Kraft Foods Group, Inc. and Mondelez Global LLC agreed to settle the 2015 complaint by the Commodity Futures Trading Commission charging the firms with manipulating or attempting to manipulate the price of the December 2011 wheat futures contract traded on the Chicago Board of Trade and cash wheat by payment of a US $16 million fine. The CFTC also charged the firms with using or attempting to use a manipulative or deceptive device or contrivance in connection with the same futures contract; exceeding applicable speculative position limits in connection with their holding of December 2011 wheat futures; and engaging in wash sales in connection with trading both sides of exchange for physical transactions at various times from 2009 through 2014.
In agreeing to the settlement, the CFTC and the defendants acquiesced not to make any public statements about this case other than referencing the settlement agreement between the parties and public documents filed in the enforcement action. This agreement was formally codified in a consent order. However, the consent order, unlike other typical CFTC consent orders, also did not contain any factual findings or conclusions of law.
Concurrently with its announcement of the settlement, the CFTC issued a press release summarizing its complaint against the defendants including a statement that “[t]he $16 million penalty is approximately three times defendants’ alleged gain" and a comment by new Chairman Heath Tarbert regarding the harm of market manipulation to farmers (click here to access). The CFTC also released a “Statement of the Commission” (click here to access) and a joint statement by Commissioners Dan Berkovitz and Rostin Behnam (click here to access).
Subsequently, the defendants requested an “emergency status” hearing before the judge presiding over the matter – the Hon. John Robert Blakey of the US District Court for the Northern District of Illinois – alleging that the CFTC violated the terms of the consent order and should be held in contempt and/or subject to sanctions. The judge scheduled a hearing on these allegations for this morning (August 19).
According to the 2015 complaint filed by the CFTC in a federal court in Illinois, by November 29, 2011, the defendants 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.
Ultimately, the defendants’ actions caused the price of cash wheat to decline and the December wheat futures contract to increase, alleged the CFTC. According to the Commission, as a result of their activities, the companies realized US $5.4 million in profits. (Click here for additional background on all the CFTC’s allegations in the article “Manipulation Is Not Hedging Says CFTC in Federal Court Lawsuit Against Kraft Foods Group and Mondelez Global” in the April 5, 2015 edition of Bridging the Week.) In addition to agreeing to a monetary settlement, the defendants consented to entry of an injunction prohibiting them from future violations of the relevant provisions of law charged in the complaint. According to its terms, the consent agreement does not constitute “an agreement or a legal determination that [d]efendants have or have not violated any provision [of applicable law.”
In June 2015 defendants moved the federal court hearing this matter to dismiss the manipulation and use of a manipulative device or contrivances charges in the CFTC’s complaint. The federal court denied defendants’ motion in December 2015. (Click here for details in the article “Global Food Merchants’ Motion to Dismiss CFTC’s Enforcement Action for Alleged Manipulation Denied” in the December 20, 2015 edition of Bridging the Week.)
The terms of the settlement were initially agreed by the parties in March 2019; however, the parties have apparently been working on the precise language since that time with multiple delays in reaching a final accord. (Click here for background in the article “Where’s the CFTC v. Agricultural Food Giants’ Purported Manipulation Settlement?” in the June 9, 2019 edition of Bridging the Week.”)
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, the defendants in the CFTC’s enforcement action. 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. which owns Mondelez Global. Under the consent order, the US $16 million fine is to be paid by Mondelez Global, but both defendants are jointly and severally liable for the payment.
Legal Weeds: One of the charges included in the CFTC’s original complaint was that the defendants’ purported manipulation or attempted manipulation of the December 2011 wheat futures contract also constituted the defendants’ intentional or reckless use, or attempted use of “a manipulative device or artifice to defraud” in violation of the CFTC’s fraud-based anti-manipulation authority granted it under the Dodd-Frank Wall Street Reform and Consumer Protection Act. (Click hereto access Commodity Exchange Act § 6(c)(1), 7 U.S.C. § 9(1) and here to access CFTC Rule 180.1.)
The CFTC charged that the defendants violated this provision because they “intended to affect or acted recklessly with regards to affecting the prices of the December 2011 wheat futures contract and engaged in overt acts in furtherance of [their] intent.” However, this allegation was conclusory and did not note who specifically was defrauded by defendants’ purported conduct (other than the “market” generally) and how.
Defendants raised this point in their motion to dismiss. According to the court:
Defendants argue that the CFTC must allege “something suggesting that the market allegedly received a message from Kraft, in some particularly identified form, that was different from Kraft’s alleged true intent,” and that 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.”
In response, the CFTC claimed that the defendants acquired an extraordinarily large futures position in order to “create the false appearance of demand for wheat from the December 2011 futures contract”:
Thus, [the defendants] through its activities in the market, conveyed a false sense of demand, and the resulting prices in the market (both of cash wheat and of wheat futures) were based not solely on the actual supply and demand in the market, but rather were influenced by [the defendants’] false signals of demand.
Defendants argued that their very large long position “could have signaled many things” and therefore their trading could not be seen as necessarily deceptive or manipulative. However, the court concluded that, for purposes of considering a motion to dismiss, it is “confined at this stage to the Complaint itself.” As a result, the complaint adequately alleged that defendants’ conduct was meant to fraudulently “signal” the market and declined to grant defendants’ motion to dismiss.
Because of this settlement, it will be another day before the Commission’s view of what it must demonstrate to prove fraud under this still relatively new law provision will be impartially evaluated.
My View: The decision of the CFTC to acquiesce to a gag order applied to both defendants as well as itself and its agreement not to include express findings of fact and conclusions of law in the consent order is highly unusual. Although the amount of the fine and the injunction against future violations incurred by the defendants is onerous and sends a loud warning to the industry, the Commission’s agreement not to provide insight into its thinking either in the consent order or through official, public comments is counterproductive and undercuts any intended message.
The Commission explained its agreement by saying that the limitation on the Commission making certain public statements applied only to the CFTC itself and not individual commissioners “speaking in their personal capacities.” However, this view seems a stretch and clouds the significance of any potential comments.
Moreover, while it is not uncommon for CFTC staff when speaking at public forums to make clear they are speaking in their individual capacities, none of the CFTC press release, “Statement of the Commission,” or joint statement by Commissioners Berkovitz and Behnam noted that these statements were in any commissioner’s personal capacity. Absent such a disclaimer, it would appear that when the CFTC publishes statements it does so on behalf of the Commission. Indeed, companies, as well as government agencies, only speak through their leaders and staff, absent some carve-out. Thus, depending on the outcome of today’s hearing, it is not clear that even individual CFTC commissioners or officers may provide insight into the Commission’s thinking going forward.
Very, very strange.