nature.

 

The Managing Owner’s Trading Strategy

 

Multiple Trading Systems

 

The Managing Owner makes its systematically-based investment and trading decisions pursuant to its investment and trading methods, which may include technical trend analysis, certain non-traditional technical systems (i.e., systems falling outside of traditional technical trend analysis), and money management principles, each of which may be revised from time to time. The objective of the Managing Owner’s investment and trading methods is to consider multiple data inputs, or “factors,” in order to arrive at relatively near-term return forecasts for each traded instrument, and take appropriate, risk-managed positions. These factors include price data, but also a range of price derivative and non-price data.

 

Trades generated by quantitative models may be profitable or unprofitable. The Managing Owner’s objective is to have the profits from its profitable trades exceed the losses from its unprofitable trades. During periods in which market behavior differs significantly from that analyzed to build the models, substantial losses are possible, and even likely.

 

The Managing Owner is engaged in an ongoing research effort to improve its trading methods and to apply its quantitative analytic expertise to new financial products.

 

Successful systematic futures and forward trading depends on several elements. Two of the main factors are the development and selection of the trading systems used in each market, and the allocation of portfolio risk among the markets available for trading.

 

Market environments change over time, and particular systems may perform well in one environment but poorly in another. Likewise, market sectors and individual markets go through periods where systematic trading is very profitable and other periods where no system is able to generate any profits.

 

The goal of the Managing Owner’s research has been to develop and select a mix of systems in each market and to allocate risk across a wide array of markets, so as to contain overall portfolio risk within a targeted range, while allowing exposure to profitable opportunities.

 

Over more than 40 years, the Managing Owner and its predecessor entities have developed hundreds of trading systems. These trading systems generate buy or sell decisions in a particular market based on the analysis of price movements in the market, some non-price information or a combination of both.

 

Of course, systems can be materially different — better in some periods and worse in others. The main distinguishing features are: the time frame over which systems work (intra-day to long-term); the granularity of data fed into them (tick data to daily, weekly or monthly frequencies); the amount of data used to learn the market structure; the statistical or technical methods used to make forecasts; the type of data (market or economic statistics); and the source of data (cash, futures, forward or option markets-generated data or government and industry generated statistical information). No single approach will work all the time. Therefore, the Managing Owner’s objective is to have several approaches and several data inputs operating in conjunction with one another.

 

When arriving at the portfolio allocation, the Managing Owner generally seeks maximum diversification subject to liquidity and sector concentration constraints and subject to the mandate of the strategy. Each market is traded using a diversified set of trading systems, which may be optimized for groups of markets, sectors or specific markets. The markets traded and allocations are reviewed at least monthly, although changes may occur more or less frequently. The following factors, among others, are considered in constructing a universe of markets to trade for the Trust: profitability, liquidity of markets, professional judgment, desired diversification, transaction costs, exchange regulations and depth of market. The current allocation to any market in the Trust’s portfolio does not exceed 3% of total market exposure, measured by risk allocation.

 

46

 

 

Risk Management

 

Risk is a function of both price level and price volatility. For example, for any given level of volatility, a 100,000 barrel crude oil position is worth more and is, therefore, probably more risky with oil at $90 per barrel than with oil at $50 per barrel. Similarly, oil would be more risky if prices are moving in a 5% daily range than if prices are moving in a 1% daily range. The Managing Owner sizes the position in each market taking into account its measurement of risk based on price level and volatility in that market. Market exposure is then managed by the position-sizing models which measure the risk in the portfolio’s position in each market. In the event the model determines that the risk has changed beyond an acceptable threshold, it will signal a change in the position — a decrease in position size when risk increases and an increase in position size when risk decreases. The Managing Owner’s position-sizing models maintain overall portfolio risk and distribution of risk across markets within designated ranges. The position-sizing model manages the position traded by each of the (directional) trading systems discussed above.

 

In addition, the Managing Owner’s risk management processes focus on money management principles applicable to the portfolio as a whole rather than to individual markets. The first principle is portfolio diversification, which attempts to improve the quality of profits by reducing volatility.

 

Additional money management principles applicable to the portfolio as a whole include: (1) limiting the assets committed as margin or collateral, generally within a range of 5% to 35% of an account’s net assets, though the amount may at any time be higher or lower and (2) prohibiting pyramiding — that is, using unrealized profits in a particular market as margin for additional positions solely in the same market.

 

Another important risk management function is the careful control of leverage or total portfolio exposure. Leverage levels are determined by simulating the entire portfolio — all markets, all systems, all risk control models, the exact weightings of the markets in the portfolio and the proposed level of leverage — over the past five or ten years to determine the portfolio’s simulated risk and return characteristics as well as the worst case experienced by the portfolio in the simulation period. The worst case, or peak-to-trough drawdown, is measured from a daily high in portfolio assets to the subsequent daily low whether that occurs days, weeks or months after the daily high. If the Managing Owner considers the drawdown too severe or the portfolio’s simulated volatility too high, it can reduce the leverage or total portfolio exposure. There are, however, no restrictions on the amount of leverage the Trust may use at any given time.

 

Decisions whether to trade a particular market require the exercise of judgment. The decision not to trade certain markets for certain periods, or to reduce the size of a position in a particular market, may result at times in missing significant profit opportunities.

 

In some cases, the Managing Owner employs discretion in the execution of trades where trader expertise plays a role in timing of orders and, from time to time, the Managing Owner may adjust the size of a position, long or short, in any given market indicated by its systematic trading strategies. This exercise of discretion (other than in trade execution) has historically been very rare and would generally occur only in response to unusual market conditions that may not have been factored into the design of the trading systems. Such adjustments would be done with the intention of reducing risk exposures as opposed to seeking additional risk. Decisions to make such adjustments also require the exercise of judgment and may include consideration of the volatility of the particular market; the pattern of price movements, both inter-day and intra-day; open interest; volume of trading; changes in spread relationships between various forward contracts; and overall portfolio balance and risk exposure.

 

With respect to the execution of trades, the Managing Owner employees responsible for trade order entry may at times consider the judgment of others, including dealers and bank traders. No assurance is given that it will be possible to execute trades regularly at or near the desired buy or sell point.

 

The trading method, systems and money management principles utilized by the Managing Owner are proprietary and confidential. The foregoing description is general and is not intended to be complete.

 

Use Of Proceeds

 

The entire proceeds of this offering of the Units will be used by the Trust to engage in its trading activities and as reserves to support that trading.

 

The Trust will deposit its assets in cash with the Trust’s clearing brokers and other futures clearing brokers to be used as margin, in accounts established in the name of the Trust at major U.S. banks and with its foreign exchange counterparties. The assets deposited as margin with the clearing brokers will be held in “customer segregated funds accounts” or “foreign futures and foreign options secured amount accounts,” as required by the Commodity Exchange Act, as amended (the “CEA”) and CFTC regulations. In general, the Managing Owner expects that approximately 3% to 13% of the Trust’s assets will be held in customer segregated funds and approximately 3% to 13% will be held in foreign futures and options secured amount accounts. Assets held in customer segregated funds accounts and foreign futures and options secured amount accounts will be held in cash or in U.S. Treasury instruments approved by the CFTC for the investment of customer segregated funds. In general, the Managing Owner expects that approximately 70% to 85% of the Trust’s assets will be held in bank, U.S. government securities and related instrument money market fund or custody accounts opened in the Trust’s name, although the actual level may vary from time to time. Assets held in these accounts will be held primarily in interest-bearing deposits or in U.S. Treasury instruments and/or Government Agency and related instruments. However, any interest actually earned may be nominal as a result of the historically low interest rates currently available.

 

47

 

 

The Trust will trade in the forward currency and may trade in swap markets. The Trust will deposit assets with its currency forward and swap counterparties in order to initiate and maintain its currency forward and swap contracts, primarily with Morgan Stanley & Co. LLC, Deutsche Bank AG, and Bank of America, N.A., the latter two of which serve as the Trust’s prime brokers in connection with the Trust’s foreign currency forward contract transactions. Such assets will be held in U.S. Treasury instruments or in cash, for which the Trust will receive an interest credit at short-term rates. The foreign exchange and swap counterparties may receive a benefit as a result of the deposit of such cash in the form of a reduction in their outstanding overnight borrowings, despite such cash belonging to the Trust, not the counterparties. Approximately 3% to 12% of the Trust’s assets will be held, in the Trust’s name, in cash or U.S. Treasury instruments in accounts in the U.S., with foreign exchange and swap counterparties. These accounts may not be subject to the segregation regulations of the CFTC and thus may offer less protection than segregated funds accounts in the event of the bankruptcy of a foreign exchange or swap counterparty.

 

On an ongoing basis, the Managing Owner anticipates that the Trust will be able to earn interest on approximately 90% of its daily Net Assets. The Managing Owner will not receive any interest income earned on the approximately 10% of the Trust’s Net Assets which do not earn interest for the Trust.

 

Under current margin requirements, the Managing Owner expects the Trust’s average margin to equity ratio, including collateral held by foreign exchange and swap counterparties, to be approximately 5% to 35% of the Trust’s assets. However, margin requirements vary from time to time, and the Trust is not limited in the amount of leverage it may use at any one time.

 

The Managing Owner does not anticipate making any distributions of Trust profits.

 

The Trust will not lend any of its assets to any person or entity other than through permitted securities investments. The Managing Owner will not commingle the property of the Trust with the property of any other person or entity in violation of law.

 

Charges

 

The Managing Owner believes that you should consider the charges to which the Trust is subject when making your investment decision.

 

Charges Paid by the Trust

 

Recipient   Nature of Payment   Amount of Payment
         
The Managing Owner   Management Fee  

Series 3 Units: 1.75% annually, paid as a monthly fee of 0.14583 of 1% of the Trust’s month-end Net Assets attributable to Series 3 Units and Series 5 Units, respectively, before accruals for unpaid Series 3 Management Fees or Series 3 Profit Shares.

 

During 2017, the Trust incurred $541,360 in Series 3 Management Fees that were paid and accrued to the Managing Owner.

 

Series 5 Units: 2.50% annually, paid as a monthly fee of 0.20833 of 1% of the Trust’s month-end Net Assets attributable to Series 5 Units, before accruals for unpaid Series 5 Management Fees or Series 5 Profit Shares. Subject to the applicable cap on Selling Agent compensation, the Managing Owner will, in turn, pay a portion of this amount to the Selling Agents in connection with the sale of Series 5 Units.

 

48

 

 

Executing, Clearing Brokers and Others   Round-Turn Brokerage, Electronic Trading Platform and Other Execution Fees   Actual costs of executing and clearing the Trust’s futures trades and actual electronic platform trading costs attributable to Series 3 Units, Series 4 Units and Series 5 Units, estimated at approximately 0.30% of the Trust’s average month-end Net Assets per year attributable to the Series 3 Units, Series 4 Units and Series 5 Units. During 2017, the Trust incurred $90,324 in round-turn brokerage and electronic trading platform and other execution fees attributable to the Series 3 Units and Series 4 Units.
         
Forward and Swap Counterparties/Prime Brokers   “Bid-ask” Spreads, Prime Brokerage Fees   “Bid-ask” spreads are not actually fees but are dealer profit margins incorporated into forward and swap contract pricing. They are, therefore, unquantifiable. The Trust, and not the Managing Owner, may pay, depending upon whether the trade is executed at a prime broker or away from a prime broker, approximately $6-$7 in prime brokerage fees per $1 million of currency forward contracts facilitated on behalf of the Trust attributable to the Series 3 Units, Series 4 Units and Series 5 Units, estimated at approximately 0.01% of the Trust’s average month-end Net Assets per year attributable to the Series 3 Units, Series 4 Units and Series 5 Units. During 2017, approximately 91% of the Trust’s currency forward contracts were not subject to such prime brokerage fee.
         
The Managing Owner   Annual Profit Share  

Series 3 Units and Series 5 Units: 20% of any aggregate New Trading Profit attributable to Series 3 Units and Series 5 Units, respectively, excluding interest income and after reduction for Management Fees, executing and clearing costs and ongoing offering and administrative costs.

 

During 2017, the Trust allocated $307,932 in Profit Share attributable to Series 3 Units to the Managing Owner.

         
Others   Trustee fees, legal, accounting, printing, postage and other offering and administrative costs   As incurred; not expected to exceed 0.60 of 1% of average month-end Net Assets annually. During 2017, the Trust incurred $1,440,217 in administrative expenses.
    Extraordinary charges   Actual payments to third parties; expected to be negligible.

 

 

 

Management Fees — Series 3 Units

 

The Trust will pay the Managing Owner an annual management fee equal to 1.75% of the average month-end Net Assets attributable to the Series 3 Units after reduction for expenses but before reduction for any accrued but unpaid Series 3 Management Fees or Series 3 Profit Shares.

 

Management Fees —Series 5 Units

 

The Trust will pay the Managing Owner an annual management fee equal to 2.50% of the average month-end Net Assets attributable to the Series 5 Units after reduction for expenses but before reduction for any accrued but unpaid Series 5 Management Fees or Series 5 Profit Shares. From this amount, the Managing Owner will pay up to 0.75% per year of the average month-end Net Assets attributable to Series 5 Units to the Selling Agents in respect of the Series 5 Units sold by such Selling Agents. The maximum amount of such Selling Agent compensation, in addition to upfront selling commissions and any other compensation paid to such Selling Agents as set forth in the “Selling Agent Compensation Table” and “Items of Compensation Chart” below, will not exceed 9.50% of the gross offering proceeds of the Series 5 Units sold pursuant to this Prospectus. Once the maximum threshold is reached with respect to a Series 5 Unit, the broker serving as Selling Agent for such Series 5 Unit will receive no further selling compensation and the up to 0.75% amount that would otherwise be paid to the Selling Agent for that Series 5 Unit will instead be rebated to the Trust for the benefit of all Series 5 Unitholders.

 

Upfront Selling Commissions — Series 5 Units

 

To the extent set forth in a Unitholder’s Subscription Agreement, a Series 5 Unitholder introduced by certain Selling Agents may be required to pay an upfront selling commission of up to 3% of the subscription amount for the applicable Series 5 Units.

 

49

 

 

Round-Turn Brokerage Fees

 

The Trust, not the Managing Owner, will pay the actual costs of executing and clearing the Trust’s futures trades attributable to Series 3 Units, Series 4 Units and Series 5 Units, estimated at approximately 0.30% of the Trust’s average month-end Net Assets per year attributable to the Series 3 Units, Series 4 Units and Series 5 Units. The costs of executing and clearing the Trust’s futures trades attributable to Series 3 Units, Series 4 Units and Series 5 Units will be borne by the Series 3 Units, Series 4 Units and Series 5 Units, respectively, not by the Trust as a whole.

 

The costs of executing and clearing the Trust’s futures trades include brokerage commissions paid to the clearing brokers and electronic trading platform fees, as both are described below, and NFA transaction fees of $0.04 per round-turn trade of a futures contract and $0.02 for each trade of a commodity option executed on a U.S. exchange.

 

The Managing Owner has negotiated brokerage rates with the clearing brokers ranging from approximately $1.00 to approximately $8.00 per round-turn trade, including all related exchange and regulatory fees. Commissions on some foreign exchanges are somewhat higher. Electronic trading platform fees for futures range from $0.15 to $0.25 per contract, depending upon the futures trading volume. At these rates, and including the foreign currency prime broker fees described below, the Managing Owner estimates the Trust’s aggregate execution and clearing costs borne by the Series 3 Units, Series 4 Units and Series 5 Units will be approximately 0.30% of average month-end Net Assets attributable to the Series 3 Units, Series 4 Units and Series 5 Units per year. The Managing Owner does not receive any portion of the commissions paid to the clearing brokers.

 

“Bid-Ask” Spreads

 

Currency dealers trade with a spread between the price at which they are prepared to buy or sell a particular currency. These “bid-ask” spreads are not actually fees but, rather, represent a profit margin to the dealer for making a market in the currency. The Managing Owner cannot quantify the amount of dealer profit that is embedded in a price quoted by a dealer, but the Managing Owner believes that the Trust will effect its currency transactions at prevailing market prices. Because the Trust will buy currency at the offer price and sell it at the bid price, the Trust, not the Managing Owner, will pay the dealer spreads. Dealer profit from the Trust’s currency trading may, over time, be substantial. Moreover, if the Trust trades swaps, banks and other dealers charge a “spread” between “bid” and “ask” prices, reflecting their profit on the transaction. The Trust, and not the Managing Owner, may pay, depending upon whether the trade is executed at a prime broker or away from a prime broker, approximately $6-$7 in prime brokerage fees per $1 million of currency forward contracts facilitated on behalf of the Trust attributable to the Series 3 Units, Series 4 Units and Series 5 Units, such prime brokerage fees to be an expense borne by the Series 3 Units, Series 4 Units and Series 5 Units. Prime brokerage fees borne by the Series 3 Units, Series 4 Units and Series 5 Units are estimated at approximately 0.01% of the Trust’s average month-end Net Assets per year attributable to the Series 3 Units, Series 4 Units and Series 5 Units. During 2017, approximately 91% of the Trust’s currency forward contracts were not subject to such prime brokerage fee.

 

20% Profit Share Based on “High Water Mark” New Trading Profit

 

The Trust pays the Managing Owner a Profit Share attributed to the Series 3 Units and Series 5 Units, respectively, equal to 20% of any cumulative New Trading Profit recognized, in the aggregate, by the Series 3 Units and Series 5 Units as of the end of each calendar year (respectively, the “Series 3 Profit Share” and “Series 5 Profit Share” and each, a “Profit Share”). New Trading Profit is any cumulative Trading Profit in excess of the highest level — the “High Water Mark”— of cumulative Trading Profit as of any previous calendar year-end. Trading Profit includes (1) realized trading profit (loss) plus or minus (2) the change in unrealized trading profit (loss) on open positions as of the previous calendar year-end. New Trading Profit in respect of Series 3 Units is calculated after payment of the monthly Series 3 Management Fee, execution and clearing costs and ongoing offering and administrative expenses. New Trading Profit in respect of Series 5 Units is calculated after payment of the monthly Series 5 Management Fee, execution and clearing costs and ongoing offering and administrative expenses, and, for the avoidance of doubt, does not take into consideration any upfront selling commissions which will be deducted by the applicable Selling Agent directly from the intended subscription amount for Series 5 Units. For purposes of determining the Unit Net Asset Value and for allocating Profit Shares in respect of Units redeemed as of a date other than December 31, the Profit Share is accrued, and the accruals are reversed to reflect losses, on a monthly basis. Trading Profit does not include interest earned on the Trust’s assets. Profit Shares previously paid do not reduce New Trading Profit. That is, the Managing Owner does not have to “earn back” its Profit Shares in order to produce New Trading Profit.

 

50

 

 

For example, assume that at the end of the first year of trading the Series 5 Units had, after payment of monthly Series 5 Management Fee, execution and clearing costs and ongoing offering and administrative costs, a realized profit of $50,000 on its closed positions and an unrealized profit of $150,000 on open positions. Series 5 Trading Profit would equal $200,000 and 20%, or $40,000, would be allocated as a Series 5 Profit Share. Assume that during the second calendar year, again after payment of monthly Series 5 Management Fee, execution and clearing costs and ongoing offering and administrative costs, the Series 5 Units had realized profits of $60,000 and a decrease in the unrealized profits on its open positions of $50,000. Cumulative Series 5 New Trading Profit would have increased to $210,000 ($200,000 + $60,000 -$50,000), and 20% of $10,000, or $2,000, would be allocated as a Series 5 Profit Share. Now assume that during the third year, again after payment of monthly Series 5 Management Fee, execution and clearing costs and ongoing offering and administrative costs, the Series 5 Units incurred realized losses of $150,000 and a decrease in the unrealized profit on its open positions of $100,000. Series 5 Trading Profit would have decreased as of the end of such year to $(40,000) ($210,000 - $150,000 - $100,000), and no Series 5 Profit Share would be paid. The Managing Owner would retain the $42,000 already paid as Series 5 Profit Shares but would not receive additional Series 5 Profit Shares until cumulative Series 5 New Trading Profit exceeded $210,000 as of a year-end.

 

Redemption of Units will result in a proportional decrease in any loss carryforward — since the last calendar year-end as of which a Profit Share was paid — as of the date of redemption. Redemption of Units at a time when there is accrued New Trading Profit will result in a proportional Profit Share allocation to the Managing Owner.

 

Series 4 Units, which are available only to employees and former employees of the Managing Owner and its affiliates who purchase their Units through the Managing Owner’s 401(k) and Profit Sharing Plan, are not subject to the Managing Owner’s Profit Share.

 

Offering Expenses

 

The Trust pays its own offering costs, including, without limitation: costs associated with the offering and sale of the Units (such as printing and postage costs associated with producing and distributing this Prospectus and related sales literature to the Selling Agents, as well as payments to administrators for processing subscription agreements); professional fees and expenses (including legal and accounting) in connection with the update of the Trust’s offering documents, constitutional documents and other relevant documents; communication expenses with respect to investor services and all expenses relating to Unitholder meetings, if any; and costs of preparing, printing, filing, registering and distributing this Prospectus as well as financial and other reports, forms, proxies and similar documents. The Managing Owner may pay certain of these costs and, if so, will be reimbursed without interest by the Trust. Under certain circumstances, for example, where such costs are unexpectedly high, the Managing Owner may, but is not obligated to do so, waive a portion of such reimbursement. The offering costs of the Trust will not exceed 1% of the gross offering proceeds of the Units. When added to selling compensation discussed herein, the “organizational and offering expenses” of the Trust, as defined by Rule 2310 of the Financial Industry Regulatory Authority, Inc. (“FINRA”), will not exceed 11% of the gross offering proceeds of the Units.

 

Operating Expenses

 

The Trust also pays its own operating costs, including, but not limited to: (i) the Management Fee payable to the Managing Owner (ii) direct and indirect investment expenses (such as, but not limited to, brokerage commissions and other transaction-execution costs; dealer spreads, give-up fees; NFA fees; exchange-related fees, externally incurred costs of establishing and utilizing electronic trading, computer, software and systems connections directly or indirectly with the Trust’s brokers and counterparties or with third parties to facilitate electronic trading with the Trust’s brokers and counterparties; costs relating to the use of trading algorithms; clearing fees; valuation and portfolio pricing; interest charges; custodial fees and charges and financing charges; and applicable withholding and other taxes); (iii) all expenses related to the purchase, sale, transmittal or custody of trading assets and related items; (iv) costs and expenses associated with or deriving from obtaining and maintaining exchange memberships and credit ratings; (v) any taxes and duties payable in any jurisdiction in connection with the Trust’s operations; (vi) compliance costs of regulatory and governmental inquiries, subpoenas and proceedings (in each case, to the extent involving the Trust or the Managing Owner in its capacity as managing owner, CPO or CTA of the Trust); (vii) costs associated with possible reorganizations or restructurings of the Trust; and (viii) costs of any litigation or investigation involving Trust activities and any indemnification payments, if any; (ix) legal, financial and tax accounting, auditing and other professional fees and expenses, including consulting and appraisal fees and expenses pertaining to the Trust; (x) administrative expenses (including, if applicable, the fees and out-of-pocket expenses of an administrator unaffiliated with the Managing Owner (and its agents) which the Managing Owner may select for the Trust); (xi) establishing computer and systems connectivity with administrators and other third-party service providers; (xii) paying agency, transfer agency, accounting verification (if any) and/or investor registrar services and the costs of middle-office and back-office support as provided by the Managing Owner or administrators, as applicable; (xiii) due diligence expenses, including due diligence relating to anti-money laundering, know your customer and other inquiries; (xiv) costs of maintaining the Trustee’s and Verification Agent’s services in Delaware or in any other applicable jurisdiction (viii) legal, compliance, tax, accounting and audit costs, fees and expenses (including interest charges) relating to the Trust’s regulatory and self-regulatory filings, registrations, memberships and reporting (including, but not limited to, expenses incurred in connection with complying with applicable U.S. reporting obligations, such as those required by the SEC, the CFTC or other regional counterparts, as well as out-of-pocket costs of preparing regulatory filings related to the Trust or the Managing Owner with respect to the Trust); (xv) the costs and fees attributable to any third-party proxy voting or class actions service or consultant; (xvi) the Trust’s insurance costs, including without limitations, errors and omissions insurance and directors and officers insurance, if any; and any other operating or administrative expenses related to accounting, research, third-party consultants, and reporting.

 

51

 

 

The Managing Owner estimates such costs, excluding those expenses relating to the Management Fee and trade execution and clearing costs (each as described herein), assuming Trust assets of $175,000,000, and, when aggregated with the offering costs described above, are not expected to exceed 0.60 of 1% of the Trust’s average annual Net Assets in any given year. The Managing Owner may pay certain of these costs and, if so, will be reimbursed without interest by the Trust. Under certain circumstances, for example, where such costs are unexpectedly high, the Managing Owner may, but is not obligated to do so, waive a portion of such reimbursement.

 

Extraordinary Expenses

 

The Trust is responsible for the taxes, if any, imposed on the Trust itself. The Trust is required to pay any extraordinary charges incidental to its trading, for example, insurance or delivery expenses. The Managing Owner expects that any such charges will be negligible.

 

Charges Paid by the Managing Owner

 

Selling Commissions

 

The Managing Owner will pay, from its own funds, the Selling Agent’s installment selling commissions or compensation (excluding any upfront selling commissions to be paid directly by investors with respect to Series 5 Units) in connection with the sale and distribution of the Series 3 Units and Series 5 Units.

 

Redemptions; Net Asset Value

 

Redemption Procedure

 

The Trust is intended as a medium- to long-term investment, which the Managing Owner construes to mean at least a 3-5 year period. However, you may redeem Units as of the close of business on the last day of any calendar month. You must give at least 10 days’ prior written notice to the Managing Owner of your intent to redeem.

 

The Managing Owner may declare additional redemption dates upon notice to the Unitholders and may, in unusual circumstances, permit certain, or all, Unitholders to redeem as of dates other than month-end.

 

Unitholders may redeem any whole number of Units.

 

Fractional Units may be redeemed only upon redemption of a Unitholder’s entire remaining interest in the Trust.

 

A form of Request for Redemption is attached to the Fifth Amended and Restated Declaration of Trust and Trust Agreement (the “Declaration of Trust”) as an Annex.

 

All requests for redemption will be honored and payment will be made within 15 business days of the month-end redemption date. The Managing Owner will make arrangements with Selling Agents who so request to pay redemptions through crediting Unitholders’ customer securities accounts with such Selling Agents. In the unlikely event a market disruption that results in the closing of financial markets in the U.S. or abroad makes it impossible or impracticable to value the Units or liquidate Trust assets, redemptions may be suspended or payment of redemption proceeds may be delayed. Unitholders will be notified by telephone or first-class mail if redemptions are suspended or if redemption payments will be delayed due to such a market disruption.

 

Investments by the Managing Owner, other than its required investment in the Trust, may be redeemed on the same terms as the Units.

 

Net Asset Value

 

Net Assets are determined in accordance with generally accepted accounting principles of the U.S. and include unrealized profits as well as unrealized losses on open commodity positions. Net Assets include the sum of all cash, U.S. Treasury instruments or other fixed-income instruments, valued at market, the liquidating value, or cost of liquidation, of all futures, forward and options positions and the fair market value of all other assets of the Trust, less all liabilities of the Trust, including accrued liabilities, irrespective of whether such liabilities, such as Profit Shares, may, in fact, never be paid. If a contract cannot be liquidated on a day with respect to which Net Assets are being determined, the settlement price on the next day on which the contract can be liquidated will be the basis for determining the liquidating value of such contract, or such day, or such other value as the Managing Owner may deem fair and reasonable.

 

52

 

 

The Net Asset Value of a Unit of a particular Series refers to the Net Assets allocated to the aggregate capital accounts of the Units of such Series divided by the number of outstanding Units of such Series.

 

The Clearing Brokers AND SWAP DEALERS

 

The Trust utilizes the services of various clearing and executing brokers in connection with its futures trading. The Managing Owner currently clears trades through SG Americas Securities, LLC, Deutsche Bank Securities Inc., and Merrill Lynch, Pierce, Fenner & Smith Incorporated, but may execute or clear some or all of the Trust’s trades through other brokerage firms or cease utilizing the services of one or more of the foregoing without notice to the Unitholders (the “Clearing Brokers”). The Managing Owner may execute or clear trades through brokerage firms which are also Selling Agents.

 

The Trust’s prime brokers for purposes of trading in the forward currency and swap markets are currently Deutsche Bank AG and Bank of America, N.A. The Managing Owner clears such trades with Deutsche Bank AG, Bank of America, N.A. and Morgan Stanley & Co. LLC. The Managing Owner may trade in the currency forward or swap markets through other dealers or cease utilizing the services of one or more of the foregoing without notice to the Unitholders.

 

The Customer Agreements among the clearing brokers, the Managing Owner and the Trust generally provide that the clearing brokers will not be liable to the Trust except for gross negligence, willful misconduct or bad faith and, in the case of trades executed as well as cleared by the clearing brokers, for errors in such execution.

 

SG Americas Securities, LLC (“SGAS”) is a wholly owned subsidiary of SG Americas Securities Holdings, LLC (“SGASH”), which is a wholly owned subsidiary of Société Générale (“SG”), a French bank. Effective January 2, 2015, Newedge USA, LLC (“NUSA”) merged with and into SGAS, with SGAS being the surviving entity. Effective on such date, all rights, receivables, assets, and liabilities of legacy NUSA were assumed by SGAS by operation of law.

 

In February 2015, SGAS, as successor to NUSA, settled, without admitting or denying the allegations, a matter brought by CME Group alleging that, on multiple occasions between 2010 and 2012, NUSA employees executed certain customers’ orders as EFRPs, instead of on CME Group’s GLOBEX platform. The settlement also included allegations that the EFRPs were non bona fide and/or were inadequately documented. In connection with this matter, SGAS paid a fine of $1,700,000.

 

In October 2015, SGAS, as successor to NUSA, settled, without admitting or denying the allegations, a matter brought by ICE Futures U.S. that was based on alleged failures by NUSA to report an open interest in three energy futures contracts in accordance with the rules of the exchange over a period of approximately twenty-two business days in May and June 2014. In connection with this matter, SGAS paid a fine of $100,000.

 

In October 2015, SGAS, as successor to NUSA, settled, without admitting or denying the allegations, a matter brought by FINRA, for failing to report short interest positions and failure to establish and maintain a supervisory system that was reasonably designed to achieve compliance with the applicable laws and regulations concerning short interest reporting. In connection with this matter, SGAS paid a fine of $120,000.

 

In December 2015, SGAS, as successor to NUSA, settled a matter brought by the Chicago Board of Options Exchange alleging that, during 2010 and 2011, NUSA failed to report, or accurately report, “reportable positions” on its large option position report in violation of Exchange Rule 4.2. In connection with this matter, SGAS paid a fine of $650,000.

 

On December 22, 2015, the SEC instituted public administrative and cease-and-desist proceedings pursuant to Sections 15(b)(4) and 21C of the Exchange Act against SGAS, and pursuant to Section 8A of the Securities Act, Sections 15(b)(6) and 21C of the Exchange Act, and Section 9(b) of the Investment Company Act against Yimin Ge (“Ge”). From October 2011 to June 2013, Ge, then a trader at SGAS, a registered broker-dealer, engaged in a series of unlawful prearranged purchases of fixed-income securities and sales back to two different registered investment advisers, Morgan Stanley Investment Management Inc. (“MSIM”) and “Firm A”. Because each relevant purchase from MSIM and Firm A was recorded in SGAS’s books and records without any reference to the resale or reoffer arrangement, SGAS’s books and records were inaccurate pursuant to the SEC’s order. Accordingly, the SEC’s order found that SGAS willfully violated and Ge willfully aided and abetted and caused SGAS’s violations of Section 17(a) of the Exchange Act and Rule 17a-3(a)(2) thereunder. Furthermore, SGAS failed reasonably to supervise Ge within the meaning of Section 15(b)(4)(E) of the Exchange Act by failing to prevent and detect Ge’s violations with respect to the unlawful parking arrangement with Huang. In anticipation of the institution of these proceedings, SGAS submitted an offer of settlement which the SEC accepted. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the SEC, or to which SEC is a party, and without admitting or denying the findings herein, except as to the SEC’s jurisdiction over SGAS and the subject matter of these proceedings, which are admitted, and except as provided therein, SGAS consented to the entry of the SEC’s order instituting administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act, Sections 15(b) and 21C of the Exchange Act, and Section 9(b) of the Investment Company Act, making findings, and imposing remedial sanctions and a cease-and-desist order. SGAS additionally agreed to pay disgorgement, representing profits gained as a result of the conduct described herein of $198,338 and prejudgment interest of $12,755 as well as a civil money penalty in the amount of $800,000 to the SEC for transfer to the general fund of the U.S. Treasury in accordance with Exchange Act Section 21F(g)(3).

 

53

 

 

In June 2016, SGAS, as successor to NUSA, settled, without admitting or denying the allegations, a matter brought by the Chicago Board of Trade (“CBOT”) alleging that on six days between November 2013 and January 2014, three traders for Newedge (one employed by Newedge and two by its Canadian affiliate) entered into separate transactions with third parties prior to consummating the block trade with the counterparty, in violation of CBOT Rules 432.W and 526. The settlement included a fine in the amount of $100,000 and a disgorgement of profits in the amount of $19,502.50.

