United States District Court, N.D. Illinois, Eastern Division
U.S. Commodity Futures Trading Commission, Plaintiff,
Kraft Foods Group, Inc., and Mondel ē z Global LLC, Defendants
U.S. Commodity Futures Trading Commission, Plaintiff: Robert
Thomas Howell, III, Rosemary C. Hollinger, U.S. Commodity
Futures Trading Commission, Chicago, IL; Susan J. Gradman,
Commodity Futures Trading Commission, Chicago, IL; Jennifer
Ellen Smiley, Commodity Futures Trading Commission, Division
of Enforcement, Chicago, IL.
Ploss, Plaintiff, Pro se.
Kraft Foods Group, Inc., Mondelez Global LLC, Defendants:
Aaron Stephenson Furniss, PRO HAC VICE, Sutherland Asbill &
Brennan, LLP, Atlanta, GA; Dean Nicholas Panos, J. Kevin
McCall, Nicole Amie Allen, Thomas Edward Quinn, Jenner &
Block LLP, Chicago, IL; Gregory S. Kaufman, PRO HAC VICE,
Sutherland, Asbill & Brennan, Washington, DC; Ronald W.
Zdrojeski, PRO HAC VICE, Sutherland Asbill & Brennan LLP, New
York, NY; Stephen Thomas Tsai, PRO HAC VICE, Sutherland
Asbill & Brennan LLP, Washington, DC.
OPINION AND ORDER
Robert Blakey, United States District Judge.
matter concerns the alleged misconduct of Defendant Kraft in
purchasing and selling wheat and wheat futures. Plaintiff,
the Commodity Futures Trading Commission (" CFTC"
), brought this action pursuant to 7 U.S.C. § 13a-1, and
alleges four causes of action: (I) use of a manipulative or
deceptive device in connection with a contract for sale of a
commodity or future, in violation of Section 6(c)(1) of the
Commodities Exchange Act (the " Act" ), and CFTC
Regulation 180.1; (II) manipulation and attempted
manipulation of the price of cash wheat and wheat futures in
violation of Sections 9(a)(2) and 6(c)(3) of the Act, and
CFTC Regulation 180.2; (III) exceeding the speculative
position limit with regard to wheat futures in violation of
Sections 4a(b) and (e) of the Act, and CFTC Regulation 150.2;
and (IV) wash sales, fictitious sales and noncompetitive
trading in violation of Sections 4c(a)(1) and (2) of the Act,
and CFTC Regulation 1.38(a).  Cmplt. Defendants moved to
dismiss Counts I and II of the Complaint. . For the
reasons explained below, that motion is denied.
Defendants are Kraft Foods Group, Inc. (" Kraft" )
and Mondelē z Global LLC (" Mondelē z" ).
Kraft is one of North America's largest consumer packaged
food and beverage companies, and operated the snack food
business that is the subject of this Complaint.  at ¶
¶ 8, 10. During the time period covered by this
Complaint, Kraft Foods Inc. owned Kraft. Id. at
¶ 10. Through a spin-off agreement in which Kraft Foods
Inc. altered its corporate structure, Defendant Mondelē
z came to operate the snack food business formerly operated
by Kraft. Id. In the same spin-off, Kraft Foods Inc.
became Mondelē z International Inc., which now owns
Defendant Mondelē z Global. The Court's discussion
concerns primarily Kraft, not Mondelē z, because Kraft
operated the snack food business during the relevant time
is one of the largest domestic users of #2 Soft Red Winter
Wheat.  at ¶ 11. It is this type of wheat, and its
futures contracts, which are at issue in this matter. Kraft
consumes approximately 30 million bushels of wheat per year,
90 percent of which is milled into flour at its Toledo, Ohio
flour mill (the " Mill" ). Id. at ¶
¶ 11, 14. Kraft can store five million bushels of
unprocessed wheat at the Mill. Id. Kraft uses that
wheat in the production of snack foods, including Oreo, Ritz,
Triscuit, Wheat Thins, and Chips Ahoy! Id. at ¶
11. Kraft typically purchases wheat on a daily basis
throughout the year and strives to maintain a two-month
supply in its inventory. Id. at ¶ 14.
flour that it can use in snack food production, Kraft
requires wheat for milling that meets certain specifications
for baking and human consumption. Id. at ¶ 12.
