Attached files

file filename
EX-32.01 - EX-32.01 - MORGAN STANLEY SMITH BARNEY CHARTER CAMPBELL LPd214492dex3201.htm
EX-32.02 - EX-32.02 - MORGAN STANLEY SMITH BARNEY CHARTER CAMPBELL LPd214492dex3202.htm
EX-31.02 - EX-31.02 - MORGAN STANLEY SMITH BARNEY CHARTER CAMPBELL LPd214492dex3102.htm
EX-31.01 - EX-31.01 - MORGAN STANLEY SMITH BARNEY CHARTER CAMPBELL LPd214492dex3101.htm
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, 2016

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: 000-50064

MORGAN STANLEY SMITH BARNEY CHARTER CAMPBELL L.P.

 

(Exact name of registrant as specified in its charter)

 

Delaware   01-0710311

 

(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

c/o Ceres Managed Futures LLC

522 Fifth Avenue

New York, New York 10036

 

(Address of principal executive offices) (Zip Code)

(855) 672-4468

 

(Registrant’s telephone number, including area code)

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. (Check one):

 

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, 2016, 1,507,961.460 Limited Partnership Units were outstanding.


Table of Contents

MORGAN STANLEY SMITH BARNEY CHARTER CAMPBELL L.P.

FORM 10-Q

INDEX

 

PART I. Financial Information:    Page
Number
 
 

Item 1.

  Financial Statements:   
    Statements of Financial Condition as of September 30, 2016 and December 31, 2015 (unaudited)      2   
    Condensed Schedules of Investments as of September 30, 2016 (unaudited) and December 31, 2015      3-4   
    Statements of Income and Expenses for the three and nine months ended September 30, 2016 and 2015 (unaudited)      5   
    Statements of Changes in Partners’ Capital for the nine months ended September 30, 2016 and 2015 (unaudited)      6   
    Notes to Financial Statements (unaudited)      7-18   
 

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      19-22   
 

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      23-25   
 

Item 4.

  Controls and Procedures      26   

PART II. Other Information:

  
 

Item 1.

  Legal Proceedings      27-34   

                   

 

Item 1A.      

  Risk Factors      35   
 

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      35   
 

Item 3.

  Defaults Upon Senior Securities      35   
 

Item 4.

  Mine Safety Disclosures      35   
 

Item 5.

  Other Information      35   
 

Item 6.

  Exhibits      36   


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Morgan Stanley Smith Barney Charter Campbell L.P.

Statements of Financial Condition

(Unaudited)

 

        September 30,             December 31,      
    2016     2015  

Assets:

   

Equity in trading account:

   

Investment in U.S. Treasury bills, at fair value (amortized cost $0 and $15,499,510 at September 30, 2016 and December 31, 2015, respectively)

    $ -              $ 15,498,983     

Unrestricted cash

    15,308,337          4,372,856     

Restricted cash

    2,081,826          2,434,648     

Net unrealized appreciation on open futures contracts

    298,044          -          
 

 

 

   

 

 

 

Total equity in trading account

    17,688,207          22,306,487     
 

 

 

   

 

 

 

Cash at bank

    413          -          

Interest receivable

    2,186          605     
 

 

 

   

 

 

 

Total assets

    $ 17,690,806          $ 22,307,092     
 

 

 

   

 

 

 

Liabilities and Partners’ Capital:

   

Liabilities:

   

Net unrealized depreciation on open futures contracts

    $ -              $ 190,939     

Net unrealized depreciation on open forward contracts

    42,890          57,817     

Accrued expenses:

   

Ongoing placement agent fees

    30,283          38,090     

General Partner fees

    30,283          38,090     

Management fees

    22,713          28,569     

Redemptions payable to Limited Partners

    373,029          278,476     
 

 

 

   

 

 

 

Total liabilities

    499,198          631,981     
 

 

 

   

 

 

 

Partners’ Capital:

   

General Partner, 17,148.765 and 20,184.324 Units outstanding at September 30, 2016 and December 31, 2015, respectively

    189,624          243,785     

Limited Partners, 1,537,579.121 and 1,774,475.344 Units outstanding at September 30, 2016 and December 31, 2015, respectively

    17,001,984          21,431,326     
 

 

 

   

 

 

 

Total partners’ capital (net asset value)

    17,191,608          21,675,111     
 

 

 

   

 

 

 

Total liabilities and partners’ capital

    $ 17,690,806          $ 22,307,092     
 

 

 

   

 

 

 

 

Net asset value per Unit

    $ 11.06          $ 12.08     
 

 

 

   

 

 

 

 

See accompanying notes to financial statements.

 

- 2 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Condensed Schedule of Investments

September 30, 2016

(Unaudited)

 

             Notional ($)/        
Number of
Contracts
       Fair Value            % of Partners’    
Capital

Futures Contracts Purchased

              

Commodity

       86          $ 111,786            0.65   %

Equity

       203          16,602            0.10    

Interest Rates

       340          87,084            0.50    
         

 

 

      

 

 

 

Total futures contracts purchased

            215,472            1.25    
         

 

 

      

 

 

 

Futures Contracts Sold

              

Commodity

       255          80,140            0.47    

Equity

       20          61            0.00    *

Interest Rates

       42          2,371            0.01    
         

 

 

      

 

 

 

Total futures contracts sold

            82,572            0.48    
         

 

 

      

 

 

 

Net unrealized appreciation on open futures contracts

            $ 298,044            1.73    %
         

 

 

      

 

 

 

Unrealized Appreciation on Open Forward Contracts

              

Commodity

       77          $ 138,047            0.80    %

Currencies

     $     53,709,712          512,632            2.98    
         

 

 

      

 

 

 

Total unrealized appreciation on open forward contracts

            650,679            3.78    
         

 

 

      

 

 

 

Unrealized Depreciation on Open Forward Contracts

              

Commodity

       40          (120,444)           (0.70)   

Currencies

     $     72,361,584          (573,125)           (3.33)   
         

 

 

      

 

 

 

Total unrealized depreciation on open forward contracts

            (693,569)           (4.03)   
         

 

 

      

 

 

 

Net unrealized depreciation on open forward contracts

            $           (42,890)                   (0.25)   %
         

 

 

      

 

 

 

 

*

Due to rounding.

 

 

See accompanying notes to financial statements.

 

- 3 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Condensed Schedule of Investments

December 31, 2015

 

     Notional ($)/
Number of
Contracts
   Fair Value        % of Partners’    
Capital

Futures Contracts Purchased

              

Commodity

       43              $ 3,021            0.01   %

Equity

       66              (13,248)           (0.06)   

Interest Rates

       256              (4,446)           (0.02)   
         

 

 

      

 

 

 

Total futures contracts purchased

            (14,673)           (0.07)   
         

 

 

      

 

 

 

Futures Contracts Sold

              

Commodity

       448              (178,528)           (0.82)   

Equity

       79              (217)           (0.00)  **

Interest Rates

       252              2,479            0.01    
         

 

 

      

 

 

 

Total futures contracts sold

            (176,266)           (0.81)   
         

 

 

      

 

 

 

Net unrealized depreciation on open futures contracts

            $ (190,939)           (0.88)   %
         

 

 

      

 

 

 

Unrealized Appreciation on Open Forward Contracts

              

Commodity

       32              $ 26,107            0.12    %

Currencies

       $     76,943,413              1,238,301                  5.71    
         

 

 

      

 

 

 

Total unrealized appreciation on open forward contracts

            1,264,408            5.83    
         

 

 

      

 

 

 

Unrealized Depreciation on Open Forward Contracts

              

Commodity

       126              (135,773)           (0.63)   

Currencies

       $ 70,802,583              (1,186,452)           (5.47)   
         

 

 

      

 

 

 

Total unrealized depreciation on open forward contracts

                  (1,322,225)           (6.10)   
         

 

 

      

 

 

 

Net unrealized depreciation on open forward contracts

            $ (57,817)           (0.27)   %
         

 

 

      

 

 

 

U.S. Government Securities

              

 

Face Amount      

   Maturity Date   

Description

       Fair Value          % of Partners’    
Capital

 $      15,500,000

   1/21/2016    U.S. Treasury bills, 0.0125%*
(Amortized cost of $15,499,510)
       $       15,498,983                   71.51  %

 

*

Liquid non-cash held as collateral.