 

On September 28, 2016, the CFTC issued an order filing and simultaneously settling charges against SGAS, as successor to NUSA, a CFTC-registered futures commission merchant, for participating in unlawful wash trades and for failing to diligently supervise over a three and a half year period. The CFTC order found that NUSA executed and confirmed the execution of, and reported to the Chicago Mercantile Exchange (“CME”) and CBOT, numerous non-bona fide exchange of futures for physical transactions (“EFPs”) in agricultural and soft commodities, throughout the period from June 2010 through at least January 2014, for and on behalf of its clients that are, are of the character of, or are commonly known as wash sales, in prohibition of Section 4c(a) of the CEA. According to the CFTC order, the EFP trades that NUSA executed and confirmed were for the same contract, quantity, and same or similar price with the buyer and seller for each EFP under the same common control and ownership. The CFTC found that the trades were executed under circumstances where certain NUSA account representatives either knew that clients desired to net out futures positions across commonly owned and controlled accounts through the use of EFPs, or else failed to inquire why clients were routinely on both sides of the EFPs. Accordingly, the transactions constituted illegal “wash sales” within the meaning of Section 4c(a) of the CEA. Moreover, the order states that because the EFPs were not done in accordance with the written rules of the CME and CBOT, they were not bona fide EFPs, and, therefore, NUSA caused prices to be reported, registered, or recorded that were not true and bona fide prices, also in violation of Section 4c(a) of the CEA. The CFTC found that by accepting and transmitting EFP orders that were not executed openly and competitively pursuant to exchange rules, but in a manner that avoided market risk and price competition that legitimate, competitive trading entails, NUSA executed noncompetitive trades for customers in violation of CFTC Regulation 1.38(a). The CFTC also found that during the relevant period, NUSA failed to supervise diligently its employees’ handling of the transactions at issue and lacked adequate policies and procedures designed to detect and deter the execution of wash EFP trades, in violation of CFTC Regulation 166.3. The CFTC order required SGAS to pay a $750,000 civil monetary penalty and comply with an undertaking to improve its internal controls and procedures in order to detect and prevent the execution, clearing and reporting to an exchange of EFPs.

 

In April 2017, SGAS settled, without admitting or denying the allegations, a matter brought by the Chicago Board of Options Exchange for failing to report, or accurately report, “reportable positions” on its large option position report in violation of Exchange Rules 4.2 and 4.13. In connection with this matter, SGAS paid a fine of $100,000.

 

In April 2017, SGAS settled, without admitting or denying the findings, a matter brought by FINRA for failing to establish and maintain a supervisory system reasonably designed to ensure that customers of a recently acquired firm were sent account statements, notified of availability of statements on its customer portal, agreed to receive statements and confirmations electronically, and were sent confirmations which contained all of the required information. The settlement included payment of a fine in the amount of $100,000.

 

On September 25, 2018, the SEC issued an order against SGAS finding that the misconduct of predecessor entity NUSA allowed pre-released ADRs to be issued that were not backed by the appropriate number of ordinary shares. The SEC found that NUSA improperly provided thousands of pre-released ADRs over a more than three-year period when neither the broker nor its customers had the requisite shares. The SEC’s order finds that SG Americas violated Section 17(a)(3) of the Securities Act of 1933 and failed reasonably to supervise its securities lending desk personnel. Without admitting or denying the SEC’s findings, SG Americas agreed to return more than $480,000 of alleged ill-gotten gains plus $82,000 in prejudgment interest and a $250,000 penalty, more than $800,000 in total.

 

54

 

 

In re: Commodity Exchange, Inc., Gold Futures and Options Trading Litigation (filed March 10, 2014, and thereafter, U.S. District Court of the Southern District of New York (the “SDNY”)) are consolidated putative class actions filed by multiple individuals claiming financial injury stemming from the participation of SG (with four other financial institutions) in the process for setting the daily price of gold in London. Plaintiffs claim that the participating financial institutions manipulated the process and thereby caused them losses. SGAS is named as a defendant in four of the pending litigations. SGAS is defending against these actions.

 

In re: Treasury Securities Auction Antitrust Litigation is a consolidation of individually filed litigations alleging collusion in the market for U.S. treasuries. Plaintiffs allege that SGAS, and the other primary dealers, which are also named as defendants, used electronic chat rooms to exchange customer information, coordinate trading, and increase bid-ask spreads in the when-issued market. They further allege that chat rooms were used to rig Treasury auctions to decrease the price of Treasuries. SGAS is defending against the case.

 

The Official Committee of Unsecured Creditors of Tribune Company, et al. v. Dennis J. Fitzsimmons, et al.; Deutsche Bank Trust Company Americas, et al. v. Adaly Opportunity Fund TD Securities Inc., et al.; and Williams A. Niese, et al. v. AllianceBernstein L.P., et al. are lawsuits arising from the bankruptcy of the Tribune Company, which was the subject of a leveraged buyout in 2007. The suits generally allege that the LBO left the company overleveraged, thus leading to its bankruptcy, and seek to recover payments made to holders of Tribune shares under various federal and state law theories of liability. The Deutsche Bank Trust Company Americas, et al. v. Adaly Opportunity Fund TD Securities Inc., et al. and Williams A. Niese, et al. v. AllianceBernstein L.P., et al. lawsuits have been dismissed, but remain subject to potential appeal. SGAS is defending against the cases.

 

AC Scout Trading, LLC v. SG Americas Securities, LLC and Newedge USA, LLC is a FINRA arbitration filed by a former Newedge customer alleging claims of fraud, breach of FINRA rules, breach of contract, breach of implied covenant of good faith and fair dealing, and negligence. The allegations involve losses incurred in connection with a position in tin futures contracts traded in the London Metal Exchange (“LME”). SGAS is defending against the case.

 

Vega Opportunity Fund LLC v. Newedge USA, LLC is a FINRA arbitration filed by a former Newedge customer alleging claims of fraud, deceptive trade practices, breach of fiduciary duty, breach of contract, and violation of Illinois Securities Law. Newedge is alleged to be responsible for capital losses due to false representations of risk management by Newedge. SGAS is defending against the case.

 

Julius di Filippo and David Caron v. The Bank of Nova Scotia, et al. is a putative class action lawsuit filed in the Ontario Superior Court of Justice alleging conspiracy to manipulate the price of gold and gold-related investment instruments. SGAS is defending against the case.

 

SGAS has also been named in purported class and individual actions in connection with its role in underwriting various debt and equity securities offerings. Currently pending matters relate to the offerings of TerraForm Global; Alibaba Group Holdings Limited; Cnova N.V.; Plains All American Pipeline, L.P. and Plains GP Holdings, L.P.; and Match Group, Inc. In addition, claims against SGAS in two other matters, which relate to securities offerings of Lehman Brothers Holdings, Inc. and Bank of America Corp., have now been dismissed, but remain subject to potential appeal. Claims in all these cases are asserted under the Securities Act and/or state law against SGAS in its role as a member of the underwriting syndicate, and are based upon purported misstatements or omissions by the issuers in the offering documents. SGAS is defending against the cases.

 

SGAS, along with other financial institutions, has been named as a defendant in several putative class actions alleging violations of U.S. antitrust laws and the CEA in connection with its activities as a U.S. primary dealer, buying and selling U.S. Treasury securities. The cases have been consolidated in the U.S. District Court in Manhattan. SGAS’s time to respond to the complaints has not yet been set.

 

A portion of the Trust’s futures transactions are cleared through Deutsche Bank Securities Inc. (“DBSI”). DBSI has its main business office located at 60 Wall Street, New York, New York 10005, U.S.A., and is an indirect wholly owned subsidiary of Deutsche Bank AG which serves as one of the Trust’s prime brokers in the forward currency and swap markets. DBSI is registered with the CFTC as a futures commission merchant and is a member of the NFA in such capacity. DBSI is also a U.S.-registered broker-dealer. Deutsche Bank AG and its subsidiaries and affiliates, including DBSI (collectively, “Deutsche Bank”), are, in the ordinary course of their business, the subject of litigation, and regulatory examinations, inquiries and investigations.

 

On December 22, 2014, the CFTC issued an order filing and simultaneously settling charges against DBSI for failing to properly invest customer segregated funds, failing to prepare and file accurate financial reports, failing to maintain required books and records, and for related supervisory failures. None of the violations resulted in any customer losses. The CFTC’s order found that that, for the period June 18, 2012 through August 15, 2012, DBSI failed to accurately compute the amount of customer funds on deposit. As a result of these miscalculations, DBSI’s investment of customer funds in certain money market mutual funds during that period exceeded the 50% asset-backed concentration limit for such investments in violation of CFTC Regulation 1.25. The order also found that on at least six occasions between June 2011 and March 2013, DBSI failed to file accurate financial statements with the CFTC in a timely manner in violation of CFTC Regulation 1.10(B). According to the order, DBSI did not have automated processes in place designed to ensure accuracy of DBSI’s financial reporting. Consequently, DBSI filed six amended financial and operational combined uniform single (focus) reports as a result of the errors. The CFTC order further found that DBSI failed to create and maintain complete and systematic records, such as order tickets, for a number of block trades it executed at various times throughout October 1, 2009 and March 16, 2012 in violation of CFTC Regulation 1.35(A). The CFTC order found that each of these violations was a result of DBSI’s failure to maintain adequate controls and systems, reflecting a lack of supervision over its business as a CFTC registrant in violation of CFTC Regulation 166.3. The order recognized DBSI’s cooperation and corrective action it undertook after its deficiencies were discovered. DBSI and the CFTC have entered into a settlement agreement whereby DBSI, without admitting or denying any of the findings conclusions therein, consented to the entry of the order instituting proceedings under 6(c) and 6(d) of the CEA, to cease and desist from violations the CFTC regulations set forth in the settlement agreement, and to pay a civil monetary penalty in the amount of $3,000,000.

 

55

 

 

On May 26, 2015, the SEC issued a cease and desist order in a settled administrative proceeding against Deutsche Bank AG. The matter related to the manner in which Deutsche Bank valued “gap risk” associated with certain Leveraged Super Senior (“LSS”) synthetic positions in collateralized debt obligations (“CDOs”) during the fourth quarter of 2008 and the first quarter of 2009, which was the height of the financial crisis. Gap risk is the risk that the present value of a trade could exceed the value of posted collateral. During the two quarters at issue, Deutsche Bank did not adjust its value of the LSS trades to account for gap risk, essentially assigning a zero value for gap risk. The SEC found that although there was no standard industry model to value gap risk and the valuation of these instruments was complex, Deutsche Bank did not reasonably adjust the value of the LSS trades for gap risk during these periods, resulting in misstatements of its financial statements for the two quarters at issue. The SEC also found that Deutsche Bank failed to maintain adequate systems and controls over the valuation process. The SEC found violations of Sections 13(a) (requirement to file accurate periodic reports with the SEC), 13(b)(2)(A) (requirement to maintain accurate books and records), and 13(b)(2)(B) (requirement to maintain reasonable internal accounting controls) of the Exchange Act. Deutsche Bank paid a $55 million penalty, for which it had previously recorded a provision, and neither admitted nor denied the findings.

 

On September 30, 2015, the CFTC issued an order filing and simultaneously settling charges against Deutsche Bank AG for failing to properly report its swaps transactions from in or about January 2013 until July 2015 (the “Relevant Period”). The CFTC order also found that Deutsche Bank AG did not diligently address and correct the reporting errors until Deutsche Bank AG was notified of the CFTC’s investigation, and failed to have an adequate swaps supervisory system governing its swaps reporting requirements. The order required Deutsche Bank AG to pay a $2.5 million civil monetary penalty and comply with undertakings to improve its internal controls to ensure the accuracy and integrity of its swaps reporting. According to the CFTC order, during the Relevant Period, Deutsche Bank failed to properly report cancellations of swap transactions in all asset classes, which in the aggregate included between tens of thousands and hundreds of thousands of reporting violations and errors and omissions in its swap reporting. Deutsche Bank was aware of problems relating to its cancellation messages since its reporting obligations began on December 31, 2012, but failed to provide timely notice to its swap data repository (“SDR”) and did not diligently investigate, address and remediate the problems until it was notified of the CFTC’s Division of Enforcement’s investigation in June 2014. The CFTC further found that Deutsche Bank’s reporting failures resulted in part due to deficiencies with its swaps supervisory system. Deutsche Bank AG did not have an adequate system to supervise all activities related to compliance with the swaps reporting requirements until at least sometime between April and July of 2014 – well after its reporting obligations went into effect, according to the order.

 

DBSI has been responding to requests for information from the SEC concerning whether a former research analyst made statements inconsistent with his published research, in violation of applicable rules and regulations, and whether DBSI’s policies and procedures were adequate. On February 17, 2016, the SEC announced a settlement with the former research analyst based on a violation of Rule 501 of Regulation AC of the Exchange Act. DBSI is fully cooperating with the investigation.

 

On August 18, 2016, the CFTC filed a civil complaint in the SDNY, charging Deutsche Bank AG with failing to report any swap data for multiple asset classes for five days; submitting incomplete and untimely swap data; failing to supervise its employees responsible for swap data reporting; having an inadequate Business Continuity and Disaster Recovery Plan; and violating a prior CFTC order. As alleged in the CFTC’s complaint, on April 16, 2016, Deutsche Bank’s swap data reporting system experienced a systems outage that prevented Deutsche Bank AG from reporting any swap data for multiple asset classes for approximately five days. Deutsche Bank AG’s subsequent efforts to end the system outage repeatedly exacerbated existing reporting problems and often led to the discovery or creation of new reporting problems, many of which violate a CFTC order entered in September 2015. For example, the complaint alleges that Deutsche Bank AG’s swap data reported before and after the system outage revealed persistent problems with the integrity of certain data fields, including numerous invalid legal entity identifiers (“LEIs”). The complaint further alleges that a number of these reporting problems persist through August 18, 2016, affecting market data that is made available to the public, as well as data that is used by the CFTC to evaluate systemic risk throughout the swaps markets. The complaint also alleges that the system outage and the subsequent reporting problems transpired at least in part because Deutsche Bank AG failed to have an adequate Business Continuity and Disaster Recovery Plan and other appropriate supervisory systems in place. In addition, the CFTC and Deutsche Bank AG filed a joint motion seeking the appointment of a monitor to ensure Deutsche Bank AG’s compliance with its reporting responsibilities under the CEA and CFTC regulations. Specifically, the monitor will assess and make recommendations regarding Deutsche Bank AG’s swap data reporting activities, including, but not limited to, its policies, procedures, infrastructure, and systems. In addition, the CFTC seeks the imposition of a civil monetary penalty and a permanent injunction.

 

56

 

 

On October 12, 2016, the SEC issued a cease and desist order in a settled administrative proceeding against DBSI for its (1) failure to establish, maintain and enforce policies and procedures reasonably designed to prevent the misuse of material, nonpublic information generated by DBSI’s equity research analysts, in violation of Section 15(g) of the Exchange Act, from at least January 12, 2012 through December 2014 (2) publication of a research report that was falsely certified as accurately reflecting the lead analyst’s view regarding the covered company, in violation of Rule 501 of regulation analyst certification (“Regulation AC”), and (3) failure to preserve and furnish promptly to the SEC staff certain electronic communications relating to DBSI’s business as a broker and dealer, in violation of Section 17(A) of the Exchange Act and Rule 17A-4 thereunder. Pursuant to the order, the SEC found that as a result of DBSI’s conduct, DBSI had willfully violated Sections 15(g) and 17(a) of the Exchange Act and Rule 17A-4 thereunder and Rule 501 of Regulation AC. In connection with the settlement, DBSI was censured and ordered to pay a civil money penalty in the amount of $9,500,000.

 

On December 16, 2016, the SEC, the New York Attorney General’s office (“NYAG”) and FINRA announced settlements with DBSI relating to DBSI’s electronic order routing, its alternative trading system (“ATS” or “Dark Pool”), SuperX and related disclosures. The SEC and NYAG settlements primarily involve a first-generation order routing algorithm used by DBSI prior to 2014, while the FINRA settlement primarily involves disclosure concerning the functionality available to customers utilizing SuperX. DBSI admitted to the allegation made by the SEC and NYAG, but neither admitted nor denied FINRA’s allegations. In connection with the resolution of all three matters, DBSI agreed to pay a total of $40.3 million.

 

On February 1, 2018, the CFTC issued an order filing and settling charges against DBSI for attempted manipulation of the ISDAFIX benchmark and requiring DBSI to pay a $70 million civil monetary penalty. The order finds that over a five-year period, beginning in at least January 2007 and continuing through May 2012, DBSI made false reports and through the acts of multiple traders attempted to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix (“USD ISDAFIX”), a leading global benchmark referenced in a range of interest rate products, to benefit its derivatives positions, including positions involving cash-settled options on interest rate swaps. In addition to paying the civil monetary penalty, DBSI agreed to remedial undertakings, including maintaining systems and controls reasonably designed to prevent potential manipulation of interest rate swaps benchmarks.

 

On February 12, 2018, the SEC instituted public administrative proceedings against DBSI and its registered representative. These proceedings arise out of the failure of DBSI and its registered representative reasonably to supervise DBSI traders, and for DBSI reasonably to supervise DBSI salespeople, to prevent and detect violations of the antifraud provisions of the federal securities laws in connection with DBSI’s secondary market transactions in non-agency commercial mortgage-backed securities (“CMBS”). These transactions took place between 2001 and 2015, when traders on the DBSI CMBS Secondary Trading Desk and CMBS sales personnel made false and misleading statements to customers in an effort to increase the difference between DBSI’s purchase price and sales price and, thereby, increase DBSI’s profit. DBSI failed to establish and/or implement policies and procedures reasonably designed to prevent and detect traders and salespeople from making false and misleading statements to customers. Based on the conduct described, those CMBS salespeople and CMBS desk traders, including those traders under the representative’s direct supervision, who were involved in the conduct described above violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder. As a result of the conduct, DBSI failed reasonably to supervise the traders on the CMBS desk and the CMBS salespeople, all of whom were subject to DBSI’s supervision within the meaning of Section 15(b)(4)(E) of the Exchange Act, with a view to preventing and detecting violations of the antifraud provisions of the federal securities laws arising from the false and misleading statements. In anticipation of the administrative proceedings, DBSI and its registered representative entered into a settlement with the SEC whereby DBSI will pay to affected customers an aggregate amount of $3,729,743, representing profits that it earned on the trades in CMBS that are subject to the order and including disgorgement of $1,476,245 and prejudgment interest of $123,741. DBSI additionally paid a civil monetary penalty of $750,000 on February 16, 2018.

 

57

 

 

On March 18, 2014, a civil judgment was entered in the Middle District of Florida against DBSI, and in favor of Amegy Bank (“Amegy”). Amegy alleged that DBSI converted Amegy’s collateral when a private client, through DBSI, sold securities the client had pledged to Amegy as collateral for a loan. On August 10, 2015, the Eleventh Circuit Court of Appeals affirmed the judgment. DBSI filed a petition for re-hearing en banc on August 31, 2015. The court denied DBSI’s petition on October 20, 2015. On November 13, 2015, DBSI received a release from judgment after payment to Amegy.

 

DBSI has been named in a FINRA arbitration complaint filed by Robert Stiller, former CEO, President and Chairman of Green Mountain Coffee Roasters (“GMCR”) alleging that GMCR stock was wrongfully liquidated from his Margin Accounts. Stiller makes several claims including breach of contract and duty of good faith and seeks monetary damages of no less than $300 million. On January 14, 2016, DBSI settled the Stiller arbitration for $7,250,000. DBSI has also been named in a similar FINRA arbitration complaint filed by William Davis, former member of the Board of Directors of GMCR. Davis also alleged that GMCR stock was wrongfully liquidated from his Margin Accounts, asserted similar claims and sought monetary damages of no less than $38 million. On November 22, 2016, DBSI settled the Davis arbitration.

 

On January 12, 2018, the Fire & Police Pension Association of Colorado filed a putative class action lawsuit in the SDNY relating to the Canadian Dealer Offered Rate (“CDOR”), a Canadian dollar-denominated interest rate benchmark, against numerous financial institutions including DBSI, Deutsche Bank AG, and affiliate Deutsche Bank Securities Limited. The complaint alleges that the defendants, members of the panel of banks on whose submissions CDOR was calculated and their affiliates, suppressed their CDOR submissions from at latest August 9, 2007 through at earliest June 30, 2014 in order to benefit their positions in CDOR-referencing financial instruments. The complaint asserts claims under the Sherman Act, Commodity Exchange Act, and the Racketeer Influenced and Corrupt Organizations Act, as well as state common law contract and unjust enrichment claims.

 

DBSI has been named as a respondent in 14 arbitrations filed by investors in the Glanmore Property Fund (“Glanmore”), a managed fund that invests in high-yield U.K. commercial real estate, alleging that DBSI misrepresented the nature and risks of Glanmore when shares were sold, and further failed to conduct adequate due diligence concerning the valuation of the fund’s portfolio. DBSI acquired Glanmore’s fund manager in 2006. All of the arbitrations have been resolved.

 

Deutsche Bank has been named as defendant in numerous civil litigations in various roles as issuer or underwriter in residential mortgage backed securities (“RMBS”) offerings. These cases include purported class action suits, actions by individual purchasers of securities, and actions by insurance companies that guaranteed payments of principal and interest for particular tranches of securities offerings. Although the allegations vary by lawsuit, these cases generally allege that the RMBS offering documents contained material misrepresentations and omissions, including with regard to the underwriting standards pursuant to which the underlying mortgage loans were issued, or assert that various representations or warranties relating to the loans were breached at the time of origination.

 

Deutsche Bank has been named as a defendant in a civil action brought by the Commonwealth of Virginia asserting claims for fraud and breach of the Virginia Fraud Against Taxpayers Act as a result of purchases by the Virginia Retirement System (“VRS”) of RMBS issued or underwritten by Deutsche Bank. This matter was settled in the fourth quarter of 2015.

 

Deutsche Bank is a defendant in putative class actions relating to its role, along with other financial institutions, as underwriter of RMBS issued by IndyMac MBS, Inc. On September 8, 2014, Deutsche Bank, certain other financial institution defendants and lead plaintiffs executed a stipulation to settle the action. On September 30, 2014, the court issued an order certifying the class for settlement and approving notice to the class. On February 23, 2015, the court issued an order approving the settlement and dismissing the action. Under the settlement, all settling defendants paid a total of $340 million. On March 25, 2015, Pacific Investment Management Company, LLC filed a notice of appeal of the court’s February 23, 2015 order, but withdrew the appeal on June 11, 2015.

 

Deutsche Bank is a defendant in putative class action relating to its role, along with other financial institutions, as underwriter of RMBS issued by Novastar Mortgage Corporation. No specific damages are alleged in the complaint. The lawsuit was brought by plaintiffs representing a class of investors who purchased certificates in those offerings. The parties reached a settlement-in-principle to resolve the matter for a total of $165 million, a portion of which will be paid by Deutsche Bank. The settlement is subject to final court approval. On August 30, 2017, FHFA/Freddie Mac filed an objection to the settlement.

 

58

 

 

On April 17, 2013, Bank of America announced that it had reached a settlement in principle to dismiss various class action claims, which include the class action claims brought against underwriters, including Deutsche Bank, relating to RMBS issued by Countrywide Financial Corporation. The settlement in principle which is subject to final court approval does not require any payment by underwriters, including Deutsche Bank.

 

On December 19, 2014, a stipulation was filed dismissing with prejudice claims brought against Deutsche Bank by Massachusetts Mutual Life Insurance DBSI relating to two offerings issued by entities affiliated with Countrywide Financial Corporation (“Countrywide”). Deutsche Bank’s understanding is that the dismissal with respect to these offerings was pursuant to a confidential settlement agreement to which Deutsche Bank was not a party. Deutsche Bank was a defendant in separate litigation brought by Mass Mutual Life Insurance Company relating to certificates not issued by entities affiliated with Countrywide. On July 22, 2015, Deutsche Bank and Mass Mutual Life Insurance Company entered into a settlement agreement to resolve all pending claims against Deutsche Bank. On August 11, 2015, Deutsche Bank paid the settlement amount, and on August 15, 2015, the court dismissed the actions.

 

Deutsche Bank currently is a defendant in various non-class action lawsuits and arbitrations by alleged purchasers of, and counterparties involved in transactions relating to, RMBS, and their affiliates, including: (1) the Federal Deposit Insurance Corporation (“FDIC”) as receiver for: (a) Colonial Bank (alleging no less than $189 million in damages in the aggregate against all defendants), (b) Guaranty Bank (alleging no less than $901 million in damages in the aggregate against all defendants), and (c) Citizens National Bank and Strategic Capital Bank (alleging no less than $66 million in damages in the aggregate against all defendants); (2) the Federal Home Loan Bank of Boston; (3) Phoenix Light SF Limited (as purported assignee of claims of special purpose vehicles created and/or managed by former WestLB AG); and (4) Royal Park Investments (as purported assignee of claims of a special-purpose vehicle created to acquire certain assets of Fortis Bank. Unless otherwise indicated, the complaints in these matters did not specify the damages sought.

 

On or about June 6, 2016, the actions brought by the FDIC, as receiver for Franklin Bank, Guaranty Bank and Colonial Bank, against Deutsche Bank in connection with its role as underwriter of RMBS issued by entities affiliated with Countrywide were dismissed in connection with a settlement reached between the FDIC and Deutsche Bank and other financial institutions who also were sued as underwriters.

 

Deutsche Bank remains as a defendant in three actions brought by the FDIC relating to other RMBS offerings. In separate actions brought by the FDIC as receiver for Colonial Bank and Guaranty Bank, the appellate courts have reinstated claims previously dismissed on statute of limitations grounds. In the case concerning Guaranty Bank, petitions for rehearing and certiorari to the U.S. Supreme Court were denied, fact discovery is almost complete and expert work is ongoing. Also, on September 14, 2017, the court granted in part Deutsche Bank’s motion for summary judgment regarding the proper method of calculating pre-judgment interest. In the case concerning Colonial Bank, petitions for rehearing and certiorari to the U.S. Supreme Court were denied, and on June 21, 2017, the FDIC filed a second amended complaint, which defendants moved to dismiss on September 7, 2017. On June 21, 2017, the FDIC filed a second amended complaint. In the case concerning Citizens National Bank and Strategic Capital Bank, petitions for rehearing and certiorari to the U.S. Supreme Court were denied, and on July 31, 2017, the FDIC filed a second amended complaint, which defendants moved to dismiss on September 14, 2017.

 

On November 3, 2016, Deutsche Bank reached a settlement to resolve claims brought by the Federal Home Loan Bank of San Francisco on two resecuritizations of RMBS certificates for an amount not material to Deutsche Bank. Following this settlement and two other previous partial settlements of claims, Deutsche Bank remained a defendant with respect to one RMBS offering, for which Deutsche Bank, as an underwriter, was provided contractual indemnification. On January 23, 2017, a settlement agreement was executed to resolve the claims relating to that RMBS offering, and the matter has been dismissed. On March 27, 2017, plaintiff filed a notice of dismissal on its remaining claims.

 

Deutsche Bank and Monarch Alternative Capital LP and certain of its advisory clients and managed investments vehicles reached an agreement on December 18, 2014 to propose a settlement agreement to HSBC to resolve litigation relating to three RMBS trusts. After receiving approval from a majority of certificate holders, on July 13, 2015, HSBC executed the settlement agreements, and on July 27, 2015, the actions were dismissed. A substantial portion of the settlement funds paid by Deutsche Bank was reimbursed by a non-party to the litigation. The net economic impact of the settlements was not material to Deutsche Bank.

 

59

 

 

Residential Funding Company has brought a repurchase action against Deutsche Bank for breaches of representations and warranties on loans sold to Residential Funding Company and for indemnification for losses incurred as a result of RMBS-related claims and actions asserted against Residential Funding Company. The complaint did not specify the amount of damages sought. On June 20, 2016, the parties executed a confidential settlement agreement, and on June 24, 2016, the court dismissed the case with prejudice.

 

Deutsche Bank was a defendant in a civil action brought by Texas County & District Retirement System alleging fraud and other common law claims in connection with Texas County & District Retirement System’s purchase of four RMBS bonds underwritten by Deutsche Bank. On November 18, 2015, Deutsche Bank and Texas County & District Retirement System reached an agreement to settle the latter’s claims against Deutsche Bank. On December 3, 2015, the district court entered an order dismissing the action with prejudice.

 

Deutsche Bank was named as a defendant in a civil action brought by the Charles Schwab Corporation seeking rescission of its purchase of a single Countrywide-issued RMBS certificate. In the fourth quarter of 2015, Bank of America, which indemnified Deutsche Bank in the case, reached an agreement to settle the action with respect to the single certificate at issue for Deutsche Bank. On March 16, 2016, the court finalized the dismissal with prejudice of Deutsche Bank Securities Inc. as a defendant.

 

Deutsche Bank was named as a defendant in a FINRA arbitration brought by the Knights of Columbus (“Knights”) alleging fraud, negligence, violation of state securities law, and violations of industry rules and practice in connection with six third-party offerings underwritten by Deutsche Bank. On February 22, 2016, Deutsche Bank and Knights executed an agreement to settle the matter.

 

On February 18, 2016, Deutsche Bank and Amherst Advisory & Management LLC (“Amherst”) executed settlement agreements to resolve breach of contract actions relating to five RMBS trusts. On June 30, 2016, the parties executed settlement agreements, amending and restating the agreements the parties signed on February 18, 2016. Following an August 2016 vote by the certificate holders in favor of the settlement, the trustee accepted the settlement agreements and dismissed the actions. On October 17, 2016, the parties filed stipulations of discontinuance with prejudice, which were so-ordered by the court on October 18 and October 19, 2016, thereby resolving the five actions. A portion of the settlement funds paid by Deutsche Bank was reimbursed by a non-party to the litigations.

 

On February 3, 2016, Lehman Brothers Holding, Inc. instituted an adversary proceeding in U.S. Bankruptcy Court for the Southern District of New York against, among others, MortgageIT, Inc. (“MortgageIT”) and Deutsche Bank AG, as alleged successor to MortgageIT, asserting breaches of representations and warranties set forth in certain 2003 and 2004 loan purchase agreements concerning 63 mortgage loans that MortgageIT sold to Lehman, which Lehman in turn sold to the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). The complaint seeks indemnification for losses incurred by Lehman in connection with settlements entered into with Fannie Mae and Freddie Mac as part of the Lehman bankruptcy proceedings to resolve claims concerning those loans. On January 31, 2018, the parties reached a settlement to resolve the litigation. On February 6, 2018, the court ordered a voluntary stipulation of dismissal.

 

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against dozens of entities, including Deutsche Bank, alleging a variety of claims under the Massachusetts Uniform Securities Act (“MUSA”) and various other Massachusetts statutory and common laws. The complaint did not specify the amount of damages sought. On October 16, 2015, the parties signed a settlement agreement to resolve the matter. On October 27, 2015, the Federal Home Loan Bank of Boston filed a stipulation of voluntary dismissal with prejudice.

 

On September 22, 2015, Deutsche Bank and the Federal Home Loan Bank of Des Moines, as successor to the Federal Home Loan Bank of Seattle, executed a settlement agreement resolving all claims related to the single bond at issue. On October 12, 2015, the court entered the parties’ stipulation dismissing the matter.

 

Pursuant to a confidential settlement agreement dated January 15, 2015, John Hancock Life Insurance Company (U.S.A.) and affiliates agreed to dismiss with prejudice the action they had filed against Deutsche Bank.

 

On October 1, 2014, the district court entered an order dismissing with prejudice claims brought against Deutsche Bank by Triaxx Prime CDO 2006-1 Ltd., Triaxx Prime CDO 2006-1 LLC, Triaxx Prime CDO 2006-2 Ltd., Triaxx Prime CDO 2006-2 LLC, Triaxx Prime CDO 2007-1 Ltd. and Triaxx Prime CDO 2007-1 LLC. Deutsche Bank’s understanding is that the dismissal was pursuant to a confidential settlement between the plaintiffs and certain defendants affiliated with Countrywide Securities Corporation. Deutsche Bank did not contribute to the settlement.

 

Deutsche Bank is a defendant in an action brought by Royal Park Investments (as purported assignee of claims of a special-purpose vehicle created to acquire certain assets of Fortis Bank) alleging common law claims related to the purchase of RMBS. The complaint did not specify the amount of damages sought. On April 17, 2017, the court dismissed the complaint, and on February 13, 2018, Royal Park filed its appeal.

 

60

 

 

In June 2014, HSBC, as trustee, brought an action in New York state court against Deutsche Bank to revive a prior action, alleging that Deutsche Bank failed to repurchase mortgage loans in the ACE Securities Corp. 2006-SL2 RMBS offering. The revival action was stayed during the pendency of an appeal of the dismissal of a separate action wherein HSBC, as trustee, brought an action against Deutsche Bank alleging breaches of representations and warranties made by Deutsche Bank concerning the mortgage loans in the same offering. On March 29, 2016, the court dismissed the revival action, and on April 29, 2016, plaintiff filed a notice of appeal. The plaintiff’s appeal has been adjourned in light of a case pending in the New York Court of Appeals involving similar legal issues.

