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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 000-53114

LV FUTURES FUND L.P.

 

(Exact name of registrant as specified in its charter)

 

Delaware   20-8529012

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

Ceres Managed Futures LLC  
522 Fifth Avenue  
New York, NY   10036
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code   (855) 672-4468  

 

 

 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   x    Smaller reporting company  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  x

As of October 31, 2015, 8,308.367 Limited Partnership Class A Units were outstanding, 1,544.368 Limited Partnership Class B Units were outstanding, 2,039.850 Limited Partnership Class C Units were outstanding, and 9.003 Limited Partnership Class Z Units were outstanding.


Table of Contents

LV FUTURES FUND L.P.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2015

 

   PART I. FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
   Statements of Financial Condition as of September 30, 2015 (Unaudited) and December 31, 2014      2   
   Statements of Income and Expenses for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)      3   
   Statements of Changes in Partners’ Capital for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)      4   
   Notes to Financial Statements (Unaudited)      5-14   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      15-19   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      20-25   

Item 4.

   Controls and Procedures      26   
   PART II. OTHER INFORMATION   

Item 1.

   Legal Proceedings      27-33   

Item 1A.

  

Risk Factors

     34   

Item 2.

   Unregistered Sales of Securities and Use of Proceeds      34-35   

Item 4.

   Mine Safety Disclosures      35   

Item 6.

   Exhibits      36   


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

LV FUTURES FUND L.P.

STATEMENTS OF FINANCIAL CONDITION

 

       (Unaudited)  
  September 30,  
  2015  
       December 31,  
  2014  
 
       $          $    

ASSETS

     

Investments in Affiliated Trading Companies:

     

Investment in Augustus I, LLC

     5,161,115           3,935,697     

Investment in Boronia I, LLC

     2,634,559           2,976,216     

Investment in TT II, LLC

     3,923,681           3,356,258     
  

 

 

    

 

 

 

Total Investments in Affiliated Trading Companies, at fair value (cost $12,979,521 and $10,908,721, respectively)

     11,719,355           10,268,171     
  

 

 

    

 

 

 

Receivable from Affilated Trading Companies

     -               3,299,645     
  

 

 

    

 

 

 

Total Assets

     11,719,355           13,567,816     
  

 

 

    

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

     

Liabilities:

     

Redemptions payable to Limited Partners

     172,685           289,466     
  

 

 

    

 

 

 

Total Liabilities

     172,685           289,466     
  

 

 

    

 

 

 

Partners’ Capital

     

Class A (8,719.561 and 9,712.725 Units, respectively)

     7,938,231           9,354,914     

Class B (1,544.368 and 1,645.070 Units, respectively)

     1,464,647           1,644,359     

Class C (2,039.850 and 2,039.850 Units, respectively)

     2,015,245           2,116,018     

Class Z (119.912 and 145.959 Units, respectively)

     128,547           163,059     
  

 

 

    

 

 

 

Total Partners’ Capital

     11,546,670           13,278,350     
  

 

 

    

 

 

 

Total Liabilities and Partners’ Capital

           11,719,355                 13,567,816     
  

 

 

    

 

 

 

NET ASSET VALUE PER UNIT

     

Class A

     910.39           963.16     

Class B

     948.38           999.57     

Class C

     987.94           1,037.34     

Class Z

     1,072.01           1,117.16     

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

LV FUTURES FUND L.P.

STATEMENTS OF INCOME AND EXPENSES

(Unaudited)

 

       For the Three Months Ended          For the Nine Months Ended    
       September 30,  
  2015  
       September 30,  
  2014  
       September 30,  
  2015  
       September 30,  
  2014  
 
       $                 $           

EXPENSES

           

Ongoing Placement Agent fees

     51,021            59,292            166,048            216,539      

General Partner fees

     29,210            33,864            94,807            124,002      

Administrative fees

     11,686            13,546            37,925            49,602      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Expenses

     91,917            106,702            298,780            390,143      
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INVESTMENT LOSS

     (91,917)           (106,702)           (298,780)           (390,143)     
  

 

 

    

 

 

    

 

 

    

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS

           

Net realized gain (loss) on investments

     248,282            206,825            248,522            616,220      

Net change in unrealized appreciation (depreciation) on investments

     267,193            661,247            (619,616)           263,202      
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Net Realized and Unrealized Gain (Loss) on Investments

     515,475            868,072            (371,094)           879,422      
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME (LOSS)

     423,558            761,370            (669,874)           489,279      
  

 

 

    

 

 

    

 

 

    

 

 

 

NET INCOME (LOSS) ALLOCATION:

           

Class A

     290,091            537,880            (488,628)           366,099      

Class B

     53,015            90,541            (76,036)           49,411      

Class C

     75,341            117,529            (100,773)           57,161      

Class Z

     5,111            15,420            (4,437)           16,608      

NET INCOME (LOSS) PER UNIT*

           

Class A

     31.86            51.44            (52.77)           45.68      

Class B

     34.33            54.45            (51.19)           50.82      

Class C

     36.94            57.62            (49.40)           56.27      

Class Z

     42.62            64.42            (45.15)           68.10      
WEIGHTED AVERAGE NUMBER OF UNITS
OUTSTANDING
   Units      Units         Units      Units  

Class A

           9,052.513                  10,796.996            9,348.264                  13,126.830      

Class B

     1,544.369            1,676.744            1,577.567            2,251.175      

Class C

     2,039.850            2,039.850                   2,039.850            2,548.806      

Class Z

     119.912            305.956            125.691            362.053      

 

*

Represents the change in net asset value per Unit during the period.

The accompanying notes are an integral part of these financial statements.

 

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LV FUTURES FUND L.P.

STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

For the Nine Months Ended September 30, 2015 and 2014

(Unaudited)

 

     Class A      Class B      Class C      Class Z      Total  
     $      $      $      $      $  

Partners’ Capital, December 31, 2014

     9,354,914            1,644,359            2,116,018            163,059            13,278,350      

Subscriptions

     40,000            -                -                -                40,000      

Net Income (Loss)

     (488,628)           (76,036)           (100,773)           (4,437)           (669,874)     

Redemptions

     (968,055)           (103,676)           -                (30,075)           (1,101,806)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, September 30, 2015

     7,938,231            1,464,647            2,015,245            128,547            11,546,670      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, December 31, 2013

     14,640,613            2,974,351            4,000,502            415,113            22,030,579      

Subscriptions

     25,000            -                -                -                25,000      

Net Income (Loss)

     366,099            49,411            57,161            16,608            489,279      

Redemptions

     (5,305,926)           (1,410,485)           (1,984,218)           (272,338)           (8,972,967)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Partners’ Capital, September 30, 2014

     9,725,786            1,613,277            2,073,445            159,383            13,571,891      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Class A      Class B      Class C      Class Z      Total  
     Units      Units      Units      Units      Units  

Beginning Units, December 31, 2014

     9,712.725            1,645.070            2,039.850            145.959            13,543.604      

Subscriptions

     42.147            -                -                -                42.147      

Redemptions

     (1,035.311)           (100.702)           -                (26.047)           (1,162.060)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Units, September 30, 2015

     8,719.561                  1,544.368                  2,039.850                    119.912                  12,423.691      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Beginning Units, December 31, 2013

           16,259.279            3,198.746            4,166.314            405.437            24,029.776      

Subscriptions

     28.034            -                -                -                28.034      

Redemptions

     (6,007.769)           (1,553.676)           (2,126.464)           (259.478)           (9,947.387)     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Units, September 30, 2014

     10,279.544            1,645.070            2,039.850            145.959                  14,110.423      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

LV FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

 

1.   Organization

LV Futures Fund L.P. (the “Partnership”) was formed on February 22, 2007, under the Delaware Revised Uniform Limited Partnership Act, as a multi-advisor commodity pool created to profit from the speculative trading of domestic commodities and foreign commodity futures contracts, forward contracts, foreign exchange commitments, options on physical commodities and futures contracts, spot (cash) commodities and currencies, exchange of futures contracts for physicals transactions, exchange of physicals for futures contracts transactions, and any rights pertaining thereto (collectively, “Futures Interests”) (refer to Note 5. Financial Instruments of the Trading Companies) through the Partnership’s investments in its affiliated trading companies (each, a “Trading Company” or collectively, the “Trading Companies”). The Partnership is one of the partnerships in the Managed Futures Multi-Strategy Profile Series, comprised of the Partnership and Meritage Futures Fund L.P.

The Partnership invests substantially all of its assets in multiple affiliated Trading Companies, each of which allocates substantially all of its assets to the trading program of an unaffiliated commodity trading advisor (each, a “Trading Advisor” or collectively, the “Trading Advisors”) which makes investment decisions for each respective Trading Company.

The Partnership commenced trading operations on August 1, 2007, in accordance with the terms of its limited partnership agreement, as amended from time to time (the “Limited Partnership Agreement”). Morgan Stanley Smith Barney LLC is doing business as Morgan Stanley Wealth Management (“Morgan Stanley Wealth Management”) and serves as the placement agent to the Partnership. Morgan Stanley & Co. LLC (“MS&Co.”) acts as each Trading Company’s clearing commodity broker. Morgan Stanley & Co. International plc previously acted as each Trading Company’s commodity broker to the extent it traded on the London Metal Exchange. Each Trading Company’s over-the-counter (“OTC”) foreign exchange spot, option, and forward contract counterparty is MS&Co. to the extent a Trading Company trades options on OTC foreign currency forward contracts.

The Trading Companies, their Trading Advisors and their trading system styles for the Partnership at September 30, 2015, are as follows:

 

Trading Company

  

Trading Advisor

  

Trading System Style

Morgan Stanley Smith Barney Augustus I, LLC (“Augustus I, LLC”)

  

GAM International Management Limited (“GAM”)

  

Discretionary

Morgan Stanley Smith Barney Boronia I, LLC (“Boronia I, LLC”)

  

Boronia Capital Pty. Ltd. (“Boronia”)

  

Systematic

Morgan Stanley Smith Barney TT II, LLC (“TT II, LLC”)

  

Transtrend B.V. (“Transtrend”)

  

Systematic

 

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Table of Contents

LV FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS

 

Ceres Managed Futures LLC (“Ceres” or the “General Partner”), the general partner and commodity pool operator of the Partnership and the trading manager of each Trading Company, is a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC (“MSSBH”). MSSBH is wholly-owned indirectly by Morgan Stanley. Morgan Stanley Wealth Management is a principal subsidiary of MSSBH. MS&Co. is a wholly-owned subsidiary of Morgan Stanley.