**

Due to rounding.

 

See accompanying notes to financial statements.

 

- 4 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Statements of Income and Expenses

(Unaudited)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2016     2015     2016     2015  

Investment Income:

       

Interest income

    $ 8,225          $ 696          $ 26,387          $ 1,556     
 

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

       

General Partner fees

    93,750          115,002          301,600          380,317     

Ongoing placement agent fees

    93,750          115,002          301,600          380,317     

Management fees

    70,313          86,252          226,201          285,238     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    257,813          316,256          829,401          1,045,872     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment loss

    (249,588)         (315,560)         (803,014)         (1,044,316)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Trading Results:

       

Net gains (losses) on trading of commodity interests:

       

Net realized gains (losses) on closed contracts

    (120,556)         (2,322,317)         (1,414,253)         (1,449,619)    

Net change in unrealized gains (losses) on open contracts

    (461,567)         3,348,708          503,418          1,450,696     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total trading results

    (582,123)         1,026,391          (910,835)         1,077     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    $ (831,711)         $ 710,831          $ (1,713,849)         $ (1,043,239)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per Unit*

    $ (0.53)         $ 0.36          $ (1.02)         $ (0.56)    

Weighted average number of Units outstanding

    1,605,242.184          1,915,669.300          1,696,618.768          1,968,538.748     

 

*

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

 

See accompanying notes to financial statements.

 

- 5 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Statements of Changes in Partners’ Capital

For the Nine Months Ended September 30, 2016 and 2015

(Unaudited)

 

    Units of                    
    Partnership     Limited     General        
    Interest     Partners     Partner     Total  

Partners’ Capital, December 31, 2015

    1,794,659.668          $ 21,431,326          $ 243,785          $ 21,675,111     

Net income (loss)

    -              (1,694,871)         (18,978)         (1,713,849)    

Redemptions

    (239,931.782)         (2,734,471)         (35,183)         (2,769,654)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital, September 30, 2016

    1,554,727.886          $ 17,001,984          $ 189,624          $ 17,191,608     
 

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital, December 31, 2014

        2,044,806.087          $ 25,731,841          $ 282,949          $ 26,014,790     

Net income (loss)

    -              (1,030,837)         (12,402)         (1,043,239)    

Redemptions

    (170,396.871)         (2,144,756)         (25,000)         (2,169,756)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Partners’ Capital, September 30, 2015

    1,874,409.216          $   22,556,248          $             245,547          $         22,801,795     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes to financial statements.

 

- 6 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Notes to Financial Statements

(Unaudited)

1.  Organization:

Morgan Stanley Smith Barney Charter Campbell L.P. (the “Partnership”) is a Delaware limited partnership organized in 2002 to engage primarily in the speculative trading of futures contracts, options on futures and forward contracts, and forward contracts on physical commodities and other commodity interests, including, but not limited to, foreign currencies, financial instruments, metals, energy and agricultural products (collectively, “Futures Interests”) (refer to Note 4, “Financial Instruments”). The General Partner (defined below) may also determine to invest up to all of the Partnership’s assets in United States (“U.S.”) Treasury bills and/or money market mutual funds, including money market mutual funds managed by Morgan Stanley or its affiliates. The Partnership is one of the Morgan Stanley Charter series of funds, comprised of the Partnership, Morgan Stanley Smith Barney Charter Aspect L.P. and Morgan Stanley Smith Barney Charter WNT L.P.

Ceres Managed Futures LLC, a Delaware limited liability company, acts as the general partner (“Ceres” or the “General Partner”) and commodity pool operator for the Partnership. Ceres is a wholly-owned subsidiary of Morgan Stanley Smith Barney Holdings LLC (“MSSBH”). MSSBH is wholly-owned indirectly by Morgan Stanley. Morgan Stanley Smith Barney LLC is doing business as Morgan Stanley Wealth Management (“Morgan Stanley Wealth Management”). Morgan Stanley Wealth Management is a principal subsidiary of MSSBH.

During the reporting periods ended September 30, 2016 and 2015, the Partnership’s commodity broker was Morgan Stanley & Co. LLC (“MS&Co.”), a registered futures commission merchant. The Partnership also deposits a portion of its cash in a non-trading account at JPMorgan Chase Bank, N.A. MS&Co. also acts as the counterparty on all trading of foreign currency forward contracts. MS&Co. is a wholly-owned subsidiary of Morgan Stanley. Campbell & Company, Inc. (the “Trading Advisor”) is the trading advisor to the Partnership.

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, accounting, regulatory reporting, tax and other services as agreed from time to time. In addition, the Administrator maintains certain books and records of the Partnership. The General Partner pays or reimburses the Partnership, from the General Partner fee (formerly, the administrative fee) it receives, the ordinary administrative expenses of the Partnership. This includes the expenses related to the engagement of the Administrator. Therefore, the engagement of the Administrator did not impact the Partnership’s break-even point.

 

- 7 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Notes to Financial Statements

(Unaudited)

 

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, 2016, the results of its operations for the three and nine months ended September 30, 2016 and 2015 and changes in partners’ capital for the nine months ended September 30, 2016 and 2015. 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 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, 2015. The December 31, 2015 information has been derived from the audited financial statements as of and for the year ended December 31, 2015.

Due to the nature of commodity trading, the results of operations for the interim periods presented should not be considered indicative of the results that may be expected for the entire year.

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.

Profit Allocation: The General Partner and each limited partner of the Partnership share in the profits and losses of the Partnership in proportion to the amount of partnership interest owned by each except that no limited partner is liable for obligations of the Partnership in excess of its capital contributions and profits, if any, net of distributions or redemptions and losses, if any.

Statement of Cash Flows: The Partnership is not required to provide a Statement of Cash Flows.

Partnership’s Investments: All commodity interests of the Partnership, including derivative financial instruments and derivative commodity instruments, are held for trading purposes. The commodity interests are recorded on trade date and open contracts are recorded at fair value (as described in Note 6, “Fair Value Measurements”) at the measurement date. Investments in commodity interests denominated in foreign currencies are translated into U.S. dollars at the exchange rates prevailing at the measurement date. Gains or losses are realized when contracts are liquidated and are determined using the first-in, first-out method. Unrealized gains or losses on open contracts are included as a component of equity in trading account in the Statements of Financial Condition. Net realized gains or losses and net change in unrealized gains or losses are included in the Statements of Income and Expenses.