 

Deutsche Bank is a defendant in eight separate civil lawsuits brought by various groups of investors concerning its role as trustee of certain RMBS trusts. The actions generally allege claims for breach of contract, breach of fiduciary duty, breach of the duty to avoid conflicts of interest, negligence and/or violations of the Trust Indenture Act of 1939, based on the trustees’ alleged failure to perform adequately certain obligations and/or duties as trustee for the trusts. The eight actions include two putative class actions brought by a group of investors, including funds managed by BlackRock Advisors, LLC, PIMCO-Advisors, L.P., and others (the “BlackRock Class Actions”), one putative class action brought by Royal Park Investments SA/NV, and five individual lawsuits. One of the BlackRock Class Actions is pending in the SDNY in relation to 62 trusts, which allegedly suffered total realized collateral losses of $9.8 billion, although the complaint does not specify a damage amount. On January 23, 2017, the SDNY granted in part and denied in part the trustees’ motion to dismiss. At a February 2, 2017 conference, the SDNY dismissed plaintiffs’ representations and warranties claims as to 21 trusts whose originators or sponsors had entered bankruptcy. The only claims that remain are for violation of the Trust Indenture Act of 1939 as to some trusts, and breach of contract. On March 27, 2017, the trustees filed an answer to the complaint. On January 26, 2018, BlackRock filed a motion for class certification. Discovery is ongoing. The second BlackRock Class Action is pending in the Superior Court of California in relation to 465 trusts, which allegedly suffered total realized collateral losses of $75.7 billion, although the complaint does not specify a damage amount. The trustees filed a demurrer seeking to dismiss the tort claims asserted by plaintiffs and a motion to strike certain elements of the breach of contract claim, and on October 18, 2016, the court sustained the trustees’ demurrer, dismissing the tort claims, but denied the motion to strike. On December 19, 2016, the trustees filed an answer to the complaint. Discovery is ongoing in that action. The putative class action brought by Royal Park Investments SA/NV is pending in the SDNY and concerns ten trusts, which allegedly suffered total realized collateral losses of more than $3.1 billion, although the complaint does not specify a damage amount. Royal Park filed a renewed motion for class certification on May 1, 2017, and the motion is pending. Discovery is ongoing. On August 4, 2017, Royal Park filed a separate, additional class action complaint against the trustee in the same court asserting claims for breach of contract, unjust enrichment, conversion, breach of trust, equitable accounting and declaratory and injunctive relief arising out of the payment from trust funds of the trustee’s legal fees and expenses in the other, ongoing Royal Park litigation. On October 10, 2017, the trustee filed a motion to dismiss that complaint.

 

The four individual lawsuits include actions by (a) the National Credit Union Administration Board (“NCUA”), as an investor in 97 trusts, which allegedly suffered total realized collateral losses of U.S.$ 17.2 billion, although the complaint does not specify a damage amount; (b) certain CDOs (collectively, “Phoenix Light”) that hold RMBS certificates issued by 43 RMBS trusts, and seeking “hundreds of millions of dollars in damages”; (c) Commerzbank AG, as an investor in 50 RMBS trusts, seeking recovery for alleged “hundreds of millions of dollars in losses;” and (d) IKB International, S.A. in Liquidation and IKB Deutsche Industriebank AG (collectively, “IKB”), as an investor in 30 RMBS trusts, seeking more than $268 million of damages. In the NCUA case, the trustee’s motion to dismiss for failure to state a claim is pending and discovery is stayed. In the Phoenix Light case, the plaintiffs filed an amended complaint on September 27, 2017, and the trustees filed an answer to the complaint on November 30, 2017, and the trustees filed an answer to the complaint on January 29, 2018; discovery is ongoing. In the Commerzbank case, the plaintiff filed an amended complaint on November 30, 2017, and the trustees filed an answer to the complaint on January 29, 2018; discovery is ongoing. In the IKB case, the court heard oral argument on the trustee’s motion to dismiss on May 3, 2017, but has not yet issued a decision. On June 20, 2017, the IKB plaintiffs stipulated to the dismissal with prejudice of all claims asserted against Deutsche Bank concerning four trusts. Discovery is ongoing.

 

On December 20, 2013, Deutsche Bank announced that it reached an agreement to resolve its residential mortgage-backed securities litigation with the Federal Housing Finance Agency (“FHFA”) as conservator for Fannie Mae and Freddie Mac. As part of the agreement, Deutsche Bank paid $1.9 billion of which DBSI paid $887 million. The settlement included dismissal of claims brought against Deutsche Bank in the SDNY relating to approximately $14.3 billion of RMBS purchased by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (the “GSEs”) that were issued, sponsored and/or underwritten by Deutsche Bank and an agreement to resolve claims brought by or at the direction of the FHFA and/or the GSEs seeking the repurchase of mortgage loans contained in RMBS purchased by the GSEs. The settlement did not resolve two matters brought by the FHFA against Deutsche Bank as underwriter of RMBS issued by Countrywide and Societe Generale and/or their affiliates. As underwriter, Deutsche Bank received a customary agreement of indemnity from Countrywide and Societe Generale and/or their affiliates. On February 27, 2014, the FHFA and Societe Generale announced that they reached a settlement of the action concerning RMBS issued by Societe Generale. The settlement included a release of the claims asserted against all defendants in that action, including Deutsche Bank. The settlement did not require any payment by Deutsche Bank.

 

61

 

 

On July 16, 2012, the Fourth Judicial District for the State of Minnesota dismissed Deutsche Bank from a litigation brought by Moneygram Payment Systems, Inc. (“Moneygram”) relating to investments in RMBS, collateralized debt obligations and credit-linked notes. The court further denied Moneygram’s motion for reconsideration, and Moneygram has filed an appeal. On January 11, 2013, Moneygram filed a summons with notice in the Civil Branch of the Supreme Court of the State of New York (the “N.Y. Supreme Court”) seeking to assert claims similar to those dismissed in Minnesota. On June 17, 2013, Moneygram filed an amended summons with notice and complaint in the N.Y. Supreme Court. On July 22, 2013, the Minnesota Court of Appeals affirmed the dismissal of Deutsche Bank AG, but reversed the dismissal of DBSI. On October 15, 2013, the Minnesota Supreme Court denied DBSI’s petition for review of the Minnesota Court of Appeal’s decision reversing the district court’s dismissal of claims against DBSI. The Court of Appeals issued its judgment on October 28, 2013. On January 31, 2014, DBSI filed a petition for writ of certiorari with the U.S. Supreme Court to seek review of Minnesota Court of Appeals decision finding specific personal jurisdiction over DBSI.

 

Pursuant to terms of settlement agreements, litigations filed by Allstate Insurance Company, Cambridge Place Investments Management Inc., Dexia SA/NV, Stichting Pensionfonds ABP, West Virginia Investment Management Board, The Union Central Life Insurance Company, Teachers Insurance and Annuity Association of America and the Western and Southern Life Insurance Co. were dismissed. The financial terms of each of these settlements are confidential and not material to DBSI.

 

From 2005 through 2008, as part of Deutsche Bank’s U.S. residential mortgage loan business, Deutsche Bank sold approximately $84 billion of private label securities and $71 billion of loans through whole loan sales, including to U.S. government-sponsored entities such as the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. Deutsche Bank has been presented with demands to repurchase loans from or to indemnify purchasers, investors or financial insurers with respect to losses allegedly caused by material breaches of representations and warranties. Deutsche Bank’s general practice is to process valid repurchase demands that are presented in compliance with contractual rights. As of September 30, 2014, Deutsche Bank has approximately $4.5 billion of outstanding mortgage repurchase demands (based on original principal balance of the loans). These demands consist primarily of demands made in respect of private label securitizations by the trustees or servicers thereof. Against these outstanding demands, Deutsche Bank recorded provisions of $514 million as of September 30, 2014. As of September 30, 2014, Deutsche Bank has completed repurchases, obtained agreements to rescind and otherwise settled claims on loans with an original principal balance of approximately $5.0 billion. In connection with those repurchases, agreements and settlements, Deutsche Bank has obtained releases for potential claims on approximately $66.0 billion of loans sold by Deutsche Bank as described above.

 

On November 17, 2014, pursuant to confidential settlement agreements executed on November 6, 2014, Assured Guaranty Municipal Corporation dismissed with prejudice the action it had filed against Deutsche Bank and Deutsche Bank dismissed with prejudice the third-party claims it had filed in that action against Greenpoint Mortgage Funding, Inc.

 

Deutsche Bank, along with certain affiliates, have received subpoenas and requests for information from certain regulators and government entities, including members of the Residential Mortgage-Backed Securities Working Group of the U.S. Financial Fraud Enforcement Task Force, concerning its activities regarding the origination, purchase, securitization, sale, valuation and/or trading of mortgage loans, RMBS, CMBS, CDOs, other asset-backed securities and credit derivatives. Deutsche Bank is cooperating fully in response to those subpoenas and requests for information. On January 17, 2017, Deutsche Bank executed a settlement with the U.S. Department of Justice (the “DOJ”) to resolve potential claims related to its RMBS business conducted from 2005 to 2007. The settlement became final and was announced by the DOJ on January 17, 2017. Under the settlement, Deutsche Bank paid a civil monetary penalty of $3.1 billion and agreed to provide $4.1 billion in consumer relief.

 

In September 2016, Deutsche Bank received administrative subpoenas from the Maryland Attorney General seeking information concerning Deutsche Bank’s RMBS and CDO businesses from 2002 to 2009. On June 1, 2017, Deutsche Bank and the Maryland Attorney General reached a settlement to resolve the matter for $15 million in cash and $80 million in consumer relief (to be allocated from the overall $4.1 billion consumer relief obligation agreed to as part of Deutsche Bank’s settlement with the DOJ).

 

62

 

 

Deutsche Bank AG and DBSI, including a division of the DBSI, have been named as defendants in twenty-three actions, including two putative class actions, asserting various claims under the federal securities laws and state common law arising out of the sale of auction rate securities (“ARS”). All of those actions have been resolved or dismissed with prejudice.

 

Deutsche Bank AG and certain of its affiliates and officers, including DBSI, were the subject of a consolidated putative class action, filed in the SDNY, asserting claims under the federal securities laws on behalf of persons who purchased certain trust preferred securities issued by Deutsche Bank AG and its affiliates between October 2006 and May 2008. In a series of opinions, the court dismissed all claims as to four of the six offerings at issue, but allowed certain alleged omissions claims relating to the November 2007 and February 2008 offerings to proceed. On November 17, 2016, plaintiffs moved for class certification as to the November 2007 offering. On January 20, 2017, plaintiffs amended their motion for class certification to include the February 2008 offering and seek to add an additional individual as a proposed class representative. On February 10, 2017, the SDNY (i) ordered that plaintiffs on the November 2007 offering provide proof that they either sold at a loss or held to redemption, and otherwise stayed all proceedings with respect to the November 2007 offering, and (ii) stayed all proceedings with respect to the February 2008 offering pending a decision by the Supreme Court of the United States in California Public Employees’ Retirement System v. ANZ Securities in which the Supreme Court is expected to consider whether the filing of a putative class action serves to toll the three-year time limitation in Section 13 of the Securities Act with respect to the claims of putative class members. On June 26, 2017, the Supreme Court issued its opinion, holding that the three year provision in Section 13 is a statute of repose and is not subject to equitable tolling. On October 16, 2017, the court struck plaintiffs’ motion for class action certification, holding that claims by the additional individual proposed as a class representative were barred by the statute of repose. The court also ruled that the original plaintiffs had standing to prosecute claims on both the November 2007 and February 2008 offerings. Class action certification and merits discovery is ongoing. On February 21, 2018, defendants moved for an order denying class certification as to both offerings.

 

On December 8, 2014, the DOJ filed a civil complaint against, among others, DBSI and Deutsche Bank, alleging that Deutsche Bank owes more than $190 million in taxes, penalties, and interest relating to two transactions that occurred between March and May 2000. The DOJ’s case arises out of Deutsche Bank’s March 2000 acquisition of Charter Corp. (“Charter”) and its subsequent sale in May 2000 of Charter to an unrelated entity called BMY Statutory Trust. Charter’s primary asset, both at the time of purchase by Deutsche Bank and sale to BMY Statutory Trust, was Meyers Squibb Company (“BMY”) stock. When the BMY stock was sold by the BMY Statutory Trust, the BMY Statutory Trust offset its gain with a loss from an unrelated transaction. The IRS subsequently disallowed the loss on audit exposing the BMY gain to taxation. The IRS assessed additional tax, penalties and interest against the BMY Statutory Trust, which were not paid. Relying on certain theories, including fraudulent conveyance, the DOJ sought to recoup from Deutsche Bank the taxes, plus penalties and interest, owed by BMY Statutory Trust. Deutsche Bank and the DOJ agreed to a final settlement of the case, and the court dismissed the case with prejudice on January 4, 2017. Under the terms of the settlement, Deutsche Bank paid $95 million.

 

On July 1, 2013, the European Commission (the “EC”) issued a Statement of Objections (the “SO”) against Deutsche Bank, including DBSI, Markit Group Limited (“Markit”), ISDA, and twelve other banks alleging anti-competitive conduct under Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) and Article 53 of the European Economic Area Agreement (the “EEA Agreement”). The SO sets forth preliminary conclusions of the EC that (i) attempts by certain entities to engage in exchange trading of unfunded credit derivatives were foreclosed by improper collective action in the period from 2006 through 2009, and (ii) the conduct of Markit, ISDA, Deutsche Bank and the twelve other banks constituted a single and continuous infringement of Article 101 of the TFEU and Article 53 of the EEA Agreement. On December 4, 2015, the EC announced the closure without action of its investigation of Deutsche Bank and the twelve other banks. On July 20, 2016, the EC settled its investigation against Markit and ISDA.

 

In addition, a multi-district civil class action is currently pending in the SDNY against Deutsche Bank, including DBSI, and numerous other CDS dealer banks, as well as Markit and ISDA. Plaintiffs filed a second consolidated amended class action complaint on April 11, 2014 alleging that the banks conspired with Markit and ISDA to prevent the establishment of exchange traded CDS, with the effect of raising prices for OTC CDS transactions. Plaintiffs seek to represent a class of individuals and entities located in the United States or abroad who, during a period from January 1, 2008 through December 31, 2013, directly purchased CDS from or directly sold CDS to the dealer defendants in the United States. On September 30, 2015, Deutsche Bank executed a settlement agreement to resolve the matter for $120 million, which was approved by the court on April 15, 2016.

 

63

 

 

Deutsche Bank has received requests for information from certain regulatory and law enforcement agencies globally who are investigating trading in, and various other aspects of, the foreign exchange market. Deutsche Bank is cooperating with these investigations. Relatedly, Deutsche Bank has conducted its own internal global review of foreign exchange trading and other aspects of its foreign exchange business.

 

On October 19, 2016, the CFTC, Division of Enforcement issued a letter (“CFTC Letter”) notifying Deutsche Bank that the CFTC “is not taking any further action at this time and has closed the investigation of Deutsche Bank regarding foreign exchange. As is customary, the CFTC Letter states that the CFTC “maintains the discretion to decide to reopen the investigation at any time in the future.” The CFTC Letter has no binding impact on other regulatory and law enforcement agency investigations regarding Deutsche Bank’s foreign exchange trading and practices, which remain pending.

 

On December 7, 2016, it was announced that Deutsche Bank has reached an agreement with CADE, the Brazilian antitrust enforcement agency, to settle an investigation into conduct in the foreign exchange market by a former Brazil-based Deutsche Bank trader. As part of that settlement, Deutsche Bank paid a fine of BRL 51 million and agreed to continue to comply with CADE’s administrative process until it is concluded. This resolves CADE’s administrative process as it relates to Deutsche Bank, subject to Deutsche Bank’s continued compliance with the settlement terms.

 

On February 13, 2017, the DOJ, Criminal Division, Fraud Section, issued a letter (“DOJ Letter”) notifying Deutsche Bank that the DOJ has closed its criminal inquiry “concerning possible violations of federal criminal law in connection with the foreign exchange markets.” As is customary, the DOJ Letter states that the DOJ may reopen its inquiry if it obtains additional information or evidence regarding the inquiry. The DOJ Letter has no binding impact on other regulatory and law enforcement agency investigations regarding Deutsche Bank’s foreign exchange trading and practices, which remain pending.

 

On April 20, 2017, it was announced that Deutsche Bank AG, DB USA Corporation and Deutsche Bank AG New York Branch reached an agreement with the Board of Governors of the Federal Reserve System to settle an investigation into Deutsche Bank’s foreign exchange trading and practices. Under the terms of the settlement, Deutsche Bank entered into a cease-and-desist order, and agreed to pay a civil monetary penalty of $137 million. In addition, the Fed ordered Deutsche Bank to “continue to implement additional improvements in its oversight, internal controls, compliance, risk management and audit programs” for its foreign exchange business and other similar products, and to periodically report to the Fed on its progress.

 

Additionally, there are currently four U.S. putative class actions pending against Deutsche Bank. The first pending action is a consolidated action brought on behalf of a putative class of over-the-counter traders and a putative class of central-exchange traders, who are domiciled in or traded in the United States or its territories, and alleges illegal agreements to restrain competition with respect to and to manipulate both benchmark rates and spot rates, particularly the spreads quoted on those spot rates; the complaint further alleges that those supposed conspiracies, in turn, resulted in artificial prices on centralized exchanges for foreign exchange futures and options. On September 29, 2017, plaintiffs filed a motion seeking preliminary approval of a settlement with Deutsche Bank in the amount of $190 million, which the court preliminarily approved on the same day. A final fairness hearing for all settlements in this action, including Deutsche Bank’s, is currently scheduled for May 23, 2018. A second action tracks the allegations in the consolidated action and asserts that such purported conduct gave rise to, and resulted in a breach of defendants’ fiduciary duties under the U.S. Employee Retirement Income Security Act of 1947, as amended (“ERISA”). On August 24, 2016, the court granted defendants’ motion to dismiss. Plaintiffs in that action have filed a notice of appeal in the U.S. Court of Appeals for the Second Circuit, which is pending. The third putative class action was filed in the same court on December 21, 2015, by Axiom Investment Advisors, LLC alleging that Deutsche Bank rejected FX orders placed over electronic trading platforms through the application of a function referred to as “Last Look” and that these orders were later filled at prices less favorable to putative class members. Plaintiffs have asserted claims for breach of contract, quasi-contractual claims, and claims under New York statutory law. On February 13, 2017, Deutsche Bank’s motion to dismiss was granted in part and denied in part. Plaintiffs filed a motion for class certification on January 15, 2018, which Deutsche Bank will oppose. This matter remains pending. The fourth putative class action (the “Indirect Purchasers” action), which was filed on September 26, 2016, amended on March 24, 2017, and later consolidated with a similar action that was filed on April 28, 2017, tracks the allegations in the consolidated action and asserts that such purported conduct injured “indirect purchasers” of FX instruments. These claims are brought pursuant to the Sherman Act and various states’ consumer protection statutes. Deutsche Bank’s motion to dismiss this action is pending. Discovery has not yet commenced in the Indirect Purchasers action.

 

64

 

 

Deutsche Bank also has been named as a defendant in multiple putative class actions brought in the SDNY alleging antitrust and CEA claims relating to the alleged manipulation of foreign exchange rates. The complaints in the class actions do not specify the damages sought. On January 28, 2015, the federal judge overseeing the class actions granted the motion to dismiss with prejudice in two actions involving non-U.S. plaintiffs while denying the motion to dismiss in one action involving U.S. plaintiffs then pending. Additional actions have been filed since the judge’s January 28, 2015 order. There are now four actions pending. The pending consolidated action is brought on behalf of a putative class of over-the-counter traders and a putative class of central exchange traders, who are domiciled in or traded in the United States or its territories, and alleges illegal agreements to restrain competition with respect to and to manipulate both benchmark rates and spot rates, particularly the spreads quoted on those spot rates; the complaint further alleges that those supposed conspiracies, in turn, resulted in artificial prices on centralized exchanges for foreign exchange futures and options. A second action tracks the allegations in the consolidated action and asserts that such purported conduct gave rise to, and resulted in a breach of, defendants’ fiduciary duties under ERISA. The third putative class action was filed in the same court on December 21, 2015, by Axiom Investment Advisors, LLC alleging that Deutsche Bank rejected FX orders placed over electronic trading platforms through the application of a function referred to as “Last Look” and that these orders were later filled at prices less favorable to putative class members. Plaintiff has asserted claims for breach of contract, quasi-contractual claims, and claims under New York statutory law. Filed on September 26, 2016, amended on March 24, 2017, and later consolidated with a similar action that was filed on April 28, 2017, the fourth putative class action (the “Indirect Purchasers” action) tracks the allegations in the consolidated action and asserts that such purported conduct injured “indirect purchasers” of FX instruments. These claims are brought pursuant to the Sherman Act and various states’ consumer protection statutes.

 

On August 24, 2016, the SDNY granted defendants’ motion to dismiss the ERISA action. Plaintiffs in that action filed an appellate brief in the United States Court of Appeals for the Second Circuit on January 9, 2017. On February 13, 2017, the SDNY granted in part and denied in part Deutsche Bank’s motion to dismiss the Last Look action. Plaintiffs in the Indirect Purchasers action filed an amended complaint on March 24, 2017. Deutsche Bank intends to move to dismiss this action. Discovery has commenced in the consolidated and Last Look actions. Discovery has not yet commenced in the Indirect Purchasers actions.

 

Deutsche Bank has also been named as a defendant in two Canadian class proceedings brought in the provinces of Ontario and Quebec. Filed on September 10, 2015, these class actions assert factual allegations similar to those made in the consolidated action in the United States and seek damages pursuant to the Canadian Competition Act as well as other causes of action.

 

On September 12, 2010, Deutsche Bank announced the decision to make a voluntary takeover offer for the acquisition of all shares in Deutsche Postbank AG. On October 7, 2010, Deutsche Bank AG published the official offer document. In its takeover offer, Deutsche Bank offered Postbank shareholders consideration of € 25 for each Postbank share. The takeover offer was accepted for a total of approximately 48.2 million Postbank shares.

 

In November 2010, a former shareholder of Postbank, Effecten-Spiegel AG, which had accepted the takeover offer, brought a claim against Deutsche Bank alleging that the offer price was too low and was not determined in accordance with the applicable law of the Federal Republic of Germany. The plaintiff alleges that Deutsche Bank had been obliged to make a mandatory takeover offer for all shares in Deutsche Postbank AG, at the latest, in 2009. The plaintiff avers that, at the latest in 2009, the voting rights of Deutsche Post AG in Deutsche Postbank AG had to be attributed to Deutsche Bank AG pursuant to Section 30 of the German Takeover Act. Based thereon, the plaintiff alleges that the consideration offered by Deutsche Bank AG for the shares in Deutsche Postbank AG in the 2010 voluntary takeover offer needed to be raised to € 57.25 per share.

 

The Cologne District Court dismissed the claim in 2011 and the Cologne appellate court dismissed the appeal in 2012. The Federal Court set aside the Cologne appellate court’s judgment and referred the case back to the appellate court. In its judgment, the Federal Court stated that the appellate court had not sufficiently considered the plaintiff’s allegation that Deutsche Bank AG and Deutsche Post AG “acted in concert” in 2009.

 

Starting in 2014, additional former shareholders of Postbank, who accepted the 2010 tender offer, brought similar claims as Effecten-Spiegel AG against Deutsche Bank which are pending with the Cologne District Court and the Higher Regional Court of Cologne, respectively. On October 20. 2017, the Cologne District Court handed down a decision granting the claims in a total of 14 cases which were combined in one proceeding. The Cologne District Court took the view that Deutsche Bank was obliged to make a mandatory takeover offer already in 2008 so that the appropriate consideration to be offered in the takeover offer should have been €57.25 per share. Taking the consideration paid into account, the additional consideration per share owed to shareholders which have accepted the takeover offer would thus amount to €32.25. Deutsche Bank appealed this decision and the appeal has been assigned to the 13th Senate of the Higher Regional Court of Cologne, which also is hearing the appeal of Effecten-Spiegel AG.

 

65

 

 

On November 8, 2017, a hearing took place before the Higher Regional Court of Cologne in the Effecten-Spiegel case. In that hearing, the Higher Regional Court indicated that it disagreed with the conclusions of the Cologne District Court and took the preliminary view that Deutsche Bank was not obliged to make a mandatory takeover offer in 2008 or 2009. Initially the Higher Regional Court resolved to announce a decision on December 13, 2017. However, this was postponed to February 2018 because the plaintiff challenged the three members of the 13th Senate of the Higher Regional Court of Cologne for alleged prejudice. The challenge was rejected by the Higher Regional Court of Cologne at the end of January 2018. In February 2018, the court granted a motion by Effecten-Spiegel AG to re-open the hearing and scheduled a further hearing for June 29, 2018.

 

The claims for payment against Deutsche Bank in relation to these matters total almost €700 million (excluding interest). In February 2018, a law firm representing some plaintiffs in the above-mentioned civil actions also filed a criminal complaint with the public prosecutor in Frankfurt am Main against certain Deutsche Bank personnel alleging that they engaged in fraudulent conduct in connection with the takeover offer.

 

Deutsche Bank has been served with a material number of additional lawsuits filed against Deutsche Bank shortly before the end of the year 2017 and these claims are now pending with the District Court of Cologne. Some of the new plaintiffs allege that the consideration offered by Deutsche Bank AG for the shares in Postbank in the 2010 voluntary takeover should be raised to €64.25 per share.

 

In September 2015, former shareholders of Deutsche Postbank AG filed in the Cologne District Court shareholder actions against Deutsche Postbank AG to set aside the squeeze-out resolution taken in the shareholders meeting of Deutsche Postbank AG in August 2015. Among other things, the plaintiffs allege that Deutsche Bank AG was subject to a suspension of voting rights with respect to its shares in Postbank based on the allegation that Deutsche Bank AG failed to make a mandatory takeover offer at a higher price in 2009. The squeeze out is final and the proceeding itself has no reversal effect, but may result in damage payments. The claimants in this proceeding refer to legal arguments similar to those asserted in the Effecten-Spiegel proceeding described above. In a decision on October 20, 2017, the Cologne District Court declared the squeeze-out resolution to be void. The court, however, did not rely on a suspension of voting rights due to an alleged failure of Deutsche Bank to make a mandatory takeover offer, but argued that Postbank violated information rights of Postbank shareholder in Postbank’s shareholders meeting in August 2015. Postbank has appealed this decision.

 

The legal question whether Deutsche Bank had been obliged to make a mandatory takeover offer for all Postbank shares prior to its 2010 voluntary takeover may also impact two pending appraisal proceedings (Spruchverfahren). These proceedings were initiated by former Postbank shareholders with the aim to increase the cash compensation offered in connection with the squeeze-out of Postbank shareholders in 2015 and the cash compensation offered and annual guaranteed dividend paid in connection with the execution of a domination and profit and loss transfer agreement (Beherrschungs- und Gewinnabfuhrungsvertrag) between DB Finanz-Holding AG (now DB Beteiligungs-Holding GmbH) and Postbank in 2012. The Cologne District Court issued resolutions indicating that it is inclined to consider a potential obligation of Deutsche Bank to make a mandatory takeover offer for Postbank at an offer price of €57.25 when determining the adequate cash compensation in the appraisal proceedings. The cash compensation paid in connection with the domination and profit and loss transfer agreement was €25.18 and was accepted for approximately 0.5 million shares. The squeeze-out compensation paid ill 2015 was €35.05 and approximately 7 million shares were squeezed-out.

 

Deutsche Bank has received requests for information from certain regulatory authorities related to high frequency trading and the operation of Deutsche Bank’s alternative trading system, SuperX. Deutsche Bank is cooperating with these requests.

 

DBSI, along with numerous other securities firms and individuals, has been named as an underwriter defendant in a consolidated class action lawsuit pending in SDNY relating to certain debt and equity securities issued by MF Global Holdings Ltd. The lawsuit alleges material misstatements and omissions in a registration statement and prospectuses. On November 25, 2014, DBSI and certain other settling underwriter defendants executed a Stipulation and Agreement of Settlement and Dismissal with the lead plaintiffs in the Class Action (the Class Action Settlement). On December 12, 2014, the Court preliminarily approved the Class Action Settlement and scheduled a final approval hearing for June 26, 2015. Following a hearing on that date, the court entered a judgment granting final approval to the Class Action Settlement. On November 25, 2014, DBSI also executed a Settlement Agreement and General Release in AG Oncon, et al. v. Corzine et al. (the “AG Oncon Action”). The AG Oncon Action, which was consolidated with the class action for pretrial purposes, was an individual action that asserted claims against DBSI that were substantially similar to those asserted in the Class Action. On January 5, 2015, in accordance with the Settlement Agreement and General Release in the AG Oncon Action, the court entered a judgment dismissing with prejudice all claims against DBSI and certain other settling underwriter defendants.

 

66

 

 

DBSI has been named as a respondent in 27 arbitrations seeking damages allegedly sustained from investments in the Aravali Fund (“Aravali”), a third-party hedge fund sold by DBSI to retail clients. Aravali used a high degree of leverage in investing in municipal bonds to generate return and income, leverage that led to the collapse of the fund when the municipal bond market suffered a decline in the fall of 2008. All 27 of the arbitrations have concluded or have been resolved and have been dismissed with prejudice. One additional Aravali claim recently was resolved prior to the commencement of an arbitration.

 

Deutsche Bank AG and DBSI, and current and/or former employees, have collectively been named as defendants in a number of legal proceedings brought by customers in various tax-oriented transactions that Deutsche Bank participated in between 1999 and 2002 and that are generally the subject of a non-prosecution agreement Deutsche Bank entered into with the DOJ in 2010. Deutsche Bank provided financial products and services to these customers, who were advised by various accounting, legal and financial advisory professionals. The customers claimed tax benefits as a result of these transactions, and the IRS has rejected those claims. In these legal proceedings, the customers allege that the professional advisors, together with Deutsche Bank, improperly misled the customers into believing that the claimed tax benefits would be upheld by the IRS. The legal proceedings are pending in state and federal courts, and claims against Deutsche Bank are alleged under both U.S. state and federal law. Numerous legal proceedings have been resolved and dismissed with prejudice with respect to Deutsche Bank. A number of other legal proceedings have been filed and remain pending against Deutsche Bank and are currently at various pre-trial stages, including discovery. Deutsche Bank has received and resolved a number of unfiled claims as well.

 

DBSI has been named as a respondent in sixteen arbitrations and a defendant in one litigation seeking damages for losses sustained through a put spread options investment strategy directed by an independent registered investment advisor, Themis Asset Strategies LLC (“Themis”), whose principal Derek Clark was a client advisor at the DBSI from 2002-2005. Claimants include direct clients of Themis, for whom DBSI performed execution and custody services, and customers of DBSI, who participated in the trading program through DBSI’s referral program. The litigation plaintiff is a non-customer whose trades were executed through the DBSI’s options desk and delivered to another firm. The put spread options strategy experienced a severe decline during the market turmoil of October 2008, and DBSI discontinued its referral arrangement with Themis in November 2008. The litigation and one of the arbitrations is pending and the other fifteen arbitrations have been resolved or dismissed with prejudice.

 

DBSI, along with numerous other securities firms and individuals, has been named as a defendant in a consolidated class action lawsuit pending in the SDNY relating to certain debt and equity securities issued by MF Global Holdings Ltd. The lawsuit alleges material misstatements and omissions in a registration statement and prospectuses. This litigation is in discovery.

 

In January 2009, the City of Milan (the “City”) issued civil proceedings in the District Court of Milan against Deutsche Bank and three other banks (together the “Banks”) in relation to a 2005 bond issue by the City (the “Bond”) and a related swap transaction which was subsequently restructured several times between 2005 and 2007 (the “Swap”) (the Bond and Swap together, the “Milan Transaction”). The City sought damages and/or other remedies on the grounds of alleged fraudulent and deceitful acts and alleged breach of advisory obligations. During March 2012, the City and the Banks agreed to discharge all existing civil claims between them in respect of the Milan Transaction, with no admission of liability by the Banks. While some aspects of the Swap remain in place between Deutsche Bank and the City, others were terminated as part of the civil settlement. As a further condition of the civil settlement, the sums seized from the Banks by the Milan Prosecutor (in the case of Deutsche Bank, €25 million) have been returned by the Prosecutor to the Banks. Deutsche Bank also received a small interest payment in respect of the seized sum.

 

Deutsche Bank AG and DBSI regularly act in the capacity of underwriter and sales agent for debt and equity securities of corporate issuers and are from time to time named as defendants in litigation commenced by investors relating to those securities. Deutsche Bank AG and DBSI, along with numerous other financial institutions, have been sued in the SDNY in various actions in their capacity as underwriters and sales agents for debt and equity securities issued by American International Group, Inc. (“AIG”) between 2006 and 2008. The consolidated complaint alleges, among other things, that the offering documents failed to reveal that AIG had substantial exposure to losses due to credit default swaps, that AIG’s real estate assets were overvalued, and that AIG’s financial statements did not conform to US GAAP. On March 20, 2015, the court approved a settlement, funded by AIG, and releasing Deutsche Bank AG and DBSI from all claims.

 

DBSI, along with numerous other financial institutions, was named as a defendant in two putative class action lawsuits pending in the SDNY relating to alleged misstatements and omissions in the securities filings of Vivint Solar Inc. (“Vivint”) in connection with Vivint’s October 1, 2014 IPO, which actions were subsequently consolidated. DBSI acted as one of several underwriters for the IPO. On May 6, 2015, defendants moved to dismiss the Second Amended Consolidated Complaint. On December 10, 2015, the court granted defendants’ motion to dismiss, with prejudice. On January 5, 2016, the lead plaintiff filed a notice of appeal. The underwriters, including DBSI, received a customary indemnification agreement from Vivint as issuer in connection with the IPO.

