Kraft Foods Group, Inc. and Mondelez Global LLC entered into a “binding agreement” with the Commodity Futures Trading Commission to settle the CFTC’s 2015 lawsuit against them which claimed that wheat futures trades the defendants entered into during November 2011 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, charged the CFTC, was a violation of federal law and the Commission’s rules prohibiting manipulation, attempted manipulation and fraud-based manipulation. The CFTC also charged the defendants with violating speculative position limits, as well noncompetitive trading in connection with multiple transfers of positions between different accounts that were executed as exchanges for related positions (instead of as transfer trades). (Click here for more background on the CFTC’s enforcement action 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.)
No terms of the settlement were announced. The parties are obligated to report back to the federal court in Chicago hearing this case for a status update on May 28, 2019.
Previously, the defendants sought to dismiss the CFTC’s charges related to traditional and the new fraud-based manipulation. The district court rejected the defendants’ motion. (Click here for details in the article “Global Food Merchant’s Motion to Dismiss CFTC’s Enforcement Action for Alleged Manipulation Denied” in the December 20, 2015 edition of Bridging the Week.) The court later declined to allow the defendants to appeal their loss (click here for details).
Legal Weeds: In December 2018, a US federal court in New York City ruled that the CFTC did not meet its burden of proof in its enforcement action against DRW Investments, LLC and Don Wilson, its chief executive officer. The CFTC had charged the defendants with manipulation and attempted manipulation of the IDEX USD Three-Month Interest Rate Swap Futures Contract from January 24 through August 12, 2011. Because of the timing of the alleged wrongful conduct, the CFTC did not charge defendants with violating the CFTC’s new fraud-based manipulation authority.
The court held that the defendants’ trading activities were legitimate and were consistent with their view that the futures contract’s design was flawed and that the futures instrument was inherently more valuable than a comparable over-the-counter contract. According to the court, “[i]t is not illegal to be smarter than your counterparties in a swap transaction, nor is it improper to understand a financial product better than the people who invented that product.” (Click here for background in the article “Being Smarter Than Your Counterparties Is Not Manipulation Rules Judge in CFTC Enforcement Action” in the December 9, 2019 edition of Bridging the Week.) The CFTC subsequently determined not to appeal this decision.
The reach of the CFTC’s fraud-based manipulation authority is currently being considered by a federal appeals court in California. Recently, a federal district court in California held that the CFTC cannot use the prohibition against persons engaging in any manipulative or deceptive device or contrivance in connection with the sale of any commodity in interstate commerce enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act to prosecute acts of purported fraud except in instances of fraud‑based market manipulation. The CFTC claimed in its appeals court argument that the district court misread and misapplied the plain language of the relevant statute. (Click here for details in the article “CFTC Asks Appeals Court to 'End the Confusion' Regarding Clarity of Law Regarding Actual Delivery and Fraud-Based Manipulation” in the March 17, 2019 edition of Bridging the Week.)