The U.S. Commodity Futures Trading Commission (CFTC) filed a lawsuit in U.S. District Court in Northern Illinois on Wednesday, April 1st against Kraft foods and snack spinoff, Mondelez International, accusing the companies of price manipulation of the wheat market. The CFTC alleges that Kraft executives and a leading procurement director exchanged several emails outlining a plot to purchase 3 times the amount of “soft” wheat that it could physically store in order to drive down market prices of wheat futures. This specialty wheat is used by Mondelez to make snack cookies and crackers like Oreo and Ritz among others. According to the complaint, Kraft executives tried to “induce sellers to believe” Kraft planned to take delivery of loads of wheat, when in reality, according to the CFTC, they had no such intention. The alleged collusion between executives and middlemen regarding this transaction violates provisions of the 2010 Dodd-Frank financial market reforms. The $90 million purchase enabled an increase of price differences from the time of the purchase in December, 2011, and the price of wheat futures in March, 2012. This saved the company approximately $5.4 million.
While Kraft’s actions may have produced a relatively nominal cash savings in the world of billion-dollar global empires, this is one example where the principle and precedent of the matter is more important than the dollars. Aitan Goelman, CFTC director of enforcement states, “This case goes to the core of the CFTC’s mission: protecting market participants and the public from manipulation and abusive practices that undermine the integrity of the derivatives markets,” Aitan Goelman, the CFTC’s director of enforcement, said in a press release. It was recklessness in the derivatives market, especially the secondary mortgage sector that led to the greatest American financial crisis since the Great Depression.
Despite the strong words from Goelman, The CFTC has very little experience enforcing Dodd-Frank. This is only the second case to date that has incorporated the new CFTC authority over market manipulation given to it by the Dodd-Frank overhaul; so its verdict will be a likely cornerstone of legal precedent. In fact, even though Dodd-Frank is the regulatory framework for the financial industry, it is not settled law. Several Dodd-Frank provisions have been struck down in court over the past few years, including a similar ruling in 2012. One notable skeptic, University of Illinois economist Scott Irwin, does not think the CFTC’s case is very strong, stating that, “If you’re going to manipulate the market, I would think that they would do it in a bigger way than that.”
CNBC– Everett Rosenfeld
Reuters – Tom Polansek
Wall Street Journal – Aruna Viswanatha and Jacob Bunge