February 26, 2007
Securities and Exchange Commission
100 F Street, N. E.
Washington, D.C. 20549-1090
Attn: Ms. Nancy M. Morris, Secretary
RE: File No.: SR-CBOE-2006-106
This letter is with reference to the proposed rule change SR-CBOE-2006-106 filed on December 12, 2006 on behalf of the CBOE. As provided by the Securities Exchange Commission I am permitted to comment on this rule filing. As such I am stating that I am categorically opposed to the approval of this rule filing.
In the following paragraphs I will show that by allowing the Securities and Exchange Commission to authorize this rule interpretation by the CBOE it will result in a unilateral revocation of a contract between myself, all other CBOT members and the CBOE and the CBOE board of Directors which provides for certain "rights and privileges" expressly granted to "CBOT Exercisers", as found in the CBOE Certificate of Incorporation in Section (b) of Article fifth. (And further re-visited in subsequent negotiated agreements between various CBOE and CBOT committees and their respective board of directors).
Further if this rule interpretation is approved a breach of contract by the CBOE will result in its agreement to grant all "rights and privileges" to CBOE "Exercise Members" as are given to all other CBOE members, including the distribution of any dividends or other distributions that the CBOE management shall issue. In addition this breach of contract by the CBOE will result in preventing me from earning a living as a Market Maker on the CBOE as I have for 29 years. Finally if this rule change were granted the resulting "taking" by the CBOE would be one so onerous that it would be against public policy and therefore eventually overruled in another venue. Further I will show from my experience at the CBOE, particularly at the committee level, the CBOE has a history of attempting to dilute the rights of CBOT Exercisers and this attempt to make this rule "interpretation" is the ultimate dilution of CBOT Exerciser rights by eliminating this whole class of membership which is defined in the CBOE Charter. Further the rule "interpretation" that is in front of your forum to be approved by your body is in fact an amendment to the constitution of substantial significance and not an interpretation of a rule at all and as such must be approved by 80% of the membership of the CBOE, as stipulated by the CBOE constitution. Finally, even though after evaluating all the evidence the Securities and Exchange Commission would most likely find that the attempted rule interpretation should be overruled, I believe that the Securities Exchange Commission is the wrong venue to resolve this issue.
I have been a CBOE member from 1976 though 2005. For the first few years I was a CBOE member through the use of a "regular CBOE membership" I first leased and then purchased. In 1979 I sold my CBOE membership and simultaneously purchased a CBOT membership and regained my CBOE membership status and its respective rights and privileges through the CBOE exercise process as described in the CBOE Certificate of incorporation fifth (b). I continue to own my CBOT membership. The CBOE exercise process is expressly outlined in the CBOE Charter. At the time of my purchase of the CBOT membership the CBOT membership was priced approximately $150,000, about $100,000 higher or three times the price of the CBOE membership. My purchase was made after extensive research. My research at the time (and now) showed that the premium I was paying for my CBOT membership over the price of the CBOE membership was due to the fact that it provided me with all the "Rights and Privileges" of both exchanges.