 

67

 

 

DBSI, along with numerous other financial institutions, has been named as a defendant in a putative consolidated class action lawsuit pending in the U.S. District Court for the District of New Jersey relating to alleged misstatements and omissions in the offering documents issued by Valeant Pharmaceuticals International, Inc. (“Valeant”) in connection with Valeant’s issuance of senior notes in January 2015 and March 2015 (the “Note Offerings”), as well as Valeant’s secondary offering of common stock in March 2015 (the “Stock Offering”). DBSI acted as one of several initial purchasers of the Note Offerings and as one of several underwriters of the Stock Offering. Jointly with the other bank defendants, DBSI filed a motion to dismiss the consolidated complaint on September 13, 2016. On April 28, 2017, the court partially granted and partially denied the motion to dismiss the U.S. action; the claims relating to the Note Offering were dismissed, but the claims related to the Stock Offering were allowed to proceed. On November 29, 2017, the matter was stayed until conclusion of a related criminal trial of two individuals (one of whom was employed by Valeant). That trial is scheduled to begin in April 2018. DBSI, along with the other financial institutions, has also been named as a defendant in a class action lawsuit pending in the Superior Court of Quebec asserting a statutory claim against DBSI for misrepresentations in primary market disclosures. On August 29, 2017, the Quebec Court authorized the plaintiffs to pursue their claims by way of class action. On November 30, 2017, the Quebec Court of Appeal dismissed defendants’ motions for leave to appeal the lower court’s ruling that certified the matter as a class action. Accordingly, the matter will now proceed to discovery as a class action. On January 2, 2018, several pension funds filed an additional suit in the District of New Jersey against Valeant Pharmaceuticals and other defendants, including DBSI. The complaint asserts negligent misrepresentation claims against DBSI and another financial institution stemming from their involvement as initial purchasers of the March 2015 Valeant Note Offering. On February 23, 2018, DBSI, jointly with the other defendants in the action, filed a motion to dismiss the complaint. On January 4, 2018, a hedge fund and related entities filed a suit in the SDNY against Valeant Pharmaceuticals and other defendants, including DBSI. The complaint asserts claims under Sections 11 and 12 of the Securities Act against DBSI and other financial institutions stemming from their involvement as underwriters of the March 2015 Valeant Stock Offering. On March 6, 2018, DBSI, jointly with the other defendants in the action, filed a motion to dismiss certain claims in the complaint. In connection with its role as an initial purchaser in the Note Offerings and an underwriter in the Stock Offering, DBSI received a customary indemnification agreement from Valeant as issuer.

 

DBSI and one of its former employees are named as defendants in a lawsuit brought by Insurative Premium Finance (Jersey) Limited (“Insurative”) in the U.S. District Court for the District of Massachusetts arising from the former employee’s alleged involvement in a fraudulent scheme involving the purchase of premium life insurance policies by clients of DBSI. Insurative alleges that it was contracted to provide the financing for the life insurance policies and that it suffered lost profits when the clients terminated the financing arrangement. This litigation has been settled.

 

Deutsche Bank and certain of its officers have been named as defendants in a putative class action pending in the SDNY brought on behalf of all persons who acquired Deutsche Bank ordinary shares between January 3, 2007 and January 16, 2009 (the “class period”). In an amended complaint, plaintiff alleges that during the class period, the value of Deutsche Bank’s securities was inflated due to alleged misstatements or omissions on Deutsche Bank’s part regarding the potential exposure to Deutsche Bank arising out of the MortgageIT acquisition, and regarding the potential exposure arising from Deutsche Bank’s RMBS and CDO portfolio during the class period. By decision dated March 27, 2013, the court largely denied the motion to dismiss as to Deutsche Bank and all but one of the individual defendants. The court dismissed all claims by class members who acquired shares outside the United States. Deutsche Bank is defending against this action.

 

Deutsche Bank is involved in legal proceedings with respect to a hydropower project in Albania. On the other side are two Italian companies, BEG SpA and Hydro Srl. BEG is Deutsche Bank’s joint venture partner with respect to the project; Hydro is the joint venture vehicle (owned 55 % by BEG and 45 % by Deutsche Bank). The dispute centers around whether Deutsche Bank has an obligation to fund construction of the project in full. Deutsche Bank’s position is that its sole funding obligation with respect to the project was to provide an equity injection of up to €35 million, which obligation it has fulfilled.

 

Initially, Deutsche Bank was defendant in an arbitration claim from Hydro in Italy for damages of €411 million for alleged failure to finance the construction of the project (“Rome 1”). In November 2011, the arbitration panel ruled that there was evidence of some (unspecified) further financing commitment on Deutsche Bank’s part, and issued an award of approximately €29 million against Deutsche Bank. Deutsche Bank appealed to the Court of Appeal in Rome for the award to be set aside. The Court affirmed the award in July 2013. Deutsche Bank is considering an appeal to the Italian Supreme Court.

 

68

 

 

In June 2012, Kaupthing hf, an Icelandic stock corporation, acting through its winding-up committee, issued Icelandic law clawback claims for approximately € 509 million (plus interest calculated on a damages rate basis and penalty rate basis) against Deutsche Bank in both Iceland and England. The claims relate to leveraged credit linked notes (“CLNs”), referencing Kaupthing, issued by Deutsche Bank to two British Virgin Island special purpose vehicles (“SPVs”) in 2008. The SPVs were ultimately owned by high net worth individuals. Kaupthing claims to have funded the SPVs and alleges that Deutsche Bank was or should have been aware that Kaupthing itself was economically exposed in the transactions. Kaupthing claims that the transactions are voidable by Kaupthing on a number of alternative grounds, including the ground that the transactions were improper because one of the alleged purposes of the transactions was to allow Kaupthing to influence the market in its own CDS (credit default swap) spreads and thereby its listed bonds. Additionally, in November 2012, an English law claim (with allegations similar to those featured in the Icelandic law claims) was commenced by Kaupthing against Deutsche Bank in London (together with the Icelandic proceedings, the “Kaupthing Proceedings”). Deutsche Bank filed a defense in the Icelandic proceedings in late February 2013. In February 2014, proceedings in England were stayed pending final determination of the Icelandic proceedings. Additionally, in December 2014, the SPVs and their joint liquidators served Deutsche Bank with substantively similar claims arising out of the CLN transactions against Deutsche Bank and other defendants in England (the “SPV Proceedings”). The SPVs claimed approximately € 509 million (plus costs, as well as interest), although the amount of that interest claim was less than in Iceland. Deutsche Bank has now reached a settlement of the Kaupthing and SPV Proceedings which has been paid in the first quarter of 2017.

 

The public prosecutor’s office in Munich (Staatsanwaltschaft München I) has conducted and is currently conducting criminal investigations in connection with the Kirch case with regard to former Management Board members as well as the current Management Board members Jürgen Fitschen and Dr. Stephan Leithner. The Kirch case involved several civil proceedings between Deutsche Bank AG and Dr. Leo Kirch as well as media companies controlled by him. The key issue was whether an interview given by Dr. Rolf Breuer, then Spokesman of Deutsche Bank’s Management Board, in 2002 with Bloomberg television, during which Dr. Rolf Breuer commented on Dr. Kirch’s (and his companies’) inability to obtain financing, caused the insolvency of the Kirch companies. In February 2014, Deutsche Bank and the Kirch heirs reached a comprehensive settlement, which has ended all legal disputes between them.

 

The allegations of the public prosecutor are that the relevant former Management Board members failed to correct in a timely manner factual statements made by Deutsche Bank’s litigation counsel in submissions filed in one of the civil cases between Kirch and Deutsche Bank AG before the Munich Higher Regional Court and the Federal Court of Justice, after allegedly having become aware that such statements were not correct, and/or made incorrect statements in such proceedings, respectively.

 

On April 25, 2016, following the trial before the Munich District Court regarding the main investigation involving Juergen Fitschen and four other former Management Board members, the Munich District Court acquitted all of the accused, as well as Deutsche Bank AG, which was a secondary participant in such proceedings. On April 26, 2016, the public prosecutor filed an appeal. An appeal is limited to a review of legal errors rather than facts. On October 18, 2016, a few weeks after the written judgment was served, the public prosecutor provided notice that it will uphold its appeal only with respect to former Management Board members Juergen Fitschen, Dr. Rolf Breuer and Dr. Josef Ackermann and that it will withdraw its appeal with respect to former Management Board members Dr. Clemens Boersig and Dr. Tessen von Heydebreck for whom the acquittal thereby becomes binding. On January 24, 2018, the Attorney General’s office applied to convene an oral hearing before the Federal Supreme Court to decide about the Munich public prosecutor’s appeal.

 

The other investigations by the public prosecutor (which also deal with attempted litigation fraud in the Kirch civil proceedings) are ongoing. Deutsche Bank is fully cooperating with the Munich public prosecutor’s office.

 

Following the decline of the Korea Composite Stock Price Index 200 (“KOSPI 200”) in the closing auction on November 11, 2010 by approximately 2.7%, the Korean Financial Supervisory Service (“FSS”) commenced an investigation and expressed concerns that the fall in the KOSPI 200 was attributable to a sale by Deutsche Bank of a basket of stocks, worth approximately €1.6 billion, that was held as part of an index arbitrage position on the KOSPI 200. On February 23, 2011, the Korean Financial Services Commission, which oversees the work of the FSS, reviewed the FSS’ findings and recommendations and resolved to take the following action: (i) to file a criminal complaint to the Korean Prosecutor’s Office for alleged market manipulation against five employees of the Deutsche Bank group and Deutsche Bank’s subsidiary Deutsche Securities Korea Co. (“DSK”) for vicarious liability; and (ii) to impose a suspension of six months, commencing April 1, 2011 and ending September 30, 2011, of DSK’s business for proprietary trading of cash equities and listed derivatives and DMA (direct market access) cash equities trading, and the requirement that DSK suspend the employment of one named employee for six months. There was an exemption to the business suspension which permitted DSK to continue acting as liquidity provider for existing derivatives linked securities. On August 19, 2011, the Korean Prosecutor’s Office announced its decision to indict DSK and four employees of the Deutsche Bank group on charges of spot/futures linked market manipulation. The criminal trial commenced in January 2012. On January 25, 2016, the Seoul Central District Court rendered a guilty verdict against a DSK trader and a guilty verdict against DSK. A criminal fine of KRW 1.5 billion (less than €2.0 million) was imposed on DSK. The Court also ordered forfeiture of the profits generated on the underlying trading activity. The Deutsche Bank group disgorged the profits on the underlying trading activity in 2011. The criminal trial verdict has been appealed by both the prosecutor and the defendants.

 

69

 

 

In addition, a number of civil actions have been filed in Korean courts against Deutsche Bank and DSK by certain parties who allege they incurred losses as a consequence of the fall in the KOSPI 200 on November 11, 2010. First instance court decisions were rendered against Deutsche Bank and DSK in some of these cases starting in the fourth quarter of 2015. The outstanding known claims have an aggregate claim amount of approximately € 50 million (at present exchange rates).

 

Following the bankruptcy of the Italian company Parmalat, prosecutors in Parma conducted a criminal investigation against various bank employees, including employees of Deutsche bank, and brought charges of fraudulent bankruptcy against a number of Deutsche Bank employees and others. The trial commenced in September 2009 and is ongoing.

 

Certain retail bondholders and shareholders have alleged civil liability against Deutsche Bank in connection with the above-mentioned criminal proceedings. Deutsche Bank has made a formal settlement offer to those retail investors who have asserted claims against Deutsche Bank. This offer has been accepted by some of the retail investors. The outstanding claims will be heard during the criminal trial process.

 

In January 2001, a group of institutional investors (bondholders and shareholders) commenced a civil claim for damages in an aggregate amount of approximately €130 million plus interest and costs, in the Milan courts against various international and Italian banks, including Deutsche Bank and Deutsche Bank S.p.A., on allegations of cooperation with Parmalat in the fraudulent placement of securities and of deepening the insolvency of Parmalat. Hearings on a preliminary application (made for preliminary matters, including jurisdiction) brought by the defendant banks have taken place and the court has reserved judgment and ordered the case to proceed on the merits. An appeal by Deutsche Bank to the Italian Supreme Court on the jurisdiction argument has been rejected, and the case will now proceed.

 

Deutsche Bank is in litigation in the United Kingdom and the United States with Sebastian Holdings Inc., a Turks and Caicos company (“SHI”). The dispute arose in October 2008 when SHI accumulated trading losses and subsequently failed to meet margin calls issued by Deutsche Bank. The U.S. action is a damages claim brought by SHI against Deutsche Bank in New York state court, arising out of the same circumstances as Deutsche Bank’s suit against SHI in the U.K. and seeking damages of at least $2.5 billion in an amended complaint filed January 10, 2011. The New York State Court has granted Deutsche Bank’s motion to dismiss SHI’s tort claims, certain of its contract and quasi-contract claims, and its claims for punitive damages, which ruling has been affirmed by the Appellate Division. SHI has filed a motion for leave to file an amended complaint, and Deutsche Bank has filed a motion for summary judgment dismissing the action. No trial date has been set.

 

Deutsche Bank has received subpoenas and requests for information from various regulatory and law enforcement agencies in Europe, North America and Asia Pacific in connection with industry-wide investigations concerning the setting of London Interbank Offered Rate (“LIBOR”), Euro Interbank Offered Rate (“EURIBOR”), Tokyo Interbank Offered Rate (“TIBOR”), Singapore Interbank Offered Rate (“SIBOR”) and other interbank offered rates. Deutsche Bank is cooperating with these investigations.

 

On December 4, 2013, Deutsche Bank reached a settlement with the EC as part of a collective settlement to resolve the EC’s investigations in relation to anticompetitive conduct in the trading of Euro interest rate derivatives and Yen interest rate derivatives. Under the terms of the settlement agreement, Deutsche Bank agreed to pay €466 million for the Euro interest rate derivatives and €259 million for the Yen interest rate derivatives matters, respectively, or €725 million in total. This fine has been paid in full.

 

On April 23, 2015, Deutsche Bank entered into separate settlements with the DOJ, the CFTC, the U.K. Financial Conduct Authority (“FCA”), and the New York State Department of Financial Services (“NYSDFS”) to resolve investigations into misconduct concerning the setting of LIBOR, EURIBOR, and TIBOR. Under the terms of these agreements, Deutsche Bank agreed to pay penalties of $2.175 billion to the DOJ, CFTC and NYSDFS and GBP 226.8 million to the FCA. These fines have been paid in full and do not form part of Deutsche Bank’s provisions, save for $150 million that is payable to the DOJ, subject to court approval (currently scheduled for March 28, 2017), following the sentencing of DB Services (UK) Ltd. (an indirectly-held, wholly-owned subsidiary of Deutsche Bank) in connection with its guilty plea to one count of wire fraud and Deutsche Bank entered into a Deferred Prosecution Agreement with a three year term pursuant to which it agreed (among other things) to the filing of an Information in the U.S. District Court for the District of Connecticut charging Deutsche Bank with one count of wire fraud and one count of price fixing in violation of the Sherman Act. The fines referred to above, which include a $150 million fine paid in April 2017 following the March 28, 2017 sentencing of DB Group Services (UK) Ltd., have been paid in full.

 

70

 

 

On November 29, 2016, the SEC staff informed Deutsche Bank that it has concluded its LIBOR investigation and that it does not intend to recommend an enforcement action by the SEC.

 

On December 21, 2016, the Swiss Competition Commission, WEKO, formally announced its LIBOR-related settlement decisions addressing various banks, including Deutsche Bank AG, relating to EURIBOR and Yen LIBOR. Deutsche Bank will be required to pay a fine of CHF 5.0 million with respect to Yen Libor and approximately CHF 0.4 million for WEKO’s fees. Deutsche Bank received full immunity from fines for EURIBOR in return for being the first party to notify such conduct to WEKO. The settlement amount is already fully reflected in the existing litigation provisions.

 

On October 25, 2017, Deutsche Bank entered into a settlement with a working group of U.S. state attorneys general resolving their interbank offered rate investigation. Among other considerations, Deutsche Bank agreed to make a settlement payment of $220 million. The settlement amount has been paid in full.

 

Other regulatory investigations of Deutsche Bank concerning the setting of various interbank offered rates remain ongoing, and Deutsche Bank remains exposed to further action.

 

Deutsche Bank is party to 43 U.S. civil actions concerning manipulation relating to the setting of various Interbank Offered Rates, as well as one action pending in the UK. Most of the civil actions, including putative class actions, are pending in the SDNY, against Deutsche Bank and numerous other banks. All but four of the civil actions were filed on behalf of parties who allege losses as a result of manipulation relating to the setting of U.S. dollar LIBOR. The four civil actions pending against Deutsche Bank that do not relate to U.S. dollar LIBOR are also pending in the SDNY, and include one action concerning EURIBOR, one consolidated action concerning Pound Sterling (“GBP”) LIBOR, one action concerning Swiss franc (“CHF”) LIBOR, and one action concerning two Singapore Dollar (“SGD”) benchmark rates, SIBOR and the Swap Offer Rate (“SOR”).

 

Claims for damages for all 43 of the civil actions discussed have been asserted under various legal theories, including violations of the CEA, federal and state antitrust laws, the U.S. Racketeer Influenced and Corrupt Organizations Act (“RICO”), and other federal and state laws. In all but five cases, the amount of damages has not been formally articulated by the counterparty. The five cases that allege a specific amount of damages are individual actions consolidated in the U.S. dollar LIBOR MDL (as defined below) and seek a minimum of more than $1.25 billion in damages in the aggregate from all defendants including Deutsche Bank.

 

With one exception, all of the civil actions pending in the SDNY concerning U.S. dollar LIBOR are being coordinated as part of a multidistrict litigation (“U.S. dollar LIBOR MDL”). Another previously pending non-MDL U.S. dollar LIBOR action concluded after its dismissal became final. In light of the large number of individual cases pending against Deutsche Bank and their similarity, the civil actions included in the U.S. dollar LIBOR MDL are now subsumed under the following general description of the litigation pertaining to all such actions, without disclosure of individual actions except when the circumstances or the resolution of an individual case is material to Deutsche Bank.

 

Following a series of decisions in the U.S. dollar LIBOR MDL between March 2013 and December 2016 narrowing their claims, plaintiffs are currently asserting antitrust claims, CEA claims and state law fraud, contract, unjust enrichment and other tort claims. The SDNY has also issued decisions dismissing certain plaintiffs’ claims for lack of personal jurisdiction and on statute of limitations grounds.

 

On December 20, 2016, the district court issued a ruling dismissing certain antitrust claims while allowing others to proceed. Multiple plaintiffs have filed appeals of the district court’s December 20, 2016 ruling to the U.S. Court of Appeals for the Second Circuit, and those appeals are proceeding in parallel with the ongoing proceedings in the district court. On November 13, 2017, plaintiffs filed their opening briefs.

 

Discovery is underway in several of the cases. Motions for class certification were fully briefed on November 10, 2017, and the court heard oral argument on January 18, 2018. On February 28, 2018, the court issued its decision on plaintiffs’ motions for class certification. The court denied motions to certify (i) a class of purchasers of Eurodollar futures and options traded on the Chicago Mercantile Exchange (Metzler Investment GmbH v. Credit Suisse Group AG) and (ii) a class of lending institutions that originated, held, purchased, or sold loans tied to U.S. dollar LIBOR (Berkshire Bank v. Bank of America Corp.). The court granted a motion, to certify a class of plaintiffs that transacted in U.S. dollar LIBOR-linked financial instruments purchased over the counter directly from LIBOR panel banks with respect to those plaintiffs’ remaining antitrust claims against two domestic-bank defendants (Mayor & City Council of Baltimore v. Credit Suisse AG), but denied a motion to certify a class with respect to those same plaintiffs’ state-law contract and unjust enrichment claims.

 

71

 

 

On July 13, 2017, Deutsche Bank executed a settlement agreement in the amount of $80 million with plaintiffs to resolve a putative class action pending as part of the U.S. dollar LIBOR MDL asserting claims based on alleged transactions in Eurodollar futures and options traded on the Chicago Mercantile Exchange (Metzler Investment GmbH v. Credit Suisse Group AG). The settlement agreement was submitted to the court for preliminary approval on October 11, 2017. The settlement agreement is subject to further review and approval by the court.

 

On February 6, 2018, Deutsche Bank executed a settlement agreement in the amount of $240 million with plaintiffs to resolve a putative class action pending as part of the U.S. dollar LIBOR MDL asserting claims based on alleged transactions in U.S. dollar LIBOR-linked financial instruments purchased over the counter directly from LIBOR panel banks (Mayor & City Council of Baltimore v. Credit Suisse AG). The settlement agreement was submitted to the court for preliminary approval on February 27, 2018. The settlement agreement is subject to further review and approval by the court.

 

Finally, one of the actions in the U.S. dollar LIBOR MDL has been dismissed in its entirely, including (as to Deutsche Bank and other foreign defendants) on personal jurisdiction and merits grounds, and plaintiffs have filed an appeal to the U.S. Court of Appeals for the Second Circuit. The appeal was fully briefed, and oral argument was held on September 25, 2017. On February 23, 2018, the Second Circuit affirmed in part and vacated in part the district court’s decision. Among other things, the court held that plaintiffs had established a prima facie case of personal jurisdiction with respect to Deutsche Bank and another foreign defendant for certain state law claims concerning direct transactions with plaintiffs and granted plaintiffs leave to amend their allegations concerning several other defendants and their agency and conspiracy theories of jurisdiction. The Second Circuit otherwise affirmed the district court’s decision on personal jurisdiction. The Second Circuit also affirmed the district court’s dismissal on the merits of plaintiffs’ claims concerning fixed-rate instruments, but reversed the district court’s dismissal of certain of plaintiffs’ claims under the Exchange Act for unjust enrichment.

 

Plaintiffs in the non-MDL case proceeding in the SDNY have moved to amend their complaint, and a decision on that motion is pending.

 

There is a further civil action regarding U.S. dollar LIBOR to which Deutsche Bank is a party in the U.K., in which a claim for damages has been asserted pursuant to Article 101 of The Treaty on the Functioning of the European Union, Section 2 of Chapter 1 of the U.K. Competition Act 1998 and U.S. state laws. The U.K. action was served on Deutsche Bank in July 2017.

 

On July 21. 2017, Deutsche Bank executed a settlement agreement in the amount of $77 million with plaintiffs to resolve two putative class actions pending in the SDNY alleging manipulation of Yen LIBOR and Euroyen TIBOR (Laydon v. Mizuho Bank, Ltd. and Sonterra Capital Master Fund Ltd. v. UBS AG). The agreement was submitted to the court for approval, and the court granted final approval of the settlement on December 7, 2017. Accordingly, these two actions are not included in the total number of actions above.

 

On May 10, 2017, Deutsche Bank executed a settlement agreement in the amount of $170 million with plaintiffs to resolve a putative class action pending in the SDNY alleging manipulation of EURIBOR (Sullivan v. Barclays PLC). The agreement was submitted to the court for preliminary approval on June 12, 2017. The court granted preliminary approval on July 7, 2017. The settlement agreement is subject to further review and final approval by the court. Under the terms of the settlement. Deutsche Bank has paid $170 million, and is no longer reflecting that amount in its litigation provisions.

 

A putative class action alleging manipulation of the Pound Sterling (“GBP”) LIBOR remains pending in the SDNY. It is the subject of a fully briefed motion to dismiss. The court held argument on August 4, 2017.

 

On September 25, 2017, the court in the SDNY dismissed the plaintiffs’ putative class action alleging manipulation of the Swiss Franc (“CHF”) LIBOR in full, but gave plaintiffs an opportunity to file an amended complaint. Plaintiffs filed that amended complaint on November 6, 2017. Defendants moved to dismiss the amended complaint on February 7, 2018.

 

On August 18, 2017, the court in the SDNY dismissed the plaintiffs’ putative class action alleging manipulation of the Singapore Interbank Offered Rate (“SIBOR”) and Swap Offer Rate (“SOR”) in part, but gave plaintiffs an opportunity to file an amended complaint. Plaintiffs filed their amended complaint on September 18, 2017, and it is the subject of a fully briefed motion to dismiss.

 

72

 

 

On August 16, 2016, a putative class action was filed in the SDNY against Deutsche Bank and other defendants, bringing claims based on alleged collusion and manipulation in connection with the Australian Bank Bill Swap Rate (“BBSW”). The complaint alleges that the defendants, among other things, engaged in money market transactions intended to influence the BBSW fixing, made false BBSW submissions, and used their control over BBSW rules to further the alleged misconduct. Plaintiffs bring suit on behalf of persons and entities that engaged in U.S.-based transactions in BBSW-linked financial instruments from 2003 through the present. An amended complaint was filed on December 16, 2016, and defendants’ motions to dismiss have been filed.

 

Certain regulators and law enforcement authorities in various jurisdictions, including the SEC and DOJ, are investigating, among other things, Deutsche Bank’s compliance with the U.S. Foreign Corrupt Practices Act and other laws with respect to the Bank’s hiring practices related to candidates referred by clients, potential clients and government officials, and its engagement of finders and consultants. Deutsche Bank is responding to and continuing to cooperate with these investigations. Certain regulators in other jurisdictions have also been briefed on these investigations.

 

On May 20, 2013, plaintiff Salix Capital US Inc. (“Salix”), on their own behalf and as assignee of the Frontpoint Funds, filed a complaint alleging that Deutsche Bank AG and DBSI, along with various other financial institutions, conspired to manipulate LIBOR for the period from August 2007 to May 2010. On October 6, 2014, Salix filed its Second Amended Complaint asserting federal antitrust and various state law claims against Deutsche Bank AG and DBSI. Also on October 6, 2014, plaintiffs Principal Funds, Inc. and related companies (collectively, the Principal Plaintiffs) filed Amended Complaints asserting similar allegations and claims against Deutsche Bank AG, and adding DBSI as a defendant. These actions have been coordinated as part of the U.S. dollar LIBOR MDL in the SDNY. On August 4, 2015, DBSI was dismissed from these actions. On December 15, 2015 the Principal Plaintiffs filed two new complaints in SDNY alleging that Deutsche Bank AG and DBSI conspired to manipulate LIBOR for the period from August 2007 to May 2010. These actions are currently subject to the U.S. dollar LIBOR MDL court’s stay for newly filed cases.

 

Sal. Oppenheim jr. & Cie. AG & Co. KGaA (“Sal. Oppenheim”) was prior to its acquisition by Deutsche Bank in 2010 involved in the marketing and financing of participations in closed end real estate funds. These funds were structured as Civil Law Partnerships under German law. Usually, Josef Esch Fonds-Project GmbH performed the planning and project development. Sal. Oppenheim held an indirect interest in this company via a joint-venture. In relation to this business a number of civil claims have been filed against Sal. Oppenheim. Some but not all of these claims are also directed against former managing partners of Sal. Oppenheim and other individuals. The claims brought against Sal. Oppenheim relate to investments of originally approximately €1.1 billion, of which claims relating to investments of originally approximately €140 million are still pending. Currently, the aggregate amounts claimed in the pending proceedings are approximately €190 million. The investors are seeking to unwind their fund participation and to be indemnified against potential losses and debt related to the investment. The claims are based in part on an alleged failure of Sal. Oppenheim to provide adequate information on related risks and other material aspects important for the investors’ decision. Based on the facts of the individual cases, some courts decided in favor and some against Sal. Oppenheim. Appeals are pending.

 

Deutsche Bank has received inquiries from certain regulatory and law enforcement authorities, including requests for information and documents, pertaining to investigations of precious metals trading and related conduct. Deutsche Bank is cooperating with these investigations. On January 29, 2018, the CFTC issued an order filing and settling charges against Deutsche Bank AG and DBSI, requiring Deutsche Bank to pay a $30 million civil monetary penalty and to undertake remedial relief. The order finds that from at least February 2008 and continuing through at least September 2014, Deutsche Bank AG, by and through certain precious metals traders, engaged in a scheme to manipulate the price of precious metals futures contracts by utilizing a variety of manual spoofing techniques with respect to precious metals futures contracts traded on the Commodity Exchange, Inc. or “COMEX”, and by trading in a manner to trigger customer stop-loss orders.

 

Deutsche Bank is a defendant in two consolidated class action lawsuits pending in the SDNY. The suits allege violations of U.S. antitrust law, the CEA and related state law arising out of the alleged manipulation of gold and silver prices through participation in the Gold and Silver Fixes, but do not specify the damages sought. Deutsche Bank has reached agreements to settle the Gold action for $60 million and the Silver action for $38 million. The agreements remain subject to final court approval.

 

In addition, Deutsche Bank is a defendant in Canadian class action proceedings in the provinces of Ontario and Quebec concerning gold and silver. Each of the proceedings seeks damages for alleged violations of the Canadian Competition Act and other causes of action.

 

73

 

 

Deutsche Bank has received requests for information from certain U.S. regulatory and law enforcement agencies concerning its historical processing of U.S. dollar payment orders through U.S. financial institutions for parties from countries subject to U.S. embargo laws. These agencies are investigating whether such processing complied with U.S. federal and state laws. In 2006, Deutsche Bank voluntarily decided that it would not engage in new U.S. dollar business with counterparties in Iran, Sudan, North Korea and Cuba and with certain Syrian banks, and to exit existing U.S. dollar business with such counterparties to the extent legally possible. In 2007, Deutsche Bank decided that it would not engage in any new business, in any currency, with counterparties in Iran, Syria, Sudan and North Korea and to exit existing business, in any currency, with such counterparties to the extent legally possible; it also decided to limit its non-U.S. dollar business with counterparties in Cuba. On November 3, 2015, Deutsche Bank entered into agreements with the New York State Department of Financial Services and the Federal Reserve Bank of New York to resolve their investigations of Deutsche Bank. Deutsche Bank paid the two agencies $200 million and $58 million, respectively, and agreed to terminate certain employees, not rehire certain former employees and install an independent monitor for one year. In addition, the Federal Reserve Bank of New York ordered certain remedial measures, specifically, the requirement to ensure an effective OFAC compliance program and an annual review of such program by an independent party until the Federal Reserve Bank of New York is satisfied as to its effectiveness.

 

On May 2, 2017, the United States Attorney’s Office for the Southern District of New York notified Deutsche Bank that it has closed its investigation of Deutsche Bank’s historical life settlements business, which included the origination and purchase of investments in life insurance assets during the 2005 to 2008 period. As is customary, the United States Attorney’s Office further informed Deutsche Bank that it may reopen its investigation if it obtains additional information or evidence.

 

Deutsche Bank has received inquiries from certain regulatory and law enforcement authorities, including requests for information and documents, pertaining to sovereign, supranational and agency (“SSA”) bond trading. Deutsche Bank is cooperating with these investigations.

 

Deutsche Bank AG and DBSI have been named as defendants in several putative class action complaints filed in the SDNY alleging violations of U.S. antitrust law and common law related to alleged manipulation of the secondary trading market for SSA bonds. On August 17, 2017, Deutsche Bank reached an agreement to settle the actions for the amount of $48.5 million. The settlement remains subject to approval.

 

Deutsche Bank is also a defendant in a putative class action complaint filed on November 7, 2017 in the Ontario Superior Court of Justice alleging violations of Canadian and foreign anti-trust law, and commons law. The complaint relies on allegations similar to those in the U.S. class actions, and seeks punitive damages. The case is in its early stages.

 

DBSI has been responding to requests for information from FINRA concerning DBSI’s policies, procedures and controls relating to intercom speakers (also known as “squawk boxes”). On August 8, 2016, DBSI settled the investigation with FINRA by making a payment of $12.5 million.

 

Deutsche Bank has investigated the circumstances around equity trades entered into by certain clients with Deutsche Bank in Moscow and London that offset one another. The total volume of the transactions under review is significant. Deutsche Bank’s internal investigation of potential violations of law, regulation and policy and into the related internal control environment has concluded, and Deutsche Bank is assessing the findings identified during the investigation; to date it has identified certain violations of Deutsche Bank’s policies and deficiencies in Deutsche Bank's control environment. Deutsche Bank has advised regulators and law enforcement authorities in several jurisdictions (including Germany, Russia, the U.K. and U.S.) of this investigation. Deutsche Bank has taken disciplinary measures with regards to certain individuals in this matter and will continue to do so with respect to others as warranted.

 

On January 30 and 31, 2017, the New York State Department of Financial Services (“DFS”) and UK FCA announced settlements with Deutsche Bank related to their investigations into this matter. The settlements conclude the DFS and the FCA’s investigations into the bank’s anti-money laundering (“AML”) control function in its investment banking division, including in relation to the equity trading described above. Under the terms of the settlement agreement with the DFS, Deutsche Bank entered into a Consent Order, and agreed to pay civil monetary penalties of $425 million and to engage an independent monitor for a term of up to two years. Under the terms of the settlement agreement with the FCA, Deutsche Bank agreed to pay civil monetary penalties of approximately GBP 163 million. On May 30, 2017, the Fed announced its settlement with Deutsche Bank resolving this matter as well as additional AML issues identified by the Fed. Deutsche Bank paid a penalty of $41 million. Deutsche Bank also agreed to retain independent third parties to assess its Bank Secrecy Act/AML program and review certain foreign correspondent banking activity of its subsidiary Deutsche Bank Trust Company Americas. Deutsche Bank is also required to submit written remediation plans and programs.