Restricted and Unrestricted Cash: The cash held by the Partnership that is available for Futures Interests trading is on deposit in commodity brokerage accounts with MS&Co. As reflected in the Statements of Financial Condition, restricted cash equals the cash portion of assets on deposit to meet margin requirements plus the cash required to offset unrealized losses on foreign currency forward and option contracts and offset unrealized losses only on the offsetting London Metal Exchange positions. All of these amounts are maintained separately. Cash that is not classified as restricted cash is therefore classified as unrestricted cash. Restricted and unrestricted cash includes cash denominated in foreign currencies of ($25,028) (proceeds of $25,042) and ($230,412) (proceeds of $230,918) as of September 30, 2016 and December 31, 2015, respectively.

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 2012 through 2015 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.

 

- 8 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Notes to Financial Statements

(Unaudited)

 

Investment Company Status: Effective January 1, 2014, 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.

Net Income (Loss) per Unit: Net income (loss) per unit of limited partnership interest (“Unit(s)”) is calculated in accordance with Accounting Standards Codification (“ASC”) 946, “Financial Services- Investment Companies.” See Note 3, “Financial Highlights.”

Fair Value of Financial Instruments: The carrying value of the Partnership’s assets and liabilities presented in the Statements of Financial Condition that qualify as financial instruments under the Financial Accounting Standards Board (“FASB”) ASC 825, “Financial Instruments,” approximates fair value due to the short term nature of such balances.

Recent Accounting Pronouncement: In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments for all entities that hold financial assets or owe financial liabilities. One of the amendments in this update eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet or a description of changes in the methods and significant assumptions. Additionally, the update eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities. Investment companies are specifically exempted from ASU 2016-01’s equity investment accounting provisions and will continue to follow the industry specific guidance for investment accounting under Topic 946. For public business entities, this update is effective for fiscal years beginning after December 15, 2017, and interim periods therein. For other entities, it is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The General Partner is currently evaluating the impact this guidance will have on the Partnership’s financial statements and related disclosures.

Reclassification: Certain prior period amounts have been reclassified to conform to current period presentation. Amounts previously presented as net unrealized gain (loss) on open contracts in the Statements of Financial Condition are now reported as net unrealized appreciation on open futures contracts, net unrealized depreciation on open futures contracts, net unrealized appreciation on open forward contracts and net unrealized depreciation on open forward contracts, as applicable. In addition, amounts previously presented as futures and forward contracts purchased and futures and forward contracts sold in the Condensed Schedules of Investments are now reported as futures contracts purchased, futures contracts sold, unrealized appreciation on open forward contracts and unrealized depreciation on open forward contracts, as applicable.

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, 2015.

 

- 9 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Notes to Financial Statements

(Unaudited)

 

3.  Financial Highlights:

Financial highlights for the limited partner class as a whole for the three and nine months ended September 30, 2016 and 2015 were as follows:

 

     Three Months Ended    Nine Months Ended
     September 30,    September 30,
     2016    2015    2016    2015

Per Unit Performance (for a unit outstanding throughout the period):*

                   

Net realized and unrealized gains (losses)

       $ (0.37)           $ 0.53            $ (0.55)           $ (0.02)   

Net investment loss

       (0.16)           (0.17)           (0.47)           (0.54)   
    

 

 

      

 

 

      

 

 

      

 

 

 

Increase (decrease) for the period

       (0.53)           0.36            (1.02)           (0.56)   

Net asset value per Unit, beginning of period

       11.59            11.80            12.08            12.72    
    

 

 

      

 

 

      

 

 

      

 

 

 

Net asset value per Unit, end of period

       $       11.06            $     12.16            $       11.06            $     12.16    
    

 

 

      

 

 

      

 

 

      

 

 

 
     Three Months Ended    Nine Months Ended
     September 30,    September 30,
     2016    2015    2016    2015

Ratios to Average Limited Partners’ Capital:**

                   

Net investment loss***

       (5.4)%           (5.6)%           (5.4)%           (5.6)%   
    

 

 

      

 

 

      

 

 

      

 

 

 

Operating expenses before incentive fees

       5.6%           5.6%           5.6%           5.6%   

Incentive fees

       - %           - %           - %           - %   
    

 

 

      

 

 

      

 

 

      

 

 

 

Operating expenses after incentive fees

       5.6%           5.6%           5.6%           5.6%   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total return:

                   

Total return before incentive fees

       (4.6)%           3.1%           (8.4)%           (4.4)%   

Incentive fees

       - %           - %           - %           - %   
    

 

 

      

 

 

      

 

 

      

 

 

 

Total return after incentive fees

       (4.6)%           3.1%           (8.4)%           (4.4)%   
    

 

 

      

 

 

      

 

 

      

 

 

 

 

*

Net investment loss per Unit is calculated by dividing the expenses net of interest income by the average number of Units outstanding during the period. The net realized and unrealized gains (losses) per Unit is a balancing amount necessary to reconcile the change in net asset value per Unit with the other per unit information.

 

**

Annualized (other than incentive fees, if applicable).

 

***

Interest income less total expenses.

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 the limited partner class using the limited partners’ share of income, expenses and average partners’ capital.

 

- 10 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Notes to Financial Statements

(Unaudited)

 

4.  Financial Instruments:

The Partnership trades Futures Interests. Futures and forwards represent contracts for delayed delivery of an instrument at a specified date and price.

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 Partnership’s contracts are accounted for on a trade-date basis. Gains or losses are realized when the contracts are liquidated and are determined using the first-in, first-out method.

In general, the risks associated with off-exchange-traded contracts are greater than those associated with exchange-traded contracts because of the greater risk of default by the counterparty to an off-exchange-traded contract. The Partnership has credit risk associated with counterparty nonperformance. As of the date of the financial statements, the credit risk associated with the instruments in which the Partnership trades is limited to the unrealized gain amounts reflected in the Partnership’s Statements of Financial Condition.

The Partnership also has credit risk because MS&Co. acts as the commodity futures broker, or the counterparty, with respect to most of the Partnership’s assets. Exchange-traded futures and exchange-traded forward contracts are fair valued on a daily basis, with variations in value settled on a daily basis. With respect to the Partnership’s off-exchange-traded forward currency contracts, there are no daily settlements of variation in value, nor is there any requirement that an amount equal to the net unrealized gains (losses) on such contracts be segregated. However, the Partnership is required to meet margin requirements equal to the net unrealized loss on open forward currency contracts in the Partnership’s accounts with the counterparty, which is accomplished by daily maintenance of the cash balance in a custody account held at MS&Co., for the benefit of MS&Co. With respect to those off-exchange-traded forward currency contracts, the Partnership is at risk to the ability of MS&Co., the sole counterparty on all such contracts, to perform. The Partnership has a netting agreement with MS&Co. The primary terms are based on industry standard master netting agreements. This agreement, which seeks to reduce both the Partnership’s and MS&Co.’s exposure on off-exchange-traded forward currency contracts, including options on such contracts, should materially decrease the Partnership’s credit risk in the event of MS&Co.’s bankruptcy or insolvency.

The Partnership does not isolate the portion of the results of operations arising from the effect of changes in foreign exchange rates on investments from fluctuations from changes in market prices of investments held. Such fluctuations are included in total trading results in the Partnership’s Statements of Income and Expenses.