In the Charter and constitution of the CBOE and further in amendments later instituted by the CBOE, the CBOE allowed the CBOE exerciser to trade at both exchanges. The only condition that the CBOE rules require is that the trading cannot be done simultaneously. Therefore one could trade on one exchange floor and then go "across the street" and trade at the other exchange. Once "electronic trading" came into existence rules were put in effect to enforce this restriction of simultaneous trading on both exchanges. Other than that restriction of simultaneous trading every CBOE exerciser has always had the same rights and Privileges as any other CBOE member. I will show examples of the CBOE's history of attempting to make, in effect, two levels of membership classes one inferior to the other through actions by the CBOE board or CBOE committees that resulted in reducing the rights of the CBOE exerciser member. The CBOE's attempt to make this rule change is just another instance where the CBOE Board of Directors is continuing to dilute the CBOE exerciser's rights, this time by using the venue of the SEC to amend the CBOE constitution in a way to effect the ultimate dilution of CBOE exerciser rights by eliminating the whole membership class of CBOE exercisers. It is quite obvious that this is an attempt by the CBOE directors to exclude the CBOE Exercisers from participating in the CBOE planned stock IPO in order that the stock distribution be split up among just the original 900 regular CBOE members. As will be shown the CBOE Charter, constitution and subsequent agreements do not exclude any right to participate in equity distributions. If there was an exclusion of such an important right such as participating in an equity distribution in the CBOE, some document would have specifically stated this exclusion, and there is none. In fact it specifically says in Article fifth (b) of the CBOE Certificate of incorporation that CBOE exercisers have vested all the rights and privileges as all other members. In addition paragraph 3(a) of the 1992 agreement between the CBOT and CBOE spells out that a cash or property distribution must be given to all members if given to the CBOE regular members as a class. Further it obligates all CBOE exercisers to be subject to all fees, dues and assessments and like charges...as all other members. For approximately 29 years I paid my share of fees and dues, and as the logical quid pro quo I should be vested with all the rights and privileges that are stated in the same paragraph. As such I and all other CBOE exercisers should be able to participate in the CBOE IPO, just like all CBOE "regular" members will. Obviously this whole Rule-approval process in front of the Securities and Exchange Commission that is being initiated by the CBOE is just another attempt by the CBOE Board of Directors to reduce the rights of CBOE exercisers and prevent me from participating in the CBOE stock IPO. By doing this the CBOE board of directors did not act in good faith to all its members.
The CBOE board of directors and the CBOE committee system itself has perpetuated the continued dilution of rights of CBOE exercisers. The hierarchy at the CBOE has always struggled with the ebb and flow of CBOT members who became CBOE exercisers coming across the street to trade options whenever they desired. This lack of certainty of the number of CBOE members at any given time was always of concern to this hierarchy. How could they limit the ebb and flow of CBOE exercisers? This thought process of controlling when CBOT members could become CBOE members if put in action would in itself dilute the rights of CBOT members. Now the approval by the Securities and Exchange Commission of this rule filing will provide the ultimate solution to this "problem" of the CBOT member's inconsistent pattern of becoming CBOE members and in the process will eliminate all rights of CBOE exercisers.
Another way the CBOE has perpetuated the dilution of the rights of the CBOE exerciser is the way the membership committee of the CBOE controls the process of becoming a member and how it differs from the regular CBOE member's process. Firms using "regular CBOE memberships" can move off and on their memberships within one day and at times by giving notice to the exchange by 8:00 am of the same day. The process is commonly known as using a "parking space". A firm utilizing a CBOT membership that has been "exercised" has a much longer approval process to put one of their nominees on that membership. Therefore many CBOE brokerage firms will not lease a CBOT membership to be utililized on the CBOE because of this interpretation of the rules that requires this delay in becoming a member. This reduces the value of the CBOT lease because it basically eliminates a large group of potential lessees of memberships namely brokerage firms, because these firms require the ability to rotate their employees on and off of memberships due to illness and vacations at a moments notice. This interpretation by the membership committee and how it differentiates between the types of memberships is a further example of how the CBOE perpetuates the dilution of rights of CBOE exercisers.
