Kraft Foods Petitions Court to Dismiss CFTC's Charge That It Manipulated Wheat Futures and Cash Wheat Prices
Commentary by Bob Zwirb
Kraft Foods Group, Inc. ("Kraft") and Mondelēz Global LLC (collectively, the "Firms") filed a motion with the United States District Court for the Northern District of Illinois Eastern Division to dismiss a case stemming from the CFTC's complaint on April 1, 2015. The complaint alleged that the Firms manipulated the prices of cash wheat and wheat futures and attempted to "deceive the market."
In the motion to dismiss, the Firms argue that the CFTC failed to prove Kraft's intention to manipulate the wheat cash market by taking long positions in wheat futures. They argue that the CFTC's complaint failed to prove how or why the Firms deceived the market. Finally, the Firms argue that they did not seek to create an artificial price in the futures market in an attempt to reduce prices in the cash wheat market.
The Firms argue that Count I of the CFTC's complaint should be dismissed, since the CFTC's allegation that prices changed as a result of the Firms' bona fide transactions is insufficient to demonstrate that they deceived or manipulated the market. The Firms also asserted that the CFTC's argument fails to raise the possibility of misconduct above a "speculative level." According to the Firms, the CFTC's complaint omits any explanation as to why they would have engaged in unusual market conduct if they did not intend to take the delivery of wheat from futures contracts.
Additionally, the Firms argue that Count II of the CFTC's complaint, which claims that the Firms violated the CFTC's speculative position limits rule when they reduced their wheat futures position in December 2011, should be dismissed on the grounds that the Firms' actions were consistent with a "commodity end-user taking legitimate steps to acquire a necessary commodity in the market as it existed at the time." Therefore, the Firms state, the CFTC has no basis to assert that the Firms' actions were a direct attempt to manipulate the price of wheat in the future and cash markets.
Commentary
This case represents the first real test of the CFTC's new fraud-based anti-manipulation authority under Dodd-Frank and CFTC Rule 180.1, which was intended to help the CFTC to prevail by dispensing with the obligation to prove two key elements of traditional manipulation: intent and artificiality; i.e., that the respondent acted with specific intent, that it had the ability to influence the market price, and that it caused an artificial price. Even under this standard, however, some proof of fraudulent intent is still required. According to the CFTC, a manipulative device must be "intended to mislead investors by artificially affecting market activity," and Rule 180.1 is directed at misconduct that "deceives or defrauds" the market, elements of which the Memorandum claims were not set out adequately by the CFTC. 75 Fed. Reg. 67657, 67658-59 (Nov. 3, 2010).
Keep in mind that the CFTC has issued an interpretation in concordance with its pre-Dodd-Frank traditional manipulation standard, also alleged here, that makes it easier for the CFTC to prevail even under that standard. To wit: that an illegal effect on price can be "conclusively presumed" from the nature of the conduct in question and other factual circumstances without the benefit of "extensive economic analysis." 76 Fed. Reg. 41398, 41404 (July 2011). Whether that standard is good or fair is a different question than whether the CFTC has the legal authority to enforce that standard.
Previously, we opined on the importance of the business or economic rationale that Kraft might offer in response to the CFTC's allegations. That rationale, as articulated in this Memorandum in Support of Defendant's Motion to Dismiss the CFTC's Complaint, involves Kraft's efforts to purchase wheat at the best price during a period of "difficult market conditions," when prices in the futures and cash markets converged in late 2011. Pursuing that rationale, Kraft argues that the CFTC's "allegations amount to no more than a commodity end-user demonstrating its willingness to purchase wheat elsewhere if certain suppliers' prices are too high." The question of whether Kraft's explanation trumps the CFTC's allegations at this early stage is both legal and economic, but the fact that Kraft took advantage of this price convergence alone does not disprove the allegations, as Professor Pirrong explains.