Efforts to finalize the Chicago Board Options Exchange’s $1-billion settlement with Chicago Board of Trade members are dragging on longer than expected, dealing a potential blow to the CBOE’s plans to become a public company.
CBOE is so concerned about the lack of progress on a definitive settlement that it has postponed a July 17 member vote on the deal.
"Representatives of the plaintiff class and counsel for the parties are currently working to complete the terms of the proposed agreement," CBOE chairman and CEO William Brodsky said in a note to members Thursday. "We will inform you of the revised date of the vote once the definitive agreement has been completed."
The settlement, announced June 2, was meant to end CBOE’s legal tangle with CBOT members who say their role in founding the options market 35 years ago entitles them to a stake in it today.
Two CBOT members sued CBOE in August 2006 to press that view on behalf of their fellow members. Resolving the dispute by handing CBOT members 18% of its stock and $300 million in cash, as per the terms of the tentative agreement, would free CBOE to pursue an IPO. But almost as soon as they got word of the deal, CBOT members began bickering over how to divide the spoils.
Now, several prominent CBOT members — including a former CBOT chairman and the head of one of the biggest trading firms at the Chicago Mercantile Exchange — have lodged written objections with the lawyer who brokered the agreement, saying it unfairly favors some CBOT members over others and suggesting they will take legal action to block it.
Separately, CME Group Inc., which has been footing the legal bill for CBOT since it bought the exchange last year, wants to avoid a settlement that could reduce the value of some of its assets, people familiar with the talks say. CME must sign off on any settlement.
It’s unclear whether the decision to delay CBOE’s member vote signals a complete collapse of the settlement. But it is a blow to Mr. Brodsky, who has watched competing exchanges snag huge windfalls through IPOs and mergers but has been prevented by the ownership dispute from taking part in any deal-making himself.
“Time is not our friend and comes at a great cost to CBOE and its owners,” Mr. Brodsky told CBOE members shortly after the settlement was announced. Without a settlement, the legal process “could tie us up for three years or more.” A settlement would allow CBOE to lay the groundwork for a potential IPO by the end of the year.
At issue, according to letters from prominent CBOT members, are the eligibility requirements for participation in the settlement. There are about 400 CBOT members who appear to qualify under any circumstances. Another 1,000 would have to buy CME stock and/or one or more trading rights in order to participate. Special rules — such as requiring the stock be held for a certain period to qualify — could deter them from doing so. The higher the hurdles, the fewer who will actually participate and the bigger the payout to each that does.
In a June 19 letter to Gordon Nash, the lawyer for the two CBOT plaintiffs, DRW Trading CEO Don Wilson calls for the settlement to be crafted to allow the maximum number of CBOT members to take part. In a separate letter dated July 2, former CBOT Chairman Nickolas Neubauer takes Mr. Gordon to task over terms Mr. Neubauer says will unfairly limit the pool of participants.
“This is both wrong and a mistake,” Mr. Neubauer said in the letter, which was also signed by former CBOT director Frank Serrino and longtime trader Jacob Morowitz. “We have been working with a significant number of members who would file objections to such settlement terms, opt out of the class and/or institute a new suit.”
CME’s interests appear to align with the disgruntled letter writers. It paid $40 million last year to acquire 159 trading rights from CBOT members as part of its takeover of the exchange. Restricting eligibility for the settlement would dampen demand for those rights, known as ERPs, and cut into CME profits.
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