The General Partner monitors and attempts to control the Partnership’s risk exposure on a daily basis through financial, credit and risk management monitoring systems, and accordingly, believes that it has effective procedures for evaluating and limiting the credit and market risks to which the Partnership may be subject. These monitoring systems generally allow the General Partner to statistically analyze actual trading results with risk adjusted performance indicators and correlation statistics. In addition, online monitoring systems provide account analysis of futures, forward and option positions by sector, margin requirements, gain and loss transactions and collateral positions.

The futures, forwards and options traded, and the U.S. Treasury bills held, by the Partnership 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 Partnership’s open positions, and consequently, in its earnings, whether realized or unrealized, and cash flow. Gains and losses on open positions of exchange-traded futures and exchange-traded forward contracts are settled daily through variation margin. Gains and losses on off-exchange-traded forward currency contracts are settled upon termination of the contract.

 

- 11 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Notes to Financial Statements

(Unaudited)

 

5.  Trading Activities:

The Partnership’s objective is to profit from speculative trading in Futures Interests. Therefore, the Trading Advisor will take speculative positions in Futures Interests where it feels the best profit opportunities exist for its trading strategy. As such, the average number of contracts outstanding in absolute quantities (the total of the open long and open short positions) has been presented as a part of the volume disclosure, as position direction is not an indicative factor in such volume disclosures.

All of the commodity interests owned by the Partnership are held for trading purposes. The monthly average number of futures contracts traded during the three months ended September 30, 2016 and 2015 were 959 and 682, respectively. The monthly average number of futures contracts traded during the nine months ended September 30, 2016 and 2015 were 946 and 1,041, respectively. The monthly average number of metals forward contracts traded during the three months ended September 30, 2016 and 2015 were 177 and 390, respectively. The monthly average number of metals forward contracts traded during the nine months ended September 30, 2016 and 2015 were 224 and 412, respectively. The monthly average notional values of currency forward contracts traded during the three months ended September 30, 2016 and 2015 were $168,417,915 and $250,883,368, respectively. The monthly average notional values of currency forward contracts traded during the nine months ended September 30, 2016 and 2015 were $214,958,990 and $284,713,166, respectively.

The following tables summarize the gross and net amounts recognized relating to the assets and liabilities of the Partnership’s derivative instruments and transactions eligible for offset subject to master netting agreements or similar agreements as of September 30, 2016 and December 31, 2015, respectively.

 

          Gross Amounts     Amounts                    
          Offset in the     Presented in the     Gross Amounts Not Offset in the        
    Gross     Statements of     Statements of     Statements of Financial Condition        
    Amounts     Financial     Financial     Financial     Cash Collateral        

September 30, 2016

  Recognized     Condition     Condition      Instruments       Received/Pledged*        Net Amount    

Assets

           

Futures

    $ 542,530          $ (244,486)         $ 298,044          $ -              $ -              $ 298,044     

Forwards

    650,679          (650,679)         -              -              -              -         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $     1,193,209          $       (895,165)         $         298,044          $ -              $ -              $ 298,044     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Futures

    $ (244,486)         $ 244,486          $ -              $ -              $ -              $ -         

Forwards

    (693,569)         650,679          (42,890)         -              -              (42,890)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ (938,055)         $ 895,165          $ (42,890)         $ -              $ -              $ (42,890)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fair value

              $ 255,154  
           

 

 

 

 

- 12 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Notes to Financial Statements

(Unaudited)

 

          Gross Amounts     Amounts                    
          Offset in the     Presented in the     Gross Amounts Not Offset in the        
    Gross     Statements of     Statements of     Statements of Financial Condition        
    Amounts     Financial     Financial     Financial     Cash Collateral        

December 31, 2015

  Recognized     Condition     Condition      Instruments       Received/Pledged*      Net Amount  

Assets

           

Futures

    $ 269,891          $ (269,891)         $ -              $ -              $ -              $ -         

Forwards

    1,264,408          (1,264,408)         -              -              -              -         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ 1,534,299          $   (1,534,299)         $ -              $ -              $ -              $ -         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Futures

    $ (460,830)         $ 269,891          $ (190,939)        $ -              $ -              $ (190,939)    

Forwards

    (1,322,225)         1,264,408          (57,817)        -              -              (57,817)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $     (1,783,055)         $ 1,534,299          $         (248,756)        $ -              $ -              $ (248,756)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fair value

              $         (248,756) 
           

 

 

 

 

*

In the event of default by the Partnership, MS&Co., the Partnership’s commodity futures broker and/or the sole counterparty to the Partnership’s off-exchange-traded contracts, as applicable, has the right to offset the Partnership’s obligation with the Partnership’s cash and/or U.S. Treasury bills held by MS&Co., thereby minimizing MS&Co.’s risk of loss. There is no collateral posted by MS&Co. and as such, in the event of default by MS&Co., the Partnership is exposed to the amount shown in the Statements of Financial Condition. In the case of exchange-traded contracts, the Partnership’s exposure to counterparty risk may be reduced since the exchange’s clearinghouse interposes its credit between buyer and seller and the clearinghouse’s guarantee fund may be available in the event of a default.

 

- 13 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Notes to Financial Statements

(Unaudited)

 

The following tables indicate the Partnership’s gross fair values of derivative instruments of futures and forward contracts as separate assets and liabilities as of September 30, 2016, and December 31, 2015, respectively.

 

       September 30, 2016  

Assets

  

Futures Contracts

  

Commodity

     $                   345,212     

Equity

     81,768     

Interest Rates

     115,550     
  

 

 

 

Total unrealized appreciation on open futures contracts

     542,530     
  

 

 

 

Liabilities

  

Futures Contracts

  

Commodity

     (153,286)    

Equity

     (65,105)    

Interest Rates

     (26,095)    
  

 

 

 

Total unrealized depreciation on open futures contracts

     (244,486)    
  

 

 

 

Net unrealized appreciation on open futures contracts

     $ 298,044  
  

 

 

 

Assets

  

Forward Contracts

  

Commodity

     $ 138,047     

Currencies

     512,632     
  

 

 

 

Total unrealized appreciation on open forward contracts

     650,679     
  

 

 

 

Liabilities

  

Forward Contracts

  

Commodity

     (120,444)    

Currencies

     (573,125)    
  

 

 

 

Total unrealized depreciation on open forward contracts

     (693,569)    
  

 

 

 

Net unrealized depreciation on open forward contracts

     $ (42,890)  ** 
  

 

 

 

 

*   

This amount is in “Net unrealized appreciation on open futures contracts” in the Statements of Financial Condition.

**   

This amount is in “Net unrealized depreciation on open forward contracts” in the Statements of Financial Condition.

 

- 14 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Notes to Financial Statements

(Unaudited)

 

       December 31, 2015  

Assets

  

Futures Contracts

  

Commodity

     $                 175,711     

Equity

     26,772     

Interest Rates

     67,408     
  

 

 

 

Total unrealized appreciation on open futures contracts

     269,891     
  

 

 

 

Liabilities

  

Futures Contracts

  

Commodity

     (351,218)    

Equity

     (40,237)    

Interest Rates

     (69,375)    
  

 

 

 

Total unrealized depreciation on open futures contracts

     (460,830)    
  

 

 

 

Net unrealized depreciation on open futures contracts

     $ (190,939) 
  

 

 

 

Assets

  

Forward Contracts

  

Commodity

     $ 26,107     

Currencies

     1,238,301     
  

 

 

 

Total unrealized appreciation on open forward contracts

     1,264,408     
  

 

 

 

Liabilities

  

Forward Contracts

  

Commodity

     (135,773)    

Currencies

     (1,186,452)    
  

 

 

 

Total unrealized depreciation on open forward contracts

     (1,322,225)    
  

 

 

 

Net unrealized depreciation on open forward contracts

     $ (57,817)  ** 
  

 

 

 

 

*   

This amount is in “Net unrealized depreciation on open futures contracts” in the Statements of Financial Condition.

