Trucking companies want answers after K-Ratio abruptly shut down its fuel hedging program in late June, two days before some carriers say they were scheduled to receive their fuel swap settlements for the previous month. But K-Ratio says it was incorrectly led to believe the program was being handled properly and that it faces huge losses if it honors the open contracts.
A spokesperson for the fuel swap program, called K-Ratio X, told FreightWaves on Tuesday that it had notified 34 trucking companies participating in the program.
A caveat of the proposed settlement is that all 34 trucking companies holding open contracts must agree to the "cash-neutral" terms and sign it or the deal is off — and carriers may face legal ramifications if they snub the deal.
"K-Ratio X will have no choice but to pursue alternative legal courses of action to resolve potential significant liabilities under the open contracts, which may require you to repay certain payments made to you," the proposed agreement states.
As of the Tuesday deadline given to fuel swap participants, a K-Ratio spokesperson said over 50% had signed the agreement and "we remain in active conversations with the remaining parties."
Some trucking company executives told FreightWaves they've hired attorneys specializing in futures and derivatives law to review the agreement. Some said they don't plan to sign it and are "exploring their options" to recoup the money they are owed from the monthly settlements and the cash they paid in advance for the fuel futures contracts.
Motor carriers outsourced their risk to Chicago-based K-Ratio X, which, in turn, used futures and options to hedge. For some, the practice paid off big the past few months as fuel prices soared and the carriers started receiving settlement checks from K-Ratio X at the end of each month based on an average of the daily prices of the fuel that was hedged.
Other trucking companies were relatively new to K-Ratio X's fuel swap program. The owner of a Midwestern trucking company told FreightWaves he had recently invested $75,000, the minimum amount required to participate in K-Ratio's swaps program. After receiving a settlement check for around $5,000 in May, the owner, who did not want to be named, said he was scheduled to receive an additional payment for around $15,000 in June, which didn't happen.
The carriers said they were sent universal settlement agreements on July 12, notifying them that K-Ratio X's management team had "recently discovered that insufficient hedging appears to have been conducted" of certain over-the-counter (OTC) options agreements entered into by the company and it was suspending the program.
K-Ratio X estimated that its losses could be more than $10 million if the company is forced to honor participating motor carriers' open contracts.
"Despite representing to the managers of K-Ratio X that its hedging program was properly and correctly implemented, this agent apparently failed to do so, and has thereby placed K-Ratio X in a difficult financial circumstance," according to the settlement agreement sent to carriers by K-Ratio X's Chicago-based law firm, Piccione Keeley & Associates.
The proposed agreement, obtained by FreightWaves, states that K-Ratio X is not financially able to honor the OTC option transactions for unexpired or open contracts.
"Because the contracts haven't expired, the price of the open contracts change daily and their loss or gain changes," a financial adviser of a Midwestern firm, who didn't want to be named but is familiar with the agreement, told FreightWaves. "K-Ratio is implying that the agent who was supposed to hedge didn't actually do it."
K-Ratio X's former agent, Kyle Lintner, served as its former principal and managing director of the company's fuel futures program. He told FreightWaves he didn't do "anything immoral, illegal or wrong" and that all of K-Ratio's management team, including its independent accounting firm, could track the status of every fuel futures contract daily.
Lintner appeared on several of FreightWaves' media platforms prior to his June 23 firing.
"Kyle Lintner was a regular unpaid contributor to FreightWaves media. He will not be utilized in future FreightWaves media pending final resolution of the matters discussed in this article," a FreightWaves spokesperson said.
Lintner, who has been a registered floor broker and trader with the Chicago Board of Trade since 2003, hasn't had any complaints filed against him, according to the NFA and the Commodity Futures Trading Commission (CFTC) websites.
Lintner said the NFA was conducting a routine examination of K-Ratio X's fuel futures program because it was so new prior to his independent contractor agreement being terminated on June 23.
Lintner said he is also cooperating with NFA examiners.
National average USLD rack price over the past 12 months (SONAR chart).
Lender agrees to advance funds if all carriers agree
Some carriers may benefit from the proposed agreement while others stand to lose a significant amount of money if they sign.
K-Ratio X states that an unnamed lender "has agreed to source outside funds to advance monies sufficient to pay all of the total net cash balance to all persons holding open contracts in order to settle potential claims. The proposed settlement agreement would allow K-Ratio to continue operating and stay afloat "without the unsustainable obligations under the open contracts."
Some carriers said they paid cash premiums to K-Ratio to lock in fuel prices through March 2022 but will not be refunded their money if they made money or received cash settlements from its fuel hedging program. One trucking company owner told FreightWaves his company was owed over $100,000 for its June settlement and that other carriers are owed even more.
K-Ratio X also announced Tuesday that it has retained Carl Gilmore as a third-party market expert "to conduct a forensic review of its swap options contract trading, assist with the customer resolution process and to provide recommendations on its supervisory and compliance policies and procedures."