Ceres may reallocate the Partnership’s assets to the different Trading Companies at its sole discretion.

Units of limited partnership interest (“Units”) of the Partnership are offered in two classes in a private placement pursuant to Regulation D under the Securities Act of 1933, as amended (the “Securities Act”). Depending on the aggregate amount invested in the Partnership, limited partners receive class A or D Units in the Partnership (each, a “Class” and collectively, the “Classes”). Certain limited partners who are not subject to the ongoing placement agent fee are deemed to hold Class Z Units. Ceres received Class Z Units with respect to its investment in the Partnership. As of September 30, 2015 and December 31, 2014, there were no Class D Units outstanding. Class B and Class C Units are no longer being offered to new investors, but will continue to be offered to existing Class B and Class C investors.

Ceres is not required to maintain any investment in the Partnership, and may withdraw any portion of its interest in the Partnership at any time, as permitted by the Limited Partnership Agreement. In addition, Class Z Units are only being offered to certain individuals affiliated with Morgan Stanley at Ceres’ sole discretion. Class Z Unit holders are not subject to paying the ongoing placement agent fee.

During June 2015, the General Partner determined to invest a portion of the Partnership’s and the Trading Companies’ excess cash (the Partnership and the Trading Companies assets not used for futures interest trading or required margin for such trading) in United States (“U.S.”) Treasury bills and/or other permitted investments. The Trading Companies receive interest on U.S. Treasury bills at the relevant coupon rate. There will be no change to the treatment of the excess cash not invested in U.S. Treasury bills or other permitted investments. The General Partner intends to hold the U.S. Treasury bills until maturity, but in the event that the General Partner is required to liquidate U.S. Treasury bills before they mature, to meet redemption requests or otherwise, the Partnership and the Trading Companies may incur a loss on such U.S. Treasury bills and/or may be subject to additional fees or other costs. The General Partner will endeavor to maintain sufficient cash in the Partnership’s and the Trading Companies’ accounts in order to avoid early liquidation of U.S. Treasury bills.

In July 2015, the General Partner delegated certain administrative functions to SS&C Technologies, Inc., a Delaware corporation, currently doing business as SS&C GlobeOp (the “Administrator”). Pursuant to a master services agreement, the Administrator furnishes certain administrative services in connection with the operation of the Partnership and the Trading Companies, including the preparation of required books and records and reports to limited partners, government agencies and regulators; computation of net asset value; assistance in connection with certain limited partner communications; calculation and accrual of income, expenses, gains and losses; preparation of financial, performance and other reporting; coordination of the annual audit with the Partnership’s and the Trading Companies’ auditor; preparation of the Partnership’s and the Trading Companies’ draft annual financial statements and accompanying materials; assistance with updating periodic regulatory filings; provision of tax services as agreed with the General Partner; assistance in opening and operating the Partnership’s and the Trading Companies’ bank accounts; provision of daily profit and loss, estimated net asset value and position and reconciliation reports; and reconciliation of daily transactions, positions and cash balances to the Partnership’s and the Trading Companies’ brokerage and bank accounts. In addition, the Administrator will maintain certain books and records of the Partnership and the Trading Companies. The General Partner pays or reimburses the Partnership and the Trading Companies, from the administrative fee it receives, the ordinary administrative expenses of the Partnership and the Trading Companies. This includes the expenses related to the engagement of the Administrator. Therefore, the engagement of the Administrator will not impact the Partnership’s break-even point.

 

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Table of Contents

LV FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS

 

2.   Basis of Presentation and Summary of Significant Accounting Policies

The accompanying financial statements and accompanying notes are unaudited but, in the opinion of the General Partner, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Partnership’s financial condition at September 30, 2015, and the results of its operations for the three and nine months ended September 30, 2015 and 2014, and changes in partners’ capital for the nine months ended September 30, 2015 and 2014. These financial statements present the results of interim periods and do not include all of the disclosures normally provided in annual financial statements. These financial statements should be read together with the financial statements and notes included in the Partnership’s December 31, 2014 Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) for the year ended December 31, 2014. The December 31, 2014 information has been derived from the audited financial statements as of and for the year ended December 31, 2014.

Use of Estimates: The preparation of financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities, income and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. As a result, actual results could differ from these estimates.

Partnership’s Investments: The Partnership’s investments in affiliated Trading Companies reflected on the Statements of Financial Condition represent the Partnership’s pro rata share of the net asset value of each Trading Company. Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement”, as amended, permits, as a practical expedient, the Partnership to measure the fair value of its investments in affiliated Trading Companies on the basis of the net asset value per share (or its equivalent) if the net asset value per share of such investments is calculated in a manner consistent with the measurement principles of ASC Topic 946, “Financial Services – Investment Companies” as of the Partnership’s reporting date. The net assets of each Trading Company are equal to the total assets of the Trading Company (including, but not limited to, all cash and cash equivalents, accrued interest and amortization of original issue discount, and the fair value of all open Futures Interests and other assets) less all liabilities of the Trading Company (including, but not limited to, brokerage commissions that would be payable upon the closing of open Futures Interests, management fees, incentive fees, and other expenses), determined in accordance with GAAP.

Affiliated Trading Companies’ Investments: The fair value of exchange-traded futures, option and forward contracts is determined by the various futures exchanges, and reflects the settlement price for each contract as of the close of business on the last business day of the reporting period. The fair value of foreign currency forward contracts is extrapolated on a forward basis from the spot prices quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period from various exchanges. The fair value of non-exchange-traded foreign currency option contracts is calculated by applying an industry standard model application for options valuation of foreign currency options, using as input the spot prices, interest rates, and option implied volatilities quoted as of approximately 3:00 P.M. (E.T.) on the last business day of the reporting period. U.S. Treasury bills are valued at the last available bid price received from independent pricing services as of the close of business on the last business day of the reporting period.

The financial statements of the Partnership have been prepared using the “Fund of Funds” approach and accordingly the Partnership’s pro rata share of all revenue and expenses of the Trading Companies is reflected as net change in unrealized appreciation (depreciation) on investments on the Statements of Income and Expenses. Contributions to and withdrawals from the Trading Companies are recorded on the effective date. The Partnership records a realized gain or loss on its investments in the Trading Companies as the difference between the redemption proceeds and the related cost of such investment. In determining the cost of such investments, the Partnership uses the first in first out method. The Partnership maintains sufficient cash balances on hand to satisfy ongoing operating expenses for the Partnership. As of September 30, 2015 and December 31, 2014, the Partnership’s cash balances were zero.

Investment Company Status: The Partnership adopted Accounting Standards Update (“ASU”) 2013-08, “Financial Services — Investment Companies (Topic 946): Amendments to the Scope, Measurement and Disclosure Requirements” and based on the General Partner’s assessment, the Partnership has been deemed to be an investment company since inception. Accordingly, the Partnership follows the investment company accounting and reporting guidance of Topic 946 and reflects its investments at fair value with unrealized gains and losses resulting from changes in fair value reflected in the Statements of Income and Expenses.

 

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LV FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS

 

Income Taxes: Income taxes have not been listed as each partner is individually liable for the taxes, if any, on its share of the Partnership’s income and expenses. The General Partner has concluded that no provision for income tax is required in the Partnership’s financial statements. The Partnership files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The 2011 through 2014 tax years remain subject to examination by U.S. federal and most state tax authorities. The General Partner does not believe that there are any uncertain tax positions that require recognition of a tax liability.

Net Income (Loss) per Unit: Net income (loss) per Unit is calculated in accordance with investment company guidance. See Note 4, “Financial Highlights”.

Recent Accounting Pronouncement: In May 2015, the Financial Accounting Standards Board issued ASU 2015-07, “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” which relates to disclosures for investments that calculate net asset value per share (potentially fund of fund structures). The ASU requires investments for which the practical expedient is used to measure fair value at net asset value be removed from the fair value hierarchy. Instead, an entity is required to include those investments as a reconciling line item so that the total fair value amount of investments in the disclosure is consistent with the amount on the balance sheet. Further, the ASU removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using the practical expedient. The standard is effective for public business entities for fiscal years beginning after December 15, 2015. Early adoption is permitted. The Partnership has elected to adopt the guidance as of June 30, 2015. As a result of this adoption, the investments that are measured at fair value based on the net asset value per share (or its equivalent) practical expedient have been removed from the fair value hierarchy in all periods presented in these financial statements.

There have been no material changes with respect to the Partnership’s critical accounting policies as reported in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

3.   Related Party Transactions

The Trading Companies’ cash is on deposit in commodity brokerage accounts with Morgan Stanley and will be maintained in cash, U.S. Treasury bills and/or other permitted investments and segregated as customer funds, to the extent required by Commodity Futures Trading Commission (“CFTC”) regulations. From time to time, a portion of the Trading Companies’ excess cash (the Trading Companies’ assets not used for futures interest trading or required margin for such trading) may be invested by MS&Co. in permitted investments chosen by the General Partner from time to time. The Trading Companies will receive 100% of the interest income earned on any excess cash invested in permitted investments. For excess cash which is not invested, MS&Co. pays each Trading Company interest income on 100% of its average daily equity maintained in cash in the Trading Companies’ accounts during each month at a rate equal to the monthly average of the 4-week U.S. Treasury bill discount rate less 0.15% during such month but in no event less than zero. When the effective rate is less than zero, no interest is earned. For purposes of such interest payments, daily funds do not include monies due to each Trading Company on Futures Interests that have not been received. MS&Co. will retain any excess interest not paid by MS&Co. to the Trading Companies on such uninvested cash.

The Partnership and the Trading Companies pay Ceres or its affiliates a monthly administrative fee. The Partnership pays monthly general partner fees to Ceres. The Partnership pays ongoing placement agent fees to Morgan Stanley Wealth Management on a monthly basis equal to a percentage of the net asset value of a limited partner’s Units as of the beginning of each month.