 

74

 

 

DBSI, along with numerous other underwriters of various securities offering by SunEdison, Inc. and its majority-owned affiliate TerraForm Global, Inc., is named in nine putative securities class and individual actions filed beginning in October 2015 in state and federal courts. The complaints all allege violations of the federal securities laws and several of the individual actions also variously assert claims under state securities laws and for common law negligent misrepresentation with respect to various offerings by SunEdison or Terraform. The actions have been transferred for pre-trial proceedings to a multi-district litigation (the “MDL”) pending in the SDNY. Defendants filed motions to dismiss in the two class actions, based respectively on SunEdison’s August 2015 offering of preferred stock and TerraForm’s July 2015 initial public offering of common stock. Following the filing of the motion to dismiss the class action based on TerraForm’s initial public offering, the issuer and plaintiffs entered into an agreement to resolve the action as to all defendants without contribution from the underwriters. The parties submitted the settlement and received preliminary approval in December 2017, and a final approval hearing is scheduled for April 2018. The cases and causes of actions arising exclusively out of Terraform offerings were subsequently dismissed. On March 6, 2018, defendants’ motion to dismiss the class action based on SunEdison offering was granted as to certain alleged misstatements and omissions and denied as to others. Defendants are required to answer the class complaint by March 20, 2018. Further proceedings on the individual cases based on the SunEdison preferred stock offering were being held in abeyance until the court decided the motion to dismiss in the class case. The underwriters, including DBSI, received customary indemnification from SunEdison and Terraform in connection with the offerings, but the availability of indemnification from SunEdison was adversely impacted when SunEdison filed for bankruptcy protection on April 21, 2016 in the U.S. Bankruptcy Court for the Southern District of New York.

 

On October 5, 2016, the CFTC issued a subpoena to Deutsche Bank and its affiliates, including DBSI, seeking documents and information concerning the trading and clearing of interest rate swaps (“IR Swaps”). Deutsche Bank is cooperating fully in response to the subpoena and requests for information.

Deutsche Bank and DBSI are defendants, along with numerous other IR Swaps dealer banks, in a multi-district civil class action filed in the SDNY. The class action plaintiffs are consumers of IR Swaps. Competitor trading platforms TeraExchange and Javelin have also filed individual lawsuits. All of the cases have been consolidated for pretrial purposes. Plaintiffs filed second consolidated amended complaints on December 9, 2016 alleging that the banks conspired with TradeWeb and ICAP to prevent the establishment of exchange-traded IR Swaps. On July 28, 2017, defendants’ motions to dismiss the second consolidated amended complaints were granted in part and denied in part. On February 21, 2018, class plaintiffs filed a motion for leave to file a third consolidated amended class action complaint. Discovery is ongoing.

 

DBSI had been responding to requests for information from the SEC concerning whether a former research analyst made statements inconsistent with his published research, in violation of applicable rules and regulations, and whether DBSI’s policies and procedures were adequate. On February 17, 2016, the SEC announced a settlement with the former research analyst based on a violation of Rule 501 of Regulation AC of the Exchange Act. On October 12, 2016, the SEC announced a settlement with DBSI for $9.5 million.

 

DBSI was a defendant in several putative class actions alleging violations of U.S. antitrust law, the CEA and common law related to the alleged manipulation of the U.S. Treasury securities market. These cases have been consolidated in the SDNY. On November 16, 2017, plaintiffs filed a consolidated amended complaint, which did not name DBSI as a defendant. On December 11, 2017, the court dismissed DBSI from the class action without prejudice.

 

Deutsche Bank has received inquiries from certain regulatory authorities, including requests for documents and information, with respect to “pre-release” american depositary receipts (“ADRs”). Deutsche Bank is cooperating with these inquiries and is conducting its own internal review of pre-release ADR transactions and related practices.

 

Deutsche Bank has received inquiries from a regulatory authority, including requests for information and documents, with respect to Deutsche Bank’s retention of electronic data and Deutsche Bank’s compliance with and policies and procedures related to the recordkeeping requirements for broker-dealers. Deutsche Bank is cooperating with this investigation.

 

On June 1, 2011, Morgan Stanley & Co. Incorporated converted from a Delaware corporation to a Delaware limited liability company. As a result of that conversion, Morgan Stanley & Co. Incorporated is now named Morgan Stanley & Co. LLC (“MS&Co.”).

 

MS&Co., a Delaware limited liability company with its main business office located at 1585 Broadway, New York, New York 10036, is a wholly owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Among other registrations and memberships, MS&Co. is registered as a futures commission merchant and is a member of the NFA.

 

75

 

 

In re Morgan Stanley Mortgage Pass-Through Certificates Litigation, which had been pending in the SDNY, was a putative class action involving allegations that, among other things, the registration statements and offering documents related to the offerings of certain mortgage pass-through certificates in 2006 and 2007 contained false and misleading information concerning the pools of residential loans that backed these securitizations. On December 18, 2014, the parties’ agreement to settle the litigation received final court approval, and on December 19, 2014, the court entered an order dismissing the action.

 

On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against MS&Co. and another defendant in the Superior Court of the State of Washington, styled Federal Home Loan Bank of Seattle v. Morgan Stanley & Co. Inc., et al. The amended complaint, filed on September 28, 2010, alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $233 million. The complaint raises claims under the Washington State Securities Act and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On January 23, 2017, the parties reached an agreement to settle the litigation.

 

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against MS&Co. and other defendants in the Superior Court of the State of California styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al. An amended complaint filed on June 10, 2010 alleged that defendants made untrue statements and material omissions in connection with the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $704 million. The complaint raised claims under both the federal securities laws and California law and sought, among other things, to rescind the plaintiff’s purchase of such certificates. On January 26, 2015, as a result of a settlement with certain other defendants, the plaintiff requested and the court subsequently entered a dismissal with prejudice of certain of the plaintiff’s claims, including all remaining claims against MS&Co.

 

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against MS&Co. and other defendants in the Superior Court of the State of California styled Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al. An amended complaint, filed on June 10, 2010, alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by the MS&Co. was approximately $276 million. The complaint raises claims under both the federal securities laws and California law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On December 21, 2016, the parties reached an agreement to settle the litigation.

 

On July 9, 2010 and February 11, 2011, Cambridge Place Investment Management Inc. filed two separate complaints against MS&Co. and other defendants in the Superior Court of the Commonwealth of Massachusetts, both styled Cambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc., et al. The complaints assert claims on behalf of certain clients of plaintiff’s affiliates and allege that defendants made untrue statements and material omissions in the sale of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co. or sold to plaintiff’s affiliates’ clients by MS&Co. in the two matters was approximately $263 million. On February 11, 2014, the parties entered into an agreement to settle the litigation. On February 20, 2014, the court dismissed the action.

 

On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against MS&Co., which is styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al. and is pending in the N.Y. Supreme Court. The complaint relates to a $275 million credit default swap referencing the super senior portion of the STACK 2006-1 CDO. The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment and alleges that MS&Co. misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that MS&Co. knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied MS&Co.’s motion to dismiss the complaint. Based on currently available information, MS&Co. believes it could incur a loss of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.

 

76

 

 

On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against MS&Co. and other defendants in the Circuit Court of the State of Illinois styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. The complaint alleges that defendants made untrue statements and material omissions in the sale to plaintiff of a number of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. in this action was approximately $203 million. The complaint seeks, among other things, to rescind the plaintiff’s purchase of such certificates. The defendants filed a motion to dismiss the corrected amended complaint on May 27, 2011, which was denied on September 19, 2012. On December 13, 2013, the court entered an order dismissing all claims related to one of the securitizations at issue. After that dismissal, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $78 million. At December 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $46 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $46 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

 

On October 25, 2010, MS&Co., certain affiliates and Pinnacle Performance Limited, a special purpose vehicle (“Pinnacle”), were named as defendants in a purported class action related to securities issued by Pinnacle in Singapore, commonly referred to as Pinnacle Notes. The case is styled Ge Dandong, et al. v. Pinnacle Performance Ltd., et al. and is pending in the SDNY. An amended complaint was filed on October 22, 2012. The court denied defendants’ motion to dismiss the amended complaint on August 22, 2013 and granted class certification on October 17, 2013. On October 30, 2013, defendants filed a petition for permission to appeal the court’s decision granting class certification. On January 31, 2014, plaintiffs filed a second amended complaint. The second amended complaint alleges that the defendants engaged in a fraudulent scheme to defraud investors by structuring the Pinnacle Notes to fail and benefited subsequently from the securities’ failure. In addition, the second amended complaint alleges that the securities’ offering materials contained material misstatements or omissions regarding the securities’ underlying assets and the alleged conflicts of interest between the defendants and the investors. The second amended complaint asserts common law claims of fraud, aiding and abetting fraud, fraudulent inducement, aiding and abetting fraudulent inducement, and breach of the implied covenant of good faith and fair dealing. On July 17, 2014, the parties reached an agreement in principle to settle the litigation, which received final court approval on July 2, 2015.

 

On July 5, 2011, Allstate Insurance Company and certain of its affiliated entities filed a complaint against MS&Co. in the N.Y. Supreme Court, styled Allstate Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on September 9, 2011 and alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The complaint raises common law claims of fraud, fraudulent inducement, aiding and abetting fraud and negligent misrepresentation and seeks, among other things, compensatory and/or recessionary damages associated with plaintiffs’ purchases of such certificates. On January 16, 2015, the parties reached an agreement to settle the litigation.

 

On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against MS&Co. and other defendants in the Court of Common Pleas in Ohio, styled Western and Southern Life Insurance Company, et al. v. Morgan Stanley Mortgage Capital Inc., et al. An amended complaint was filed on April 2, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of the certificates allegedly sold to plaintiffs by MS&Co. was approximately $153 million. On June 8, 2015, the parties reached an agreement to settle the litigation.

 

On September 2, 2011, the FHFA, as conservator for Fannie Mae and Freddie Mac, filed 17 complaints against numerous financial services companies, including MS&Co. A complaint against MS&Co. and other defendants was filed in the N.Y. Supreme Court, styled Federal Housing Finance Agency, as Conservator v. Morgan Stanley et al. The complaint alleges that defendants made untrue statements and material omissions in connection with the sale to Fannie Mae and Freddie Mac of residential mortgage pass-through certificates with an original unpaid balance of approximately $11 billion. The complaint raised claims under federal and state securities laws and common law and seeks, among other things, rescission and compensatory and punitive damages. On February 7, 2014, the parties entered into an agreement to settle the litigation. On February 20, 2014, the court dismissed the action.

 

On November 4, 2011, the FDIC, as receiver for Franklin Bank S.S.B, filed two complaints against MS&Co. in the District Court of the State of Texas. Each was styled Federal Deposit Insurance Corporation as Receiver for Franklin Bank, S.S.B v. Morgan Stanley & Company LLC F/K/A Morgan Stanley & Co. Inc. and alleged that MS&Co. made untrue statements and material omissions in connection with the sale to plaintiff of mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly underwritten and sold to plaintiff by MS&Co. in these cases was approximately $67 million and $35 million, respectively. On July 2, 2015, the parties reached an agreement to settle the litigation.

 

77

 

 

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against MS&Co. and other defendants in the Superior Court of the Commonwealth of Massachusetts styled Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al. An amended complaint was filed on June 19, 2012 and alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint raises claims under the Massachusetts Uniform Securities Act, the Massachusetts Consumer Protection Act and common law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On May 26, 2011, defendants removed the case to the United States District Court for the District of Massachusetts. On October 11, 2012, defendants filed motions to dismiss the amended complaint, which was granted in part and denied in part on September 30, 2013. On November 25, 2013, July 16, 2014, and May 19, 2015, respectively, the plaintiff voluntarily dismissed its claims against MS&Co. with respect to three of the securitizations at issue. After these voluntary dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $332 million. At December 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $51 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $51 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

 

On April 25, 2012, Metropolitan Life Insurance Company and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY, styled Metropolitan Life Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on June 29, 2012, and alleges that the defendants made untrue statements and material omissions in the sale to the plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten, and/or sold by MS&Co. was approximately $758 million. The amended complaint raised common law claims of fraud, fraudulent inducement, and aiding and abetting fraud and seeks, among other things, rescission, compensatory, and/or rescissionary damages, as well as punitive damages, associated with the plaintiffs’ purchases of such certificates. On April 11, 2014, the parties entered into a settlement agreement.

 

On April 25, 2012, The Prudential Insurance Company of America and certain affiliates filed a complaint against MS&Co. and certain affiliates in the Superior Court of the State of New Jersey styled The Prudential Insurance Company of America, et al. v. Morgan Stanley, et al. On October 16, 2012, plaintiffs filed an amended complaint. The amended complaint alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. is approximately $1.073 billion. The amended complaint raises claims under the New Jersey Uniform Securities Law, as well as common law claims of negligent misrepresentation, fraud, fraudulent inducement, equitable fraud, aiding and abetting fraud, and violations of the New Jersey RICO statute, and includes a claim for treble damages. On January 8, 2016, the parties reached an agreement to settle the litigation.

 

On December 14, 2012, Royal Park Investments SA/NV filed a complaint against MS&Co., certain affiliates, and other defendants in the N.Y. Supreme Court, styled Royal Park Investments SA/NV v. Merrill Lynch et al. On October 24, 2013, plaintiff filed a new complaint against MS&Co. in the N.Y. Supreme Court, styled Royal Park Investments SA/NV v. Morgan Stanley et al., alleging that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $597 million. The complaint raises common law claims of fraud, fraudulent inducement, negligent misrepresentation, and aiding and abetting fraud and seeks, among other things, compensatory and punitive damages. The plaintiff filed an amended complaint on December 1, 2015.

 

On February 14, 2013, Bank Hapoalim B.M. filed a complaint against MS&Co. and certain affiliates in the Supreme Court of NY, styled Bank Hapoalim B.M. v. Morgan Stanley et al. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $141 million. On July 28, 2015, the parties reached an agreement to settle the litigation, and on August 12, 2015, the plaintiff filed a stipulation of discontinuance with prejudice.

 

78

 

 

On March 7, 2013, the Federal Housing Finance Agency filed a summons with notice on behalf of the trustee of the Saxon Asset Securities Trust, Series 2007-1, against MS&Co. and an affiliate. The matter is styled Federal Housing Finance Agency, as Conservator for the Federal Home Loan Mortgage Corporation, on behalf of the Trustee of the Saxon Asset Securities Trust, Series 2007-1 v. Saxon Funding Management LLC and Morgan Stanley and is pending in the N.Y. Supreme Court. The notice asserts claims for breach of contract and alleges, among other things, that the loans in the trust, which had an original principal balance of approximately $593 million, breached various representations and warranties. The notice seeks, among other relief, specific performance of the loan breach remedy procedures in the transaction documents, unspecified damages, indemnity, and interest.

 

On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against MS&Co., certain affiliates, and other defendants in the N.Y. Supreme Court. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff currently at issue in this action was approximately $644 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court granted in part and denied in part MS&Co.’s motion to dismiss the complaint. On June 20, 2017 the appellate division affirmed the lower court’s June 10, 2014 order. On October 3, 2017, the appellate division denied MS&Co.’s motion for leave to appeal to the New York Court of Appeals. At December 25, 2017, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $215 million, and the certificates had incurred actual losses of approximately $88 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $215 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses.

 

On May 17, 2013, plaintiff in IKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed a complaint against MS&Co. and certain affiliates in the N.Y. Supreme Court. The complaint alleges that defendants made material misrepresentations and omissions in the sale to plaintiff of certain mortgage passthrough certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiff was approximately $132 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On October 29, 2014, the court granted in part and denied in part MS&Co.’s motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $116 million. On August 11, 2016, the appellate division affirmed the trial court’s order denying in part MS&Co.’s motion to dismiss the complaint. At December 25, 2017, the current unpaid balance of the remaining mortgage pass-through certificates at issue in this action was approximately $24 million, and the certificates had incurred actual losses of $58 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $24 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

 

On September 23, 2013, the plaintiff in National Credit Union Administration Board v. Morgan Stanley & Co. Inc., et al. filed a complaint against MS&Co. and certain affiliates in the SDNY. The complaint alleged that defendants made untrue statements of material fact or omitted to state material facts in the sale to the plaintiff of certain mortgage pass-through certificates issued by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten and/or sold by MS&Co. to plaintiffs in the matters was approximately $417 million. The complaint alleged violations of federal and various state securities laws and sought, among other things, rescissionary and compensatory damages. On November 23, 2015, the parties reached an agreement to settle the matter.

 

On July 23, 2014, the SEC approved a settlement by MS&Co. and certain affiliates to resolve an investigation related to certain subprime RMBS transactions sponsored and underwritten by those entities in 2007. Pursuant to the SEC’s investigation, MS&Co. and certain affiliates were charged with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act by misleading investors in a pair of RMBS securitizations that the firms underwrote, sponsored, and issued. The investigation specifically found that the firms misrepresented the current or historical delinquency status of mortgage loans underlying those RMBS securitizations that came against a backdrop of rising borrower delinquencies and unprecedented distress in the subprime market. As part of the settlement, MS&Co. and certain affiliates agreed to pay disgorgement and penalties in an amount of $275 million and neither admitted nor denied the SEC’s findings.

 

79

 

 

On September 16, 2014, the Virginia Attorney General’s Office filed a civil lawsuit, styled Commonwealth of Virginia ex rel. Integra REC LLC v. Barclays Capital Inc., et al., against MS&Co. and several other defendants in the Circuit Court of the City of Richmond related to RMBS. The lawsuit alleges that the MS&Co. and the other defendants knowingly made misrepresentations and omissions related to the loans backing RMBS purchased by the Virginia Retirement System (“VRS”). The complaint alleges VRS suffered total losses of approximately $384 million on these securities, but does not specify the amount of alleged losses attributable to RMBS sponsored or underwritten by the MS&Co. The complaint asserts claims under the Virginia Fraud Against Taxpayers Act, as well as common law claims of actual and constructive fraud, and seeks, among other things, treble damages and civil penalties. On January 6, 2016, the parties reached an agreement to settle the litigation. An order dismissing the action with prejudice was entered on January 28, 2016.

 

In October 2014, the Illinois Attorney General’s Office (“ILAG”) sent a letter to MS&Co. alleging that MS&Co. knowingly made misrepresentations related to RMBS purchased by certain pension funds affiliated with the State of Illinois and demanding that MS&Co. pay ILAG approximately $88 million. MS&Co. and ILAG reached an agreement to resolve the matter on February 10, 2016.

 

On January 13, 2015, NYAG, which is also a member of the RMBS Working Group, indicated that it intended to file a lawsuit related to approximately 30 subprime securitizations sponsored by MS&Co. NYAG indicated that the lawsuit would allege that MS&Co. misrepresented or omitted material information related to the due diligence, underwriting and valuation of the loans in the securitizations and the properties securing them and indicated that its lawsuit would be brought under the Martin Act. MS&Co. and NYAG reached an agreement to resolve the matter on February 10, 2016.

 

On February 25, 2015, MS&Co. reached an agreement in principle with the DOJ, Civil Division and the United States Attorney’s Office for the Northern District of California, Civil Division (collectively, the “Civil Division”) to pay $2.6 billion to resolve certain claims that the Civil Division indicated it intended to bring against MS&Co. That settlement was finalized on February 10, 2016.

 

On April 21, 2015, the Chicago Board Options Exchange, Incorporated (“CBOE”) and the CBOE Futures Exchange, LLC (“CFE”) filed statements of charges against MS&Co. in connection with trading by one of MS&Co.’s former traders of EEM options contracts that allegedly disrupted the final settlement price of the November 2012 VXEM futures. CBOE alleged that MS&Co. violated CBOE Rules 4.1, 4.2 and 4.7, Sections 9(a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. CFE alleged that MS&Co. violated CFE Rules 608, 609 and 620. The matters were resolved on June 28, 2016 without any findings of fraud.

 

On June 18, 2015, MS&Co. entered into a settlement with the SEC and paid a fine of $500,000 as part of the MCDC Initiative to resolve allegations that MS&Co. failed to form a reasonable basis through adequate due diligence for believing the truthfulness of the assertions by issuers and/or obligors regarding their compliance with previous continuing disclosure undertakings pursuant to Rule 15c2-12 in connection with offerings in which MS&Co. acted as senior or sole underwriter.

 

On August 6, 2015, MS&Co. consented to and became the subject of an order by the CFTC to resolve allegations that MS&Co. violated CFTC Regulation 22.9(a) by failing to hold sufficient US Dollars in cleared swap segregated accounts in the United States to meet all US Dollar obligations to cleared swaps customers. Specifically, the CFTC found that while MS&Co. at all times held sufficient funds in segregation to cover its obligations to its customers, on certain days during 2013 and 2014, it held currencies, such as euros, instead of US dollars, to meet its US dollar obligations. In addition, the CFTC found that MS&Co. violated Regulation 166.3 by failing to have in place adequate procedures to ensure that it complied with Regulation 22.9(a). Without admitting or denying the findings or conclusions and without adjudication of any issue of law or fact, MS&Co. accepted and consented to the entry of findings, the imposition of a cease and desist order, a civil monetary penalty of $300,000, and undertakings related to public statements, cooperation, and payment of the monetary penalty.

 

On April 1, 2016, the California Attorney General’s Office filed an action against MS&Co. and certain affiliates in California state court styled California v. Morgan Stanley, et al., on behalf of California investors, including the California Public Employees’ Retirement System and the California Teachers’ Retirement System. The complaint alleges that MS&Co. made misrepresentations and omissions regarding residential mortgage-backed securities and notes issued by the Cheyne SIV, and asserts violations of the California False Claims Act and other state laws and seeks treble damages, civil penalties, disgorgement, and injunctive relief. On September 30, 2016, the court granted MS&Co.’s demurrer, with leave to replead. On October 21, 2016, the California Attorney General filed an amended complaint. On January 25, 2017, the court denied MS&Co.’s demurrer with respect to the amended complaint.

 

80

 

 

On December 20, 2016, MS&Co. consented to and became the subject of an order by the SEC in connection with allegations that MS&Co. willfully violated Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-3(e), 17a-5(a), and 17a-5(d) thereunder, by inaccurately calculating its Reserve Account requirement under Rule 15c3-3 by including margin loans to an affiliate in its calculations, which resulted in making inaccurate records and submitting inaccurate reports to the SEC. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, MS&Co. consented to a cease and desist order, a censure, and a civil monetary penalty of $7,500,000.

 

On September 28, 2017, the CFTC issued an order filing and simultaneously settling charges against MS&Co. for failing to diligently supervise the reconciliation of exchange and clearing fees with the amounts it ultimately charged customers for certain transactions on the CME Group, ICE Futures U.S., and other exchanges. The CFTC order requires MS&Co. to pay a $500,000 civil monetary penalty and cease and desist from violating the CFTC regulation governing diligent supervision. The CFTC found that MS&Co. failed in certain respects to implement and maintain adequate systems and procedures for reconciling exchange and clearing fees from at least 2009 through April 2016. Prior to 2010, MS&Co. recognized the need to ensure that the increasingly complex structure for exchange fees was managed by dedicated personnel using automated systems, and MS&Co. developed and began implementing a proprietary automated system to identify, process, and reconcile exchange fees. The order finds that, in aggregate, between 2009 and April 2016, MS&Co. overcharged customers in the United States $1,550,182 in connection with transactions on various exchanges, and customers of an MS&Co. affiliate were overcharged $1,439,047 in connection with transactions on various exchanges. MS&Co. has fully refunded nearly all of the affected customers and has otherwise taken responsibility for the relevant remaining amounts. The order states that, beginning in early 2015, MS&Co. modified an automated process in its proprietary fee system to directly identify potential overcharges, and MS&Co. represents that this functionality should prevent future overcharges.

 

On November 2, 2017, the CFTC issued an order filing and simultaneously settling charges against MS&Co. for non-compliance with applicable rules governing Part 17 Large Trader reports to the CFTC spanning a ten-year period and affecting thousands of line items of information. The CFTC order requires MS&Co. to pay a $350,000 civil monetary penalty, cease and desist from further violations of the CEA and applicable regulations, and comply with certain undertakings, including continuing cooperation with the CFTC’s Division of Enforcement in any investigation, civil litigation, or administrative matter related to the subject matter of this action. MS&Co.’s Large Trader reports to the CFTC included substantial amounts of data. The order finds that from 2007 through 2017, MS&Co. omitted mandatory futures and options data from its Part 17 Large Trader reports to the CFTC. These omissions were the result of four distinct problems with MS&Co.’s proprietary reporting software. Each one of these software issues caused required data to be omitted. The order finds that, by not including this mandatory futures and options data in its Large Trader reports, MS&Co. violated Section 4g(a) of the CEA and CFTC Regulation 17.

 

Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), is a Delaware corporation registered with the CFTC as a futures commission merchant. MLPF&S is a clearing member of CBOT, and CME, and is either a clearing member or member of all other principal U.S. futures and futures options exchanges. With regard to those domestic futures and futures options exchanges of which it is not a clearing member, MLPF&S has entered into third party brokerage relationships with futures commissions merchants that are clearing members of those exchanges. MLPF&S maintains its principal place of business at One Bryant Park, New York, NY10036. Bank of America, N.A. (“BANA”) serves as a prime broker for the Trust in the forward currency and swap markets. Bank of America Corporation (“Bank of America”) is the ultimate corporate parent of MLPF&S and BANA.

 

On July 1, 2013, the EC announced that it had addressed a Statement of Objections to Bank of America and related entities (together, the “Bank of America Entities”); a number of other financial institutions; Markit Group Limited; and the International Swaps and Derivatives Association (together, the “Parties”). The Statement of Objections sets forth the EC’s preliminary conclusion that the Parties infringed EU competition law by participating in alleged collusion to prevent exchange trading of credit default swaps and futures. According to the Statement of Objections, the conduct of the Bank of America Entities took place between August 2007 and April 2009. As part of the EC’s procedures, the Parties have been given the opportunity to review the evidence in the investigative file, respond to the EC’s preliminary conclusions, and request a hearing before the EC. If the EC is satisfied that its preliminary conclusions are proved, the EC has stated that it intends to impose a fine and require appropriate remedial measures. On December 4, 2015, the EC announced that it was closing its investigation against the Bank of America Entities and the other financial institutions involved in the investigation.

 

81

 

 

MLPF&S and certain of its affiliates have been named as defendants in a number of cases relating to their various roles as issuer, originator, seller, depositor, sponsor, and/or underwriter in mortgage-backed securities (“MBS”) offerings, pursuant to which the MBS investors were entitled to a portion of the cash flow from the underlying pools of mortgages. These cases generally include actions by individual MBS purchasers and governmental actions. Although the allegations vary by lawsuit, these cases generally allege that the registration statements, prospectuses and prospectus supplements for securities issued by securitization trusts contained material misrepresentations and omissions, in violation of the Securities Act and/or state securities laws and other state statutory and common laws. These cases generally involve allegations of false and misleading statements regarding: (i) the process by which the properties that served as collateral for the mortgage loans underlying the MBS were appraised; (ii) the percentage of equity that mortgage borrowers had in their homes; (iii) the borrowers’ ability to repay their mortgage loans; (iv) the underwriting practices by which those mortgage loans were originated; (v) the ratings given to the different tranches of MBS by rating agencies; and (vi) the validity of each issuing trust’s title to the mortgage loans comprising the pool for the securitization (collectively, “MBS Claims”). Plaintiffs in these cases generally seek unspecified compensatory damages, unspecified costs and legal fees and, in some instances, seek rescission. A number of other entities threatened legal actions against MLPF&S concerning MBS offerings.

 

On August 8, 2011, American International Group, Inc. and certain of its affiliates filed a complaint in New York Supreme Court, New York County, in a case entitled American International Group, Inc. et al. v. Bank of America Corporation et al. AIG has named, among others, MLPF&S and certain related entities as defendants. AIG’s complaint asserts certain MBS Claims pertaining to 142 MBS offerings and two MBS private placements relating to Merrill Lynch entities, in which AIG alleges that it purchased securities between 2005 and 2007. AIG seeks rescission of its purchases or a rescissory measure of damages or, in the alternative, compensatory damages of no less than $10 billion as to all defendants; punitive damages; and other unspecified relief. Defendants removed the case to the SDNY and the district court denied AIG’s motion to remand. On April 19, 2013, the U.S. Court of Appeals for the Second Circuit issued a decision vacating the order denying AIG’s motion to remand and remanded the case to district court for further proceedings concerning whether the court will exercise its jurisdiction on other grounds. On July 15, 2014, MLPF&S, Bank of America and related entities entered into a settlement agreement to resolve all RMBS claims asserted in the previously disclosed case entitled American International Group, Inc. et al. v. Bank of America Corporation et al (the “AIG Action”), among other matters. The settlement provides for dismissal with prejudice of the AIG Action and the release by AIG of MLPF&S and its affiliates from the claims asserted therein. Bank of America paid AIG $650 million in this settlement, MLPF&S’s portion of which was fully accrued.

 

On September 2, 2011, the FHFA, as conservator for Fannie Mae and Freddie Mac, filed complaints in the SDNY against Bank of America, MLPF&S and certain related entities, and certain current and former officers and directors of these entities. The actions are entitled Federal Housing Finance Agency v. Bank of America Corporation, et al., (the “FHFA Bank of America Litigation”) and Federal Housing Finance Agency v. Merrill Lynch & Co., Inc., et al. (the “FHFA Merrill Lynch Litigation”). The complaints assert certain MBS Claims relating to MBS issued and/or underwritten by Bank of America, MLPF&S and related entities in 23 MBS offerings and in 72 MBS offerings, respectively, between 2005 and 2008 and allegedly purchased by either Fannie Mae or Freddie Mac in their investment portfolios. FHFA seeks, among other relief, rescission of the consideration Fannie Mae and Freddie Mac paid for the securities or alternatively damages allegedly incurred by Fannie Mae and Freddie Mac, including consequential damages. FHFA also seeks recovery of punitive damages in the FHFA Merrill Lynch Litigation.

 

On November 8, 2012 and November 28, 2012, the court denied motions to dismiss in the FHFA Merrill Lynch Litigation and the FHFA Bank of America Litigation, respectively. On December 16, 2013, the district court granted FHFA’s motion for partial summary judgment, ruling that loss causation is not an element of, or a defense to, FHFA’s claims under Virginia or Washington, D.C. blue sky laws.

 

On March 25, 2014, Bank of America entered into a settlement with FHFA and Freddie Mac to resolve all outstanding RMBS litigation between FHFA, Fannie Mae and Freddie Mac, and Bank of America and its affiliates, including MLPF&S, as well as other matters. The net cost of the settlement to Bank of America was $6.3 billion, MLPF&S’s portion of which was fully accrued. The FHFA Settlement resolved all claims asserted in the FHFA Bank of America Litigation and FHFA Merrill Lynch Litigation, among other actions. Both actions have been dismissed and FHFA, Fannie Mae and Freddie Mac have released Bank of America and its affiliates, including MLPF&S, from the claims asserted therein.

 

82

 

 

On March 14, 2013, The Prudential Insurance Company of America and certain of its affiliates (collectively “Prudential”) filed a complaint in the U.S. District Court for the District of New Jersey, in a case entitled Prudential Insurance Company of America, et al. v. Bank of America, N.A., et al. Prudential has named, among others, MLPF&S and certain related entities as defendants. Prudential’s complaint asserts certain MBS Claims pertaining to 54 MBS offerings in which Prudential alleges that it purchased securities between 2004 and 2007. Prudential seeks, among other relief, compensatory damages, rescission or a rescissory measure of damages, treble damages, punitive damages, and other unspecified relief. On April 17, 2014, the court granted in part and denied in part defendants’ motion to dismiss the complaint. Prudential thereafter split its claims into two separate complaints, filing an amended complaint in the original action and a complaint in a separate action entitled Prudential Portfolios 2 et al. v. Bank of America, N.A., et al. Both cases are pending in the U.S. District Court for the District of New Jersey. On February 5, 2015, the court granted in part and denied in part defendants’ motion to dismiss those complaints, granting plaintiff leave to replead in certain respects. The parties have agreed to resolve Prudential’s claims for an amount that is not material to MLPF&S’s results of operations (MLPF&S’s portion of which was fully accrued as of March 31, 2015). Pursuant to the settlement, Prudential has filed stipulations for dismissal of all claims with prejudice.

 

MLPF&S received a number of subpoenas and other requests for information from regulators and governmental authorities regarding MBS and other mortgage-related matters, including inquiries, investigations and potential proceedings related to a number of transactions involving MLPF&S’s underwriting and issuance of MBS and its participation in certain CDO and structured investment vehicle offerings. These inquiries and investigations included, among others: investigations by the RMBS Working Group of the Financial Fraud Enforcement Task Force, including the DOJ and state Attorneys General concerning the purchase, securitization and underwriting of mortgage loans and RMBS. MLPF&S provided documents and testimony and continues to cooperate fully with these inquiries and investigations.

 

On August 21, 2014, Bank of America announced a comprehensive settlement with the DOJ, certain federal agencies, and the states of California, Delaware, Illinois, Kentucky, Maryland, and New York. The settlement resolves, among other things, certain federal and state civil claims concerning the MLPF&S’s participation in the packaging, origination, marketing, sale, structuring, arrangement, and issuance of RMBS and CDOs. As part of the settlement, Bank of America agreed to make $9.65 billion in payments, $5 billion of which will serve as a penalty under the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”). Additionally, Bank of America agreed to provide $7 billion worth of consumer relief, which could include, among other things, principal forgiveness and forbearance, loan modification, and targeted lending, to be completed by August 31, 2018.

