The Commodity Futures Trading Commission filed a lawsuit against Kraft Foods Group, Inc. and Mondelez Global LLC claiming that trades they entered on the Chicago Board of Trade for the alleged purpose of hedging were in fact entered for the purpose of artificially lowering prices in the related cash market. This activity, claimed the CFTC, was a violation of federal law and the Commission’s rules.
According to a complaint filed by the CFTC in a federal court in Illinois, by November 29, 2011, the companies purchased 3,150 long CBOT December 2011 wheat futures contracts, which was equivalent to 15.75 million bushels or approximately US $93.5 million worth of wheat (November 29 was the first day of the delivery period for the December 2011 wheat futures contract). The companies did this, said the CFTC, with the intent to depress the price of wheat in the cash market.
Although the companies used wheat for their commercial purposes, acknowledged the CFTC complaint, they could not have used the quantity of wheat they potentially controlled at the time of the companies’ long futures purchase without incurring exorbitant costs, said the Commission. This is because they allegedly did not have sufficient storage facilities of their own.
Ordinarily, said the CFTC, the companies purchased wheat in the futures market solely as a hedge against future anticipated purchases in the cash market. Once the companies purchased cash wheat, they offset their futures hedge. The companies did not take delivery of most of the transactions at issue, however, said the Commission. Moreover, of the 1320 contracts the companies did take delivery on, they resold 1188 of their shipping certificates.
Ultimately, the companies' actions caused the price of cash wheat to decline, alleged the CFTC. According to the Commission, as a result of their activities, the companies realized US $5.4 million in profits.
The CFTC accused the companies of engaging in manipulation and attempted manipulation through their activities, as well as engaging in a “manipulative or deceptive device or contrivance.” Under law, the former allegation requires proof of intent and an artificial price, among other elements, while the latter does not.
The CFTC also charged the companies with violating speculative position limits in connection with wheat futures positions they held on five days in December 2011. Although the companies had a hedging exemption to cover their cash needs that was effective for one year from December 1, 2010, they failed to request renewal of the exemption until December 28, 2011, noted the CFTC.
In addition, the CFTC said that the companies engaged in non-competitive trading in connection with multiples transfers of positions between different accounts that were executed as exchanges for related positions (instead of as transfer trades).
During the period covered by the CFTC’s complaint, Kraft Foods Inc. was the parent of Kraft Food Group, Inc. and its affiliate Mondelez Global LLC. In October 2012, the companies engaged in a corporate restructuring that resulted in Kraft Foods Group being one corporation owned by public shareholders and Kraft Foods Inc., its former parent, being a separate publicly traded company and renamed Mondelez International Inc.
My View: It will be interesting to follow this case to see how the charging of the respondents both under the CFTC’s traditional anti-manipulation authority (click here to access CFTC Rule 180.2) and its newly gotten anti-manipulative or deceptive device or contrivance authority (click here to access CFTC Rule 180.1) plays out. In charging respondents in a federal court with a violation of its new prohibitions, the CFTC solely argued that the companies “intended to affect or acted recklessly with regards to affecting the prices of the December 2011 wheat futures contract and engaged in over acts in furtherance of its intent”—conduct seemingly descriptive of traditional manipulation. In publishing a Q&A related to its new authority (click here to access), the CFTC argued that that its new prohibitions “enhances the Commission’s ability to prosecute manipulation.” However, the relevant provision’s prohibition against using or employing “any manipulative device,” seems limited on its face to activities “to defraud.” It is not clear whom respondents were endeavoring to defraud through their trading activities, even assuming all of the Commission’s facts, as alleged, are true. As I have stated before, CFTC Rule 180.1 is extraordinarily broad and provides little guidance as to what is precisely prohibited activity.