 

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LV FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS

 

4.   Financial Highlights

Financial highlights for each Class of Units for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

     Class A      Class B      Class C      Class Z  

PER UNIT OPERATING PERFORMANCE:

           

NET ASSET VALUE, JULY 1, 2015

       $ 878.53              $ 914.05              $ 951.00              $ 1,029.39      
  

 

 

    

 

 

    

 

 

    

 

 

 

NET OPERATING RESULTS:

           

Net investment loss

     (7.63)           (6.78)           (5.84)           (3.69)     

Net realized/unrealized gain (loss)

     39.49            41.11            42.78            46.31      
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     31.86            34.33            36.94            42.62      
  

 

 

    

 

 

    

 

 

    

 

 

 

NET ASSET VALUE, SEPTEMBER 30, 2015

       $ 910.39              $ 948.38              $ 987.94              $ 1,072.01      
  

 

 

    

 

 

    

 

 

    

 

 

 

RATIOS TO AVERAGE NET ASSETS:

           

Net investment loss (1) (2)

     (3.39)%            (2.87)%            (2.37)%            (1.38)%      

Partnership expenses (1) (2)

     3.39%            2.87%            2.37%            1.38%      

TOTAL RETURN:

     3.63%            3.76%            3.88%            4.14%      

PER UNIT OPERATING PERFORMANCE:

           

NET ASSET VALUE, JANUARY 1, 2015

       $ 963.16              $ 999.57              $ 1,037.34              $ 1,117.16      
  

 

 

    

 

 

    

 

 

    

 

 

 

NET OPERATING RESULTS:

           

Net investment loss

     (24.14)           (21.42)           (18.42)           (11.61)     

Net realized/unrealized gain (loss)

     (28.63)           (29.77)           (30.98)           (33.54)     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     (52.77)           (51.19)           (49.40)           (45.15)     
  

 

 

    

 

 

    

 

 

    

 

 

 

NET ASSET VALUE, SEPTEMBER 30, 2015

       $     910.39              $     948.38              $     987.94              $     1,072.01      
  

 

 

    

 

 

    

 

 

    

 

 

 

RATIOS TO AVERAGE NET ASSETS:

           

Net investment loss (1) (2)

     (3.44)%            (2.92)%            (2.41)%            (1.41)%      

Partnership expenses (1) (2)

     3.44%            2.92%            2.41%            1.41%      

TOTAL RETURN:

     (5.48)%            (5.12)%            (4.76)%            (4.04)%      

 

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LV FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS

 

     Class A      Class B      Class C      Class Z  

PER UNIT OPERATING PERFORMANCE:

           

NET ASSET VALUE, JULY 1, 2014

       $ 894.69              $ 926.22              $ 958.85              $ 1,027.55      
  

 

 

    

 

 

    

 

 

    

 

 

 

NET OPERATING RESULTS:

           

Net investment loss

     (7.64)           (6.75)           (5.79)           (3.59)     

Net realized/unrealized gain (loss)

     59.08            61.20            63.41            68.01      
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     51.44            54.45            57.62            64.42      
  

 

 

    

 

 

    

 

 

    

 

 

 

NET ASSET VALUE, SEPTEMBER 30, 2014

       $ 946.13              $ 980.67              $ 1,016.47              $ 1,091.97      
  

 

 

    

 

 

    

 

 

    

 

 

 

RATIOS TO AVERAGE NET ASSETS:

           

Net investment loss (1) (2)

     (3.37)%            (2.88)%            (2.38)%            (1.38)%      

Partnership expenses (1) (2)

     3.37%            2.88%            2.38%            1.38%      

TOTAL RETURN:

     5.75%            5.88%            6.01%            6.27%      

PER UNIT OPERATING PERFORMANCE:

           

NET ASSET VALUE, JANUARY 1, 2014

       $ 900.45              $ 929.85              $ 960.20              $ 1,023.87      
  

 

 

    

 

 

    

 

 

    

 

 

 

NET OPERATING RESULTS:

           

Net investment loss

     (22.67)           (20.01)           (17.13)           (10.64)     

Net realized/unrealized gain (loss)

     68.35            70.83            73.40            78.74      
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     45.68            50.82            56.27            68.10      
  

 

 

    

 

 

    

 

 

    

 

 

 

NET ASSET VALUE, SEPTEMBER 30, 2014

       $     946.13              $     980.67              $     1,016.47              $     1,091.97      
  

 

 

    

 

 

    

 

 

    

 

 

 

RATIOS TO AVERAGE NET ASSETS:

           

Net investment loss (1) (2)

     (3.41)%            (2.91)%            (2.41)%            (1.40)%      

Partnership expenses (1) (2)

     3.41%            2.91%            2.41%            1.40%      

TOTAL RETURN:

     5.07%            5.47%            5.86%            6.65%      

 

(1)

Annualized.

(2)

Does not include investment income and the expenses of the Trading Companies in which the Partnership invests.

The above ratios and total return may vary for individual investors based on the timing of capital transactions during the period. Additionally, these ratios are calculated for each Class of Units using share of income, expenses and average net assets of the Partnership and excludes the income and expenses of the Trading Companies.

 

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LV FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS

 

5.   Financial Instruments of the Trading Companies

The Trading Advisors trade Futures Interests on behalf of the Trading Companies. Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price. Futures Interests are open commitments until the settlement date, at which time they are realized. They are valued at fair value, generally on a daily basis, and the unrealized gains and losses on open contracts (the difference between contract trade price and market price) are reported in the Trading Companies’ Statements of Financial Condition as net unrealized gain or loss on open contracts. The resulting net change in unrealized gains and losses is reflected in the net change in unrealized trading profit (loss) from one period to the next on the Trading Companies’ Statements of Income and Expenses. Risk arises from changes in the value of these contracts and the potential inability of counterparties to perform under the terms of the contracts. There are numerous factors which may significantly influence the fair value of these contracts, including interest rate volatility.

The Trading Companies may buy or write put and call options through listed exchanges and the over-the-counter market. The buyer of an option has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of specific Futures Interests on the underlying asset at a specified price prior to or on a specified expiration date. The writer of an option is exposed to the risk of loss if the fair value of the Futures Interests on the underlying asset declines (in the case of a put option) or increases (in the case of a call option). The writer of an option can never profit by more than the premium paid by the buyer but can potentially lose an unlimited amount.

Premiums received/premiums paid from writing/purchasing options are recorded as liabilities/assets on the Trading Companies’ Statements of Financial Condition. The difference between the fair value of an option and the premiums received/premiums paid is treated as an unrealized gain or loss within the Trading Companies’ Statements of Income and Expenses.

The fair value of an exchange-traded contract is based on the settlement price quoted by the exchange on the day with respect to which fair value is being determined. If an exchange-traded contract could not have been liquidated on such day due to the operation of daily limits or other rules of the exchange, the settlement price will be equal to the settlement price on the first subsequent day on which the contract could be liquidated. The Trading Companies’ contracts are accounted for on a trade-date basis.

The futures, forwards and options traded by the Trading Advisors on behalf of the Trading Companies and the U.S. Treasury bills held by the Trading Companies involve varying degrees of related market risk. Market risk is often dependent upon changes in the level or volatility of interest rates, exchange rates, and prices of financial instruments and commodities, factors that result in frequent changes in the fair value of the Trading Companies’ open positions, and consequently in their earnings, whether realized or unrealized, and cash flow. Gains and losses on open positions of exchange-traded futures, exchange-traded forward, and exchange-traded futures- styled option contracts are settled daily through variation margin. Gains and losses on off-exchange-traded forward currency contracts are settled upon termination of the contract. Gains and losses on off-exchange-traded forward currency option contracts are settled on an agreed-upon settlement date. However, the Trading Companies are required to meet margin requirements equal to the net unrealized loss on open forward currency contracts in the Trading Companies’ accounts with the counterparty.

 

6.   Fair Value Measurements

The Trading Companies considers prices for exchange-traded commodity futures, forward, swap and option contracts to be based on unadjusted quoted prices in active markets for identical assets (Level 1). The values of U.S. Treasury bills, non-exchange-traded forward, swap and certain option contracts for which market quotations are not readily available are priced by broker-dealers that derive fair values for those assets and liabilities from observable inputs (Level 2).

As of and for the periods ended September 30, 2015 and December 31, 2014, the Trading Companies’ investments were classified as either Level 1 or Level 2 and the Trading Companies did not hold any domestic instruments that were priced at fair value using unobservable inputs through the application of the General Partner’s assumption and internal valuation pricing models (Level 3). Transfers between levels are recognized at the end of the reporting period. During the nine months ended September 30, 2015 and the twelve months ended December 31, 2014, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

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LV FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS

 

At September 30, 2015, the Partnership’s investment in the Trading Companies represented approximately: TT II, LLC 33.48%; Boronia I, LLC 22.48%; and Augustus I, LLC 44.04% of the total investments of the Partnership, respectively.

At December 31, 2014, the Partnership’s investment in the Trading Companies represented approximately: TT II, LLC 32.70%; Augustus I, LLC 38.30%; and Boronia I, LLC 29.00% of the total investments of the Partnership, respectively.

The performance of the Partnership is directly affected by the performance of the Trading Companies.

The tables below represent summarized Income Statement information for the Trading Companies that the Partnership invests in for the three and nine months ended September 30, 2015 and 2014, respectively, in accordance with Rule 3-09 of Regulation S-X:

 

For the three months ended

September 30, 2015

   Investment Income
(Loss)
     Net Investment Loss       Total Trading 
Results
     Net Income
(Loss)
 
     $      $      $      $  

TT II, LLC

     7,272            (1,655,018)           34,483,182            32,828,164      

Augustus I, LLC

     1,785            (65,855)           (219,640)           (285,495)     

Boronia I, LLC

     13,122            (1,075,317)           8,917,469            7,842,152      

For the nine months ended

September 30, 2015

   Investment Income
(Loss)
     Net Investment Loss      Total Trading
Results
     Net Income
(Loss)
 
     $      $      $      $  

TT II, LLC

     7,272            (11,948,868)           7,069,645            (4,879,223)     

Augustus I, LLC

     1,785            (233,619)           396,752            163,133      

Boronia I, LLC

     13,122            (4,665,174)           (7,844,128)           (12,509,302)     

For the three months ended

September 30, 2014

   Investment Income
(Loss)
     Net Investment Loss      Total Trading
Results
     Net Income
(Loss)
 
     $      $      $      $  

TT II, LLC

     -                (7,955,935)           38,585,921            30,629,986      

Augustus I, LLC

     -                (121,691)           949,648            827,957      

Boronia I, LLC

     -                (3,213,470)           11,747,109            8,533,639      

Morgan Stanley Smith Barney Rotella I, LLC (“Rotella I, LLC”)

     -                (74,182)           221,035            146,853      

For the nine months ended

September 30, 2014

       Investment Income    
(Loss)
       Net Investment Loss            Total Trading    
Results
         Net Income    
(Loss)
 
     $      $      $      $  

TT II, LLC

     -                (11,905,340)           65,705,835            53,800,495      

Augustus I, LLC

     -                (246,861)           1,099,169            852,308      

Boronia I, LLC

     -                (5,320,505)           15,863,418            10,542,913      

Morgan Stanley Smith Barney Kaiser I, LLC (“Kaiser I, LLC”)

     -                (868,868)           (5,469,979)           (6,338,847)     

Rotella I, LLC

     -                (183,924)           500,581            316,657      

 

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LV FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS

 

Summarized information reflecting the Partnership’s investment in, and the Partnership’s pro rata share of the results of operations of the Trading Companies as of September 30, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014 is shown in the following tables.