"Mr. Gilmore is a highly seasoned regulatory, compliance and risk management consulting expert with 31 years of futures commission merchant and broker-dealer experience covering risk management, operational, legal, compliance, client-facing and international experience," a K-Ratio spokesperson said. "Adding Carl to our forensic analysis and resolution strategy is a huge step for us and our customers. He will help examine and analyze the fuel protection program and make appropriate recommendations."
Gilmore is also a member of the National Futures Association's (NFA's) Compliance and Risk Committee and formerly a member of the Futures Industry Association Law and Compliance Executive Committee, the company said in a statement.
Winners lose and losers win?
The CEO of a Midwestern trucking company said the settlement agreement puts him and other carriers that were successful in the K-Ratio X fuel swaps program in an impossible position.
On Monday morning, the NFA arranged a call among the 34 carriers that participated in K-Ratio's fuel swaps program. The carriers were told the NFA and K-Ratio X weren't participating in the call, but that it was recorded and would be shared with K-Ratio management and the NFA.
"The takeaway of the call was that the only carriers willing to sign this universal settlement agreement were the ones that had just bought swaps a few months ago and were losing money," the CEO, who didn't want to be named, told FreightWaves.
Trucking company executives spoke to FreightWaves on condition of anonymity because of K-Ratio's confidentiality clause outlined in its proposed settlement.
One executive compared K-Ratio X's offer to a Las Vegas gambling scenario.
"We've been playing blackjack for a couple of hours and some people have won and some people have lost," the trucking executive told FreightWaves. "All of a sudden, the house walks up and says, ‘Time out, we've figured out that two cards are missing from this deck so all of the winners have to give their money to the losers until everybody's equal.' Nobody would do this because the only people that are going to be happy are the losers."
Some participants in the program are frustrated by what they consider a lack of transparency as to why K-Ratio X failed to put safeguards in place to spot the alleged underhedging before a catastrophic failure led to the abrupt closure of the fuel swaps program.
"If you want to be transparent, get your cards on the table and tell us what you did wrong," the owner of one carrier told FreightWaves.
Carriers want to know what went wrong
According to documents reviewed by FreightWaves, K-Ratio X's futures statements were sent daily from Wedbush Securities Inc., its bank or futures commission merchant (FCM) as it is known in the trading world, to a distribution list that included Lintner and members of its management team that included Russell Gallemore, the main investor in K-Ratio, and Chris Poole. Also copied on the daily statements was Integrated Solutions, the company's independent third-party accounting firm that specialized in futures trading.
Trucking companies said they have also received letters from the NFA inquiring about their relationship with K-Ratio and its affiliates and requesting to set up a time to talk as part of the examination process.
"It's our policy not to comment on current examinations that we're conducting," Christie Hillsman, communications director for NFA, told FreightWaves.
"K-Ratio is currently a member and currently on withdrawal hold, so it's in the process of withdrawing, but because there is a current examination underway, essentially that examination needs to be finalized and completed before they can withdraw," she said.
Hillsman said there's no time frame for when the examination into K-Ratio's fuel futures program will be completed.
In July 2020, the Commodity Futures Trading Commission (CFTC) approved a final rule imposing new capital requirements on swap dealers and major swap participants that are not subject to supervision by a banking regulator and imposed new financial reporting requirements.
However, market participants are not required to be compliant with the new rule until Oct. 6.
The CFTC's final rule provides swap dealers with the option to elect one of three methods to establish and meet minimum capital requirements, depending on the characteristics of their business:
A net liquid assets method, based primarily on existing capital requirements for FCMs and on the capital requirements adopted by the Securities and Exchange Commission for security-based swap dealers and major security-based swap participants.
A bank-based method, based primarily on existing capital requirements for bank holding companies under the supervision of the Federal Reserve Board.
A tangible net worth method, designed specifically for swap dealers that are part of a larger commercial enterprise.
Rafael Martinez, a senior financial risk analyst of the CFTC, told FreightWaves he could not speak specifically to the K-Ratio X situation but provided information about the final rule that takes effect in October.
"As the rule you mention states, CFTC sets a variety of risk management requirements on swaps dealers and major swaps participants (SDs and MSPs, respectively)," Martinez told FreightWaves. "The registration requirements to be an SD or MSP are based on activity, with thresholds that show this is intended only for systemically important entities. We have only about 110 SDs and no MSP registered."
He said the CFTC regulates other types of intermediaries in the commodities derivatives markets and that each registration category has its own regulatory requirements.
As for trucking companies that refuse to sign the universal settlement agreement, what happens next is still largely unknown.
"No one seems willing to accept responsibility for what happened here," the CEO of one of the trucking companies told FreightWaves. "How can K-Ratio expect us to sign this agreement when it is not being transparent as to what caused this program to collapse?"
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