**   

This amount is in “Net unrealized depreciation on open forward contracts” in the Statements of Financial Condition.

 

- 15 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Notes to Financial Statements

(Unaudited)

 

The following table indicates the trading gains and losses, by market sector, on derivative instruments for the three and nine months ended September 30, 2016 and 2015, respectively.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

 Sector

   2016     2015     2016     2015  

 Commodity

     $       (192,927)         $       915,609          $     (1,163,855)         $         (665,555)    

 Equity

     259,761          (275,220)         (261,108)         111,624     

 Currencies

     (320,888)         492,855          (455,185)         879,754     

 Interest Rates

     (328,069)         (106,853)         969,313          (324,746)    
  

 

 

   

 

 

   

 

 

   

 

 

 

 Total

     $ (582,123)   *      $      1,026,391    *      $ (910,835)   *      $ 1,077    * 
  

 

 

   

 

 

   

 

 

   

 

 

 

*         This amount is in “Total trading results” in the Statements of Income and Expenses.

 

- 16 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Notes to Financial Statements

(Unaudited)

 

6.  Fair Value Measurements:

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to fair values derived from unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The fair value of exchange-traded futures, forward and option contracts is determined by the various 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 the last business day of the reporting period.

The Partnership 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 and liabilities (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 quotes or pricing services that derive fair values for those assets and liabilities from observable inputs (Level 2). As of September 30, 2016 and December 31, 2015 and for the periods ended September 30, 2016 and 2015, the Partnership did not hold any derivative instruments that were priced at fair value using unobservable inputs through the application of the General Partner’s assumptions and internal valuation pricing models (Level 3). Transfers between levels are recognized at the end of the reporting period. During the reporting periods, there were no transfers of assets or liabilities between Level 1 and Level 2.

 

September 30, 2016

   Total      Level 1      Level 2      Level 3  

Assets

           

Futures

     $ 542,530           $ 542,530           $ -               $                   -         

Forwards

     650,679           138,047           512,632           -         
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $           1,193,209           $           680,577           $           512,632           $ -         
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures

     $ 244,486           $ 244,486           $ -               $ -         

Forwards

     693,569           120,444           573,125           -         
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 938,055           $ 364,930           $ 573,125           $ -         
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 17 -


Table of Contents

Morgan Stanley Smith Barney Charter Campbell L.P.

Notes to Financial Statements

(Unaudited)

 

December 31, 2015

   Total      Level 1      Level 2      Level 3  

Assets

           

U.S. Treasury bills

     $         15,498,983           $ -               $ 15,498,983           $                   -         

Futures

     269,891           269,891           -               -         

Forwards

     1,264,408           26,108           1,238,300           -         
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 17,033,282           $ 295,999           $ 16,737,283           $ -         
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Futures

     $ 460,830           $ 460,830           $ -               $ -         

Forwards

     1,322,225           135,773           1,186,452           -         
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ 1,783,055           $           596,603           $         1,186,452           $ -         
  

 

 

    

 

 

    

 

 

    

 

 

 

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 there were no subsequent events requiring adjustment to or disclosure in the financial statements.

 

- 18 -


Table of Contents

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

The Partnership does not engage in sales of goods or services. Its assets are (i) its equity in trading account, consisting of restricted and unrestricted cash, net unrealized appreciation on open futures contracts, net unrealized appreciation on open forward contracts, and investment in U.S. Treasury bills at fair value, if applicable, (ii) cash at bank and (iii) interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership, through its direct investments. While substantial losses could lead to a material decrease in liquidity, no such illiquidity occurred in the third quarter of 2016.

The Partnership’s capital consists of the capital contributions of the partners as increased or decreased by net realized and/or unrealized gains or losses on trading and by expenses, interest income and redemptions of Units.

For the nine months ended September 30, 2016, the Partnership capital decreased 20.7% from $21,675,111 to $17,191,608. This decrease was attributable to redemptions of 236,896.223 limited partners Units totaling $2,734,471 and redemptions of 3,035.559 General Partner Units totaling $35,183, coupled with a net loss of $1,713,849. Future redemptions can impact the amount of funds available for investments in subsequent periods.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. The General Partner believes that the estimates utilized in preparing the financial statements are reasonable. Actual results could differ from those estimates. The Partnership’s significant accounting policies are described in detail in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” of the Financial Statements.

The Partnership records all investments at fair value in their financial statements, with changes in fair value reported as a component of net realized gains (losses) and net change in unrealized gains (losses) in the Statements of Income and Expenses. The General Partner estimates that, at any given time, approximately 20.7% to 43.2% of the Partnership’s contracts are traded over-the-counter.

 

- 19 -


Table of Contents

Results of Operations

General: The Partnership’s results depend on the Trading Advisor and the ability of the Trading Advisor’s trading program to take advantage of price movements in the futures, forward and options markets.

The Trading Advisor trades the Partnership’s assets in accordance with its Financial, Metal & Energy Large Portfolio, a proprietary, systematic trading program. The trading models utilized in the Trading Advisor’s trading program are designed to detect and exploit medium-term to long-term price changes, while also applying risk management and portfolio management principles.

The Trading Advisor believes that utilizing multiple trading models provides an important level of diversification, and is most beneficial when multiple contracts of each market are traded. Every trading model may not trade every market. It is possible that one trading model may signal a long position while another trading model signals a short position in the same market. It is the Trading Advisor’s intention to offset those signals to reduce unnecessary trading, but if the signals are not simultaneous, both trades will be taken and since it is unlikely that both positions would prove profitable, in retrospect, one or both trades will appear to have been unnecessary. It is the Trading Advisor’s policy to follow trades signaled by each trading model independently of the other models.

The following presents a summary of the Partnership’s operations for the three and nine months ended September 30, 2016 and 2015, and a general discussion of its trading activities during each period. It is important to note, however, that the Trading Advisor trades 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 Advisor 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 Advisor’s trading activities on behalf of the Partnership during the period in question. Past performance is no guarantee of future results.

The Partnership’s results of operations set forth in the financial statements 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 the Partnership trades are accounted for on a trade-date basis and marked to market on a daily basis. The difference between their original contract value and market value is recorded in the Statements of Income and Expenses as “Net change in unrealized gains (losses) on open contracts” and recorded as “Net realized gains (losses) on closed contracts” when open positions are closed out. The sum of these amounts constitutes the Partnership’s trading results. The market 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. Interest income, as well as management fees, incentive fees, General Partner fees and ongoing placement agent fees of the Partnership are recorded on an accrual basis.

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.

 

- 20 -


Table of Contents

During the Partnership’s third quarter of 2016, the net asset value per Unit decreased 4.6% from $11.59 to $11.06 as compared to an increase of 3.1% during the third quarter of 2015. The Partnership experienced a net trading loss before fees and expenses in the third quarter of 2016 of $582,123. Losses were primarily attributable to the Partnership’s trading in commodity, currencies and interest rates sectors, and were partially offset by gains in the equity sector. The Partnership experienced a net trading gain before fees and expenses in the third quarter of 2015 of $1,026,391. Gains were primarily attributable to the Partnership’s trading in commodity and currencies sectors and were partially offset by losses in the equity and interest rates sectors.

