On August 16, 2010, the Commodity Futures Trading Commission issued an order approving a settlement resolving allegations that ConAgra Trade Group, Inc. caused a non-bona fide price to be reported for the NYMEX spot month crude oil futures contract in violation of the Commodity Exchange Act. ConAgra's violation stemmed from its traders wanting the distinction of being the first to trade crude oil at $100 per barrel. The settlement is remarkable for two reasons: first, it involves the payment by ConAgra of a $12 million civil monetary penalty (significantly after the event occurred) when no fraud or other specific injury is alleged; and second, two of the five CFTC commissioners dissented from the majority's decision to accept the settlement.
The Settlement Order
In the Settlement Order, the CFTC found that on January 2, 2008, ConAgra caused NYMEX floor brokers to execute trades on its behalf that intentionally pushed the price of the NYMEX February crude oil futures contract to $100, which was then an all-time high for that contract. Transcripts of conversations between a ConAgra trader and the floor broker's clerk indicated to the CFTC that the ConAgra trader intended to push the price to $100 in order to be the first to ever have traded the contract at that price (crude oil was trading very near $100). When it became clear that offers to sell crude oil futures at a lower price remained outstanding on the floor, the ConAgra trader instructed the floor broker to buy all contracts selling at the lower price in order to preserve the $100 price. ConAgra then purchased a February crude oil contract at $100.
According to the Settlement Order, a ConAgra trader stated that ConAgra only bought the contracts trading at less than $100 in order to preserve its position as the first to trade the contract at $100. This is at the root of the CFTC's allegation that ConAgra caused a price to be reported that was not a true and bona fide price, in violation of the CEA. Based on evidence including the recorded conversations between ConAgra traders and NYMEX floor brokers, as well as evidence indicating that ConAgra traders "bragged" about having driven the crude oil spot month price to $100 for the first time, the CFTC concluded that ConAgra had caused a price that was not true and bona fide to be reported on NYMEX. However, two of the five Commissioners were unconvinced that a $12 million penalty, assessed over two and one-half years after the offending conduct, was a proper exercise of the Commission's enforcement authority.
Commissioner Sommers' dissent focuses on her view that the $12 million penalty assessed to ConAgra is greater than that allowed under the Act and applicable Commission precedent. Commissioner Sommers did not dispute that the facts gave rise to a finding that ConAgra caused a non-bona fide price to be reported on the February 2008 crude oil contract. However, she contended that the $12 million penalty far exceeded the penalty allowed by the relevant provisions of the CEA. Section 6(c) of the CEA, as it was in effect at the time of the alleged wrongful conduct, would limit the penalty to the higher of $130,000 per violation (adjusted for inflation) or triple the monetary gain for each violation. Commissioner Sommers found no evidence to indicate that ConAgra actually profited from any of the alleged violations. Thus, in order to support the $12 million penalty at $130,000 per violation, ConAgra would have had to commit at least ninety-three separate violations of the Act. Because her review of the record found no support for that proposition, Commissioner Sommers dissented, finding that the Commission was ignoring the limitations placed on monetary penalties by Section 6(c) of the CEA.
Commissioner O'Malia also dissented from the Settlement Order, but on different grounds. While alluding to the relatively large dollar amount of the penalty imposed as part of the settlement, Commissioner O'Malia's dissent focused on the regulatory purpose of civil monetary penalties and the need to use them to send the market clear signals about prohibited conduct and to deter future violations with appropriate penalties. Commissioner O'Malia characterized the penalty amount as "extremely high" in relation to other disruptive trading practice settlements, and contended that the majority had shoehorned the facts to fit that particular allegation.
Commissioner O'Malia did not agree that the facts found supported the allegations of causing a non-bona fide price to be reported. Instead, ConAgra would more properly have been accused of attempted manipulation, and Commissioner O'Malia implied that a different settlement amount would have been more appropriate to send the market the message that attempts to manipulate the market will not be tolerated.
The $12 million penalty on ConAgra for causing a non-bona fide price to be reported for the NYMEX crude oil futures contract may be indicative of an aggressive enforcement approach to be taken by the CFTC. However, the fact that two Commissioners took issue (albeit from different angles) with the appropriateness of that penalty in light of the conduct may also indicate a lack of unanimity with regard to enforcement policy. As the Commission engages in an unprecedented spate of rulemakings to implement the Dodd-Frank Act, it will be instructive to understand the varying perspectives of the Commissioners and how those perspectives influence policymaking.