 

Tutor Perini Corporation filed an action on May 18, 2011 in the U.S. District Court for the District of Massachusetts entitled Tutor Perini Corporation v. Banc of America Securities LLC, now known as Merrill Lynch, Pierce, Fenner & Smith Incorporated, successor by merger, and Bank of America, N.A. The complaint alleges that defendants failed to disclose material facts about the market for ARS that Tutor Perini purchased from BAS in late 2007 and early 2008. The complaint alleges that auctions for those ARS failed beginning in February 2008, allegedly preventing Tutor Perini from liquidating its ARS at par value in the auctions, and that Tutor Perini subsequently sold its ARS on the secondary market at a loss. The complaint asserts federal securities-fraud, MUSA, Massachusetts Unfair and Deceptive Trade Practices Act (“UDTPA”), common-law fraud, unsuitability, and intentional- and negligent-misrepresentation claims. Plaintiff seeks damages in excess of $100M.

 

On August 12, 2015, the district court granted defendants summary judgment dismissing all claims. On November 21, 2016, the U.S. Court of Appeals for the First Circuit affirmed the district court’s decision with respect to all claims against BANA and as to Perini’s unsuitability, common-law fraud, and intentional misrepresentation claims against Banc of America Securities LLC, but vacated and remanded for further proceedings on the federal securities-fraud, MUSA, UDTPA, and negligent- misrepresentation claims against Banc of America Securities LLC. The parties resolved the matter for $37 million and the case was dismissed with prejudice on June 6, 2017.

 

On July 31, 2008, the Commonwealth of Massachusetts Office of the Secretary of the Commonwealth Securities Division (“MSD”) alleged that MLPF&S violated the Massachusetts Uniform Securities Act, which, in part, prohibits unethical or dishonest conduct or practices in the securities business, concerning the sale of ARS to retail and other customers by MLPF&S. Without admitting or denying the allegations, MLPF&S entered into a settlement with the MSD, in which it agreed to certain undertakings, including offering to buy back eligible ARS from eligible investors. MLPF&S agreed to pay the MSD a civil penalty of $1,598,650.90, as part of a $125,000,000 fine that will be allocated at the Commonwealth of Massachusetts and other states’ discretion to resolve all underlying conduct relating to the sale of ARS. Three states – Connecticut, Utah, and Washington have identified their respective state settlements as constituting a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct. MLPF&S disagrees with their characterizations. 52 of the potential 54 multistate settlements have been completed to date.

 

83

 

 

Between June 5, 2009 and May 17, 2012, MLPF&S executed block trades for customers in CBOT Interest Rate futures contracts that were not reported to CBOT within the applicable time limit following execution. In addition, MLPF&S misrepresented the true and accurate time of execution of block trades to the CBOT thereby violating legacy CBOT Rules 526.F and 432.I. Further, MLPF&S failed to maintain accurate written or electronic records of the block trade transactions (specifically, the order tickets and other records MLPF&S employed to record block trades contained inaccurate timing information) and did not have accurate and reliable time-keeping mechanisms in place upon which to base the time of execution in violation of CBOT Rule 536. By failing to diligently supervise its employees or agents in the conduct of MLPF&S’s business relating to the CBOT as outlined above, MLPF&S violated legacy CBOT Rule 432.W. Without admitting or denying the rule violations, MLPF&S consented to the entry of the CBOT’s decision and agreed to pay a fine of $190,000.

 

Between June 4, 2009 and August 8, 2011, MLPF&S executed block trades for customers in the Eurodollars futures market that were not reported to the CME within the applicable time limit following execution. In addition, MLPF&S misrepresented the true and accurate time of execution of block trades to the CME thereby violating legacy CME Rules 526.F and 432.I. Further, MLPF&S failed to maintain accurate written or electronic records of the block trade transactions (specifically, the order tickets and other records MLPF&S employed to record block trades contained inaccurate timing information) and did not have accurate and reliable time-keeping mechanisms in place upon which to base the time of execution in violation of CME Rule 536. By failing to diligently supervise its employees or agents in the conduct of MLPF&S’s business relating to the CME as outlined above, MLPF&S violated legacy CME Rule 432.W. Without admitting or denying the rule violations, MLPF&S consented to the entry of the CME’s Decision and agreed to pay a fine of $60,000.

 

Pursuant to an offer of settlement made by MLPF&S on December 12, 2013, the SEC issued an order stating that MLPF&S violated the federal securities laws in connection with its structuring and marketing of a series of CDO transactions in 2006 and 2007. According to the order, MLPF&S failed to inform investors in two CDOs that a hedge fund firm that bought the equity in the transactions but whose interests were not necessarily the same as those of the CDOs’ other investors, had undisclosed rights relating to, and exercised significant influence over, the selection of the CDOs’ collateral. The order stated that, as a result of its conduct, MLPF&S violated Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 17(a)(1) of the Exchange Act and Rule 17a-3(a)(2) thereunder. MLPF&S consented to the entry of the order without admitting or denying the findings therein. The order (1) required that MLPF&S cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 17(a)(1) of the Exchange Act and Rule 17a-3(a)(2) thereunder; (2) censured MLPF&S; and (3) required that MLPF&S pay disgorgement of $56,286,000 and prejudgment interest of $19,228,027 and a civil money penalty in the amount of $56,286,000 (for a total payment of $131,800,027).

 

From at least January 1, 2010 through April 2013 (the “Relevant Period”), MLPF&S failed to supervise diligently its officers’, employees’, and agents’ processing of exchange and clearing fees charged to its customers, in violation of CFTC Regulation 166.3. As a result, MLPF&S’s reconciliation process for identifying and correcting discrepancies between the invoices from the exchange clearinghouses and the amounts charged to customers has been inaccurate and faulty since at least January 1, 2010, and led to instances in which MLPF&S appears to have overcharged some customers and undercharged others. Where MLPF&S has confirmed that there was an overcharge to a customer, the customer’s account has been adjusted, but MLPF&S has been unable to fully resolve some discrepancies. Additionally, during the Relevant Period, MLPF&S did not hire qualified personnel to conduct and oversee the fee reconciliations or provide adequate training to existing personnel regarding fee reconciliations. Without admitting or denying any of the findings or conclusions, MLPF&S agreed to the entry of the order, agreed to pay a civil monetary penalty of $1,200,000, cease and desist from further violations of CFTC Regulation 166.3, and undertake to implement strengthened processes and procedures related to futures exchange and clearing fee reconciliations that will not only improve accuracy, but will detect when MLPF&S’s customers have been charged inaccurate futures exchange and clearing fees. MLPF&S self-identified this matter before the CFTC began its investigation and has fully cooperated with the CFTC’s review of this matter.

 

On November 25, 2014, the U.S. District Court for the Western District of North Carolina issued a Final Judgment as to MLPF&S as successor by merger to Banc of America Securities LLC (the “SEC Final Judgment”) in the civil injunctive action for which a complaint was filed by the SEC on August 6, 2013 against MLPF&S, and other entities (collectively the “Entities”). The SEC complaint alleged that the Entities made material misrepresentations and omissions in connection with the sale of RMBS. Specifically, the SEC complaint alleged that the Entities failed to disclose the disproportionate concentration of wholesale loans underlying the RMBS as compared to prior RMBS offerings. The SEC complaint also alleged that the concentration of wholesale loans in the RMBS included higher likelihood that the loans would be subject to material underwriting errors, become severely delinquent, fail early in the life of the loan, or prepay. The SEC complaint further alleged that the Entities violated Regulation S-K and Subpart Regulation AB of the Securities Act by failing to disclose material characteristics of the pool of loans underlying the RMBS, that the Entities made material misrepresentations and omissions in their public files and in the loan tapes provided to investors and rating agencies, and that MLPF&S violated section 5(b)(1) of the Securities Act by failing to file with the SEC certain loan tapes that were provided only to select investors. MLPF&S consented to the entry of the SEC Final Judgment without admitting or denying the allegations in the SEC complaint. The SEC Final Judgment states that MLPF&S was permanently restrained and enjoined from violating Sections 5(b)(1), 17(a)(2) and 17(a)(3) of the Securities Act, and jointly and severally with the other Entities liable for disgorgement of $109,220,000, prejudgment interest of $6,620,000 and a civil penalty of $109,220,000; the District Court retained jurisdiction over the administration of any distribution of the foregoing funds.

 

84

 

 

On June 1, 2015, pursuant to SEC Administrative Release 34-75083, the SEC announced that public administrative and cease and desist proceedings were instituted against MLPF&S and Merrill Lynch Professional Clearing Corp. (“MLPro”) (collectively, “Merrill’) for violations of Rule 203(b) of Regulation SHO in connection with its practices related to its execution of short sales. The violations arose from two separate issues with respect to Merrill’s use of its easy to borrow list (“ETB List”) in connection with the execution of short sale transactions. First, Merrill’s execution platforms continued to accept short sales orders in reliance on the firm’s ETB list as the source of the locate after having learned of facts indicating that such reliance was no longer reasonable. As a consequence, Merrill’s conducted violated Rule 203(b) of Regulation SHO in that Merrill lacked the requisite reasonable grounds to believe the affected securities could be borrowed for delivery on delivery date as required by the rule. In addition, by recording the ETB list as the locate source in instances where Merrill had determined that such was no longer reasonable, Merrill failed to document an appropriate locate as required by the rule. Second, there were in certain instances in which Merrill utilized data that was more than 24 hours old to construct its ETB List, which, at times, resulted in securities being included on the ETB List when they otherwise should not have been. MLPF&S and MLPro have consented to (a) cease and desist from committing or causing any violations and any future violations of Rule 203(b) of Regulation SHO; (b) be censured; (c) pay disgorgement of $1.56 million plus prejudgment interest; (d) pay a civil monetary penalty of $9 million; and (e) comply with certain undertakings, including retaining an independent consultant within thirty (30) days of entry of the administrative order to conduct a review of their policies, procedures and practices with respect to their acceptance of short sale orders for execution in reliance on the firm’s ETB List and procedures to monitor compliance therewith to satisfy certain of its obligations under Rule 203(b) of Regulation SHO. In anticipation of the institution of these proceedings, Merrill submitted an offer of settlement which the SEC accepted. Merrill admits the findings, acknowledges that its conduct violated the federal securities laws, admits the SEC’s jurisdiction over it and the subject matter of these proceedings, and consents to the entry of this order instituting administrative and cease-and-desist proceedings pursuant to Sections 15(b) and 21c of the Exchange Act, making findings, and imposing remedial sanctions and a cease- and-desist order. Accordingly, it was ordered that Merrill cease and desist from committing or causing any violations and any future violations of Rule 203(b) of Regulation SHO and be censured. Merrill paid disgorgement, which represents profits gained as a result of the conduct, of $1,566,245.67 and prejudgment interest of $334,564.65 to the SEC. Merrill paid a civil money penalty in the amount of $9 million to the SEC. Merrill shall comply with the undertakings enumerated in the offer of settlement.

 

On June 18, 2015, the SEC brought administrative and cease-and-desist proceedings against MLPF&S on account of MLPF&S willfully violating section 17(a)(2) of the Securities Act. MLPF&S, a registered broker-dealer, conducted inadequate due diligence in certain offerings and as a result, failed to form a reasonable basis for believing the truthfulness of the assertions by these issuers and/or obligors regarding their compliance with previous continuing disclosure undertakings pursuant to Rule 15c2-12. This resulted in MLPF&S offering and selling municipal securities on the basis of materially misleading disclosure documents. The violations were self-reported by MLPF&S to the SEC pursuant to the Division of Enforcement’s Municipalities Continuing Disclosure Cooperation (“MCDC”) initiative. In anticipation of the institution of these proceedings, MLPF&S submitted an offer of settlement which the SEC accepted. MLPF&S consequently consented to the entry of the order instituting administrative and cease-and-desist proceedings pursuant to Section 8a of the Securities Act and Section 15(b) of the Exchange Act, making findings, and imposing remedial sanctions and a cease-and-desist order. In view of the foregoing, the SEC deemed it appropriate and in the public interest to impose the sanctions agreed to in MLPF&S’s offer. Accordingly, the SEC ordered that MLPF&S cease and desist from committing or causing any violations and any future violations of 17(a)(2) of the Securities Act; pay a civil money penalty in the amount of $500,000 to the SEC; and retain an independent consultant to conduct a review of MLPF&S’s policies and procedures as they relate to municipal securities underwriting due diligence.

 

85

 

 

On June 23, 2016, the SEC issued an administrative order in which it found that Merrill had willfully violated Section 15(c)(3) of the Exchange Act and Rule 15c3-3 thereunder and Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(10) and 17a-5(a) thereunder, and that MLPF&S willfully violated Section 17(a)(1) of the Exchange Act and Rules 17a-5(d)(3) (as it existed prior to amendments to Rule 17a-5 in 2014), 17a-5(d)(2)(ii), 17a-5(d)(3) and 17a-11(e) thereunder, and Exchange Act Rule 21F-17. Specifically, the order found that (i) MLPF&S and MLPro engaged in a series of complex trades that allowed it to use customer cash to finance firm inventory, (ii) MLPF&S allowed certain of its clearing banks to hold liens on customer securities, and (iii) MLPF&S used language in certain of its policies, procedures, and agreements with employees that unduly limited the disclosure of confidential information. In determining to accept MLPF&S’s and MLPro’s offer, the SEC considered remedial acts promptly undertaken by MLPF&S and MLPro and substantial cooperation afforded the SEC staff during the course of its investigation. In the order, (i) MLPF&S and MLPro were censured, (ii) MLPF&S was ordered to cease and desist from committing or causing any violations and any future violations of Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-3, 17a-3(a)(10), 17a-5(a), 17a-5(d)(2)(ii), 17a- 5(d)(3), 17a-11(e) and 21F-17 thereunder, (iii) MLPro was ordered to cease and desist from committing or causing any violations and any future violations of Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-3, 17a-3(a)(10) and 17a-5(a) thereunder, (iv) MLPF&S and MLPro were ordered to pay disgorgement of $50,000,000 and prejudgment interest in the amount of $7,000,000, and (v) MLPF&S was ordered to pay a civil monetary penalty of $358,000,000.

 

On June 23, 2016, the SEC issued an administrative order in which it found that MLPF&S, without admitting or denying any allegations, violated Section 17(a)(2) of the Securities Act. Specifically, the order found that MLPF&S failed to adequately disclose certain fixed costs in a proprietary volatility index linked to structured notes known as Strategic Return Notes (“SRNs”) of Bank of America, which resulted in materially misleading disclosures in the offering materials of the fixed costs associated with the SRNs. In the order, MLPF&S was ordered to (i) cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) of the Securities Act, and (ii) to pay a civil monetary penalty of $10,000,000.

 

On September 22, 2017, the CFTC announced that MLPF&S agreed to the entry of an order that alleged that the CFTC had reason to believe that MLPF&S (a) violated Regulation 166.3 under the CEA in connection with its alleged failure to supervise diligently MLPF&S’s response to the investigation by the CME Group Inc.’s Market Regulation Department regarding recordkeeping and execution practices with respect to block trades; (b) violated Regulation 166.3 under the CEA in connection with its alleged inadequate procedures for preparing and maintaining records for block trades executed by the swaps desk, including procedures for recording accurate block trade execution times and not being diligent in ensuring that its existing procedures for preparing and maintaining records for block trades were being implemented; and (c) violated Section 4g of the CEA and Regulations 1.31 and 1.35 under the CEA, in connection with the alleged failure to maintain certain books and records regarding the execution of block trades. Without admitting or denying any of the findings or conclusions in the order, MLPF&S consented to the imposition of the following sanctions: (1) to cease and desist from violating Section 4g of the CEA and Regulations 1.31, 1.35 and 166.3 thereunder, (2) to pay a civil monetary penalty in the amount of $2,500,000, and (3) to comply with certain undertakings.

 

On March 8, 2018, the SEC announced a settlement of charges against MLPF&S for its failure to perform required gatekeeping functions in the unregistered sales of securities on behalf of a China-based issuer and its affiliates. The SEC’s order found that MLPF&S sold almost three million shares of Longtop Financial Technological Limited’s securities into the market despite red flags indicating that the sales could be part of an unlawful unregistered distribution. Ultimately, the distribution generated almost $38 million in proceeds for the overseas issuer and its affiliates. The SEC’s order found that MLPF&S violated Sections 5(a) and 5(c) of the Securities Act. In settlement, without admitting or denying the SEC’s findings, MLPF&S agreed to be censured and consented to the order requiring it to cease and desist from committing or causing any future violations of the registration provisions of the Securities Act. The order also requires MLPF&S to pay a penalty of $1.25 million and more than $154,000 in disgorgement and prejudgment interest from commissions and fees earned on the improper sales.

 

On June 12, 2018, the SEC announced that MLPF&S will pay more than $15 million to settle charges that its employees misled customers into overpaying for RMBS. In its order, the SEC found that MLPF&S traders and salespersons convinced the bank’s customers to overpay for RMBS by deceiving them about the price MLPF&S paid to acquire the securities. The order also found that MLPF&S’s RMBS traders and salespersons illegally profited from excessive, undisclosed commissions – called “mark-ups” – which in some cases were more than twice the amount the customers should have paid. According to the SEC’s order, MLPF&S failed to have compliance and surveillance procedures in place that were reasonably designed to prevent and detect the misconduct that increased the firm’s profits on RMBS transactions to the detriment of its customers. The SEC’s order found that that the MLPF&S traders and salespersons violated antifraud provisions of the federal securities laws in purchasing and selling RMBS and that MLPF&S failed to reasonably supervise them. Without admitting or denying the findings, MLPF&S agreed to be censured, pay a penalty of approximately $5.2 million, and pay disgorgement and interest of more than $10.5 million to MLPF&S customers that were parties to the transactions that are the subject of the order.

 

86

 

 

On June 19, 2018, the SEC charged MLPF&S with misleading customers about how it handled their orders. MLPF&S agreed to settle the charges, admit wrongdoing, and pay a $42 million penalty. According to the SEC’s order, MLPF&S falsely informed customers that it had executed millions of orders internally when it actually had routed them for execution at other broker-dealers, including proprietary trading firms and wholesale market makers. MLPF&S called this practice “masking.” Masking entailed reprogramming MLPF&S’s systems to falsely report execution venues, altering records and reports, and providing misleading responses to customer inquiries. By masking the broker-dealers who had executed customers’ orders, MLPF&S made itself appear to be a more active trading center and reduced access fees it typically paid to exchanges. After MLPF&S stopped masking in May 2013, it did not inform customers about its past practices, but instead took additional steps to hide its misconduct. Altogether, the SEC’s order found that MLPF&S falsely told customers that it executed more than 15 million “child” orders (portions of larger orders), comprising more than five billion shares, that actually were executed at third-party broker-dealers.

 

On August 20, 2018, the SEC charged MLPF&S with failing to disclose a conflict of interest arising out of its own business interests in deciding whether to continue offer client products managed by an outside third-party advisory firm. The SEC found that the conflict of interest arose in MLPF&S’ handling of third-party products managed by a U.S. subsidiary of a foreign multinational bank, in which more than 1,500 of MLPF&S’ retail advisory accounts had invested approximately $575 million. According to the SEC’s order, MLPF&S put new investments into these products on hold due to pending management changes at the third party, and MLPF&S’ governance committee planned to vote on a recommendation to terminate the products and offer alternatives to investors. According to the order, the third-party manager sought to prevent termination and contacted senior MLPF&S executives, including making an appeal to consider the companies’ broader business relationship. Following those communications, and in a break from ordinary practices, the governance committee did not vote and chose to defer action on termination. The governance committee later lifted the hold and opened the third-party products to new MLPF&S accounts. The SEC’s order found that MLPF&S failed to disclose to its clients the conflicts of interest in MLPF&S’ decision-making process. Without admitting or denying the findings, MLPF&S consented to the SEC’s order, which finds that MLPF&S was negligent in violating the antifraud and policies and procedures provisions of the Advisers Act. MLPF&S agreed to pay more than $4 million in disgorgement, $806,981 in prejudgment interest, and a more than $4 million penalty, and to be censured and to cease and desist from further violations.

 

On September 19, 2018, the CFTC issued an order filing and settling charges against BANA for attempted manipulation of the ISDAFIX benchmark and requiring Bank of America to pay a $30 million civil monetary penalty. The CFTC order finds that, beginning in January 2007 and continuing through December 2012, BANA made false reports and attempted to manipulate the USD ISDAFIX, a leading global benchmark referenced in a range of interest rate products, to benefit its derivatives positions, including positions involving cash-settled options on interest rate swaps and interest rate swap futures.

 

In 2013, Bank of America has received inquiries from and has been in discussions with regulatory authorities to address concerns regarding the sale and marketing of certain optional credit card debt cancellation products. Bank of America may be subject to a regulatory enforcement action and will be required to pay restitution or provide other relief to customers, and pay penalties to one or more regulators. In addition, BANA and Bank of America have been in discussions with regulatory authorities to address concerns that some customers may have paid for but did not receive certain benefits of optional identity theft protection services from third-party vendors of BANA and Bank of America, including whether appropriate oversight of such vendors existed. Bank of America has issued and will continue to issue refund checks to impacted customers and may be subject to regulatory enforcement actions and penalties.

 

On May 3, 2013, the FDIC filed a motion to dismiss BANA’s claims against the FDIC in its capacity as receiver for Colonial Bank, citing a Notice of No Value Determination, dated April 15, 2013, published by the FDIC in the Federal Register, 78 Fed. Reg. 76, 23565 (the “No Value Determination”). On July 22, 2013, BANA filed a complaint against the FDIC in the U.S. District Court for the District of Columbia entitled Bank of America, N.A. v. Federal Deposit Insurance Corporation, challenging the FDIC’s No Value Determination pursuant to the Administrative Procedure Act (the “APA Action”). On August 26, 2013, the U.S. District Court for the District of Columbia granted the FDIC’s motion to dismiss BANA’s claims against the FDIC in its capacity as receiver for Colonial Bank. The court ruled that the order of judgment would be held in abeyance pending resolution of the APA Action.

 

87

 

 

On June 9, 2009, Avenue CLO Fund Ltd., et al. v. Bank of America, N.A., Merrill Lynch Capital Corporation, et al. was filed in the U.S. District Court for the District of Nevada by certain Fontainebleau Las Vegas, LLC (“FBLV”) project lenders. Plaintiffs alleged that, among other things, BANA breached its duties as disbursement agent under the agreement governing the disbursement of loaned funds to FBLV, then a Chapter 11 debtor-in-possession. Plaintiffs seek monetary damages of more than $700 million, plus interest. This action was subsequently transferred by the U.S. Judicial Panel on Multidistrict Litigation (“JPML”) to the U.S. District Court for the Southern District of Florida. On March 19, 2012, the district court granted BANA’s motion for summary judgment on all causes of action against it in its capacity as disbursement agent and denied plaintiffs’ motion for summary judgment on those claims. On July 26, 2013, the U.S. Court of Appeals for the Eleventh Circuit affirmed in part and reversed in part the district court’s dismissal of the disbursement agent claims against BANA, holding that there were factual disputes that could not be resolved on a summary judgment motion, and remanded the case to the district court for further proceedings. Dismissal of the other claims was affirmed on a separate appeal. On December 13, 2013, the JPML remanded the action to the District of Nevada for trial. The parties have settled the action for $300 million, an amount that was fully accrued as of December 31, 2014. Pursuant to the settlement, plaintiffs have stipulated to the voluntary dismissal of their remaining claims with prejudice.

 

On November 25, 2009, BNP Paribas Mortgage Corporation (“BNP”) and Deutsche Bank AG each filed claims (the “2009 Actions”) against BANA in the SDNY entitled BNP Paribas Mortgage Corporation v. Bank of America, N.A and Deutsche Bank AG v. Bank of America, N.A. Plaintiffs allege that BANA failed to properly perform its duties as indenture trustee, collateral agent, custodian and depositary for Ocala Funding, LLC (“Ocala”), a home mortgage warehousing facility, resulting in the loss of plaintiffs’ investment in Ocala. Ocala was a wholly-owned subsidiary of Taylor, Bean & Whitaker Mortgage Corp. (“TBW”), a home mortgage originator and servicer which is alleged to have committed fraud that led to its eventual bankruptcy. Ocala provided funding for TBW’s mortgage origination activities by issuing notes, the proceeds of which were to be used by TBW to originate home mortgages. Such mortgages and other Ocala assets in turn were pledged to BANA, as collateral agent, to secure the notes. Plaintiffs lost most or all of their investment in Ocala when, as the result of the alleged fraud committed by TBW, Ocala was unable to repay the notes purchased by plaintiffs and there was insufficient collateral to satisfy Ocala’s debt obligations. Plaintiffs allege that BANA breached its contractual, fiduciary and other duties to Ocala, thereby permitting TBW’s alleged fraud to go undetected. Plaintiffs seek compensatory damages and other relief from BANA, including interest and attorneys’ fees, in an unspecified amount, but which plaintiffs allege exceeds $1.6 billion. On March 23, 2011, the court granted in part and denied in part BANA’s motions to dismiss the 2009 Actions. Plaintiffs filed amended complaints on October 1, 2012 that included additional contractual, tort and equitable claims. On June 6, 2013, the court granted BANA’s motion to dismiss plaintiffs’ claims for failure to sue, negligence, negligent misrepresentation and equitable relief. On November 24, 2014, BANA moved for summary judgment and plaintiffs moved for partial summary judgment. On February 19, 2015, BANA and BNP reached an agreement in principle to settle the 2009 actions for an amount not material to Bank of America’s results of operations, subject to the execution of a final settlement agreement.

 

On October 1, 2010, BANA filed suit in the U.S. District Court for the District of Columbia against the FDIC as receiver of Colonial Bank, TBW’s primary bank, and Platinum Community Bank (Platinum, a wholly-owned subsidiary of TBW) entitled Bank of America, National Association as indenture trustee, custodian and collateral agent for Ocala Funding, LLC v. Federal Deposit Insurance Corporation. The suit seeks judicial review of the FDIC’s denial of the administrative claims brought by BANA in the FDIC’s Colonial and Platinum receivership proceedings. BANA’s claims allege that Ocala’s losses were in whole or in part the result of Colonial and Platinum’s participation in TBW’s alleged fraud. BANA seeks a court order requiring the FDIC to allow BANA’s claims in an amount equal to Ocala’s losses and, accordingly, to permit BANA, as trustee, collateral agent, custodian and depositary for Ocala, to share appropriately in distributions of any receivership assets that the FDIC makes to creditors of the two failed banks. On August 5, 2011, the FDIC answered and moved to dismiss the amended complaint, and asserted counterclaims against BANA in BANA’s individual capacity seeking approximately $900 million in damages. The counterclaims allege that Colonial sent 4,808 loans to BANA as bailee, that BANA converted the loans into Ocala collateral without first ensuring that Colonial was paid, and that Colonial was never paid for these loans. On December 10, 2012, the U.S. District Court for the District of Columbia granted in part and denied in part the FDIC’s motion to dismiss BANA’s amended complaint. The court dismissed BANA’s claims to the extent they were brought on behalf of Ocala, holding that those claims were not administratively exhausted, and also dismissed three equitable claims, but allowed BANA to continue to pursue claims in its individual capacity and on behalf of Ocala’s secured parties, principally plaintiffs in the 2009 Actions. The court also granted in part and denied in part BANA’s motion to dismiss the FDIC’s counterclaims, allowing all but one of the FDIC’s 16 counterclaims to go forward.

 

88

 

 

On February 5, 2013, BANA filed a motion for clarification of the court’s December 10, 2012 ruling on BANA’s motion to dismiss the FDIC’s counterclaims. On March 6, 2013, the court ruled that certain language in the custodial agreement between BANA and Colonial Bank purporting to limit BANA’s liability is unenforceable due to ambiguity, and that BANA is foreclosed from introducing extrinsic evidence to resolve the ambiguity. On June 17, 2013, the court denied BANA’s motion seeking certification for interlocutory appeal of the court’s December 10, 2012 ruling as so clarified. On February 5, 2014, the U.S. Court of Appeals for the District of Columbia Circuit denied BANA’s petition for writ of mandamus that sought to vacate the December 10, 2012 and March 6, 2013 rulings.

 

On April 11, 2012, the Policemen’s Annuity & Benefit Fund of the City of Chicago, on its own behalf and on behalf of a proposed class of purchasers of 41 RMBS trusts collateralized mostly by Washington Mutual-originated (“WaMu”) mortgages, filed a proposed class action complaint against BANA and other unrelated parties in the SDNY, entitled Policemen’s Annuity and Benefit Fund of the City of Chicago v. Bank of America, N.A. and U.S. Bank National Association. BANA and U.S. Bank are named as defendants in their capacities as trustees, with BANA (formerly LaSalle Bank National Association) having served as the original trustee and U.S. Bank having replaced BANA as trustee. Plaintiff asserted claims under the federal Trust Indenture Act as well as state common law claims. Plaintiff alleged that, in light of the performance of the RMBS at issue, and in the wake of publicly available information about the quality of loans originated by WaMu, the trustees were required to take certain steps to protect plaintiff’s interest in the value of the securities, and that plaintiff was damaged by defendants’ failures to notify it of deficiencies in the loans and of defaults under the relevant agreements, to ensure that the underlying mortgages could properly be foreclosed, and to enforce remedies available for loans that contained breaches of representations and warranties. Plaintiff sought unspecified compensatory damages and/or equitable relief, and costs and expenses. The court dismissed some of the common law claims, but allowed the Trust Indenture Act claim and a claim for breach of contract to proceed. After the filing of two amended complaints and the consolidation of the case with a related matter filed on August 23, 2013, entitled Vermont Pension Investment Committee and the Washington State Investment Board v. Bank of America, N.A. and U.S. Bank National Association, 10 named plaintiffs filed a third amended complaint on October 31, 2013, on behalf of two proposed classes of purchasers of 35 trusts collateralized mostly by WaMu-originated mortgages (later reduced to 34 trusts). On June 5, 2014, the parties informed the court that they had reached an agreement in principle to settle the case for an amount not material to Bank of America’s results of operations, subject to approval of plaintiffs’ boards. The settlement remains subject to final court approval and various conditions. On November 10, 2014, the court preliminarily approved the proposed settlement, and scheduled a final approval hearing for March 12, 2015.

 

On February 24, 2012, Edward O’Donnell filed a sealed qui tam complaint under the False Claims Act against Bank of America, individually, and as successor to Countrywide, CHL and a Countrywide business division known as Full Spectrum Lending. On October 24, 2012, the DOJ filed a complaint-in-intervention to join the matter, adding a claim under FIRREA and adding BANA as a defendant. The action is entitled United States of America, ex rel, Edward O’Donnell, appearing Qui Tam v. Bank of America Corp., et al., and was filed in the SDNY. The complaint-in-intervention asserted certain fraud claims in connection with the sale of loans to FNMA and FHLMC by Full Spectrum Lending and by the Corporation and BANA. On January 11, 2013, the government filed an amended complaint which added Countrywide Bank, FSB (“CFSB”) and a former officer of Bank of America as defendants. The court dismissed False Claims Act counts on May 8, 2013. On September 6, 2013, the government filed a second amended complaint alleging claims under FIRREA concerning allegedly fraudulent loan sales to the GSEs between August 2007 and May 2008. On September 24, 2013, the government dismissed Bank of America as a defendant. Following a trial, on October 23, 2013, a verdict of liability was returned against CHL, CFSB, BANA and the former officer. On July 30, 2014, the court imposed a civil penalty of $1.3 billion on BANA. On February 3, 2015, the court denied Bank of America’s motions for judgment as a matter of law, or in the alternative, a new trial. On February 20, 2015, CHL, CFSB and BANA filed an appeal. The Second Circuit held oral argument on December 16, 2015, but has not issued a decision on the appeal.

 

On April 16, 2012, Ambac filed an action against BANA, First Franklin and various Merrill Lynch entities, including MLPF&S in New York Supreme Court relating to guaranty insurance Ambac provided on a First Franklin securitization sponsored by Merrill Lynch. The complaint alleges fraudulent inducement and breach of contract, including breach of contract claims against BANA based upon its servicing of the loans in the securitization. The complaint alleges that Ambac has paid hundreds of millions of dollars in claims and has accrued and continues to accrue tens of millions of dollars in additional claims. Ambac seeks as damages the total claims it has paid and its projected future claims payment obligations, as well as specific performance of defendants’ contractual repurchase obligations. On February 13, 2013, the district court granted defendants’ motion to dismiss. On August 4, 2015, the U.S. Court of Appeals for the District of Columbia Circuit vacated the district court’s decision and remanded the case to the district court, where proceedings have resumed.

 

89

 

 

On January 9, 2017, the FDIC filed suit against BANA in U.S. District Court for the District of Columbia alleging failure to pay a December 15, 2016 invoice for additional deposit insurance assessments and interest in the amount of $542 million for the quarters ending June 30, 2013 through December 31, 2014. On April 7, 2017, the FDIC amended its complaint to add a claim for additional deposit insurance and interest in the amount of $583 million for the quarters ending March 31, 2012 through March 31, 2013. The FDIC asserts these claims based on BANA’s alleged underreporting of counterparty exposures that resulted in underpayment of assessments for those quarters. BANA disagrees with the FDIC’s interpretation of the regulations as they existed during the relevant time period and is defending itself against the FDIC’s claims. Pending final resolution, BANA has pledged security satisfactory to the FDIC related to the disputed additional assessment amounts.