 

    September 30, 2015     For the three months ended September 30, 2015    
    % of
Partnership’s
Partners’
Capital
    Fair
Value
    Partnership’s pro
rata share of Net
Income (Loss)
    Partnership’s
pro rata
share of
Management
Fees
    Partnership’s
pro rata
share of
Incentive
Fees
    Partnership’s
pro rata
share of
Administrative
Fees
    Investment Objective   Redemption
Permitted
    %     $     $     $     $     $          

Augustus I, LLC

    44.7           5,161,115           (106,888)          19,787           32           4,617        

Commodity Portfolio

  Monthly

Boronia I, LLC

    22.8           2,634,559           340,968           13,668           -               3,189        

Commodity Portfolio

  Monthly

TT II, LLC

    34.0           3,923,681           281,395           8,538           -               2,391        

Commodity Portfolio

  Monthly
    September 30, 2015     For the nine months ended September 30, 2015    
    % of
Partnership’s
Partners’
Capital
    Fair
Value
    Partnership’s pro
rata share of Net
Income (Loss)
    Partnership’s
pro rata
share of
Management
Fees
    Partnership’s
pro rata
share of
Incentive
Fees
    Partnership’s
pro rata
share of
Administrative
Fees
    Investment Objective   Redemption
Permitted
    %     $     $     $     $     $          

Augustus I, LLC

    44.7           5,161,115           46,811           59,518           9,901           13,888        

Commodity Portfolio

  Monthly

Boronia I, LLC

    22.8           2,634,559           (480,183)          50,522           38,676           11,788        

Commodity Portfolio

  Monthly

TT II, LLC

    34.0           3,923,681           62,278           26,499           47,546           7,420        

Commodity Portfolio

  Monthly
    December 31, 2014     For the three months ended September 30, 2014    
    % of
  Partnership’s  
Partners’
Capital
    Fair
Value
    Partnership’s pro
rata share of Net
Income (Loss)
    Partnership’s
pro rata
share of
Management
Fees
    Partnership’s
pro rata
share of
Incentive
Fees
    Partnership’s
pro rata
share of
Administrative
Fees
    Investment Objective   Redemption
Permitted
    %     $     $     $     $     $          

Augustus I, LLC

    29.6           3,935,697           273,427           14,482           25,153           3,379        

Commodity Portfolio

  Monthly

Boronia I, LLC

    22.4           2,976,216           259,690           12,490           64,923           2,331        

Commodity Portfolio

  Monthly

TT II, LLC

    25.3           3,356,258           249,211           9,978           9,871           2,794        

Commodity Portfolio

  Monthly

Rotella I, LLC

    -               -               85,744           9,477           21,436           3,317          

 

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LV FUTURES FUND L.P.

NOTES TO FINANCIAL STATEMENTS

 

    December 31, 2014     For the nine months ended September 30, 2014      
    % of
 Partnership’s 
Partners’
Capital
    Fair
Value
    Partnership’s pro
rata share of Net
Income (Loss)
    Partnership’s
pro rata
share of
Management
Fees
    Partnership’s
pro rata
share of
Incentive
Fees
    Partnership’s
pro rata
share of
Administrative
Fees
    Investment Objective     Redemption
Permitted
    %     $     $     $     $     $            

Augustus I, LLC

    29.6           3,935,697           274,582           43,827           25,153           10,226           Commodity Portfolio      Monthly

Boronia I, LLC

    22.4           2,976,216           330,025           33,624           82,507           6,276           Commodity Portfolio      Monthly

TT II, LLC

    25.3           3,356,258           394,197           37,188           9,871           10,413           Commodity Portfolio      Monthly

Kaiser I, LLC

    -               -               (222,158)          19,534           -               3,419           Commodity Portfolio      Monthly

Rotella I, LLC

    -               -               182,248           27,573           45,744           9,650           Commodity Portfolio      Monthly

Morgan Stanley Smith Barney WNT I, LLC (“WNT I, LLC”)

    -               -               (79,472)           14,154           -               3,303           Commodity Portfolio      Monthly

 

7.   Subsequent Events

The General Partner evaluates events that occur after the balance sheet date but before financial statements are issued. The General Partner has assessed the subsequent events through the date of issuance and has determined that, other than the event listed below, there were no subsequent events requiring adjustment of, or disclosure in, the financial statements.

Effective November 1, 2015, the management fee payable by TT II, LLC to Transtrend was reduced to a rate of 1/12 of 1.00% (a 1% annual rate) of nominal assets allocated to Transtrend as of the first day of each month.

 

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Table of Contents
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of September 30, 2015, the percentage of assets allocated to each market sector was approximately as follows: Interest Rate 22.06%; Currency 41.68%; Equity 7.88%; and Commodity 28.38%.

Liquidity. MS&Co. and its affiliates act as custodians of each Trading Company’s assets pursuant to customer agreements and foreign exchange customer agreements. The Partnership allocates substantially all of its assets to multiple Trading Companies. Such assets are deposited in the Trading Companies’ trading accounts with MS&Co. or its affiliates. The funds in such accounts are available for margin and are used to engage in Futures Interests trading pursuant to instructions provided by the Trading Advisors. The assets are held either in non-interest bearing bank accounts or in securities and instruments permitted by the Commodity Futures Trading Commission for investment of customer segregated or secured funds. Since the Partnership’s sole purpose is to trade Futures Interests indirectly through the investment in the Trading Companies, it is expected that the Trading Companies will continue to own such liquid assets for margin purposes.

The Trading Companies’ investment in Futures Interests may, from time to time, be illiquid. Most U.S. futures exchanges limit fluctuations in prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits.” Trades may not be executed at prices beyond the daily limit. If the price for a particular futures or option contract has increased or decreased by an amount equal to the daily limit, positions in that futures or option contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. These market conditions could prevent the Trading Companies from promptly liquidating their futures or option contracts and result in restrictions on redemptions.

There is no limitation on daily price movements in trading forward contracts on foreign currencies. The markets for some world currencies have low trading volume and are illiquid, which may prevent the Trading Companies from trading in potentially profitable markets or prevent the Trading Companies from promptly liquidating unfavorable positions in such markets, subjecting them to substantial losses. Either of these market conditions could result in restrictions on redemptions. For the periods covered by this report, illiquidity has not materially affected the Partnership’s assets.

There are no known material trends, demands, commitments, events, or uncertainties at the present time that are reasonably likely to result in the Partnership’s liquidity increasing or decreasing in any material way.

As of September 30, 2015, approximately 65.04% of the Partnership’s total investment exposure is futures contracts which are exchange-traded while approximately 34.96% is forward contracts which are off-exchange-traded.

Capital Resources. The Partnership does not have, nor does it expect to have, any capital assets. The Partnership’s only assets are its investments in Affiliated Trading Companies (Augustus I, LLC, Boronia I, LLC and TT II, LLC). The Affiliated Trading Companies’ only assets are their equity in trading accounts, consisting of restricted and unrestricted cash, net unrealized gain on open contracts and investment U.S. Treasury bills at fair value, if applicable. Redemptions, exchanges, and sales of Units in the future will affect the amount of funds available for investments in Futures Interests in subsequent periods. It is not possible to estimate the amount, and therefore the impact, of future inflows and outflows of Units.

There are no known material trends, favorable or unfavorable, that would affect, nor any expected material changes to, the Partnership’s capital resource arrangements at the present time.

Off-Balance Sheet Arrangements and Contractual Obligations. The Partnership does not have any off-balance sheet arrangements, nor does it have contractual obligations or commercial commitments to make future payments, that would affect its liquidity or capital resources.

 

15


Table of Contents

Results of Operations

General. The Partnership’s results depend on the Trading Advisors and the ability of each Trading Advisor’s trading program to take advantage of price movements in the futures, forward and options markets. The following presents a summary of the Partnership’s operations for the three and nine months ended September 30, 2015 and 2014, and a general discussion of its trading activities during each period. It is important to note, however, that the Trading Advisors trade in various markets at different times and that prior activity in a particular market does not mean that such market will be actively traded by the Trading Advisors or will be profitable in the future. Consequently, the results of operations of the Partnership are difficult to discuss other than in the context of the Trading Advisors’ trading activities on behalf of the Partnership during the period in question. Past performance is no guarantee of future results.

As of September 30, 2015 and June 30, 2015, the allocations between the Trading Companies were as follows:

 

Trading Company

   Allocation as of 9/30/2015   Allocation as of 6/30/2015

Augustus I, LLC

   44.04%   45.90%

TT II, LLC

   33.48%   19.85%

Boronia I, LLC

   22.48%   34.25%

The Partnership’s results of operations set forth in the financial statements on pages 2 through 14 of this report are prepared in accordance with GAAP, which require the use of certain accounting policies that affect the amounts reported in these financial statements, including the following: the contracts that the Trading Companies trade are accounted for on a trade-date basis and marked to market on a daily basis. The difference between their original contract value and fair value is recorded on the Trading Companies’ Statements of Income and Expenses as “Net change in unrealized appreciation (depreciation) on investments” for open contracts, and recorded as “Net realized” when open positions are closed out. The sum of these amounts constitutes the Trading Companies’ trading results. The fair value of a futures contract is the settlement price on the exchange on which that futures contract is traded on a particular day. The value of a foreign currency forward contract is based on the spot rate as of approximately 3:00 P.M. (E.T.), the close of the business day. U.S. Treasury bills are valued at the last available bid price received from independent pricing services.

The General Partner believes that, based on the nature of the operations of the Partnership, no assumptions relating to the application of critical accounting policies other than those presently used could reasonably affect reported amounts.

