Commodities Bulletin May, 2009

COURT OF APPEAL REVERSES JUDGMENT IN FLUXO-CANE

LITIGATION

By Robert Wilson

The decision of the Court of Appeal in ED&F Man

Commodity Advisers Limited v. Fluxo-Cane Overseas Limited (13

May 2009) illustrates some of the potential pitfalls for brokers in

trying to balance compliance with directions of commodity

exchanges, the need to maintain orderly markets and protection of

credit limits and trading relations with their clients.

Man were among a number of parties who had acted as brokers for

FCO on the New York International Commodities Exchange (ICE). ICE

became concerned that FCO had acquired a high number of short

positions in the Sugar No. 11 futures contract for delivery in

March 2008, and on 14 January 2008 directed its Members to require

an additional 20% "super margin" from FCO. On 16 January

2008, ICE directed Members to close out some of FCO's short

positions by 23 January 2008 to reduce them to an acceptable level,

with or without FCO's co-operation.

On 17 January 2008, Man made margin calls on FCO, which were not

paid. On that same day, there was a meeting between FCO and ten

brokers, including Man. The aim of the meeting was to discuss what

action to take following ICE's directives and whether a

co-ordinated approach could be taken to closing out FCO's short

positions which would minimise FCO's exposure and the wider

impact on the market.

It was agreed that a further meeting would be held the next day,

18 January 2008. However, before that meeting took place, Man

liquidated positions they had placed for FCO's account. Man

subsequently brought proceedings against FCO for about US$22m under

their customer agreement. FCO responded by contending that

Man's liquidation of their positions had been premature and had

caused them substantial losses. FCO also argued that Man's

action in...