The most significant losses were incurred within the global interest rate sector during August from long positions in U.S. fixed income futures as prices declined as U.S. Federal Reserve (“Fed”) Chair Janet Yellen’s hawkish comments on U.S. monetary policy bolstered speculation that the central bank could raise interest rates in the coming months. Additional losses in this sector were recorded from long global fixed income futures positions as uncertainty and nervousness over central bank interest rate decisions drove prices lower during the first half of September. In the currency sector, losses were recorded during the third quarter from short positions in the euro versus the U.S. dollar as the relative value of the euro rebounded after concern regarding the U.K. referendum vote to leave the E.U. subsided and the relative value of the dollar decreased during late September following the Fed meeting decision not to tighten monetary policy. Within the energy complex, losses were incurred during August and September from short positions in crude oil and its related products as prices increased after reports surfaced and were confirmed that the Organization of the Petroleum Exporting Countries (“OPEC”) would curtail oil production. Losses within the metals complex were experienced primarily during August from long positions in precious metals futures as prices moved lower due to weakening investor demand. The Partnership’s losses for the quarter were partially offset by gains achieved within the global stock index sector during July as prices rose after investors looked past geopolitical concerns and focused on better-than-expected economic fundamental data. Within the agricultural markets, gains were experienced during August from short positions in wheat and corn futures as prices moved lower as positive weather conditions in the world’s grain growing regions added to a global supply glut. Additional gains were achieved in the agriculturals during September from long positions in sugar futures as prices moved higher due to unfavorable growing conditions threatening crop yields in Brazil and India, the world’s largest sugar cane growers.

 

- 21 -


Table of Contents

During the Partnership’s nine months ended September 30, 2016, the net asset value per Unit decreased 8.4% from $12.08 to $11.06 as compared to a decrease of 4.4% during the nine months ended September 30, 2015. The Partnership experienced a net trading loss before fees and expenses in the nine months ended September 30, 2016 of $910,835. Losses were primarily attributable to the Partnership’s trading in commodity, equity and currencies sectors, and were partially offset by gains in the interest rates sector. The Partnership experienced a net trading gain before fees and expenses in the nine months ended September 30, 2015 of $1,077. Gains were primarily attributable to the Partnership’s trading in equity and currencies sectors and were partially offset by losses in the commodity and interest rates sectors.

The most significant losses were incurred within the energy complex during March and May from short positions in crude oil and its related products as prices rallied as U.S. crude production continued to decline. Additional losses in this complex were experienced during April and June from short positions in natural gas futures as prices increased after warmer-than-expected weather in the U.S. spurred speculation of a tightening market. Further losses in the energies were incurred during August and September from short positions crude oil and its related products. In the currency sector, losses were recorded during February from short positions in the Canadian dollar, New Zealand dollar, and Japanese yen as the relative value of the U.S. dollar weakened amid concern of growing vulnerability of the U.S. economy. During April, losses in currencies were recorded from short positions in the British pound versus the U.S. dollar after the pound strengthened as fears the United Kingdom might vote to exit the E.U. began to prematurely subside. During May, losses were incurred from short U.S. dollar positions against a variety of currencies after the dollar steadily strengthened. During June, losses were recorded in the currency markets from positioning in the euro due to choppy price action leading up to and after the decision of the U.K. to leave the E.U. During August losses in this sector were experienced from short positions in the euro versus the U.S. dollar. Within the metals complex, losses were incurred during January and February from short precious metals positions as prices increased as uncertainty in Chinese financial markets, plunging oil prices, and signs of softening U.S. economic growth all bolstered the safe haven appeal of the metals. Additional losses in this sector were recorded during February and March from short base metals futures positions as prices rose due to a decrease in the value of the U.S. dollar and optimism that demand would improve after the Chinese government signaled increased support for economic stimulus. Further losses within the metals were incurred during May and August from long positions in precious metals futures positions as prices declined. Within the global stock indices, losses were experienced during January from long positions amid a steep sell-off in equities as global growth concerns persisted to start the New Year. During April, further losses were incurred from short global equity index futures positions as prices moved higher as commodity prices bounced and global central banks continued to provide an accommodative backdrop for stocks. Additional losses in this sector were recorded during June from global equity index futures positions as priced moved lower and September as prices fluctuated amid speculation surrounding global central bank activity and its consequential effects on the marketplace. In the agricultural markets, losses were recorded during January from short corn futures positions as prices rose after a strong U.S. export sales report and adverse weather conditions in Brazil. Additional losses in this sector were incurred during March from short wheat and soybean futures positions. Further losses in these markets were incurred during the first half of the April from long sugar futures positions, and during May from long futures positions in cocoa. The Partnership’s losses for the first nine months of the year were partially offset by gains achieved within the global interest rates sector during January and February primarily from long European bond futures positions as prices increased following dovish comments released by the European Central Bank and a flight-to-quality due to global growth concerns. Further gains from long European bond futures positions were recorded during May. In June, additional gains were achieved within this sector from long positions in European and U.S. fixed income futures as prices advanced as uncertainty surrounding the economic and political fallout following the U.K.’s vote to leave the E.U. increased demand for the relative “safety” of government debt.

 

- 22 -


Table of Contents

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Introduction

The Partnership is a commodity pool engaged primarily in the speculative trading of futures, forwards and options. The market-sensitive instruments held by the Partnership are acquired for speculative trading purposes only and, as a result, all or substantially all of the Partnership’s assets are at risk of trading loss. Unlike an operating company, the risk of market-sensitive instruments is inherent to the primary business activity of the Partnership.

The futures, forwards and options on such contracts traded by the Partnership 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 Partnership’s open positions, and consequently in its earnings, whether realized or unrealized, and cash flow. Gains and losses on open positions of exchange-traded futures and exchange-traded forward 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. Gains and losses on off-exchange-traded forward currency option contracts are settled on an agreed-upon settlement date.

The Partnership’s total market risk may increase or decrease as it is influenced by a wide variety of factors, including, but not limited to, the diversification among the Partnership’s 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 Partnership 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 Partnership typically to be many times the total capitalization of the Partnership.

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

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

 

- 23 -


Table of Contents

Quantifying the Partnership’s Trading Value at Risk

The following quantitative disclosures regarding the Partnership’s market risk exposures contain “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended (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 Partnership accounts for open positions on the basis of fair value accounting principles. Any loss in the market value of the Partnership’s open positions is directly reflected in the Partnership’s earnings and cash flow.

The Partnership’s risk exposure in the market sectors traded by the Trading Advisor is estimated below in terms of Value at Risk. Please note that the Value at Risk model is used to numerically quantify market risk for historic reporting purposes only and is not utilized by either Ceres or the Trading Advisor in their daily risk management activities.

Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership’s speculative trading and the recurrence of market movements far exceeding expectations in the markets traded by the Partnership could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership’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 Partnership’s losses in any market sector will be limited to Value at Risk or by the Partnership’s attempts to manage its market risk.

Exchange maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk. 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 Value at Risk.