For the three and nine months ended September 30, 2015

The Partnership recorded total net realized and unrealized gain on investments of $515,475 and expenses totaling $91,917, resulting in net income of $423,558 for the three months ended September 30, 2015. The Partnership’s net asset value per Unit by share Class is provided in the table below.

 

Share Class

   NAV at 9/30/15           NAV at 6/30/15  

A

     $910.39            $878.53   

B

     $948.38            $914.05   

C

     $987.94            $951.00   

Z

     $1,072.01            $1,029.39   

 

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During the third quarter, the Partnership posted a gain in Net Asset Value per Unit as trading gains in energies, metals, global interest rates, global stock indices and agriculturals more than offset trading losses in currencies. The most significant gains were achieved within the energy sector during the third quarter from short positions in crude oil and oil related products as prices decreased due to high production in the U.S. and Middle East, which added to a growing global supply glut. Within the metals sector, gains were experienced during July from short futures positions in gold and silver as prices declined as a strengthening U.S. dollar decreased the appeal of precious metals as a store of value. Additional gains were recorded during July from short base metals futures positions as prices moved lower amid concern a slowdown in the Chinese economy would weaken demand. In the global interest rate sector, gains were recorded during September from long positions in global fixed income futures as prices increased after the U.S. Federal Reserve left interest rates unchanged and investors sought safe havens amid a global rout in stock prices. Gains within the global equity index sector were recorded during the middle of July from long positions in U.S. and European equity index positions as prices rebounded with positive investor sentiment after Greece and its creditors came to an agreement over economic reform. In the agricultural sector, gains were achieved during August from short soybean futures positions as prices decreased following reports of strong U.S. crop yields and concern that China’s economic slowdown will reduce demand. A portion of the Partnership’s gains for the quarter was offset by losses incurred within the currency sector during August from short euro positions versus the U.S. dollar as the relative value of the U.S. dollar decreased following speculation that slowing global growth reduced the probability the U.S. Federal Reserv will raise interest rates during 2015.

The Partnership recorded total net realized and unrealized loss on investments of $371,094 and expenses totaling $298,780, resulting in a net loss of $669,874 for the nine months ended September 30 2015. The Partnership’s net asset value per Unit by share Class is provided in the table below.

 

Share Class

   NAV at 9/30/15           NAV at 12/31/14  

A

     $910.39            $963.16   

B

     $948.38            $999.57   

C

     $987.94            $1,037.34   

Z

     $1,072.01            $1,117.16   

During the first nine months of the year, the Partnership posted a loss in Net Asset Value per Unit as trading losses in global stock indices and agriculturals more than offset trading gains in currencies, energy, global interest rates and metals. The most significant losses were recorded within the global stock index sector during January, May, June, August and September from long U.S., European and Asian equity index futures positions as prices declined due to concerns associated with slowing global economic growth, the Greek financial crisis, and a stronger U.S. dollar. In the agricultural sector, losses were incurred during the first half of the April from short sugar futures positions as prices climbed higher after wet weather increased the likelihood the Brazilian cane harvest would be delayed. Additional losses were experienced during April and June from short coffee positions as prices.increased due to crop concerns. During July and September, smaller losses were incurred in this sector from positions in the wheat, soybean and corn markets. A portion of the Partnership’s losses during the first nine months of the year was offset by gains experienced within the currency sector during the first two quarters from short euro positions versus the U.S. dollar as the value of the euro decreased due to economic stimulus programs introduced by the European Central Bank and investor anxiety regarding the Greek financial crisis. Additional gains in this sector were achieved during January and July from short Canadian dollar positions versus the U.S. dollar as “commodity currencies” were pressured as global commodities prices fell. Within the energy complex, gains were experienced during January, as well as during the third quarter, from short positions in crude oil and oil related products as prices fell due to high production in the U.S. and Middle East, which added to a growing global supply glut. In the global interest rate sector, gains were recorded primarily during January from long European and Canadian fixed income futures positions as prices advanced after the central banks in both the European Union and Canada announced stimulus measures to combat widespread deflationary concerns and slowing economic growth. Additional gains were recorded in this sector during September from long positions in global fixed income futures as prices increased after the U.S. Federal Reserve left interest rates unchanged and investors sought safe havens amid a global rout in stock prices. Within the metals sector, gains were primarily experienced during July from short futures positions in gold and silver as prices declined after a strengthening U.S. dollar decreased the appeal of precious metals as a store of value. Additional gains were recorded during July from short futures positions in base metals as prices moved lower amid concern a slowdown in the Chinese economy would weaken demand.

 

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For the three and nine months ended September 30, 2014

The Partnership recorded total net realized and unrealized gain on investments of $868,072 and expenses totaling $106,702, resulting in net income of $761,370 for the three months ended September 30, 2014. The Partnership’s net asset value per Unit by share Class is provided in the table below.

 

Share Class

   NAV at 9/30/14           NAV at 6/30/14  

A

     $946.13            $894.69   

B

     $980.67            $926.22   

C

     $1,016.47            $958.85   

Z

     $1,091.97            $1,027.55   

During the third quarter, the Partnership posted a gain in net asset value per Unit as trading profits in currencies, agriculturals, global interest rates, and metals more than offset losses in the energies and global stock index sectors. The most significant gains were achieved within the currency sector throughout the third quarter from short positions in the Japanese yen and euro versus the U.S. dollar as diverging central bank policy paths contributed to a strong U.S. dollar relative to its peers. The Bank of Japan’s and the European Central Bank’s focus on keeping interest rates low, while the U.S. Federal Reserve indicated higher interest rates benefit the Partnership’s short currency positions. Within the agriculturals sector, gains were recorded during the third quarter from short positions in corn, soybean, and wheat futures as prices declined as favorable growing conditions in the U.S. Midwest increased speculation that crop totals would reach record levels during 2014. Within the global interest rate sector, gains were achieved primarily during August from long positions in European fixed income futures as prices advanced as investors sought the relative safety of fixed income markets following concern of escalating geopolitical tensions. European bond prices also increased as the European Central Bank moved closer to introducing a quantitative easing policy to stimulate the Eurozone. Within the metals sector, gains were experienced during September from short positions in precious metals futures as prices declined as demand decreased on speculation that the U.S. Federal Reserve will raise U.S. interest rates sooner-than-forecast. A portion of the Partnership’s gains for the quarter was offset by losses incurred within the energy sector primary during July from long crude oil and gasoline futures positions as prices. declined amid speculation that rising U.S. gasoline stockpiles may signal a reduction in U.S. demand. Additional losses in this sector were recorded in late August from short positions in natural gas futures as prices rose after a burst of late summer heat slowed stockpiling. Within the global stock index sector, losses were incurred during the second half of September from long positions in U.S. equity index futures as prices declined amid concern over economic growth in Europe and geopolitical turmoil as the U.S. Federal Reserve prepares to end its bond-buying program.

The Partnership recorded total net realized and unrealized gain on investments of $879,422 and expenses totaling $390,143, resulting in net income of $489,279 for the nine months ended September 30, 2014. The Partnership’s net asset value per Unit by share Class is provided in the table below.

 

Share Class

   NAV at 9/30/14           NAV at 12/31/13  

A

     $946.13            $900.45   

B

     $980.67            $929.85   

C

     $1,016.47            $960.20   

Z

     $1,091.97            $1,023.87   

During the first nine months of the year, the Partnership posted a gain in net asset value per Unit as trading profits in currencies, agriculturals, and global interest rates more than offset losses in the metals, energies and global stock index sectors. The most significant gains were achieved within the currencies sector during May and the third quarter from short euro positions versus the U.S. dollar as diverging central bank policy paths contributed to a strong U.S. dollar relative to its peers.

 

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In the agricultural complex, gains were achieved during February from long positions in soybean futures as prices advanced after adverse weather conditions in Brazil lowered crop estimates. Additional gains were achieved during the third quarter from short positions in corn, soybean, and wheat futures as prices declined as favorable growing conditions in the U.S. Midwest increased speculation that crop totals would reach record levels during 2014. Within the global interest rate sector, gains were experienced during January and May through August from long positions in European fixed income futures as prices moved higher amid the prospect of European Central Bank stimulus and a slowdown in the Eurozone economy, boosting demand for the relative “safety” of government debt. The Partnership’s trading gains for the first nine months of the year were partially offset by trading losses within the metals sector throughout the majority of the first three quarters of the year, primarily from short precious metals futures positions as prices whipsawed. Losses within the energy sector were incurred during January from short futures positions in crude oil and petroleum distillates as prices advanced following cold weather in the U.S., which boosted demand for heating fuel. Additional losses within this sector were incurred during July from long crude oil and gasoline futures positions as prices declined amid speculation that rising U.S. gasoline stockpiles may signal a reduction in U.S. demand. Within the global stock index markets, losses were incurred during January from long positions in U.S., European and Asian equity index futures as prices declined following softer-than-expected economic data in the U.S. and China, along with political and economic headwinds facing emerging markets. Additional losses in this sector were incurred during the second half of the September from long positions in U.S. equity index futures as prices declined.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Introduction

All of the Partnership’s assets are subject to the risk of trading loss through its investments in the Trading Companies, each of which invests substantially all of its assets in the trading program of an unaffiliated Trading Advisor. The market-sensitive instruments held by the Trading Companies are acquired for speculative trading purposes, and substantially all of the respective Trading Companies’ assets are subject to the risk of trading loss. Unlike an operating company, the risk of market-sensitive instruments is integral, not incidental, to the Trading Companies’ main line of business.

The futures, forwards and options traded by the Trading Companies and the U.S. Treasury bills held by the Trading Companies involve varying degrees of related market risk. Market risk is often dependent upon changes in the level or volatility of interest rates, exchange rates, and prices of financial instruments and commodities. These factors result in frequent changes in the fair value of the Trading Companies’ open positions, and consequently in their earnings, whether realized or unrealized, and cash flow. Gains and losses on open positions of exchange-traded futures, exchange-traded forward, and exchange-traded futures-styled option contracts and forward currency option contracts are settled daily through variation margin. Gains and losses on off-exchange-traded forward currency contracts and forward currency option contracts are settled upon termination of the contract.

The total market risk of the respective Trading Companies may increase or decrease as it is influenced by a wide variety of factors, including, but not limited to, the diversification among the Trading Companies’ open positions, the volatility present within the markets, and the liquidity of the markets.

