In the first case of its kind, 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 related Regulation 180.1. Regulation 180.1 makes it unlawful to recklessly employ manipulative devices. Most would have though enforcement would have been directed at high frequency traders and not actual users of commodities like Kraft.
The CFTC alleged Kraft purchased $90 million of wheat futures which, according to the CFTC, was far in excess of Kraft’s commercial needs. The CFTC alleged Kraft desired the market to believe that it would take delivery of a portion of the wheat, which would lower the cash price of the wheat.
Kraft moved to dismiss the claim, but the United States District Court for the Northern District of Illinois Eastern Division ruled in favor of the CFTC. The Court accepted the defendants’ argument that the Section 6(c)(1) claim that must satisfy the heightened pleading standard of Federal Rule of Civil Procedure 9(b) because it concerns the violation of an anti-fraud rule.
The defendants then argued that the “CFTC is unable to identify” and allege with the “particularity required for a fraud charge, what ‘manipulative or deceptive device or contrivance’ Kraft allegedly employed.” The Court disagreed, and found that that the CFTC adequately pled each of the following:
- the manipulative acts that were performed;
- which defendants performed them;
- when the manipulative acts were performed; and
- what effect the scheme had on the market for the commodities at issue.
The Court found the CFTC adequately pled manipulation in the first prong by alleging that:
- Kraft took a huge wheat futures position;
- that it did not intend to use in production;
- but instead intended that the position would signal Kraft’s demand for wheat in the relevant time period;
- in a way that would mislead others in the market into thinking that Kraft would take delivery of its futures position and not buy cash wheat;
- which was intended to, and in fact did, cause cash wheat prices to decrease and the price for futures to increase.
The defendants argued that the complaint is still deficient in that it does not offer any facts showing “how” Kraft allegedly misled the market as to its intended use of wheat futures. According to the Court the law imposes no such pleading requirement. The Court rejected Kraft’s argument that its massive long position could have signaled many things, and that its market position strategy, therefore, cannot qualify as adequately deceptive or manipulative. The Court stated this might prove true upon further discovery, but the Court was confined at this stage to the complaint itself. Because the complaint adequately alleged that Kraft fraudulently took its futures position to signal intent to take delivery of the December 2011 wheat from its futures contracts, and that the market was misled by that signal, which ultimately resulted in the prices at issue being based not upon market forces, but rather upon false signals, the Court found that CFTC had adequately pled manipulative conduct.
The Court next addressed scienter. Looking to precedent under securities and commodities laws, the Court found the CFTC must plead facts showing that Kraft’s conduct was either reckless or intentional; and this standard can be met by allegations of conduct showing “an extreme departure from the standards of ordinary care” which “presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it. Among other things the Court found an adequate pleading of scienter because of emails referred to in the complaint.