The CFTC accused Kraft Food Groups, Inc. and former parent Mondelez Global LLC with manipulation pursuant to Section 6(c)(1) of the Commodities Exchange Act and Regulation 180.1 promulgated thereunder. Regulation 180.1 makes it unlawful to recklessly employ manipulative devices. Kraft has moved to dismiss the claim.
Kraft’s story is straightforward. Kraft says this case is about a snack-food company that made reasonable business decisions to maintain a steady wheat supply in the face of an uncertain market. For years, the price of wheat on the cash market has borne little relation to the price of wheat on the futures market. Despite the CFTC’s stated intention to correct the difference, for years the market has been dysfunctional.
Kraft maintains, at its core, the CFTC’s complaint accuses Kraft of fraud and manipulation for seeking to purchase wheat at the best price it could in the face of difficult market conditions. In late 2011, facing a dwindling wheat supply and high prices in the cash market, Kraft made the rational decision to obtain the wheat it needed for its flour mills (for ultimate use in the production of cookies, crackers, and other snack foods) by purchasing and taking delivery of less-expensive wheat futures. The Company’s decision had several consequences. First, it began receiving wheat located in unfavorable locations. Second, prices in the cash wheat market began to fall after Kraft–which the CFTC acknowledges is one of the country’s largest purchasers of the variety of wheat at issue in this case–went elsewhere for its needs. As cash wheat prices began to come down, Kraft then made a second business decision: it resold its remaining shipping certificates, closed its open December futures position (two of several available options) and began purchasing cash wheat at lower prices.
Kraft argues these decisions and consequences do not transform Kraft’s conduct into a fraud or a manipulation. They are, instead, an example of a consumer of wheat “seeking the best price for [its] commodity,” an activity the CFTC recognizes as a “legitimate, indeed critical price-creating force in the futures market.”
Kraft believes the claim should be dismissed because allegations that prices changed as a result of bona fide transactions is insufficient to infer Kraft deceived or manipulated the market. Rule 180.1 prohibits manipulative and deceptive activities, it does not prohibit failing to disclose trading strategies.
The motion draws strong parallels to Rule 10b-5. No market manipulation occurs under that rule, according to Kraft, where the defendant makes no representations, true or false, actual or implicit, concerning the conduct at issue. Kraft makes the interesting observation that in the securities markets, market participants are perceived to have equal access to information. The commodities markets are different, because numerous market participants may have legitimate access to what some may perceive as superior information.
The complaint must fail, says Kraft, because the CFTC must allege something suggesting that the market received a message from Kraft, in some particularly identified form, that was different from Kraft’s alleged true intent. The complaint offers nothing on this point. The mere fact that Kraft established a large long position in December 2011 wheat futures cannot, in and of itself, be the method by which Kraft allegedly misled the market
Kraft also argues the complaint fails to sufficiently allege scienter.