The face value of the market sector instruments held by the Trading Companies is typically many times the applicable margin requirements. Margin requirements generally range between 2% and 15% of contract face value. Additionally, the use of leverage causes the face value of the market sector instruments held by the Trading Companies typically to be many times the total capitalization of the Trading Companies.

The Partnership’s and the Trading Companies’ past performance are no guarantee of their future results. Any attempt to numerically quantify the Trading Companies’ market risk is limited by the uncertainty of their speculative trading. The Trading Companies’ speculative trading and use of leverage may cause future losses and volatility (i.e., “risk of ruin”) that far exceed the Trading Companies’ experiences to date as discussed under the “Trading Companies’ Value at Risk in Different Market Sectors” section and significantly exceed the Value at Risk (“VaR”) tables disclosed below.

Limited partners will not be liable for losses exceeding the current net asset value of their investment.

Quantifying the Trading Companies’ Trading Value at Risk

The following quantitative disclosures regarding the Trading Companies’ 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 Trading Companies account for open positions on the basis of fair value accounting principles. Any loss in the market value of the Trading Companies’ open positions is directly reflected in the Trading Companies’ earnings and cash flow.

The Trading Companies’ risk exposure in the market sectors traded by the Trading Advisors is estimated below in terms of VaR. Please note that the VaR model is used to quantify market risk for historic reporting purposes only and is not utilized by either Ceres or the Trading Advisors in their daily risk management activities.

 

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VaR is a measure of the maximum amount which each Trading Company could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of each Trading Company’s speculative trading and the recurrence of market movements far exceeding expectations in the markets traded by the Trading Companies could result in actual trading or non-trading losses far beyond the indicated VaR of each Trading Company’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 in this section should not be considered to constitute any assurance or representation that the Trading Companies’ losses in any market sector will be limited to VaR or by the Trading Companies’ attempts to manage their respective market risk.

Exchange maintenance margin requirements have been used by the Trading Companies as the measure of their respective VaR. Maintenance margin requirements are set by exchanges to equal or exceed the maximum losses reasonably expected to be incurred in the fair value of any given contract in 95% - 99% of any one-day interval. Maintenance margin has been used rather than the more generally available initial margin, because initial margin includes a credit risk component, which is not relevant to VaR.

The Trading Companies’ Value at Risk in Different Market Sectors

As of September 30, 2015, TT II, LLC’s total capitalization was $403,891,045. The Partnership owned approximately 1% of TT II, LLC.

 

     September 30, 2015         

Market Sector

   VaR      % of Total
Capitalization
    

Currency

         $13,699,089         3.39%      

Interest Rate

     14,975,188         3.71%      

Equity

     4,207,677         1.04%      

Commodity

     25,984,309         6.43%      
  

 

 

    

 

 

    

Total

     $58,866,263         14.57%      
  

 

 

    

 

 

    

Market Sector

   Three Months Ended September 30, 2015  
     High VaR      Low VaR      Average VaR*  

Currency

         $29,664,159             $13,251,842             $21,296,596   

Interest Rate

     $16,420,352         $7,166,546         $13,315,180   

Equity

     $18,327,802         $3,545,123         $10,526,349   

Commodity

     $36,678,799         $25,984,309         $32,434,051   

 

*

Average of daily VaR.

 

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As of September 30, 2015, Augustus I, LLC’s total capitalization was $13,716,313. The Partnership owned approximately 38% of Augustus I, LLC.

 

     September 30, 2015         

Market Sector

   VaR      % of Total
Capitalization
    

Currency

     $877,447         6.40%      

Interest Rate

     155,252         1.13%      
  

 

 

    

 

 

    

Total

     $1,032,699         7.53%      
  

 

 

    

 

 

    

Market Sector

   Three Months Ended September 30, 2015  
         High VaR              Low VaR              Average VaR*      

Currency

     $1,415,042         $736,491         $964,656   

Interest Rate

     $162,105         $85,895         $115,620   

 

*

Average of daily VaR.

As of September 30, 2015, Boronia I, LLC’s total capitalization was $94,546,791. The Partnership owned approximately 3% of Boronia I, LLC.

 

     September 30, 2015         

Market Sector

   VaR      % of Total
Capitalization
    

Currency

     $4,425,277         4.68%      

Interest Rate

     3,822,929         4.04%      

Equity

     2,512,668         2.66%      

Commodity

     5,275,929         5.58%      
  

 

 

    

 

 

    

Total

     $16,036,803         16.96%      
  

 

 

    

 

 

    

Market Sector

   Three Months Ended September 30, 2015  
         High VaR              Low VaR              Average VaR*      

Currency

     $9,670,214         $2,673,839         $5,167,711   

Interest Rate

     $6,694,425         $1,793,941         $3,497,622   

Equity

     $7,040,494         $1,217,103         $3,005,205   

Commodity

     $7,086,844         $2,831,084         $4,862,845   

 

*

Average of daily VaR.

 

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As of December 31, 2014, TT II, LLC’s total capitalization was $459,215,895. The Partnership owned approximately 1% of TT II, LLC.

 

     December 31, 2014         

Market Sector

   VaR      % of Total
Capitalization
    

Currency

     $11,945,011         2.60%      

Interest Rate

     22,829,716         4.97%      

Equity

     14,275,060         3.11%      

Commodity

     16,951,707         3.69%      
  

 

 

    

 

 

    

Total

     $66,001,494         14.37%      
  

 

 

    

 

 

    

Market Sector

   Twelve Months Ended December 31, 2014  
     High VaR      Low VaR      Average VaR*  

Currency

         $43,738,616             $11,543,442             $26,678,708   

Interest Rate

     $23,486,703         $5,437,975         $15,347,791   

Equity

     $24,704,696         $4,443,784         $16,383,350   

Commodity

     $37,483,261         $12,284,581         $22,290,073   

 

*

Average of daily VaR.

As of December 31, 2014, Augustus I, LLC’s total capitalization was $11,587,450. The Partnership owned approximately 34% of Augustus I LLC.

 

     December 31, 2014         

Market Sector

   VaR      % of Total
Capitalization
    

Currency

     $720,594         6.22%      

Interest Rate

     74,725         0.64%      
  

 

 

    

 

 

    

Total

     $795,319         6.86%      
  

 

 

    

 

 

    

Market Sector

   Twelve Months Ended December 31, 2014  
     High VaR      Low VaR      Average VaR*  

Currency

         $1,251,317         $683,340         $943,758   

Interest Rate

     $127,958         -              $55,153   

 

*

Average of daily VaR.

 

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As of December 31, 2014, Boronia I, LLC’s total capitalization was $104,262,934. The Partnership owned approximately 3% of Boronia I LLC.

 

     December 31, 2014         

Market Sector

   VaR      % of Total
Capitalization
    

Currency

     $4,957,331         4.75%      

Interest Rate

     2,965,947         2.84%      

Equity

     2,889,921         2.77%      

Commodity

     5,125,195         4.92%      
  

 

 

    

 

 

    

Total

     $15,938,394         15.28%      
  

 

 

    

 

 

    

Market Sector

   Twelve Months Ended December 31, 2014  
     High VaR      Low VaR      Average VaR*  

Currency

         $11,301,501             $984,987             $4,077,565   

Interest Rate

         $5,475,674             $647,220             $2,547,225   

Equity

         $9,013,937             $712,546             $3,468,454   

Commodity

         $6,835,307             $1,782,819             $3,476,070   

 

*

Average of daily VaR.

The Partnership terminated trading in Rotella I, LLC as of December 31, 2014.

 

Market Sector

   Twelve Months Ended December 31, 2014  
     High VaR      Low VaR      Average VaR*  

Currency

     $528,702         -              $293,817   

Interest Rate

     $415,289         -              $244,560   

Equity

     $570,266         -              $272,433   

Commodity

     $244,713         -              $123,652   

 

*

Average of daily VaR.

Limitations on Value at Risk as an Assessment of Market Risk

VaR models permit estimation of a portfolio’s aggregate market risk exposure, incorporating a range of varied market risks, reflect risk reduction due to portfolio diversification or hedging activities, and can cover a wide range of portfolio assets. However, VaR risk measures should be viewed in light of the methodology’s limitations, which include, but may not be limited to, the following:

 

   

past changes in market risk factors will not always result in accurate predictions of the distributions and correlations of future market movements;

 

   

changes in portfolio value caused by market movements may differ from those of the VaR model;

 

   

VaR results reflect past market fluctuations applied to current trading positions, while future risk depends on future positions;

 

   

VaR using a one-day time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day; and

 

   

the historical market risk factor data used for VaR estimation may provide only limited insight into losses that could be incurred under certain unusual market movements.

 

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Non-Trading Risk

The Trading Companies have non-trading market risk on their foreign cash balances not needed for margin. These balances and any market risk they may represent are immaterial.

A decline in short-term interest rates would result in a decline in the Trading Companies’ cash management income. This cash flow risk is not considered to be material.

Materiality, as used throughout this section, is based on an assessment of reasonably possible market movements and any associated potential losses, taking into account the leverage, optionality, and multiplier features of the Trading Companies’ market-sensitive instruments, in relation to the Trading Companies’ net assets.

Qualitative Disclosures Regarding Primary Trading Risk Exposures

The following qualitative disclosures regarding the Partnership’s market risk exposures – except for (A) those disclosures that are statements of historical fact and (B) the descriptions of how the Partnership manages its 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 Partnership’s primary market risk exposures, as well as the strategies used and to be used by Ceres and the Trading Advisors for managing such exposures, are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership’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 Partnership.

Investors must be prepared to lose all or substantially all of their investment in the Partnership.

Qualitative Disclosures Regarding Means of Managing Risk Exposure

The Partnership and the Trading Advisors, separately, attempt to manage the risk of the Partnership’s open positions in essentially the same manner in all market categories traded. Ceres attempts to manage market exposure by diversifying the Partnership’s assets among different market sectors through the selection of commodity trading advisors and by daily monitoring of their performance. In addition, the Trading Advisors establish diversification guidelines, often set in terms of the maximum margin to be committed to positions in any one market sector or market-sensitive instrument.

Ceres monitors and controls the risk of the Partnership’s non-trading instrument, cash. Cash is the only Partnership investment directed by Ceres, rather than the Trading Advisors.

 

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Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the General Partner, Ceres’ President (Ceres’ principal executive officer) and Chief Financial Officer (Ceres’ principal financial officer) have evaluated the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2015. The Partnership’s disclosure controls and procedures are designed to provide reasonable assurance that information the Partnership is required to disclose in the reports that the Partnership files or submits under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the applicable rules and forms. Based on this evaluation, the President and Chief Financial Officer of Ceres have concluded that the disclosure controls and procedures of the Partnership were effective at September 30, 2015.

