Lawyers for the US Commodity Futures Trading Commission have agreed to settle a high-profile futures manipulation case against the food companies Mondelez International and Kraft Heinz, less than four months after the regulator suffered a bruising loss in another case.
The derivatives industry had been following the action against the food companies as an important test of new enforcement powers conferred on the CFTC by the 2010 Dodd-Frank financial reform law. But no legal precedents would be created from a settlement.
The agency accused Mondelez and Kraft Foods of manipulating US wheat markets in a scheme involving grain futures and a flour mill in the state of Ohio. The trading at issue took place in 2011, when the two companies were both part of Kraft Foods before a spin-off. Kraft was later taken over by Heinz to form Kraft Heinz.
The CFTC’s enforcement attorneys and the companies “have reached a binding agreement, and all material terms were placed on the record” in the case, the court of Judge John Robert Blakey said in a filing on Monday. The agreement followed a settlement conference held on Friday in Chicago.
The price manipulation case was the CFTC’s second to have riveted the derivatives bar. The commission chose not to appeal a humbling loss in December to Chicago-based proprietary trading company DRW and its founder, Don Wilson, after accusing them at trial of rigging an interest-rate futures market.
Like DRW, the Kraft case involves a large market participant influencing futures prices through its heft. Unlike it, the CFTC charged the Kraft successor companies using authorities under the Dodd-Frank law that prohibited the use of a “deceptive or manipulative device” in trading.
“Most people would say it’s a much more powerful instrument for the government,” said Daniel Waldman, senior counsel at the law firm Arnold & Porter.
The terms of the proposed settlement agreement were not disclosed in court records. The judge directed the parties to submit a proposed consent order before a hearing on May 28, according to the court docket.
Kraft Foods, then the maker of Ritz crackers and Oreo cookies, deviated from its standard practice of using wheat futures to hedge commercial grain price exposure and effectively became a speculator that sought to make money trading futures, the CFTC’s complaint said.
The company bought “huge” quantities of Chicago’s soft red winter wheat futures — sizeable enough that it decreased the relative value of cash wheat that merchants were selling near its flour mill in Toledo, Ohio, the CFTC alleged. The strategy netted the company $5.4m, the agency said.
The food companies were also accused of violating limits on the size of their positions and engaging in “wash sales”, or taking two sides of the same trade.
A CFTC spokeswoman declined to comment. Mondelez, Kraft Heinz and their lawyers did not respond to requests for comment. Any settlement agreed in court by CFTC’s enforcement lawyers would require approval by commission members before it could be finalised, lawyers said.
The CFTC oversees US derivatives markets worth hundreds of trillions of dollars and built a reputation as one of the most aggressive watchdogs of financial markets in the decade after the financial crisis.
Mr Waldman, a former CFTC general counsel, said the derivatives bar was watching the Kraft case to see how expansive the agency’s powers under Dodd-Frank would prove to be.
“As with the DRW case, there are very few litigated manipulation cases and therefore not as much case law as you would think,” Mr Waldman said.
Mondelez, in an annual report filed in February, said it was awaiting a ruling on an earlier motion for summary judgment in the case. The company wrote, “we expect to bear any monetary penalties or other payments in connection with the CFTC action”.
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