CFTC Charges Two Companies with Manipulating Wheat Futures and Cash Wheat Prices
Commentary by Bob Zwirb
The CFTC announced its filing of a civil enforcement complaint (the "Complaint") against Kraft Foods Group, Inc. and Mondelēz Global LLC (together, the "Companies") for the manipulation and attempted manipulation of wheat futures and cash wheat prices.
According to the Complaint, the Companies violated speculative position limits by holding wheat futures positions in excess of the speculative position limits established by the CFTC and the Chicago Board of Trade ("CBOT") without a valid hedge exemption or bona fide hedging need. The Companies also allegedly engaged in numerous noncompetitive trades in CBOT wheat.
The Complaint also alleges that in response to high cash wheat prices in late summer 2011, the Companies developed, approved and executed a strategy to buy $90 million of December 2011 wheat futures, which amounted to a six-month supply of wheat. The Complaint maintains that the Companies never intended to take delivery of the wheat and instead executed the strategy expecting that the market would react to their enormous long position by lowering cash wheat prices and strengthening the spread between December 2011 wheat and March 2012 wheat futures.
The price shifts occurred as expected and, according to the Complaint, generated over $5.4 million in profits from the Companies. In its continuing litigation against Kraft and Mondelēz, the CFTC said, it seeks a permanent injunction from futures violations of federal commodities laws, disgorgement and civil monetary penalties.
See: CFTC Complaint; CFTC Press Release.
Commentary
Five things stand out in this complaint. First, the respondents are well-known Fortune 500 companies and, unlike other companies situated similarly, do not appear to be settling. Second, notwithstanding the Enforcement Director's recent vow to litigate cases in-house, this important matter is being brought before a federal district court – perhaps because bringing it in-house would have necessitated borrowing an administrative law judge ("ALJ") from another agency (since the CFTC currently does not have any ALJs of its own) who might not be familiar with the nuances of CFTC law on manipulation, position limits and illegal trade practices. Third, although the CFTC is bringing charges via its traditional manipulation standard under CEA Section 9(a)(2) and CFTC Rule 180.2, it is relying primarily on its new fraud-based anti-manipulation authority under CEA Section 6(c) and CFTC Rule 180.1. The new standard makes it easier to prove manipulation, since it does away with two key elements of the traditional standard: specific intent and artificiality (of price). Fourth, this is not just a manipulation case, as serious as that alone can be; it also involves allegations of serious misconduct with respect to position limits and other trade practices. Finally, although the Enforcement Division has presented a seemingly compelling rationale for the alleged misconduct – i.e., to depress the price of wheat in the cash market and inflate the futures price of wheat – we have only heard the government's side of the story. It will be interesting to see what business or economic rationale the respondents offer in their answers to these charges.