The Board of directors of the CBOE has tried in some ways to "appear" to come to terms with the fact that CBOT exercisers have certain rights and privileges. The CBOE Board of Directors in 2006 set up a select group of CBOE Board of Directors to act as a panel in a forum to evaluate the CBOT exerciser's role and or participation in the impending CBOE demutualization and IPO by holding meetings which invited comments from both CBOE "regular" members and CBOE exercisers. Although the forum by the nature of the composition of the "judging panel" was quite biased it nevertheless implied that there existed some level of vested interest of the Chicago board Options Exchange by the CBOE exerciser. Only CBOE membership owners were the ones that spoke up at the forum. Those members attempted to say that CBOE exercisers were limited to trading rights only and no equity interest in any future stock filing by the CBOE. This forum was created under the auspices that the CBOE board of directors knew that the CBOE exercisers deserved something from the CBOE IPO but they wanted an "unbiased" forum to determine what exactly it was. This presentation created by the CBOE board of directors in itself is evidence that the CBOE directors believed at the least that the CBOE exerciser should exist and had certain rights but they were attempting to "get a consensus of what those rights were". If in fact the CBOE Board of directors were acting in good faith they would have selected a panel consisting of Directors from both the CBOE and the CBOT, instead of just the CBOE. The whole forum process was unnecessary because all the CBOE directors had to do was look at the CBOE Charter, Constitution, and subsequent agreements between the CBOE and CBOT they would find that CBOE exerciser's hold the same rights and privileges as any other CBOE member, including the right to any cash or property distribution by the CBOE, instead they held a forum to determine those rights. It was just another attempt to further dilute the vested rights of the CBOE exerciser.
When I was on the nominating committee of the CBOE it was always known that the potential candidate for director should if selected always represent the interest of the CBOE versus his or her own firm when acting in the capacity of a CBOE director. In this forum situation it was the obligation of these selected directors to act in the best interest of CBOE members versus CBOT members. The whole forum mentioned was a ruse. It was analogous to having the fox guard the hen house. I believe when the CBOE board could not utilize this forum in the manner in which they anticipated, which was to reduce the rights of the CBOE exerciser to merely a trading right (as compared to all rights and privileges as stated in article fifth (b), not the least of which was the right to any cash or property distribution, the CBOE Board of Directors finally had to resort to finding a way to eliminate the exercise right in total, and that is when they applied for a rule change in front of the Securities and Exchange Commission. I believe the whole creation of this panel and forum was done in bad faith as it relates to CBOE exerciser rights simply based on the composition of it.
I would like to comment on the CBOE's position in front of you as it relates to the impending merger of the CBOT-CME and show how the CBOE's claim that the membership class of "CBOE Exerciser" should totally be eliminated is totally baseless. The CBOE's position embodied in the 2001 agreement is that there not be any change of ownership of the CBOT not contemplated in its 2005 restructuring. Further they contend there in fact was a "change of ownership not contemplated in the 2005 restructuring", which the CBOE contends violates a condition of the 2001 agreement. I would contend that the whole purpose of the 2001 Agreement was to allow the CBOT to begin the process of demutualization, ie issue stock in itself. Further both parties to the 2001 Agreement, the CBOE and CBOT understood that among the many reasons a private company issues stock is to allow a company to become more liquid, to allow a company to be valued in a transparent way through the vehicle of the stock market, and this process as such would provide a type of currency to acquire other companies or be acquired by other companies that would provide synergies in one's business model. Certainly the parties to this agreement anticipated the event of a merger with another commodities exchange and in fact it was a contemplated event just like any other company who issues stock. I would argue that discussions in the media and elsewhere in Chicago occurred for years of a potential merger between the CBOT and the CME. In fact it was so often alluded to that one would have been grossly negligent in his capacity of a Board of director at a stock or commodities exchange in Chicago to not have contemplated the impending merger of the two exchanges. Therefore I believe the condition that the merger be contemplated was fulfilled, and for that reason the exercise right should not be eliminated.
