Lansing Trade Group, LLC agreed to pay US $6.55 million in aggregate fines to the Commodity Futures Trading Commission and the Chicago Board of Trade for the alleged attempted manipulation of the prices of certain wheat futures and options contracts from March 3 to 11, 2015. The CFTC also charged that Lansing aided and abetted an attempted manipulation of the cash price of yellow corn on February 19, 2015.
According to both the CFTC and CBOT, Lansing engaged in its attempted manipulation of wheat futures prices to benefit its own futures and options positions. The CFTC said that Lansing assisted in attempting to manipulate the price of corn as a favor to an unnamed third-party grain company.
Lansing is a commodity merchandising firm headquartered in Overland Park, Kansas, that trades grain and oilseeds, feed ingredients and energy products. (Click here for background on Lansing.)
The CFTC claimed that, after the close of wheat futures trading on March 3, Lansing traders learned that a market participant intended to register and tender for delivery against CBOT wheat futures a large number of shipping certificates for wheat, and they used this information to develop their manipulative strategy.
Later on March 3, the unnamed market participant registered and tendered the 250 wheat shipping certificates as expected. Because the relevant wheat was below milling grade and subject to a 20 cent per bushel discount compared to ordinary wheat, the market perceived a lack of demand, noted the CFTC. Afterward, wheat futures prices began to decline.
Subsequently, the Lansing traders increased their long wheat futures spread positions and their wheat call option positions, and purchased all 250 of the newly available wheat shipping certificates (at the time, Lansing already owned 134 shipping certificates). Lansing anticipated that wheat futures prices would rise and the value of its open positions would increase when it later canceled its wheat certificates for load-out because it would suggest there was demand for such certificates. To help effectuate their plans, Lansing traders contacted multiple market participants and a daily cash wheat newsletter to advise them of the firm's intention to cancel its wheat certificates for load-out; the newsletter agreed to publicize Lansing's intent. The firm canceled all its wheat certificates from March 6 to 11, according to the CBOT.
Neither the CFTC nor the CBOT settlement orders with Lansing indicated whether the firm’s attempted manipulation achieved its objective to raise prices.
Separately, on February 18, a Lansing trader allegedly bought and sold spot corn at below market prices at the request of an unnamed commodity broker on behalf of an unnamed grain company, charged the CFTC. The Lansing trader was told by the broker, said the CFTC, that the grain company wanted this reduced price “out there” in the market and that the transaction would be used by the grain company to spread false or misleading information about the direction of the cash market price for corn.
As part of its settlement with the CFTC, Lansing agreed to enhance its internal controls and procedures to help ensure compliance with relevant prohibitions against engaging in manipulative conduct. Lansing agreed to pay as a fine US $3.4 million to the CFTC and US $3.15 million to the CBOT to settle these matters.
Unrelatedly, Lansing also agreed to pay a fine of US $25,000 to resolve charges brought by the CBOT that, on September 21, 2016, it engaged in exchange of futures for physical transaction involving soybeans without the exchange of a related cash position demonstrating transfer of ownership. As a result, said the CBOT, the EFP was non-bona fide. CBOT claimed the purpose of the transaction was to transfer positions between two Lansing accounts.
Legal Weeds: The CBOT fine against Lansing was the largest fine issued by the CBOT since its merger with the Chicago Mercantile Exchange in July 2007. Likely, this was because staff and members of the relevant business conduct committee regard manipulative conduct as one of the most serious violations.
Although it is challenging to follow the facts of this matter from reviewing the cryptic language of the CFTC and CBOT orders, it appears that Lansing’s conduct was not atypical of its ordinary operations. According to the CFTC in a buried footnote,
As a wheat merchant, Lansing’s course of business includes the purchases, cancellations, and load-out of wheat for delivery. Irrespective of whether the cancellation and load-out of the [below milling grade] wheat was a legal, open-market transaction, Lansing nonetheless engaged in manipulation because it had the improper intent to move the prices of futures and options contracts being traded on the CBOT in Lansing’s favor through this conduct.
In general, to prove traditional manipulation, the CFTC must show that a person has the ability to influence the relevant prices, that the person specifically intended to create or effect a market price or prices that do not reflect legitimate forces of supply and demand, that an artificial price or prices existed, and that the person caused the artificial price or prices. To prove attempted manipulation, the CFTC only has to evidence an intent to affect marketprice and an overt act in furtherance of that intent. (Click here for a discussion of the elements to show traditional manipulation in the CFTC’s discussion of Commodity Exchange Act § 6(c)(3) and CFTC Rule 180.2 in the Federal Register Release Related to the Commission’s 2011 adoption of CFTC Rules 180.1 and 180.2. Click here for a discussion of attempted manipulation in In re Hohenberg Bros. Co. (CFTC 1977).)
However, as both the Commission and at least one federal court have noted previously, legitimate transactions + improper motive or intent = unlawful commodities manipulation. (Click here to access the CFTC’s view in In the Matter of Indian Farm Bureau Cooperative (CFTC 1982), and here for the opinion of a federal district court judge in New York in In re Amaranth Natural Gas Commodities Litigation (2008).)
How did the CFTC attempt to prove its case? Through recorded communications between Lansing Traders which showed “they had the understanding that the market did not expect the Wheat Certificates to be cancelled for load-out and that by doing so, they would lead market participants to believe there was a demand for the [below milling grade] wheat, which, in turn, would lead to an increase in the value of Lansing’s positions.”