 

- 24 -


Table of Contents

The Partnership’s Value at Risk in Different Market Sectors

The following tables indicate the trading Value at Risk associated with the Partnership’s open positions by market category as of September 30, 2016 and December 31, 2015, and the highest, lowest and average values during the three months ended September 30, 2016 and for the twelve months ended December 31, 2015. All open position trading risk exposures of the Partnership have been included in calculating the figures set forth below. There has been no material change in the trading Value at Risk information previously disclosed in the Form 10-K.

As of September 30, 2016, the Partnership’s total capitalization was $17,191,608.

 

                September 30, 2016     Three Months Ended September 30, 2016  

Market Sector

   Value at Risk     

 

    % of Total    
    Capitalization    

          High
Value at Risk
     Low
Value at Risk
     Average
Value at Risk*
 

Currencies

     $   1,418,125           8.25         $      1,528,596           $          516,650               $      1,008,475     

Interest Rates

     360,837           2.10            664,699           360,837           493,075     

Equity

     882,160           5.13            1,285,818           398,504           895,188     

Commodity

     778,336           4.53            1,094,593           765,390           916,957     
  

 

 

    

 

 

           

Total

     $   3,439,458           20.01            
  

 

 

    

 

 

           

* Average of daily Values at Risk.

As of December 31, 2015, the Partnership’s total capitalization was $21,675,111.

 

                December 31, 2015     Twelve Months Ended December 31, 2015  

Market Sector

   Value at Risk     

 

% of Total
    Capitalization    

          High
Value at Risk
     Low
Value at Risk
     Average
Value at Risk*
 

Currencies

     $   1,652,839           7.63         $     2,130,340           $ -                  $     1,126,511     

Interest Rates

     444,671           2.05            1,135,061                   122,032           527,396     

Equity

     446,828           2.06            1,693,336           222,168           713,433     

Commodity

     1,491,300           6.88            1,593,779           448,702           988,115     
  

 

 

    

 

 

           

Total

     $   4,035,638           18.62            
  

 

 

    

 

 

           

* Average of daily Values at Risk.

 

- 25 -


Table of Contents

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, 2016. 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, 2016.

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.

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.

 

- 26 -


Table of Contents

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

This section describes the major pending legal proceedings, other than ordinary routine litigation incidental to the business, to which MS&Co. or its subsidiaries is a party or to which any of their property is subject. There are no material legal proceedings pending against the Partnership or the General Partner.

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

MS&Co. 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, as amended (the “Exchange Act”), 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, we refer you to the “Legal Proceedings” section of Morgan Stanley’s SEC 10-K filings for 2015, 2014, 2013, 2012, and 2011. In addition, MS&Co. annually prepares an Audited Consolidated Statements of Financial Condition (“Audited Financial Statement”) that is publicly available on Morgan Stanley’s website at www.morganstanley.com. We refer you to the “Commitments, Guarantees and Contingencies—Contingencies—Legal” section in MS&Co.’s 2015 Audited Financial Statement.

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 

MS&Co. 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 MS&Co.’s due diligence on the loans that it purchased for securitization, MS&Co.’s communications with ratings agencies, MS&Co.’s disclosures to investors, and MS&Co.’s handling of servicing and foreclosure related issues.

On February 25, 2015, MS&Co. 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 MS&Co. That settlement was finalized on February 10, 2016.

 

- 27 -


Table of Contents

On April 1, 2016, the California Attorney General’s Office filed an action against MS&Co. and certain affiliates in California state court styled California v. Morgan Stanley, et al., on behalf of California investors, including the California Public Employees’ Retirement System and the California Teachers’ Retirement System. The complaint alleges that MS&Co. made misrepresentations and omissions regarding RMBS and notes issued by the Cheyne SIV, and asserts violations of the California False Claims Act and other state laws and seeks treble damages, civil penalties, disgorgement, and injunctive relief. On July 20, 2016, MS&Co. filed a demurrer, which was granted on September 30, 2016. On October 21, 2016, the California Attorney General filed an amended complaint.

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

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

On June 5, 2012, MS&Co. 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 (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, MS&Co. violated Section 4c(a) of the Commodity Exchange Act, as amended (the “CEA”) and CFTC 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 MS&Co. 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 CEA and CFTC Regulations. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, MS&Co. 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. MS&Co. entered into corresponding and related settlements with the CME and CBOT in which the CME found that MS&Co. violated CME Rules 432.Q and 538 and fined MS&Co. $750,000 and CBOT found that MS&Co. violated CBOT Rules 432.Q and 538 and fined MS&Co. $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 (the “Securities Act”), 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 MS&Co. in connection with trading by one of MS&Co.’s former traders of EEM options contracts that allegedly disrupted the final settlement price of the November 2012 VXEM futures. CBOE alleged that MS&Co. violated CBOE Rules 4.1, 4.2 and 4.7, Sections 9(a) and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. CFE alleged that MS&Co. violated CFE Rules 608, 609 and 620. The matters were resolved on June 28, 2016 without any findings of fraud.

 

- 28 -


Table of Contents

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

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

Civil Litigation

On December 23, 2009, the Federal Home Loan Bank of Seattle filed a complaint against MS&Co. and another defendant in the Superior Court of the State of Washington, styled Federal Home Loan Bank of Seattle v. Morgan Stanley & Co. Inc., et al. The amended complaint, filed on September 28, 2010, alleges that defendants made untrue statements and material omissions in the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $233 million. The complaint raises claims under the Washington State Securities Act and seeks, among other things, to rescind the plaintiff’s purchase of such certificates 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 MS&Co.’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. The defendants’ joint motions for partial summary judgment were denied on November 9, 2015. At September 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $43 million, and the certificates had not yet incurred actual losses. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $43 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On March 15, 2010, the Federal Home Loan Bank of San Francisco filed a complaint against MS&Co. and other defendants in the Superior Court of the State of California styled Federal Home Loan Bank of San Francisco v. Deutsche Bank Securities Inc. et al. An amended complaint, filed on June 10, 2010, alleges that defendants made untrue statements and material omissions in connection with the sale to plaintiff of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The amount of certificates allegedly sold to plaintiff by MS&Co. was approximately $276 million. The complaint raises claims under both the federal securities laws and California law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On August 11, 2011, plaintiff’s federal securities law claims were dismissed with prejudice. 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. At September 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in these cases was approximately $52 million, and the certificates had incurred actual losses of approximately $2 million. Based on currently available information, MS&Co. believes it could incur a loss for this action up to the difference between the $55 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

 

- 29 -


Table of Contents

On July 15, 2010, China Development Industrial Bank (“CDIB”) filed a complaint against MS&Co., 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 MS&Co. misrepresented the risks of the STACK 2006-1 CDO to CDIB, and that MS&Co. knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CDIB. The complaint seeks compensatory damages related to the approximately $228 million that CDIB alleges it has already lost under the credit default swap, rescission of CDIB’s obligation to pay an additional $12 million, punitive damages, equitable relief, fees and costs. On February 28, 2011, the court denied MS&Co.’s motion to dismiss the complaint. Based on currently available information, MS&Co. believes it could incur a loss of up to approximately $240 million plus pre- and post-judgment interest, fees and costs.

