Kraft Foods and Mondelez Global are accused of using wheat futures to manipulate the cash price of wheat in 2011 in a civil enforcement complaint filed by the CFTC. The complaint also charges them with violating speculative position limits and rules on noncompetitive, off-exchange futures transactions. The Commodities Future Trading Commission has had market manipulation, off-exchange transactions and position limits on its radar for some time now.
The amounts at issue in this lawsuit are probably substantially less than those that led to the substantial fines from the CFTC’s Libor or Forex investigations. Kraft and Mondelez are accused of making $5.4 million in profits from the manipulation of wheat. A Kraft representative has said that the lawsuit is not expected to have a material financial effect.
Kraft and Mondelez apparently didn’t like the high price of wheat in the summer of 2011 and purchased a large amount of wheat futures that they never expected to take delivery. Instead, their purchase of the wheat futures drove down wheat prices. The $90 million of wheat futures for delivery would have been a six-month supply of wheat for the food company. The 15 million bushels exceeded the storage capacity of Kraft at the time, which was $5 million.
The complaint details why Kraft’s purchase of such a large amount of futures didn’t make economic sense. Kraft wouldn’t have known where the wheat was going to be delivered and delivery along the Mississippi River isn’t advantageous to it as it increases the transportation costs back to the Kraft Mill. Kraft purchased CBOT wheat in September 2011 as a trial run and according to the CFTC, discovered that it wasn’t a feasible option.
Kraft’s cash market contracts also typically specify that it won’t take control of CBOT wheat because it is usually mixed with lower quality product. Before the scheme, Kraft last took delivery of CBOT wheat in 2002.
The companies are also accused of violating the Chicago Board of Trade’s 600-contract spot month position limit on wheat. Traders are only allowed to have more contracts if they have a valid hedge exemption or a bona fide need for the commodity. Kraft and Mondelez exceeded the speculative position limit on five dates in December 2011 by as much as 2,110 contracts. In the previous year, Kraft made an application to the CME for a hedge exemption and received it. It did not renew the exemption request until after it violated the position limits.
The noncompetitive futures trades happened over a much longer period. Kraft and Mondelez are accused of violating rules for noncompetitive, off-exchange futures trades in transactions between two separate corporate trading accounts from 2003 through January 2014. Kraft used two separate trading accounts so that it could keep track of its long and short positions. If it kept them in the same account, it’s internal computer software couldn’t keep track of the different contracts when they were in the same month in the same account.
Regulation 1.38(a) requires that noncompetitive, off-exchange futures trades take place in compliance with exchange rules. For Kraft, these rules were specified in CME Rule 538 an CBOT Rule 538. These rules permit exchanges for related positions only when they are negotiated between independent parties. Since Kraft controlled both accounts, this did not happen.
Kraft and Mondelez were one company while most of the conduct at issue happened. In 2012, Kraft split its business into Kraft Foods and Mondelez International. H.J. Heinz announced last week a $28 billion deal to purchase Kraft in a move orchestrated by Heinz owners 3G Capital and Berkshire Hathaway.
Although we may never know how the CFTC came to learn about Kraft’s alleged violations of the CFTC and CBOT rules, this is exactly the sort of information that the Dodd-Frank whistleblower program was designed to elicit from employees of offending companies. The manipulation and position limit violations took place in 2011, the same year that the CFTC opened its Whistleblower Office. The exchanges at issue also are tasked with reviewing surveillance of market transactions, so it is possible that no whistleblower was responsible.
For answers to questions about this and other aspects of the CFTC whistleblower program, as well as assistance reporting violations of the Commodity Exchange Act to the U.S Government, contact one of our whistleblower attorneys via our contact form or by calling 1-800-590-4116.