Changes in Internal Control over Financial Reporting

There have been no changes during the period covered by this quarterly report in the Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect the Partnership’s internal control over financial reporting other than the engagement of an Administrator to provide the services described in Note 1 of Item 1 of this Part under the supervision of the General Partner.

Limitations on the Effectiveness of Controls

Any control system, no matter how well designed and operated, can provide reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

 

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PART II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

There are no material legal proceedings pending against the Partnership, nor the General Partner.

The following information supplements and amends the discussion set forth under Part I, Item 3 “Legal Proceedings” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as updated by the Partnership’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015.

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.” or the “Company”).

MS&Co. is a wholly owned, indirect subsidiary of Morgan Stanley, a Delaware holding company. Morgan Stanley files periodic reports with the SEC as required by the Securities Exchange Act of 1934, which include current descriptions of material litigation and material proceedings and investigations, if any, by governmental and/or regulatory agencies or self-regulatory organizations concerning Morgan Stanley and its subsidiaries, including MS&Co. As a consolidated subsidiary of Morgan Stanley, MS&Co. does not file its own periodic reports with the SEC that contain descriptions of material litigation, proceedings and investigations. As a result, please refer to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2014, 2013, 2012, 2011 and 2010.

In addition to the matters described in those filings, in the normal course of business, each of Morgan Stanley and MS&Co. has been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation, arising in connection with its activities as a global diversified financial services institution. Certain of the legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Each of Morgan Stanley and MS&Co. is also involved, from time to time, in investigations and proceedings by governmental and/or regulatory agencies or self-regulatory organizations, certain of which may result in adverse judgments, fines or penalties. The number of these investigations and proceedings has increased in recent years with regard to many financial services institutions, including Morgan Stanley and MS&Co.

MS&Co. is a Delaware limited liability company with its main business office located at 1585 Broadway, New York, New York 10036. Among other registrations and memberships, MS&Co. is registered as a futures commission merchant and is a member of the National Futures Association.

Regulatory and Governmental Matters.

The Company has received subpoenas and requests for information from certain federal and state regulatory and governmental entities, including among others various members of the RMBS Working Group of the Financial Fraud Enforcement Task Force, such as the United States Department of Justice, Civil Division and several state Attorney General’s Offices, concerning the origination, financing, purchase, securitization and servicing of subprime and non-subprime residential mortgages and related matters such as residential mortgage backed securities (“RMBS”), collateralized debt obligations (“CDOs”), structured investment vehicles (“SIVs”) and credit default swaps backed by or referencing mortgage pass-through certificates. These matters, some of which are in advanced stages, include, but are not limited to, investigations related to the Company’s due diligence on the loans that it purchased for securitization, the Company’s communications with ratings agencies, the Company’s disclosures to investors, and the Company’s handling of servicing and foreclosure related issues.

On February 25, 2015, the Company reached an agreement in principle with the United States Department of Justice, 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 the Company. While the Company and the Civil Division have reached an agreement in principle to resolve this matter, there can be no assurance that the Company and the Civil Division will agree on the final documentation of the settlement.

In May 2014, the California Attorney General’s Office (“CAAG”), which is one of the members of the RMBS Working Group, indicated that it has made certain preliminary conclusions that the Company made knowing and material misrepresentations regarding RMBS and that it knowingly caused material misrepresentations to be made regarding the Cheyne SIV, which issued securities marketed to the California Public Employees Retirement System. The CAAG has further indicated that it believes the Company’s conduct violated California law and that it may seek treble damages, penalties and injunctive relief. The Company does not agree with these conclusions and has presented defenses to them to the CAAG.

 

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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 the Company and several other defendants in the Circuit Court of the City of Richmond related to RMBS. The lawsuit alleges that the Company 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 Company. 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 20, 2015, the defendants filed a demurrer to the complaint and a plea in bar seeking dismissal of the complaint.

In October 2014, the Illinois Attorney General’s Office (“IL AG”) sent a letter to the Company alleging that the Company knowingly made misrepresentations related to RMBS purchased by certain pension funds affiliated with the State of Illinois and demanding that the Company pay the IL AG approximately $88 million. The Company does not agree with these allegations and has presented defenses to them to the IL AG.

On January 13, 2015, the New York Attorney General’s Office (“NYAG”), which is also a member of the RMBS Working Group, indicated that it intends to file a lawsuit related to approximately 30 subprime securitizations sponsored by the Company. NYAG indicated that the lawsuit would allege that the Company 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. The Company does not agree with NYAG’s allegations and has presented defenses to them to NYAG.

On June 5, 2012, the Company consented to and became the subject of an Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, as amended, Making Findings and Imposing Remedial Sanctions by The Commodity Futures Trading Commission (the “CFTC”) to resolve allegations related to the failure of a salesperson to comply with exchange rules that prohibit off-exchange futures transactions unless there is an Exchange for Related Position (“EFRP”). Specifically, the CFTC found that from April 2008 through October 2009, the Company violated Section 4c(a) of the Commodity Exchange Act and Commission Regulation 1.38 by executing, processing and reporting numerous off-exchange futures trades to the Chicago Mercantile Exchange (“CME”) and Chicago Board of Trade (“CBOT”) as EFRPs in violation of CME and CBOT rules because those trades lacked the corresponding and related cash, OTC swap, OTC option, or other OTC derivative position. In addition, the CFTC found that the Company violated CFTC Regulation 166.3 by failing to supervise the handling of the trades at issue and failing to have adequate policies and procedures designed to detect and deter the violations of the Act and Regulations. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, the Company accepted and consented to entry of findings and the imposition of a cease and desist order, a fine of $5,000,000, and undertakings related to public statements, cooperation and payment of the fine. The Company entered into corresponding and related settlements with the CME and CBOT in which the CME found that the Company violated CME Rules 432.Q and 538 and fined the Company $750,000 and CBOT found that the Company violated CBOT Rules 432.Q and 538 and fined the Company $1,000,000.

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 settlement, MS&Co. and certain affiliates were charged with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, as amended, agreed to pay disgorgement and penalties in an amount of $275 million and neither admitted nor denied the SEC’s findings.

On April 21, 2015, the Chicago Board Options Exchange, Incorporated (“CBOE”) and the CBOE Futures Exchange, LLC (“CFE”) filed statements of charges against the Company in connection with trading by one of the Company’s former traders of EEM options contracts that allegedly disrupted the final settlement price of the November 2012 VXEM futures. CBOE alleged that the Company violated CBOE Rules 4.1, 4.2 and 4.7, Sections 9(a) and 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. CFE alleged that the Company violated CFE Rules 608, 609 and 620. Both matters are ongoing.

 

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On June 18, 2015, the Company entered into a settlement with the SEC and paid a fine of $500,000 as part of the Municipalities Continuing Disclosure Cooperation Initiative to resolve allegations that the Company 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 the Company acted as senior or sole underwriter.

On August 6, 2015, the Company consented to and became the subject of an order by the CFTC to resolve allegations that the Company 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 the Company 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 the Company 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, the Company 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.

Other Litigation

On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against the Company 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 the Company 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 October 18, 2010, defendants filed a motion to dismiss the action. By orders dated June 23, 2011 and July 18, 2011, the court denied defendants’ omnibus motion to dismiss plaintiff’s amended complaint and on August 15, 2011, the court denied the Company’s individual motion to dismiss the amended complaint. On March 7, 2013, the court granted defendants’ motion to strike plaintiff’s demand for a jury trial. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $48 million, and the certificates had not yet incurred actual losses. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $48 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company 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 March 15, 2010, the Federal Home Loan Bank of San Francisco filed two complaints against the Company and other defendants in the Superior Court of the State of California. These actions are styled Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al., and Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al., respectively. Amended complaints filed on June 10, 2010 allege 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 the Company in these cases was approximately $704 million and $276 million, respectively. The complaints raise claims under both the federal securities laws and California law and seek, among other things, to rescind the plaintiff’s purchase of such certificates. On August 11, 2011, plaintiff’s federal securities law claims were dismissed with prejudice. The defendants filed answers to the amended complaints on October 7, 2011. On February 9, 2012, defendants’ demurrers with respect to all other claims were overruled. On December 20, 2013, plaintiff’s negligent misrepresentation claims were dismissed with prejudice. 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 the Company in the Federal Home Loan Bank of San Francisco v. Credit Suisse Securities (USA) LLC, et al. action. On February 18, 2015, the court entered an order setting a number of claims for trial throughout 2016. Claims against the Company have not yet been set for trial. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $61 million, and the certificates had incurred actual losses of approximately $1 million. Based on currently available information, the Company believes it could incur a loss for this action up to the difference between the $61 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company 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.

 

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On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against the Company, styled China Development Industrial Bank v. Morgan Stanley & Co. Incorporated et al., which is pending in the Supreme Court of the State of New York, New York County (“Supreme Court of NY”). 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 the Company misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that the Company 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 the Company’s motion to dismiss the complaint. Based on currently available information, the Company believes it could incur a loss of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.

On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against the Company 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. A corrected amended complaint was filed on April 8, 2011. The corrected amended 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 and asserts claims under Illinois law. The total amount of certificates allegedly sold to plaintiff by the Company at issue in the 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 the Company or sold to plaintiff by the Company was approximately $78 million. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $52 million, and the certificates had not yet incurred actual losses. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $52 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, plus pre- and post-judgment interest, fees and costs. The Company 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, The Prudential Insurance Company of America and certain affiliates filed a complaint against the Company 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 the Company 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 Racketeer Influenced and Corrupt Organizations Act, and includes a claim for treble damages. On March 15, 2013, the court denied the defendants’ motion to dismiss the amended complaint. On January 2, 2015, the court denied defendants’ renewed motion to dismiss the amended complaint. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $581 million, and the certificates had not yet incurred actual losses. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $581 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company 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 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against the Company 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 29, 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 the Company or sold to plaintiff by the Company 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.