On October 15, 2010, the Federal Home Loan Bank of Chicago filed a complaint against MS&Co. and other defendants in the Circuit Court of the State of Illinois, styled Federal Home Loan Bank of Chicago v. Bank of America Funding Corporation et al. A corrected amended complaint was filed on April 8, 2011, which 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 MS&Co. 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 MS&Co. or sold to plaintiff by MS&Co. was approximately $78 million. At September 25, 2016, 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, MS&Co. 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 MS&Co., plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

On April 20, 2011, the Federal Home Loan Bank of Boston filed a complaint against MS&Co. and other defendants in the Superior Court of the Commonwealth of Massachusetts styled Federal Home Loan Bank of Boston v. Ally Financial, Inc. F/K/A GMAC LLC et al. An amended complaint was filed on June 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 MS&Co. or sold to plaintiff by MS&Co. was approximately $385 million. The amended complaint raises claims under the Massachusetts Uniform Securities Act, the Massachusetts Consumer Protection Act and common law and seeks, among other things, to rescind the plaintiff’s purchase of such certificates. On May 26, 2011, defendants removed the case to the United States District Court for the District of Massachusetts. The defendants’ motions to dismiss the amended complaint were granted in part and denied in part on September 30, 2013. On November 25, 2013, July 16, 2014, and May 19, 2015, respectively, the plaintiff voluntarily dismissed its claims against MS&Co. with respect to three of the securitizations at issue. After these voluntary dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $332 million. At September 25, 2016, 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, MS&Co. 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 MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

 

- 30 -


Table of Contents

On May 3, 2013, plaintiffs in Deutsche Zentral-Genossenschaftsbank AG et al. v. Morgan Stanley et al. filed a complaint against MS&Co., certain affiliates, and other defendants in the 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 MS&Co. to plaintiff currently at issue in this action was approximately $644 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, negligent misrepresentation, and rescission and seeks, among other things, compensatory and punitive damages. On June 10, 2014, the court granted in part and denied in part MS&Co.’s motion to dismiss the complaint. MS&Co. perfected its appeal from that decision on June 12, 2015. At September 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $252 million, and the certificates had incurred actual losses of approximately $85 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $252 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses.

On May 17, 2013, plaintiff in IKB International S.A. in Liquidation, et al. v. Morgan Stanley, et al. filed a complaint against MS&Co. and certain affiliates in the 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 MS&Co. to plaintiff was approximately $132 million. The complaint alleges causes of action against MS&Co. for common law fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation, and seeks, among other things, compensatory and punitive damages. On October 29, 2014, the court granted in part and denied in part MS&Co.’s motion to dismiss. All claims regarding four certificates were dismissed. After these dismissals, the remaining amount of certificates allegedly issued by MS&Co. or sold to plaintiff by MS&Co. was approximately $116 million. On August 26, 2015, MS&Co. perfected its appeal from the court’s October 29, 2014 decision. On August 11, 2016, the Appellate Division, First Department affirmed the trial court’s decision denying in part MS&Co.’s motion to dismiss the complaint. At September 25, 2016, the current unpaid balance of the mortgage pass-through certificates at issue in this action was approximately $26 million, and the certificates had incurred actual losses of $58 million. Based on currently available information, MS&Co. believes it could incur a loss in this action up to the difference between the $26 million unpaid balance of these certificates (plus any losses incurred) and their fair market value at the time of a judgment against MS&Co., or upon sale, plus pre- and post-judgment interest, fees and costs. MS&Co. may be entitled to be indemnified for some of these losses and to an offset for interest received by the plaintiff prior to a judgment.

Settled Civil Litigation

On August 25, 2008, MS&Co. 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 RMBS 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.

 

- 31 -


Table of Contents

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

On July 9, 2010 and February 11, 2011, Cambridge Place Investment Management Inc. filed two separate complaints against MS&Co. 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 MS&Co. and/or its affiliates or sold to plaintiff’s affiliates’ clients by MS&Co. 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, MS&Co., certain affiliates and Pinnacle Performance Limited, a special purpose vehicle (“SPV”), were named as defendants in a purported class action in the United States District Court for the Southern District of New York (“SDNY”), styled Ge Dandong, et al. v. Pinnacle Performance Ltd., et al. On January 31, 2014, the plaintiffs in the action, which related to securities issued by the SPV in Singapore, 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 MS&Co. 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 MS&Co. 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 January 16, 2015, the parties reached an agreement to settle the litigation.

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

 

- 32 -


Table of Contents

On September 2, 2011, the Federal Housing Finance Agency (“FHFA”), as conservator for Fannie Mae and Freddie Mac, filed 17 complaints against numerous financial services companies, including MS&Co. and certain affiliates. A complaint against MS&Co. 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 MS&Co. and certain affiliates in the Supreme Court of NY, styled Metropolitan Life Insurance Company, et al. v. Morgan Stanley, et al. An amended complaint was filed on June 29, 2012, and alleges that the defendants made untrue statements and material omissions in the sale to the plaintiffs of certain mortgage pass-through certificates backed by securitization trusts containing residential mortgage loans. The total amount of certificates allegedly sponsored, underwritten, and/or sold by MS&Co. was approximately $758 million. The amended complaint raised common law claims of fraud, fraudulent inducement, and aiding and abetting fraud and seeks, among other things, rescission, compensatory, and/or rescissionary damages, as well as punitive damages, associated with the plaintiffs’ purchases of such certificates. On April 11, 2014, the parties entered into a settlement agreement.

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

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

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

 

- 33 -


Table of Contents

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

On September 16, 2014, the Virginia Attorney General’s Office filed a civil lawsuit, styled Commonwealth of Virginia ex rel. Integra REC LLC v. Barclays Capital Inc., et al., against MS&Co. and several other defendants in the Circuit Court of the City of Richmond related to RMBS. The lawsuit alleged that MS&Co. and the other defendants knowingly made misrepresentations and omissions related to the loans backing RMBS purchased by the Virginia Retirement System. The complaint asserts claims under the Virginia Fraud Against Taxpayers Act, as well as common law claims of actual and constructive fraud, and seeks, among other things, treble damages and civil penalties. On January 6, 2016, the parties reached an agreement to settle the litigation. An order dismissing the action with prejudice was entered on January 28, 2016.

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 connection with such actions.

 

- 34 -


Table of Contents

Item 1A.  Risk Factors

There have been no material changes to the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and under Part II, Item 1A. “Risk Factors” in the Partnership’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The public offering of the Units terminated on December 1, 2008.

The following chart sets forth the purchases of Units by the Partnership.

 

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

July 1, 2016 - July 31, 2016

     20,426.318          $            12.02         N/A            N/A      

August 1, 2016 - August 31, 2016

     14,966.658          11.44          N/A            N/A      

September 1, 2016 - September 30, 2016

     33,727.753          11.06          N/A            N/A      
       69,120.729          $            11.43                     

 

  *

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 3.  Defaults Upon Senior Securities — None.

Item 4.  Mine Safety Disclosures — Not applicable.

Item 5.  Other Information — None.

 

- 35 -


Table of Contents

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 and Director 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 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.02   Certification of Chief Financial Officer and Director 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.

 

- 36 -


Table of Contents

SIGNATURES

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.

 

MORGAN STANLEY SMITH BARNEY CHARTER CAMPBELL L.P.

By:

 

Ceres Managed Futures LLC

  
 

(General Partner)

  

By:

 

/s/ Patrick T. Egan

  
 

Patrick T. Egan

  
 

President and Director

  

Date: November 10, 2016

  

By:

 

/s/ Steven Ross

  
 

Steven Ross

  
  Chief Financial Officer and Director   
 

(Principal Accounting Officer)

  

Date: November 10, 2016

 

- 37 -