 

Government authorities in the U.S. and various international jurisdictions continue to conduct investigations, to make inquiries of, and to pursue proceedings against, a significant number of FX market participants, including Bank of America, regarding FX market participants’ conduct and systems and controls. Government authorities also continue to conduct investigations concerning conduct and systems and controls of panel banks in connection with the setting of other reference rates as well as the trading of government, sovereign, supranational and agency bonds. Bank of America is responding to and cooperating with these proceedings and investigations. In addition, Bank of America, BANA and certain Merrill Lynch entities have been named as defendants along with most of the other LIBOR panel banks in a number of individual and putative class actions by persons alleging they sustained losses on U.S. dollar LIBOR-based financial instruments as a result of collusion or manipulation by defendants regarding the setting of U.S. dollar LIBOR. Plaintiffs assert a variety of claims, including antitrust, CEA, RICO, Exchange Act, common law fraud and breach of contract claims, and seek compensatory, treble and punitive damages, and injunctive relief. All cases naming Bank of America and its affiliates relating to U.S. dollar LIBOR have been consolidated for pre-trial purposes in the SDNY.

 

In a series of rulings beginning in March 2013, the district court dismissed antitrust, RICO, Exchange Act and certain state law claims, dismissed all manipulation claims based on alleged trader conduct as to Bank of America and BANA, and substantially limited the scope of CEA and various other claims. On May 23, 2016, the U.S. Court of Appeals for the Second Circuit reversed the district court’s dismissal of the antitrust claims and remanded for further proceedings in the district court, and on December 20, 2016, the district court again dismissed certain plaintiffs’ antitrust claims in their entirety and substantially limited the scope of the remaining antitrust claims.

 

Certain antitrust, CEA and state law claims remain pending in the district court against Bank of America, BANA and certain Merrill Lynch entities, and the court is continuing to consider motions regarding them. Plaintiffs whose antitrust, Exchange Act and/or state law claims were previously dismissed by the district court are pursuing appeals in the Second Circuit.

 

In addition, Bank of America, BANA and MLPF&S were named as defendants along with other FX market participants in a putative class action filed in the SDNY, in which plaintiffs allege that they sustained losses as a result of the defendants’ alleged conspiracy to manipulate the prices of over-the-counter FX transactions and FX transactions on an exchange. Plaintiffs assert antitrust claims and claims for violations of the CEA and seek compensatory and treble damages, as well as declaratory and injunctive relief. On October 1, 2015, Bank of America, BANA and MLPF&S executed a final settlement agreement, in which they agreed to pay $187.5 million to settle the litigation. The settlement is subject to final district court approval.

 

On August 29, 2011, U.S. Bank, National Association (“U.S. Bank”), as trustee for the HarborView Mortgage Loan Trust 2005-10 (the “Trust”), a mortgage pool backed by loans originated by Countrywide Home Loans, Inc. (“CHL”), filed a complaint in New York Supreme Court, in a case entitled U.S. Bank National Association, as Trustee for HarborView Mortgage Loan Trust, Series 2005-10 v. Countrywide Home Loans, Inc. (dba Bank of America Home Loans), Bank of America Corporation, Countrywide Financial Corporation, Bank of America, N.A. and NB Holdings Corporation, alleging breaches of representations and warranties. This litigation has been stayed since March 23, 2017, pending finalization of the settlement discussed below. On December 5, 2016, the defendants and certain certificate holders in the Trust agreed to settle the litigation in an amount not material to Bank of America, subject to acceptance by U.S. Bank. U.S. Bank has initiated a trust instruction proceeding in Minnesota state court relating to the proposed settlement, and that proceeding is ongoing.

 

Conflicts Of Interest

 

General

 

The Managing Owner has not established any formal procedures to resolve the conflicts of interest described below. You should be aware that no such procedures have been established, and that, consequently, you will be dependent on the good faith of the respective parties subject to such conflicts to resolve such conflicts equitably. Although the Managing Owner will attempt to monitor and resolve these conflicts in good faith, it will be extremely difficult, if not impossible, for it to assure that these conflicts will not, in fact, result in losses for the Trust. Notwithstanding the conflict of interest, the Trust will trade in parallel with all other Managing Owner accounts traded pursuant to the Managing Owner’s Diversified Portfolio.

 

90

 

 

The Managing Owner

 

The responsibilities of the Managing Owner include acting as the managing owner and trading advisor for the Trust and engaging commodity brokers and dealers to execute trades on behalf of the Trust. The Managing Owner has a conflict of interest in that it has a financial disincentive to replace itself as either the trading advisor or the entity receiving the Management Fees from the Trust.

 

The Profit Share arrangement between the Trust and the Managing Owner may create an incentive for the Managing Owner to make trading and investment decisions (or implement the Trust’s systematic trading strategy) in a manner that is more speculative or subject to a greater degree of loss than would be the case if no such arrangement existed.

 

The Managing Owner directs the trading for clients other than the Trust. The Managing Owner and its principals may have incentives (financial or otherwise) to favor such other accounts over the Trust in such matters as, for example, the allocation of available speculative position limits. Different accounts also pay different fees, trade at different levels of leverage and will, from time to time, compete for the same positions.

 

The Managing Owner has agreed to treat the Trust equitably with its other accounts. However, the Managing Owner trades different portfolios for other accounts and there can be no assurance whatsoever that such other portfolios will not outperform the Trust. The Managing Owner will, however, trade the Trust’s account in parallel with all other accounts managed by the Managing Owner pursuant to the Diversified Portfolio.

 

The Trust’s Brokers

 

The Clearing Brokers and other brokers employed by the Trust act from time to time as commodity brokers for other accounts with which they are affiliated or in which they or one of their respective affiliates has a financial interest. In addition, various accounts traded through the Trust’s brokers (and over which their personnel may have discretionary trading authority) may take positions in the futures markets opposite to those of the Trust or compete with the Trust for the same positions. The Trust’s brokers may have a conflict of interest in their execution of trades for the Trust and for other of their customers. The Managing Owner has, however, no reason to believe that the Trust’s brokers would knowingly or deliberately favor any other customer over the Trust with respect to the execution of commodity trades.

 

The Managing Owner selects the Trust’s Clearing Brokers, other brokers and counterparties to execute transactions on behalf of the Trust. The commission rates or “bid-ask” spreads paid by the Trust may not be the lowest rates the Trust could have obtained, but the Managing Owner believes that those rates/spreads are competitive with rates paid by similar customers. The Managing Owner selects those service providers based on various factors, including, but not limited to, quality of execution, commission rates, market knowledge, financial condition and creditworthiness. The Managing Owner may also consider factors that benefit the Managing Owner, such as the referral of prospective Trust and other investors to the Managing Owner. The Managing Owner’s receipt of such benefits may give it an incentive to select a Clearing Broker, other broker or counterparty that it would not otherwise use, but the Managing Owner intends to use only those Clearing Brokers, other brokers and counterparties that provide the Trust with high quality services and competitive commission rates consistent with the Managing Owner’s obligations to the Trust.

 

Certain officers or employees of the Trust’s brokers are, and may in the future be, members of U.S. commodities exchanges and are serving, and may in the future serve, on the governing bodies and standing committees of such exchanges and of their clearinghouses and of various industry organizations. In such capacities, these employees have a fiduciary duty to the exchanges and their clearinghouses which could compel such employees to act in the best interests of these entities, perhaps to the detriment of the Trust.

 

The Selling Agents

 

The Selling Agents receive substantial selling commissions on the sale of Units, whether in the form of upfront selling commissions, installment selling commissions or both. Consequently, the Selling Agents have a conflict of interest in advising their clients whether to invest in the Units.

 

The Selling Agents receive ongoing compensation or installment selling commissions based on the value of outstanding Units sold by such Selling Agents. Consequently, the Selling Agents have a disincentive to advise clients to redeem their Units even when doing so is in such clients’ best interests.

 

The total dollar amount of brokerage commissions paid by the Trust is dependent upon the size of the Trust’s capitalization. Consequently, the Selling Agents have a financial incentive to discourage their clients from redeeming Units.

 

91

 

 

In addition, one or more Selling Agents may also be selected, based on the criteria described above, to serve as Clearing Brokers, other brokers or counterparties for the Trust.

 

Proprietary Trading, Trading for Other Accounts and Portfolio Allocations

 

The Managing Owner, the Clearing Brokers and other clearing brokers employed by the Trust and their respective principals and affiliates may trade in the futures, forward and spot markets for their own accounts (each, a “Proprietary Account”) and for the accounts of their clients. In doing so, they may take positions opposite to those held by the Trust or may compete with the Trust for positions in the marketplace. Records of this trading are not available for inspection. Such trading may create conflicts of interest on behalf of one or more of such persons in respect of their obligations to the Trust.

 

Because the Managing Owner, the Clearing Brokers and other brokers employed by the Trust and their respective principals and affiliates may trade for their Proprietary Accounts at the same time that they are managing the Trust’s account, you should be aware that, as a result of a neutral allocation system, testing a new trading system, more aggressive trading or other actions not constituting a violation of fiduciary duty, such persons may, from time to time, take positions in their Proprietary Accounts which are opposite, or ahead of, the positions taken for the Trust. Such persons have incentives to favor Proprietary Accounts over the Trust. The Managing Owner generally prohibits its personnel from trading in the futures, forward and spot markets for their personal accounts, subject to limited exceptions and pre-approval.

 

In addition, the Managing Owner manages multiple portfolios, both proprietary and non-proprietary, pursuant to which its strategies are traded, and certain of these portfolios trade financial instruments in markets which are traded by other portfolios. Although it is Millburn’s policy to allocate investment opportunities in such markets on a fair and equitable basis among the relevant portfolios, certain portfolios may receive larger allocations of such opportunities on account of the specialized nature of such portfolios. Further, some portfolios, as traded on behalf of certain client accounts, may be allocated investment opportunities in markets to a greater or lesser extent than the same or similar portfolios which are traded on behalf of other client accounts because of instructions received from a client and/or the size or nature of a client account. As a result, certain portfolios and client accounts may receive increased allocations to the detriment of other portfolios and client accounts. See “The Risks You Face — The Managing Owner May Manage Accounts for Other Clients of the Managing Owner and Its Affiliates”.

 

Fiduciary Duty and Remedies

 

In evaluating the foregoing conflicts of interest, a prospective investor should be aware that the Managing Owner has a responsibility to Unitholders to exercise good faith and fairness in all dealings affecting the Trust. The fiduciary responsibility of the Managing Owner is comparable to that of a general partner of a limited partnership.

 

If you believe that the Managing Owner has violated its fiduciary duty to the Unitholders, you may seek legal relief individually or on behalf of the Trust under applicable laws to recover damages from or require an accounting by the Managing Owner. The Declaration of Trust is governed by Delaware law and any breach of the Managing Owner’s fiduciary duty under the Declaration of Trust will generally be governed by Delaware law. The Declaration of Trust does not limit fiduciary obligations under Delaware or common law. The Managing Owner may, however, assert as a defense to claims of breach of fiduciary duty that the conflicts of interest and fees payable to the Managing Owner have been disclosed to you in the Prospectus.

 

The Trust And The Trustee

 

The following summary briefly describes certain aspects of the operation of the Trust. You should carefully review the Declaration of Trust attached hereto as Exhibit A and consult with your own advisors concerning the implications to you of investing in a Delaware statutory trust.

 

Principal Office; Location of Records

 

The Trust is organized under the Delaware Statutory Trust Act (formerly, the Delaware Business Trust Act). The Trust is administered, including the performance of transfer agent services, by the Managing Owner, which is temporarily located at 1270 Avenue of the Americas, 11th Floor, New York, NY 10020 and expects to relocate in mid-February 2019 to 55 West 46th Street, 31st Floor, New York, New York 10036. The contact telephone number for the Trust and the Managing Owner is (212) 332-7300. The records of the Trust, including a list of the Unitholders and their addresses, is located at the foregoing address, and available for inspection and copying by Unitholders as provided in the Declaration of Trust.

 

Certain Aspects of the Trust

 

The Trust is the functional equivalent of a limited partnership. No special custody arrangements are applicable to the Trust that would not be applicable to a limited partnership. You should not anticipate any legal or practical protections under the Delaware Statutory Trust Act greater than those available to limited partners of a limited partnership.

 

92

 

 

To the greatest extent permissible under Delaware law, the Trustee acts in a passive role, with all authority over the operation of the Trust going to the Managing Owner. The Managing Owner is the functional equivalent of a sole general partner in a limited partnership.

 

The Declaration of Trust gives Unitholders voting rights comparable to those typically extended to limited partners in publicly-offered futures funds.

 

The Trustee

 

Wilmington Trust Company, a Delaware trust company, is the sole Trustee of the Trust. The Trustee’s principal offices are located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001. The Trustee is not affiliated with either the Managing Owner or the Selling Agents.

 

The Trustee will accept service of legal process on the Trust in the State of Delaware and will make certain filings under the Delaware Statutory Trust Act. The Trustee does not owe any other duties to the Trust, the Managing Owner or the Unitholders. The Declaration of Trust provides that the Trustee is compensated by the Trust. The Managing Owner has the discretion to replace the Trustee.

 

Under the Declaration of Trust, the Trustee has delegated to the Managing Owner the exclusive management and control of all aspects of the business of the Trust. The Trustee has no duty or liability to supervise or monitor the performance of the Managing Owner, nor will the Trustee have any liability for the acts or omissions of the Managing Owner. In the course of its management, the Managing Owner may, in its sole and absolute discretion, appoint an affiliate or affiliates of the Managing Owner as additional managing owners and retain such persons, including affiliates of the Managing Owner, as it deems necessary for the efficient operation of the Trust.

 

The Trustee is not registered in any capacity with the CFTC.

 

Management of Trust Affairs; Voting by Unitholders

 

Unitholders will not take any part in the management or control and will have no voice in the operations of the Trust or its business. Unitholders may, however, remove and replace the Managing Owner as managing owner of the Trust, and may amend the Declaration of Trust, except in certain limited respects, by the affirmative vote of a majority of the outstanding Units then owned by Unitholders. The owners of a majority of the outstanding Units then owned by Unitholders may also compel dissolution of the Trust. Although the Trust will not hold any regular, or annual, meetings of the Unitholders, upon receipt of a written proposal signed by the owners of at least 10% of the outstanding Units that a meeting be called, the Managing Owner will call a meeting of the Trust. The details of this procedure are set forth in Section 18 of the Declaration of Trust attached hereto as Exhibit A. The Managing Owner has no power under the Declaration of Trust to restrict any of the Unitholders’ voting rights.

 

The Managing Owner has the right to amend the Declaration of Trust without the consent of the Unitholders provided that any such amendment is for the benefit of and not adverse to the Unitholders or the Trustee.

 

In the event that the Managing Owner or the Unitholders vote to amend the Declaration of Trust in any material respect, the amendment will not become effective before all Unitholders have had an opportunity to redeem their Units.

 

Recognition of the Trust in Certain States

 

A number of states do not have “business trust” statutes such as that under which the Trust has been formed in the State of Delaware. In order to protect Unitholders against any possible loss of limited liability, the Declaration of Trust provides that no written obligation may be undertaken by the Trust unless such obligation is explicitly limited so as not to be enforceable against any Unitholder personally.

 

Possible Repayment of Distributions Received by Unitholders; Indemnification of the Trust by Unitholders

 

The Units are limited liability investments; you may not lose more than the amount you invest plus any profits recognized on your investment. However, you could be required, as a matter of law, to return to the Trust’s estate any distribution which you received at a time when the Trust was in fact insolvent or in violation of the Declaration of Trust. In addition, although the Managing Owner is not aware of this provision ever having been invoked in the case of any public futures fund, Unitholders agree in the Declaration of Trust that they will indemnify the Trust for any harm suffered by it as a result of (1) Unitholders’ actions unrelated to the business of the Trust, (2) transfers of their Units in violation of the Declaration of Trust or (3) taxes imposed on the Trust by the states or municipalities in which such investors reside.

 

Indemnification and Standard of Liability

 

The Managing Owner and certain of its affiliates, officers, directors and controlling persons may not be liable to the Trust or any Unitholder for errors in judgment or other acts or omissions not amounting to misconduct or negligence, as a consequence of the indemnification and exculpatory provisions described in the following paragraph. You may, therefore, have more limited rights of action than you would absent such provisions.

 

93

 

 

The Managing Owner and its affiliates will not have any liability to the Trust or to any Unitholder for any loss suffered by the Trust which arises out of any action or inaction of the Managing Owner or any such affiliate if the Managing Owner or its affiliates, in good faith, determined that such course of conduct was in the best interests of the Trust, and such course of conduct did not constitute negligence or misconduct.

 

The Trust has agreed to indemnify the Managing Owner and its affiliates, officers, directors and controlling persons against claims, losses or liabilities based on their conduct relating to the Trust, provided that the conduct resulting in the claims, losses or liabilities for which indemnity is sought did not constitute negligence, misconduct or breach any fiduciary obligation to the Trust and was done in good faith and in a manner the Managing Owner, in good faith, determined to be in the best interests of the Trust.

 

The Declaration of Trust provides that the Managing Owner, its affiliates and the Selling Agents will not be indemnified for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws unless (1) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee and the court approves indemnification of the litigation costs, or (2) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee and the court approves indemnification of the litigation costs, or (3) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and related costs should be made. It is the opinion of the SEC and certain States that indemnification for violation of the securities laws is against public policy and unenforceable.

 

Transfers of Units Restricted

 

Subject to compliance with applicable securities laws, you may assign your Units upon notice to the Trust and the Managing Owner. No assignment will be effective in respect of the Trust or the Managing Owner until the first day of the month following the month in which such notice is received. An assignee may become a substituted Unitholder only with the consent of the Managing Owner and upon execution and delivery of an instrument of transfer in form and substance satisfactory to the Managing Owner.

 

There are no certificates for the Units. Transfers of Units are reflected on the books and records of the Trust. Transferors and transferees of Units will each receive notification from the Managing Owner to the effect that such transfers have been duly reflected as notified to the Managing Owner.

 

Reports to Unitholders

 

The Managing Owner will provide you with monthly reports in compliance with CFTC requirements. The Managing Owner also distributes, not later than March 15 of each year, audited financial statements and the tax information related to the Trust necessary for the preparation of your annual federal income tax returns.

 

The Managing Owner will notify all Unitholders of a Series within seven business days of any decline in the Net Asset Value per Unit of such Series to less than 50% of such Net Asset Value as of the previous month-end valuation date. In addition, the Managing Owner will notify all Unitholders of any change in the fees paid by the Trust or of any material changes in the basic investment policies or structure of the Trust. Any such notifications will include a description of your voting rights.

 

FEDERAL INCOME TAX ASPECTS

 

The following constitutes the opinion of Sidley Austin LLP and summarizes the material federal income tax consequences to individual investors in the Trust. Sidley Austin LLP’s opinion is filed as an exhibit to the registration statement related to the Units offered by this Prospectus.

 

The Trust’s Partnership Tax Status

 

The Trust will be treated as a partnership and, based on the type of income expected to be earned by the Trust, it will not be treated as a “publicly traded partnership” taxable as a corporation. Accordingly, the Trust will not pay any federal income tax.

 

Taxation of Unitholders on Profits and Losses of the Trust

 

Each Unitholder (other than Foreign Unitholders and tax-exempt U.S. Unitholders, discussed below) must pay tax on his share of the Trust’s annual income and gains, if any, even if the Trust does not make any cash distributions. The Trust will not qualify for any deduction from its income that is applicable to certain qualified business income earned by non-corporate taxpayers for taxable years beginning after December 31, 2017.

 

The Trust generally allocates the Trust’s gains and losses equally with respect to each Unit. However, a Unitholder who redeems any Units will be specially allocated the Trust’s gains and losses in order that the amount of cash a Unitholder receives for a redeemed Unit will generally equal the Unitholder’s adjusted tax basis attributable to the redeemed Unit. A Unitholder’s adjusted tax basis in his Units generally equals the amount paid for the Units, increased by income or gains allocated to the Unitholder with respect to the Units and decreased (but not below zero) by distributions, deductions and losses allocated to the Unitholder with respect to the Units.

 

94

 

 

Deductibility of Trust Losses by Unitholders

 

A Unitholder may deduct Trust losses only to the extent of his adjusted tax basis in his Units. However, a Unitholder subject to “at-risk” limitations (generally, non-corporate taxpayers and closely-held corporations) can only deduct losses to the extent the Unitholder is “at-risk.” The “at-risk” amount is similar to adjusted tax basis, except that it does not include any amount borrowed on a nonrecourse basis or from someone with an interest in the Trust.

 

“Passive-Activity Loss Rules” and Their Effect on the Treatment of Income and Loss

 

The trading activities of the Trust are not a “passive activity.” Accordingly, a Unitholder can deduct Trust losses from taxable income (subject to certain limitations, such as the limitation on deductibility of capital losses, discussed below). However, a Unitholder cannot offset losses from “passive activities” against Trust gains.

 

Cash Distributions and Unit Redemptions

 

A Unitholder who receives cash from the Trust, either through a distribution or a partial redemption, will not pay tax on that cash until his adjusted tax basis in the Units is reduced to zero. A Unitholder who receives cash upon the complete redemption of Units will recognize gain or loss for federal income tax purposes. Such gain or loss will generally equal the difference between the amount of cash received and the Unitholder’s adjusted tax basis for his Units.

 

Potential Trust-Level Consequences of Withdrawals and Transfers of Units

 

If a Unitholder receives a distribution of property in liquidation of his Units that would, if the Trust had an Internal Revenue Code of 1986, as amended (the “Code”), Section 754 election in effect, require the Trust to make a downward adjustment of more than $250,000 to the basis of its remaining assets, then even if the Trust does not have a Code Section 754 election in effect, the Trust will be required to make a downward adjustment to the basis of its remaining assets.

 

In addition, if immediately after the transfer of a Unit, the Trust’s adjusted basis in its property exceeds the fair market value by more than $250,000 of such property, the Trust generally will be required to adjust the basis of its property with respect to the transferee Unitholder.

 

Gain or Loss on Section 1256 Contracts and Non-Section 1256 Contracts

 

Section 1256 Contracts include certain futures and forward contracts as well as certain option contracts on certain futures contracts traded on U.S. exchanges. For tax purposes, Section 1256 Contracts that remain open at year-end are marked-to-market and treated as if the position were closed at year-end. The gain or loss on Section 1256 Contracts is characterized as 60% long-term capital gain or loss and 40% short-term capital gain or loss, regardless of how long the position was open.

 

Non-Section 1256 Contracts include Section 988 transactions, i.e., transactions in which the amount paid or received is denominated by reference to a foreign currency. In general, gain or loss on Section 988 transactions is characterized as ordinary income or loss. However, the Trust elects to treat gain or loss on certain Non-Section 1256 Contracts, such as foreign futures contracts, certain foreign currency forward contracts and non-equity options on foreign currencies, as capital gain or loss.

 

Trading and Investing in Swaps

 

The Trust may invest in and trade swaps.  The proper tax treatment of swaps may not be entirely free from doubt.  The Trust expects to mark-to-market its swap positions at the end of each taxable year and to treat any gain or loss on such positions as ordinary income or loss.

 

Tax on Capital Gains and Losses

 

A non-corporate Unitholder’s long-term capital gains — net gain on capital assets held more than one year and 60% of the gain on Section 1256 Contracts — are taxed at a maximum rate of 20%. Short-term capital gains — net gain on capital assets held one year or less and 40% of the gain on Section 1256 Contracts — are subject to tax at the same rates as ordinary income.

 

Individual taxpayers can deduct capital losses only to the extent of their capital gains plus $3,000. Accordingly, the Trust could suffer significant losses and a Unitholder could still be required to pay taxes on his share of the Trust’s interest income. Capital losses generally may not be carried back to offset capital gains in prior years, but can be carried forward indefinitely.

 

An individual taxpayer can carry back net capital losses on Section 1256 Contracts three years to offset earlier gains on Section 1256 Contracts. To the extent the taxpayer cannot offset past Section 1256 Contract gains, he can carry forward such losses indefinitely as losses on Section 1256 Contracts.

 

95

 

 

No Deduction for Certain Expenses

 

Individual taxpayers may be unable to deduct investment advisory expenses and other expenses of producing income. Sidley Austin LLP has advised the Managing Owner that the amount, if any, of the Trust’s expenses which might be subject to this restriction should be de minimis. Based on such advice, the Managing Owner treats these items as ordinary business deductions, or income allocations not subject to the deductibility restrictions that apply to investment advisory expenses. However, the IRS could take a different position. The IRS could contend that the Management Fee, the Profit Share or the ordinary expenses of the Trust should be recharacterized as investment advisory expenses or, alternatively, capitalized. If these items were treated as investment advisory expenses or were capitalized, individual taxpayers would have additional tax liability. See also “— Syndication Expenses,” below.

 

Limitation on Deductibility of Business Interest

 

The Trust may be subject to certain limitations on its ability to deduct some or all of the interest paid or accrued on its indebtedness that is considered to be allocable to a trade or business conducted by the Trust under Section 163(j) of the Code. Any interest that is not allowed as a deduction for the taxable year under Section 163(j) of the Code will be allocated to the Unitholders, but may only be deducted by the Unitholders in a subsequent taxable year to the extent that the Unitholders are allocated income by the Trust that may be offset by such disallowed interest expense. Any interest that is deductible under Section 163(j) of the Code for any taxable year may be subject to additional limitations at the Unitholder level, including the limitation on investment interest discussed below.

 

Whether the foregoing limitations will apply to interest expense of the Trust will depend on whether the Trust is determined to be a “trader” or otherwise engaged in a trade or business, which depends upon the nature and extent of the Trust’s trading and investment activities. Such determination will be made by the Managing Owner for each taxable year of the Trust, and the IRS may take a contrary position.

 

Interest on indebtedness incurred by a Unitholder that is allocable to the Unitholder’s investment in the Trust may also be subject to the limitations on deductibility imposed by Section 163(j) of the Code. Unitholders should consult their own tax advisors regarding the application of these rules to indebtedness incurred at the Unitholder level.

 

Interest Income

 

Interest received by the Trust is taxed as ordinary income. Net capital losses can offset ordinary income only to the extent of $3,000 per year. See “— Tax on Capital Gains and Losses,” above.

 

Syndication Expenses

 

Neither the Trust nor any Unitholder is entitled to any deduction for syndication expenses (i.e., expenses incurred in issuing and marketing the Units), nor can these expenses be amortized by the Trust or any Unitholder even though the payment of such expenses reduces Net Asset Value.

 

The Managing Owner has paid all organization and initial offering costs from its own funds. However, the IRS could take the position that a portion of the Series 5 Management Fee paid by the Trust to the Managing Owner constitutes non-deductible syndication expenses.

 

Investment Interest Deductibility Limitation

 

Individual taxpayers can deduct “investment interest”— interest on indebtedness allocable to property held for investment — only to the extent that it does not exceed net investment income. Net investment income does not include certain net capital gains. A taxpayer can elect to include certain net capital gains in investment income if he forgoes the benefit of the reduced capital gains rate.

 

Tax on Net Investment Income

 

A 3.8% tax is imposed on some or all of the net investment income of certain individuals with modified adjusted gross income of over $200,000 ($250,000 in the case of joint filers) and the undistributed net investment income of certain estates and trusts. For these purposes, it is expected that all or a substantial portion of a Unitholder’s share of Trust income will be net investment income. In addition, certain Trust expenses may not be deducted in calculating a Unitholder’s net investment income.

 

IRS Audits of the Trust and Its Unitholders

 

The IRS audits Trust-related items at the Trust level rather than at the Unitholder level. The Managing Owner acts as the “tax matters partner” for taxable years beginning before January 1, 2018. The tax matters partner has the authority to determine the Trust’s responses to an audit of these years. If an audit of these years results in an adjustment, all Unitholders may be required to pay additional taxes, interest, and penalties.

 

96

 

 

For taxable years beginning after December 31, 2017, new IRS audit procedures apply to the Trust. Absent an election by the Trust, the Trust is required to determine and pay any imputed underpayment of tax (including interest and penalties) resulting from an adjustment of the Trust’s items of income, gain, loss, deduction or credit at the Trust level without the benefit of Unitholder-level tax items that could otherwise reduce tax due on any adjustment and, where the adjustment reallocates any such item from one Unitholder to another, without the benefit of any decrease in any item of income or gain (or increase in any item of deduction, loss or credit). If this election is not made, the cost of such imputed underpayment (including interest and penalties) will be borne by Unitholders in the year of adjustment, without any Trust or Unitholder-level tax deduction or credit for the Trust’s payments, rather than by those who were Unitholders in the taxable year to which the adjustment relates.

 

Under these new provisions, the Managing Owner is designated as the Trust’s “partnership representative.” The partnership representative has broad authority to resolve the Trust’s audit and any such resolution will be binding on all Unitholders. Unitholders have no statutory right to notice or to participate in the audit proceeding under the new provisions.

 

Taxation of Foreign Investors

 

A Unitholder who is a non-resident alien individual, foreign corporation, foreign trust or foreign estate (a “Foreign Unitholder”) generally is not subject to taxation by the U.S. on capital gains from commodity trading, provided that such Foreign Unitholder (in the case of an individual) does not spend more than 182 days in the U.S. during his taxable year, and provided further, that such Foreign Unitholder is not engaged in a trade or business within the U.S. during a taxable year to which income, gain, or loss of the Trust is treated as “effectively connected.” An investment in the Trust should not, by itself, cause a Foreign Unitholder to be engaged in a trade or business within the U.S. for the foregoing purposes, assuming that the trading activities of the Trust continue to be conducted as described in this Prospectus. In the event that the Trust were found to be engaged in a U.S. trade or business, a Foreign Unitholder would be required to file a U.S. federal income tax return for such year and pay tax at full U.S. rates. In the case of a Foreign Unitholder which is a foreign corporation, an additional 30% “branch profits” tax might be imposed. Furthermore, in such event the Trust would be required to withhold taxes from the income or gain allocable to such a Unitholder under Section 1446 of the Code.

 

Portfolio interest income (other than so-called “contingent interest”) allocable to a Foreign Unitholder is likewise not subject to federal income tax withholding, provided that such Foreign Unitholder is not engaged in a trade or business within the U.S. and provides the Trust with an IRS Form W-8BEN, W-8BEN-E or other applicable form. Similarly, a Foreign Unitholder’s allocable share of interest on U.S. bank deposits, certificates of deposit and discount obligations with maturities (from original issue) of 183 days or less is not subject to U.S. federal income tax withholding. Generally, other interest from U.S. sources (including original issue discount) paid to the Trust and allocable to Foreign Unitholders will be subject to U.S. federal income tax withholding at a statutory rate of 30%. The foregoing discussion of tax consequences to Foreign Unitholders may be subject to applicable treaty modifications.

 

The Hiring Incentives to Restore Employment Act (“HIRE Act”) requires certain foreign entities to enter into an agreement with the Secretary of the Treasury to disclose to the IRS the name, address and tax identification number of certain U.S. persons who own an interest in the foreign entity and requires certain other foreign entities to provide certain other information to avoid a 30% withholding tax on certain payments of U.S. source income. Accordingly, certain Foreign Unitholders may be subject to a 30% withholding tax in respect of certain of the Trust’s investments if they fail to enter into an agreement with the Secretary of the Treasury or otherwise fail to satisfy their obligations under the legislation. In addition, an applicable intergovernmental agreement between the United States and the jurisdiction of the Foreign Unitholder or implementing legislation may modify these requirements. Foreign Unitholders are encouraged to consult with their own tax advisors regarding the possible implications of this legislation on an investment in the Trust.

 

Tax-Exempt U.S. Unitholders

 

A tax-exempt U.S. Unitholder will not be required to pay tax on its share of income or gains of the Trust, so long as such Unitholder does not use borrowed funds in connection with its purchase of Units.

 

State and Other Taxes

 

In addition to the federal income tax consequences described above, the Trust and the Unitholders may be subject to various state and other taxes. In general, non-corporate Unitholders will not be able to deduct state, local and municipal taxes in excess of $10,000 in any taxable year for U.S. federal income tax purposes.

 

Prospective investors are urged to consult their tax advisors before deciding whether to invest.

 

PURCHASES BY EMPLOYEE BENEFIT PLANS

 

Although there can be no assurance that an investment in the Trust, or any other managed futures product, will achieve the investment objectives of an employee benefit plan, such investments have certain features which may be of interest to such plans. For example, the futures markets are one of the few investment fields in which employee benefit plans can participate in leveraged strategies without being required to pay tax on “unrelated business taxable income.” In addition, because they are not taxpaying entities, employee benefit plans are not subject to paying annual tax on their profits, if any, from the Trust despite receiving no distributions from it, as are other Unitholders.

 

97

 

 

General

 

The following section sets forth certain consequences under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Code, which a fiduciary of an “employee benefit plan” as defined in, and subject to the fiduciary responsibility provisions of, ERISA or of a “plan” as defined in and subject to Section 4975 of the Code who has investment discretion should consider before deciding to invest any of such plan’s assets in the Trust (such “employee benefit plans” and “plans” being referred to herein as “Plans,” such fiduciaries with investment discretion being referred to herein as “Plan Fiduciaries” and each entity deemed for any purpose of ERISA or Section 4975 of the Code to hold assets of any Plan being referred to herein as a “Plan Assets Entity”). The following summary is not intended to be complete, but only to address certain questions under ERISA and the Code which are likely to be raised by the Plan Fiduciary’s own counsel.