Another argument made by the CBOE to void the exercise right is that the CBOT is being merged or bought buy a "holding company" and not another commodities or securities exchange, as such they contend is one of the conditions of the agreement. The utilization of this argument is just another attempt among their history of attempts to dilute the right of CBOE exercisers. This particular argument concerning the fact that the entity that is merging with the CBOT is a holding company and not an exchange is obviously an argument based on semantics and further shows their lack of good faith in dealing with its CBOE exercisers. It is quite obvious that the business of the new merged entity that is under the umbrella of the holding company is a commodity exchange, which complies with the agreement. Further apparently the CBOE does not have a general problem with commodity exchanges under an umbrella of a holding company because prior to the anticipated merger of the CBOT and CME the CBOE never contested the fact that the CBOT was in fact formed under the business model of a holding company, ie the CBOT Holdings, Inc. Therefore I would respectfully suggest to the Securities and Exchange Commission that you should rule on this issue based on the substance of their argument and not on the argument based on semantics. Certainly a court of law would look through the semantics and rule on substance and therefore rule that the CBOT was in compliance with the 1992 agreement.
The CBOE contends that there will not be any holders of CBOT full memberships, as they existed in 1992 since all of these memberships were stripped of their ownership attributes in the 2005 restructuring and demutualization of the CBOT and therefore Condition 2 would not be satisfied. However a subsequent agreement between the CBOE and CBOT spells out the conditions in the event a CBOT demutualization occurs. The three conditions which allow the CBOT member to retain their CBOE exercise rights and privileges, are as follows, as stated in the 1992 agreement paragraph 3(a), that any cash or property distributions to CBOE exercisers is guaranteed if given to other regular CBOE members is provided for if the following three conditions are met: 1. That the 27,300 shares of stock given to each CBOT member is still accounted for and in his/her possession. 2. That the full CBOT trading right is in his/her possession. 3. That the ERP, exercise right privilege is still in his/her possession. Provided all three of these conditions are met the CBOT member shall be in the same position concerning the exercise right privilege as before the demutualization. This agreement was negotiated by both exchanges for the sole purpose of allowing the CBOT to demutualize, i.e. issue stock, and still allow it's CBOT members to retain their inherent rights as a CBOT exerciser. Based on this subsequent agreement between the CBOE and the CBOT, the CBOE is estopped from saying that CBOT members were "stripped" of their ownership attributes in the 2005 restructuring.
In conclusion the examples shown in this letter display a continuous lack of good faith in dealing with the class of CBOE members called CBOE exercisers. The CBOE's Certificate of incorporation paragraph 3(b), states, "that the nature of the business or purposes to be conducted or promoted by the Corporation (CBOE) is to provide a securities market place with high standards of honor and integrity among its members and to promote and maintain just and equitable principles of trade and business". As one can see from this letter the actions by various departments of the CBOE whether by the board of directors or the committee system, the CBOE has promoted a low standard of honor and integrity and does not promote just and equitable principles of trade and business by consistently acting in ways that reduce the rights of one segment of the membership, namely the CBOE exercisers.
Although I believe the Securities and Exchange Commission should not approve the impending CBOE rule "interpretation" based on the facts of the case, the arguments presented in this letter and other letters submitted by interested parties, I believe the Security exchange commission is the wrong venue to decide this case. This is a contract case between two parties, CBOE exerciser members of the CBOE and the CBOE itself as an institution. The case does not involve issues concerning the orderly functioning of a securities exchange. Both Exchanges are incorporated in the state of Delaware and a court in Delaware would be the logical place to debate issues of contract law. I am sure lawyers who are more knowledgeable than me with whether the Securities and Exchange Commission has the authority to rule on issues of contract will voice their opinions. And I am sure that arguments by persuasive attorneys can be construed to make the forum of the Securities and Exchange Commission the proper venue. However simply based on the fact that this is a case in contract law, and both companies/exchanges are incorporated in the same state of Delaware, then the logical venue would be the district court located in that state. In fact there presently exists a suit in the district court of Delaware initiated by the CBOT to further guarantee that all the inherent rights granted by the CBOE to CBOE exerciser members are still properly intact and enforceable. As such I respectfully request that you deny approval of this CBOE rule interpretation and direct the parties to hear the case in the district court in Delaware where the case belongs.
I appreciate the opportunity to comment on this issue. Thank you for your consideration. If you have any questions my phone number is 312-961-0553.