 

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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 were granted in part and denied in part on September 30, 2013. The defendants filed an answer to the amended complaint on December 16, 2013. Plaintiff has voluntarily dismissed its claims against the Company with respect to two of the securitizations at issue, such that the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the Company is approximately $358 million. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $56 million, and the certificates had not yet incurred actual losses. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $56 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company 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 May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against the Company, certain affiliates, and other defendants in the Supreme Court of NY. 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 the Company to plaintiff was approximately $694 million. The complaint alleges causes of action against the Company 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 denied the defendants’ motion to dismiss. On August 4, 2014, claims regarding two certificates were dismissed by stipulation. After these dismissals, the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the Company was approximately $644 million. On September 12, 2014, the Company filed a notice of appeal from the denial of the motion to dismiss. On January 12, 2015, the Company filed an amended answer to the complaint. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $277 million, and the certificates had incurred actual losses of approximately $81 million. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $277 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company may be entitled to be indemnified for some of these losses.

On May 17, 2013, the plaintiff in IKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed a complaint against the Company and certain affiliates in the Supreme Court of NY. 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 the Company to plaintiff was approximately $132 million. The complaint alleges causes of action against the Company 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 the Company’s motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by the Company or sold to plaintiff by the Company was approximately $116 million. On August 26, 2015, the Company appealed from the portion of the Court’s decision denying the Company’s motion to dismiss. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $29 million, and the certificates had incurred actual losses of $58 million. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $29 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company 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 the Company and certain affiliates in the United States District Court for the Southern District of New York (“SDNY”). The complaint alleges 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 the Company to plaintiffs was approximately $417 million. The complaint alleges causes of action against the Company for violations of Section 11 and Section 12(a)(2) of the Securities Act of 1933, as amended, violations of the Texas Securities Act, and violations of the Illinois Securities Law of 1953 and seeks, among other things, rescissory and compensatory damages.

 

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The defendants filed a motion to dismiss the complaint on November 13, 2013. On January 22, 2014 the court granted defendants’ motion to dismiss with respect to claims arising under the Securities Act of 1933, as amended and denied defendants’ motion to dismiss with respect to claims arising under Texas Securities Act and the Illinois Securities Law of 1953. On November 17, 2014, the plaintiff filed an amended complaint. On December 15, 2014, defendants answered the amended complaint. At September 25, 2015, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $194 million, and the certificates had incurred actual losses of $31 million. Based on currently available information, the Company believes it could incur a loss in this action up to the difference between the $194 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against the Company, or upon sale, plus pre- and post-judgment interest, fees and costs. The Company 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.

Settled Civil Litigation

On August 25, 2008, the Company and two ratings agencies were named as defendants in a purported class action related to securities issued by a structured investment vehicle called Cheyne Finance PLC and Cheyne Finance LLC (together, the “Cheyne SIV”). The case was styled Abu Dhabi Commercial Bank, et al. v. Morgan Stanley & Co. Inc., et al. The complaint alleged, among other things, that the ratings assigned to the securities issued by the Cheyne SIV were false and misleading, including because the ratings did not accurately reflect the risks associated with the subprime residential mortgage backed securities held by the Cheyne SIV. The plaintiffs asserted allegations of aiding and abetting fraud and negligent misrepresentation relating to approximately $852 million of securities issued by the Cheyne SIV. On April 24, 2013, the parties reached an agreement to settle the case, and on April 26, 2013, the court dismissed the action with prejudice. The settlement does not cover certain claims that were previously dismissed.

On July 9, 2010 and February 11, 2011, Cambridge Place Investment Management Inc. filed two separate complaints against the Company and/or its affiliates 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 asserted 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 the Company and/or its affiliates or sold to plaintiff’s affiliates’ clients by the Company and/or its affiliates 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 October 25, 2010, the Company, certain affiliates and Pinnacle Performance Limited, a special purpose vehicle (“SPV”), were named as defendants in a purported class action related to securities issued by the SPV in Singapore, commonly referred to as “Pinnacle Notes.” The case is styled Ge Dandong, et al. v. Pinnacle Performance Ltd., et al. and was pending in the SDNY. On January 31, 2014, the plaintiffs filed a second amended complaint, which asserted 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 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 the Company in the Supreme Court of NY, styled Allstate Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on September 9, 2011, 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 issued and/or sold to the plaintiffs by the Company was approximately $104 million. The complaint raised 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 the plaintiffs’ purchases of such certificates. On March 15, 2013, the court denied in substantial part the defendants’ motion to dismiss the amended complaint, which order the Company appealed on April 11, 2013. On May 3, 2013, the Company filed its answer to the amended complaint. On January 16, 2015, the parties reached an agreement to settle the litigation.

 

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On July 18, 2011, the Western and Southern Life Insurance Company and certain affiliated companies filed a complaint against the Company 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 the Company was approximately $153 million. On June 8, 2015, the parties reached an agreement to settle the litigation.

On September 2, 2011, the Federal Housing Finance Agency, as conservator for Fannie Mae and Freddie Mac, filed 17 complaints against numerous financial services companies, including the Company and certain affiliates. A complaint against the Company and certain affiliates and other defendants was filed in the Supreme Court of NY, 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 April 25, 2012, Metropolitan Life Insurance Company and certain affiliates filed a complaint against the Company 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 the Company 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.

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 November 4, 2011, the Federal Deposit Insurance Corporation, as receiver for Franklin Bank S.S.B, filed two complaints against the Company 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 the Company 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 the Company in these cases was approximately $67 million and $35 million, respectively. On July 2, 2015, the parties reached an agreement to settle the litigation.

On February 14, 2013, Bank Hapoalim B.M. filed a complaint against the Company 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 the Company 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.

Additional lawsuits containing claims similar to those described above may be filed in the future. In the course of its business, MS&Co., as a major futures commission merchant, is party to various civil actions, claims and routine regulatory investigations and proceedings that the General Partner believes do not have a material effect on the business of MS&Co. MS&Co. may establish reserves from time to time in connections with such actions.

 

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Item 1A. RISK FACTORS

There have been no material changes from the risk factors previously referenced in the Partnership’s Report on Form 10-K, as updated by the Partnership’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015.

 

Item 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

Units of the Partnership are sold to persons and entities who are accredited investors as the term is defined in Rule 501(a) of Regulation D.

The aggregate proceeds of securities sold in all share Classes to the limited partners, from inception through September 30, 2015, was $113,015,978. Since inception, the Partnership has received $805,000 in consideration from the sale of Units to the General Partner.

Proceeds of the net offering were used for the trading of commodity interests including futures, option, forward and swap contracts.

The following charts set forth the purchases of Units by the Partnership.

 

Period    (a) Total Number
of Units
Purchased*
    

(b) Average
Price Paid per

Unit**

    

(c) Total Number of
Units Purchased

as Part of
Publicly Announced
Plans or Programs

  

(d) Maximum Number
(or Approximate Dollar
Value) of Units that
May Yet be Purchased
Under the

Plans or Programs

Class A

                       

July 1, 2015 - July 31, 2015

     (54.724)           914.95          N/A    N/A

August 1, 2015 - August 31, 2015

     (185.232)           901.07          N/A    N/A

September 1, 2015 - September 30, 2015

     (189.683)           910.39          N/A    N/A
  

 

 

    

 

 

       
             (429.639)                     906.95            
  

 

 

    

 

 

       
Period    (a) Total Number
of Units
Purchased*
     (b) Average
Price Paid per
Unit**
     (c) Total Number of
Units Purchased
as Part of
Publicly Announced
Plans or Programs
   (d) Maximum Number
(or Approximate Dollar
Value) of Units that
May Yet be Purchased
Under the Plans or
Programs

Class B

                       

July 1, 2015 - July 31, 2015

     -                N/A              N/A    N/A

August 1, 2015 - August 31, 2015

     -                N/A              N/A    N/A

September 1, 2015 - September 30, 2015

     -                N/A              N/A    N/A
  

 

 

    

 

 

       
     -                N/A                
  

 

 

    

 

 

       
Period    (a) Total Number
of Units
Purchased*
     (b) Average
Price Paid per
Unit**
     (c) Total Number of
Units Purchased
as Part of
Publicly Announced
Plans or Programs
   (d) Maximum Number
(or Approximate Dollar
Value) of Units that
May Yet be Purchased
Under the Plans or
Programs

Class C

                       

July 1, 2015 - July 31, 2015

     -                N/A              N/A    N/A

August 1, 2015 - August 31, 2015

     -                N/A              N/A    N/A

September 1, 2015 - September 30, 2015

     -                N/A              N/A    N/A
  

 

 

    

 

 

       
     -                N/A                
  

 

 

    

 

 

       

 

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Table of Contents
Period    (a) Total Number
of Units
Purchased*
     (b) Average
Price Paid per
Unit**
     (c) Total Number of
Units Purchased
as Part of
Publicly Announced
Plans or Programs
   (d) Maximum Number
(or Approximate Dollar
Value) of Units that
May Yet be Purchased
Under the
Plans or Programs

Class Z

                       

July 1, 2015 – July 31, 2015

     -                N/A              N/A    N/A

August 1, 2015 – August 31, 2015

     -                N/A              N/A    N/A

September 1, 2015 – September 30, 2015

     -                N/A              N/A    N/A
  

 

 

    

 

 

       
           -                N/A                
  

 

 

    

 

 

       

 

*

Generally, limited partners are permitted to redeem their Units as of the end of each month on three business days’ notice to the General Partner. Under certain circumstances, the General Partner can compel redemption, although to date the General Partner has not exercised this right. Purchases of Units by the Partnership reflected in the chart above were made in the ordinary course of the Partnership’s business in connection with effecting redemptions for limited partners.

**

Redemptions of Units are effected as of the last day of each month at the net asset value per Unit as of that day.

 

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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Item 6. EXHIBITS

 

31.01    Certification of President and Director of Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02    Certification of Chief Financial Officer of Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01    Certification of President and Director of Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.02    Certification of Chief Financial Officer of Ceres Managed Futures LLC, the General Partner of the Partnership, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Document
101.PRE*    XBRL Taxonomy Extension Presentation Document
101.DEF*    XBRL Taxonomy Extension Definition Document

Notes to Exhibits List

 

*

Submitted electronically herewith.

 

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Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

LV Futures Fund L.P.

   

(Registrant)

   

By:

 

Ceres Managed Futures LLC

     

(General Partner)

November 12, 2015

   

By:

 

/s/ Steven Ross

     

Steven Ross

     

Chief Financial Officer

   

By:

 

/s/ Patrick T. Egan

     

Patrick T. Egan

     

President and Director

The General Partner which signed the above is the only party authorized to act for the registrant. The registrant has no principal executive officer, principal financial officer, controller, or principal accounting officer and has no Board of Directors.

 

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