 

In general, the terms “employee benefit plan” as defined in ERISA and “plan” as defined in Section 4975 of the Code together refer to any plan or account of various types which provides retirement benefits or welfare benefits to an individual or to an employer’s employees and their beneficiaries. Such plans and accounts include, but are not limited to, corporate pension and profit sharing plans, “simplified employee pension plans,” Keogh plans for self-employed individuals (including partners), IRAs described in Section 408 of the Code and medical benefit plans.

 

Each Plan Fiduciary must give appropriate consideration to the facts and circumstances that are relevant to an investment in the Trust, including the role that an investment in the Trust plays in the Plan’s overall investment portfolio. Each Plan Fiduciary, before deciding to invest in the Trust, must be satisfied that investment in the Trust is a prudent investment for the Plan, that the investments of the Plan, including the investment in the Trust, are diversified so as to minimize the risks of large losses, that an investment in the Trust complies with the terms of the Plan and the related trust and that an investment in the Trust does not give rise to a transaction prohibited by Section 406 of ERISA or Section 4975 of the Code.

 

Each plan fiduciary considering acquiring Units must consult its own legal and tax advisors before doing so.

 

“Plan Assets”

 

The purchase of Units by a Plan raises the issue of whether that purchase will cause, for purposes of Title I of ERISA and Section 4975 of the Code, the underlying assets of the Trust to constitute assets of such Plan. ERISA and a regulation issued thereunder (the “ERISA Regulation”) contain rules for determining when an investment by a Plan in an entity will result in the underlying assets of such entity being considered assets of such Plan for purposes of ERISA and Section 4975 of the Code (i.e., “plan assets”). Those rules provide that assets of an entity will not be considered plan assets of a Plan which purchases an equity interest in the entity if certain exceptions apply, including an exception applicable if the equity interest purchased is a “publicly-offered security” (the “Publicly-Offered Security Exemption”).

 

The Publicly-Offered Security Exception applies if the equity interest is a security that is (1) “freely transferable,” (2) part of a class of securities that is “widely held” and (3) either (a) part of a class of securities registered under Section 12(b) or 12(g) of the Exchange Act, or (b) sold to the Plan as part of a public offering pursuant to an effective registration statement under the Securities Act of 1933 and the class of which such security is a part is registered under the Exchange Act within 120 days (or such later time as may be allowed by the SEC) after the end of the fiscal year of the issuer in which the offering of such security occurred. The ERISA Regulation states that the determination of whether a security is “freely transferable” is to be made based on all relevant facts and circumstances. The ERISA Regulation specifies that, in the case of a security that is part of an offering in which the minimum investment is $10,000 or less, the following requirements, alone or in combination, ordinarily will not affect a finding that the security is freely transferable: (i) a requirement that no transfer or assignment of the security or rights in respect thereof be made that would violate any federal or state law; (ii) a requirement that no transfer or assignment be made without advance notice given to the entity that issued the security; and (iii) any restriction on substitution of an assignee as “a limited partner of a partnership, including a general partner consent requirement, provided that the economic benefits of ownership of the assignor may be transferred or assigned without regard to such restriction or consent” (other than compliance with any of the foregoing restrictions). Under the ERISA Regulation, a class of securities is “widely held” only if it is of a class of securities owned by 100 or more investors independent of the issuer and of each other. A class of securities will not fail to be widely held solely because subsequent to the initial offering the number of independent investors falls below 100 as a result of events beyond the issuer’s control.

 

98

 

 

The Managing Owner believes that the Publicly-Offered Securities Exception currently applies to the Units for the following reasons. First, the Units are registered under the Securities Act of 1933 and timely registered under the Exchange Act. Second, the Units currently are held by more than 100 investors who the Managing Owner believes are independent of the Trust and of each other. Lastly, the Managing Owner believes that the Units should be considered to be “freely transferable.”

 

Ineligible Purchasers

 

In general, Units may not be purchased with the assets of a Plan if the Managing Owner, the Trustee, any Selling Agent, any of their respective affiliates or any of their respective agents or employees either: (1) has investment discretion with respect to the investment of such plan assets; (2) has authority or responsibility to give or regularly gives investment advice with respect to such plan assets, for a fee and pursuant to an agreement or understanding that such advice will serve as a primary basis for investment decisions with respect to such plan assets and that such advice will be based on the particular investment needs of the Plan; or (3) is an employer maintaining or contributing to such Plan, except as is otherwise permissible under ERISA and Section 4975 of the Code. A party that is described in clause (1) or (2) of the preceding sentence is a fiduciary under ERISA and the Code with respect to the Plan, and any such purchase might result in a “prohibited transaction” under ERISA and the Code.

 

Except as otherwise set forth, the foregoing statements regarding the consequences under ERISA and the Code of an investment in the Trust are based on the provisions of the Code and ERISA as currently in effect, and the existing administrative and judicial interpretations thereunder. No assurance can be given that administrative, judicial or legislative changes will not occur that may make the foregoing statements incorrect or incomplete.

 

Acceptance of subscriptions on behalf of plans is in no respect a representation by the Trust, the Managing Owner or any other party related to the Trust that this investment meets the relevant legal requirements with respect to investments by any particular plan or that this investment is appropriate for any particular plan. The person with investment discretion should consult with his or her financial and legal advisors as to the propriety of an investment in the Trust in light of the circumstances of the particular plan and current tax law.

 

Plan Of Distribution

 

Subscription Procedure

 

The Series 3 and Series 5 Units are offered on a “best efforts” basis without any firm underwriting commitment through Selling Agents including, but not limited to, LPL Financial, RBC Capital Markets Corporation, Robert W. Baird & Co. Incorporated and Ameriprise Financial Services, Inc., although not all Series are offered through all Selling Agents. You may purchase Series 3 Units at Net Asset Value of the applicable Series as of the first business day of each calendar month. Series 5 Units, which sold for $1,500 per Unit as of April 1, 2018 when Series 5 Units were first issued, will be sold at their Net Asset Value as of the first business day of each calendar month. The Managing Owner may from time to time cause the Trust to issue Units at intra-month closings. The minimum initial investment is $5,000; $2,000 for trustees or custodians of eligible employee benefit plans and IRAs. Units are sold in fractions calculated up to three decimal places.

 

In order to purchase Units, you must complete, sign and deliver to a Selling Agent an original of the Subscription Agreement Signature Pages which accompanies this Prospectus, together with a check for the amount of your subscription. Checks should be made payable to “Global Macro Trust.” Subscription proceeds will be deposited in the Trust’s bank account at First Republic Bank, San Francisco, California, and then transferred to a U.S. government instrument-only money market account pending investment in the Trust’s trading accounts.

 

Clients of certain Selling Agents may make subscription payments by authorizing the Selling Agents to debit their customer securities account for the amount of the subscription. When a subscriber authorizes such a debit, the subscriber will be required to have the amount of his or her subscription payment on deposit in his or her account on a settlement date specified by such Selling Agent plus any upfront selling commissions charged directly by such Selling Agent. The Selling Agent will debit the account and transmit the debited funds, less any upfront selling commissions, directly to the Trust’s bank account via check or wire transfer made payable to “Global Macro Trust.” The settlement date specified by such Selling Agents will be no later than the termination of the relevant monthly offering period.

 

The Managing Owner will determine, in its sole discretion, whether to accept or reject a subscription in whole or in part. The Managing Owner will make its determination within five (5) business days of the submission of a subscription to the Managing Owner, except with respect to plan asset investors, including IRAs, in which case the Managing Owner will make its determination no later than five (5) business days before the end of a month (other than for subscriptions submitted after that date).

 

99

 

 

The Managing Owner will make every reasonable effort to determine the suitability of prospective Unitholders in the Trust through information received on the Subscription Agreement and other relevant documents and information. Generally, the Managing Owner must receive subscription documents at least five (5) calendar days before the end of a month for them to be accepted as of the first day of the immediately following month.

 

The Trust will receive any interest earned on subscriptions held in its accounts pending investment in the Trust’s trading account.

 

There are no fees applicable to subscriptions held pending investment in the Trust’s trading account.

 

Subscriptions, if rejected, will be returned to investors promptly following the end of the month in which the subscription was rejected or sooner if practicable.

 

Subscriptions are final and binding on a subscriber as of the close of business on the fifth business day following the submission of the subscriber’s Subscription Agreement to subscriber’s Selling Agent.

 

The Selling Agents

 

Series 3 Units are available for purchase only by investors participating in a registered investment adviser’s asset-based or fixed fee advisory program through which an investment adviser recommends a portfolio allocation to the Trust. The Managing Owner may engage one or more registered broker-dealers, as introducing brokers or wholesalers, to assist Selling Agents acting as executing brokers with the offer and sale of the Series 3 Units. The Managing Owner will pay, from its own funds, all compensation due to such broker-dealers, wholesalers and Selling Agents. Sales commissions to broker-dealers, wholesalers and Selling Agents due in connection with the sale of Series 3 Units will be paid up to 9.5% of the gross offering proceeds of the Series 3 Units in monthly installments beginning with the first month following the sale of a Series 3 Unit in an aggregate amount not to exceed 0.0417 of 1% (a 0.50% annual rate) of the month-end Net Asset Value of all Series 3 Units sold by them which remain outstanding.

 

With respect to Series 5 Units, the Managing Owner pays the Selling Agents, from its own funds, installment selling commissions of up to 0.0625 of 1% of the month-end Net Asset Value of all Series 5 Units (a 0.75% annual rate) before accruals for unpaid Series 5 Management Fees and Series 5 Profit Shares. In addition to such installment selling commissions, the Managing Owner may also engage one or more registered broker-dealers, as introducing brokers or wholesalers, to further assist with the offer and sale of the Series 5 Units. The Managing Owner will pay, from its own funds, all such additional compensation due to these broker-dealers, wholesalers and Selling Agents. Any additional sales commissions to broker-dealers, wholesalers and Selling Agents due in connection with the sale of Series 5 Units will be paid in monthly installments beginning with the first month following the sale of a Series 5 Unit in an aggregate amount not to exceed 0.0833 of 1% (a 1.0% annual rate) of the month-end Net Asset Value of all Series 5 Units sold by them which remain outstanding.

 

To the extent set forth in a Unitholder’s Subscription Agreement, a Series 5 Unitholder introduced by certain Selling Agents may also be required to pay an upfront selling commission of up to 3% of the intended subscription amount for the applicable Series 5 Units.

 

Cumulative selling compensation per Series 5 Unit (including upfront and installment selling commissions) will not exceed 9.50% of the gross offering proceeds for such Series 5 Unit sold pursuant to this Prospectus, as described in the compensation grid below.

 

The Selling Agents and brokers will determine the suitability of prospective Unitholders in the Trust, pursuant to FINRA Rule 2310, based upon information contained in the Subscription Agreement and documents furnished to the Selling Agents or brokers by their customers in opening accounts.

 

No Selling Agent will make an investment in the Trust on behalf of a client for which it has discretionary trading authority without prior written approval of the investment by the client.

 

As illustrated on the Items of Compensation chart beginning on page 103, under no circumstances will the maximum compensation paid to the Selling Agents, broker-dealers assisting selling agents and wholesalers, including initial selling commissions, installment selling commissions to selling agents, selling commissions to wholesalers, installment selling commissions to wholesalers and expense reimbursements, exceed 10% of the gross offering proceeds of the sale of the Units, which is the maximum permitted by FINRA in connection with this offering of the Units.

 

100

 

 

Selling Agent Compensation Table

 

Nature of Payment   Recipient   Amount of Payment
         
Installment Selling Commissions — Series 3 Units     Selling Agents   Certain Selling Agents may receive from the Managing Owner installment selling commissions of up to 3.1667% of the gross offering proceeds of the Series 3 Units in amounts not to exceed 0.02083 of 1% (a 0.25% annual rate) of the month-end Net Asset Value of the Series 3 Units sold by a Selling Agent selling Series 3 Units.
         
Wholesaling Fees — Series 3 Units   Wholesalers   Wholesalers wholesaling the Series 3 Units to Selling Agents or otherwise assisting with the placement of Series 3 Units may receive from the Managing Owner installment selling commissions of up to 6.3333% of the gross offering proceeds of the Series 3 Units by paying an amount not to exceed 0.0417 of 1% (a 0.50% annual rate) of the month-end Net Asset Value of all Series 3 Units sold by a Selling Agent selling Series 3 Units which remain outstanding. To the extent the applicable Selling Agents do not receive installment selling commissions in connection with the sale of the Series 3 Units, the Managing Owner may pay wholesalers up to a maximum amount of 9.5% of the gross offering proceeds of the Series 3 Units.
         
Upfront Selling Commissions — Series 5 Units   Selling Agents   Certain Selling Agents may receive directly from investors, in conjunction with the sale of Series 5 Units, upfront selling commissions of up to 3% of the gross offering proceeds of Series 5 Units sold by such Selling Agents.
         
Installment Selling Commissions — Series 5 Units   Selling Agents   Selling Agents will receive from the Managing Owner, in conjunction with the sale of Series 5 Units, installment selling commissions of up to 0.0625 of 1% (a 0.75% annual rate) of the month-end Net Asset Value of all outstanding Series 5 Units sold by such Selling Agents. In addition, Selling Agents providing additional assistance with the placement of Series 5 Units may receive from the Managing Owner installment selling commissions of an amount not to exceed 0.02833 of 1% (a 0.25% annual rate) of the month-end Net Asset Value of the outstanding Series 5 Units sold by such Selling Agents. The maximum amount of total installment commissions paid to Selling Agents depends upon the level of upfront selling commissions and wholesaling fees paid with respect to the Series 5 Units, as illustrated in the Items of Compensation chart below, provided that cumulative selling compensation paid to a Selling Agent and wholesaler in respect of a Series 5 Unit will not exceed 9.50% of the gross offering proceeds of such Series 5 Unit.
         
Wholesaling Fees — Series 5 Units   Wholesalers   Wholesalers wholesaling the Series 5 Units to Selling Agents or otherwise assisting with the placement of Series 5 Units may receive from the Managing Owner installment selling commissions of an amount not to exceed 0.0625 of 1% (a 0.75% annual rate) of the month-end Net Asset Value of all outstanding Series 5 Units sold by a Selling Agent. The maximum amount of any such compensation paid depends upon the level of upfront selling commissions and installment selling commissions paid with respect to the Series 5 Units, as illustrated in the Items of Compensation chart below, provided that cumulative selling compensation paid to a wholesaler and a Selling Agent in respect of a Series 5 Unit will not exceed 9.50% of the gross offering proceeds of such Series 5 Unit.

 

101

 

 

Expense Reimbursement     Managing Owner     The Managing Owner may, but is not obligated to, reimburse Selling Agents or otherwise pay for reasonable out of pocket expenses incurred in connection with the performance of their duties including, for example, Selling Agents’ legal fees, broker/client seminars or other deemed underwriting expenses. The amount of such reimbursements will not exceed 0.50% of the gross offering proceeds of all Series 3 and Series 5 Units sold. The amount of all such reimbursements, when aggregated with selling commissions and installment selling commissions, will not exceed 10% of the gross offering proceeds of all Units sold.

 

There are no other items of compensation paid in respect of the sale of the Trust’s Units.

 

102

 

 

Items of Compensation Pursuant to FINRA Rule 2310

 

The following table sets forth the items of compensation, and the maximum amounts thereof in respect of the offering of the Units, paid to members of FINRA pursuant to FINRA Rule 2310 on a Series-by-Series basis, with distinctions made for investment amount and the involvement of wholesalers, where appropriate. These items of compensation are set forth in detail below and are more fully described above:

 

Series 3 Investors whose Selling Agents and Wholesalers receive Installment Selling Commissions

 

Selling
Commissions to
Selling Agents
  Installment Selling
Commissions to
Selling Agents
  Selling
Commissions to
Wholesalers
  Installment Selling
Commissions to
Wholesalers
  Expense
Reimbursement
  TOTAL
This item of compensation not paid by these Units.   0.0208% of the month-end Net Asset Value of the Units sold and outstanding, subject to a limit of 3.1667% of the gross offering proceeds of the Units sold.   This item of compensation not paid by these Units.   0.0417% of the month-end Net Asset Value of the Units sold and outstanding, subject to a limit of 6.3333% of the gross offering proceeds of the Units sold.   Up to 0.50% of the gross offering proceeds of the Units sold.   Up to 10% of the gross offering proceeds of the Units sold.

 

Series 3 Investors whose Selling Agents receive Installment Selling Commissions and whose Wholesalers receive no Installment Selling Commissions

 

Selling
Commissions to
Selling Agents
  Installment Selling
Commissions to
Selling Agents
  Selling
Commissions to
Wholesalers
  Installment Selling
Commissions to
Wholesalers
  Expense
Reimbursement
  TOTAL
This item of compensation not paid by these Units.   0.0208% of the month-end Net Asset Value of the Units sold and outstanding, subject to a limit of 9.5% of the gross offering proceeds of the Units sold.   This item of compensation not paid by these Units.   This item of compensation not paid by these Units.   Up to 0.50% of the gross offering proceeds of the Units sold.   Up to 10% of the gross offering proceeds of the Units sold.

 

Series 3 Investors whose Selling Agents and Wholesalers receive no Installment Selling Commissions

 

Selling
Commissions to
Selling Agents
  Installment Selling
Commissions to
Selling Agents
  Selling
Commissions to
Wholesalers
  Installment Selling
Commissions to
Wholesalers
  Expense
Reimbursement
  TOTAL
This item of compensation not paid by these Units.   This item of compensation not paid by these Units.   This item of compensation not paid by these Units.   This item of compensation not paid by these Units.   Up to 0.50% of the gross offering proceeds of the Units sold.   Up to 0.50% of the gross offering proceeds of the Units sold.

 

Series 4 Investors

 

Selling
Commissions to
Selling Agents
  Installment Selling
Commissions to
Selling Agents
  Selling
Commissions to
Wholesalers
  Installment Selling
Commissions to
Wholesalers
  Expense
Reimbursement
  TOTAL
This item of compensation not paid by these Units.   This item of compensation not paid by these Units.   This item of compensation not paid by these Units.   This item of compensation not paid by these Units.   This item of compensation not paid by these Units.   This item of compensation not paid by these Units.

 

103

 

 

Series 5 Investors whose Selling Agents receive Upfront Selling Commissions and with No Wholesalers

 

Selling
Commissions to
Selling Agents
  Installment Selling
Commissions to
Selling Agents
  Selling
Commissions to
Wholesalers
  Installment Selling
Commissions to
Wholesalers
  Expense
Reimbursement
  TOTAL
Up to the applicable limit set forth below:   Up to 0.0833% of the month-end Net Asset Value of the Units sold and outstanding, subject to the applicable limit set forth below:   This item of compensation not paid by these Units.   This item of compensation not paid by these Units.   Up to 0.50% of the gross offering proceeds of the Units sold.   Up to 10% of the gross offering proceeds of the Units sold.

 

  3.00%     6.50%                  
  2.50%     7.00%                  
  2.00%     7.50%                  
  1.50%     8.00%                  
  1.00%     8.50%                  
  0.50%     9.00%                  

 

Each amount is calculated as a % of the gross offering proceeds of the Units sold.

 

 

  Each amount is calculated as a % of the gross offering proceeds of the Units sold and corresponds to the applicable selling commission in the first column.                

 

Series 5 Investors whose Selling Agents receive No Upfront Selling Commissions and with No Wholesalers

 

Selling
Commissions to
Selling Agents
  Installment Selling
Commissions to
Selling Agents
  Selling
Commissions to
Wholesalers
  Installment Selling
Commissions to
Wholesalers
  Expense
Reimbursement
  TOTAL
This item of compensation not paid by these Units.   Up to 0.0833% of the month-end Net Asset Value of the Units sold and outstanding, subject to a limit of 9.50% of the gross offering proceeds of the Units sold.   This item of compensation not paid by these Units.   This item of compensation not paid by these Units.   Up to 0.50% of the gross offering proceeds of the Units sold.   Up to 10% of the gross offering proceeds of the Units sold.

 

104

 

 

Series 5 Investors whose Selling Agents receive Upfront Selling Commissions and were introduced by Wholesalers

(additional services to Selling Agents)

 

Selling
Commissions to
Selling Agents
  Installment Selling
Commissions to
Selling Agents
  Selling
Commissions to
Wholesalers
  Installment Selling
Commissions to
Wholesalers
  Expense
Reimbursement
  TOTAL
Up to the applicable limit set forth below:   Up to 0.0833% of the month-end Net Asset Value of the Units sold and outstanding, subject to the applicable limit set forth below:   This item of compensation not paid by these Units.   0.0625% of the month-end Net Asset Value of the Units sold and outstanding, subject to the applicable limit set forth below:   Up to 0.50% of the gross offering proceeds of the Units sold.   Up to 10% of the gross offering proceeds of the Units sold.

 

  3.00%     3.715%           2.785%          
  2.50%     4.000%           3.000%          
  2.00%     4.285%           3.215%          
  1.50%     4.572%           3.428%          
  1.00%     4.857%           3.643%          
  0.50%     5.143%           3.857%          

 

Each amount is calculated as a % of the gross offering proceeds of the Units sold.

 

  Each amount is calculated as a % of the gross offering proceeds of the Units sold and corresponds to the applicable selling commission in the first column.       Each amount is calculated as a % of the gross offering proceeds of the Units sold and corresponds to the applicable selling commission in the first column.        

 

Series 5 Investors whose Selling Agents receive No Upfront Selling Commissions and were introduced by Wholesalers (additional services to Selling Agents)

 

Selling
Commissions to
Selling Agents
  Installment Selling
Commissions to
Selling Agents
  Selling
Commissions to
Wholesalers
  Installment Selling
Commissions to
Wholesalers
  Expense
Reimbursement
  TOTAL
This item of compensation not paid by these Units.   Up to 0.0833% of the month-end Net Asset Value of the Units sold and outstanding, subject to a limit of 5.428% of the gross offering proceeds of the Units sold.   This item of compensation not paid by these Units.   0.0625% of the month-end Net Asset Value of the Units sold and outstanding, subject to a limit of 4.071% of the gross offering proceeds of the Units sold.   Up to 0.50% of the gross offering proceeds of the Units sold.   Up to 10% of the gross offering proceeds of the Units sold.

 

Legal Matters

 

Sidley Austin LLP, Chicago, Illinois, served as legal counsel to the Managing Owner in connection with the preparation of this Prospectus. Sidley Austin LLP may continue to serve in such capacity in the future, but has not assumed any obligation to update this Prospectus. Sidley Austin LLP may advise the Managing Owner in matters relating to the operation of the Trust on an ongoing basis. Sidley Austin LLP does not represent and has not represented the prospective investors or the Trust in negotiation of its business terms, the offering of the Units or in respect of its ongoing operations. Prospective investors must recognize that, as they have had no representation in the organization process, the terms of the Trust relating to themselves and the Units have not been negotiated at arm’s length. More specifically, Sidley Austin LLP does not undertake to monitor the compliance of the Managing Owner and its affiliates with the investment program, valuation procedures and other guidelines set forth herein or in the exhibits hereto, nor does it monitor compliance with applicable laws. In preparing this Prospectus, Sidley Austin LLP relied upon information furnished by the Managing Owner and did not investigate or verify the accuracy and completeness of the information set forth herein concerning the Managing Owner, the Trust’s service providers and their affiliates and personnel.

 

Sidley Austin LLP’s engagement by the Managing Owner in respect of the Trust is limited to the specific matters as to which it is consulted by the Managing Owner and, therefore, there may exist facts or circumstances which could have a bearing on the Trust’s (or the Managing Owner’s) financial condition or operations with respect to which Sidley Austin LLP has not been consulted and for which Sidley Austin LLP expressly disclaims any responsibility.

 

105

 

 

Richards, Layton & Finger, P.A. acted as special Delaware counsel to the Trust in connection with assessing the legality of its securities under Delaware law but does not otherwise represent the Trust or the Unitholders.

 

Experts

 

Millburn Ridgefield Corporation Consolidated Statement of Financial Condition as of December 31, 2017, included in this Prospectus, has been included herein in reliance on the report of Cohen & Company, an independent registered public accounting firm, given on the authority of that firm as experts in accounting and auditing.

 

The statements of financial condition of the Trust, including the condensed schedules of investments, as of December 31, 2017 and 2016, and the related statements of operations, changes in trust capital and the financial highlights for each of the three years in the period ended December 31, 2017 (“the financial statements”) included in this Prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

 

REPORTS

 

CFTC Rules require that this Prospectus be accompanied by summary financial information, which may be a recent monthly report of the Trust, current within 60 calendar days.

 

Privacy Policy

 

Under CFTC Rules, financial institutions like the Managing Owner are required to provide privacy notices to their clients. As required by such CFTC Rules, we are providing you with the following information.

 

We collect nonpublic personal information about you from the following sources:

 

(i)Information the Managing Owner receives from you on Subscription Agreements and related forms (for example, name, address, Social Security number, birth date, assets, income, and investment experience); and

 

(ii)Information about your transactions with the Managing Owner (for example, account activity and balances).

 

In order to service your account and process your transactions, the Managing Owner may provide your personal information to its affiliates and to firms that assist the Managing Owner in servicing your account and have a need for such information such as account or fund administrators. The Managing Owner requires third-party service providers to protect the confidentiality of your information and to use the information only for the purposes for which the Managing Owner discloses the information to them.

 

The Managing Owner does not disclose any nonpublic information about its customers or former customers to anyone other than in connection with the administration, processing and servicing of customer accounts as described above or to its accountants, attorneys and auditors or as otherwise permitted or required by law.

 

The Managing Owner restricts access to nonpublic personal information about you to its personnel who need to know that information in order to provide products or services to you. The Managing Owner maintains physical, electronic and procedural controls in keeping with federal standards to safeguard your nonpublic personal information.

 

106

 

 

This Prospectus is in two parts: a Disclosure Document and a Statement of Additional Information. These parts are bound together and may not be distributed separately.

 

PART TWO

 

STATEMENT OF ADDITIONAL INFORMATION

 

The Futures, Forward AND SPOT Markets

 

Futures, Forward, Swap and Spot Contracts

 

Futures contracts in the U.S. are generally traded on exchanges and call for the future delivery of various commodities. These contractual obligations may be satisfied either by taking or making physical delivery or by making an offsetting sale or purchase of a futures contract on the same exchange.

 

Forward currency contracts are agreements to make or accept delivery of a currency and are traded off-exchange through banks or dealers. In such instances, the bank or dealer generally acts as principal in the transaction and charges “bid-ask” spreads. These contractual obligations are generally satisfied by making an offsetting agreement.

 

Foreign currency spot contracts are similar to forward currency contracts because they are agreements to make or accept delivery of a currency and are traded off-exchange through banks or dealers, similar to forwards. However, these contracts are shorter in duration, typically settling within two days of the trade date and are settled by physical delivery.

 

Swap contracts are agreements to exchange cash flows or periodic payments based on price changes of an underlying commodity, instrument or index and contain terms and conditions specially negotiated by the parties to the agreement. These agreements are settled in cash, and may be terminated at the expiration of a specific period of time or by making an offsetting agreement.

 

Unlike an investment in bonds where one expects some consistency of yield or in stocks where one expects to participate in economic growth, futures, forward, spot and swap trading is a “zero-sum,” risk transfer economic activity. For every gain realized by one futures, forward, spot or swap trader, there is an equal and offsetting loss suffered by another.

 

Hedgers and Speculators

 

The two broad classifications of persons who trade futures are “hedgers” and “speculators.” Hedging is designed to minimize the losses that may occur because of price changes, for example, between the time a merchandiser contracts to sell a commodity and the time of delivery. The futures and forward markets enable the hedger to shift the risk of price changes to the speculator. The speculator risks capital with the hope of making profits from such changes. Speculators, such as the Trust, rarely take delivery of the physical commodity but rather close out their futures positions through offsetting futures contracts.

 

Exchanges; Position and Daily Limits; Margins

 

Commodity exchanges in the U.S. generally have an associated “clearinghouse.” Once trades made between members of an exchange have been cleared, each clearing broker looks only to the clearinghouse for all payments in respect of such broker’s open positions. The clearinghouse “guarantee” of performance on open positions does not run to customers. If a member firm goes bankrupt, customers could lose money.

 

The Reform Act mandates that a substantial portion of OTC derivatives must be executed in regulated markets and submitted for clearing to regulated clearinghouses. The mandates imposed by the Reform Act may result in the Trust bearing higher upfront and mark-to-market margin, less favorable trade pricing, and the possible imposition of new or increased fees.

 

The Managing Owner will trade for the Trust on a number of foreign commodity exchanges. Foreign commodity exchanges differ in certain respects from their U.S. counterparts and are not regulated by any U.S. agency.

 

The CFTC and the U.S. exchanges have established “speculative position limits” on the maximum positions that the Managing Owner may hold or control in futures contracts on some, but not all, commodities. For example, the CFTC limits the number of contracts the Managing Owner can control in corn to 33,000 in a single delivery month, whereas the Chicago Mercantile Exchange limits the number of S&P 500 Index contracts the Managing Owner can control to 60,000 and U.S. Treasury bonds traded on the Chicago Board of Trade are not subject to position limits. The CFTC has also proposed, but not yet adopted, additional position limit rules covering energy, metals and agricultural derivative contracts. All accounts controlled by the Managing Owner, including the account of the Trust, are combined for speculative position limit purposes. If position limits are exceeded by the Managing Owner in the opinion of the CFTC or any other regulatory body, exchange or board, the Managing Owner could be required to liquidate positions held by the Trust, or may not be able to fully implement trading instructions generated by its trading models, to the extent necessary to comply with applicable position limits. To date, position limits have not been a material imposition on the ability of the Managing Owner to effect its trading method. In the event the Managing Owner controls contracts in excess of the applicable limits, the Managing Owner will equitably reduce the position it controls across affected accounts managed by the Managing Owner, including the Trust, giving due consideration to such factors as account size, position size, account risk/reward parameters and trading portfolio composition. Any such liquidation or limited implementation could result in substantial costs to the Trust.

 

107

 

 

U.S. exchanges limit the maximum change in some, but not all, futures prices during any single trading day. Once the “daily limit” has been reached, it becomes very difficult to execute trades in the same direction the market has moved. That is, if a market is “limit up,” it is difficult, or impossible, to buy, but very easy to sell. Because these limits apply on a day-to-day basis, they do not limit ultimate losses, but may reduce or temporarily eliminate liquidity. For example, the Chicago Board of Trade imposes daily limits of 40¢ on corn futures and no daily limits on U.S. Treasury bond futures. The Chicago Mercantile Exchange coordinates trading halts in the S&P 500 Index futures with halts in the trading of the stocks underlying the Index and imposes trading pauses or halts at moves of 7%, 13% and 20% in the value of the Index.

 

When a position is established, “initial margin” is deposited. On most exchanges, at the close of each trading day “variation margin,” representing the unrealized gain or loss on the open positions, is either credited to or debited from a trader’s account. If “variation margin” payments cause a trader’s “initial margin” to fall below “maintenance margin” levels, a “margin call” is made, requiring the trader to deposit additional margin or have his position closed out.

 

108

 

 

Supplemental Performance Information

 

The Trust trades the Millburn Diversified Portfolio (“MDP”). MDP is the composite performance of all fully-funded accounts which have traded the portfolio since its inception in 1977 through December 2003 and, thereafter, of all accounts (fully-funded and notional), adjusted to reflect the charges applicable to the Trust. The Trust is separate from MDP and the performance of MDP is not the performance of the Trust. Moreover, the past performance of MDP is not necessarily indicative of the future performance of the Trust. The Trust is one account which has traded MDP since July 1, 2002.

 

The analyses set forth on pages 110-111 are derived from the over 40-year history of MDP and reflect the characteristics of the portfolio and strategy traded by the Trust over an extended period which includes rising and falling stock prices, interest rates, dollar exchange rates and inflation plus numerous shocks to global economic and financial systems.

 

The S&P 500 Index, NASDAQ Composite Index, Morgan Stanley Capital International World Index (MSCI World) and Barclays Long-Term Treasury Index are unmanaged indices commonly used as market benchmarks. The performance of the indices does not reflect any fees or transaction costs as these expenses do not apply to market indices. These indices are compared to MDP and the Trust because they represent asset classes often included in investor portfolios, and are useful in illustrating the potential diversification benefits of the Trust.

 

The Trust is not a complete investment program, and investment in the Trust should be viewed as a diversification opportunity only, not as a substitute for a well diversified portfolio.

 

Please see “Note to Supplemental Performance Information” on page 112.

 

Past performance is not necessarily indicative of future results.

 

109

 

 

SUPPLEMENTAL TABLE NO. 1

PRO FORMA ANNUAL RETURNS OF THE MILLBURN DIVERSIFIED PORTFOLIO (rounded to the nearest %)
FEBRUARY 1977—NOVEMBER 2018

 

The pro forma adjustments to MDP’s performance1 reflect the cost/fee structure of the Trust applicable to investors who purchase Series 3 Units.

 

   MDP2   S&P 5003   NASDAQ4   MSCI
WORLD5
   BONDS6 
2018 (11 months)   0%   5%   6%   -1%   -7%
2017   5%   22%   28%   23%   9%
2016   12%   12%   8%   8%   1%
2015   6%   1%   6%   0%   -1%
2014   18%   14%   13%   6%   25%
2013   -6%   32%   38%   27%   -13%
2012   -6%   16%   16%   17%   4%