These specifications include the permissible numbers of
insect damaged kernels and maximum allowable levels of
vomitoxin. Id. Vomitoxin is a type of mold that may
be produced in wheat infected by Fusarium head blight or
scab. Id. U.S. Food and Drug Administration guidance
requires a vomitoxin level below one part per million in
finished baked goods. Id. Vomitoxin levels in wheat
can be reduced through normal wheat milling processes and
cleaning technologies, or by blending in wheat with lower
vomitoxin levels. Id.
to Plaintiff, Kraft has two primary options for obtaining the
wheat it requires. Id. at ¶ 15. First, it can
buy the wheat directly from a grain producer or wholesaler in
the cash market. Id. Second, it can purchase wheat
futures contracts sold on the Chicago Board of Trade ("
CBOT" ). Id. at ¶ 17. When Kraft sources
through the cash market, it can negotiate wheat
specifications to ensure that the wheat meets its
requirements. Id. at ¶ 15. It can also
negotiate the delivery location and process. Id. at
¶ 16. For instance, Kraft ordinarily will source its
cash market wheat from the Toledo region -- which includes
Ohio, Indiana, Michigan and Ontario. Id. It is not
economical for Kraft to take delivery of wheat located
outside this region, including wheat housed along the
Mississippi River, because of significantly increased
shipping costs. Id. Costs of wheat housed outside of
the Toledo region are higher because Kraft would have to pay
for the wheat to be barged to a location where it could be
transferred to rail and then sent on to the Mill.
Id. It is not possible for Kraft to barge wheat
directly from locations down the Mississippi River to the
the second option, Kraft rarely takes delivery of wheat
purchased through futures contract for delivery via the CBOT
process. Id. at ¶ 22. A futures contract is a
standardized agreement between two parties to purchase or
sell a predetermined quantity of a commodity for delivery
during a future month, at a price determined at the
initiation of the contract. Id. at ¶ 18. For
instance, the buyer would agree to pay $50 dollars for 1
bushel of wheat on the day the contract is executed, and the
seller would agree to deliver that wheat on an agreed future
date. The trader who purchases the commodity is said to have
a " long" position, while the trader who sells the
commodity has a " short" position. Id.
Futures contracts may be settled in two ways: (1) by
delivering the actual commodity on the date specified; or (2)
by " offsetting" the contract by entering an equal
and opposite trade, effectively eliminating the original
position. Id. For example, a party would "
offset" a long contract for 500 bushels of wheat by
purchasing a short contract for 500 bushels.
Rules govern trading on the Chicago Board of Trade. Under
CBOT Rules, each wheat futures contract consists of 5,000
bushels of wheat and the contracts are set for delivery
during five different contract months each calendar year:
March, May, July, September, and December. Id. at
¶ 19. A futures seller delivers a CBOT wheat contract by
tendering a " shipping certificate" to the buyer of
the futures contract. Id. That certificate
represents an interest in wheat for load-out from a
CBOT-approved delivery facility. Id. Shipping
certificates may also be bought and sold between traders or
exchanged for futures positions. Id.
acquired via the futures market is typically of a lower
quality than wheat from the cash market. Id. at
¶ 20. For example, during the relevant time period, CBOT
rules specified that futures wheat from the exchange could
have vomitoxin levels of up to 4 parts per million, four
times the maximum amount recommended by the FDA for baked
goods. Id. at ¶ ¶ 12, 20. Further, parties
who take delivery of CBOT wheat cannot specify delivery
location or load out process, nor do they even know the
delivery locations for the contracts they have purchased
until they receive shipping certificates. Id. at
of the inability to control wheat quality or delivery
location, Kraft rarely takes delivery of wheat via the CBOT
delivery process and, prior to Fall 2011, had last done so in
2002. Id. at ¶ ¶ 22, 23. Instead, Kraft
normally uses the futures markets to hedge its cash wheat
purchases, taking long futures positions that roughly
correlate with its actual wheat needs, and then offsetting
these positions as it acquires physical wheat in the cash
market. Id. The idea behind this approach is to
secure a stable supply of wheat in case there are market
2011, cash wheat prices for #2 Soft Red Winter Wheat in the
Toledo region rose from $5.74 per bushel on June 30, 2011 to
$7.72 per bushel on August 26, 2011. Id. at ¶
24. Over the same time, the price of December 2011 CBOT wheat
futures rose from $6.57 1/2 to $7.97. Id. Even
though cash wheat prices were rising, there was wheat
available in the Toledo cash market for Kraft to satisfy its
alleges that, in response to these elevated cash prices,
Kraft deviated from its practice of using the futures markets
solely to hedge its cash wheat purchases. Id. at
¶ 25. Instead, Kraft attempted to leverage its status as
a large commercial hedger to lower the price of cash wheat.
Id. at ¶ 34. According to the Complaint, Kraft
" wheat procurement staff developed, and Kraft senior
management approved, a strategy to use its status as a
commercial hedger to acquire a huge long position in December
2011 wheat futures in order to induce sellers to believe that
Kraft would take delivery, load out, and use that wheat in
its Mill." Id. at ¶ 25. In developing that
strategy, Plaintiff's claim that Kraft intended that the
market would react to its enormous long position by
increasing the price of the December 2011 futures contract
and lowering the price of cash wheat available in the Toledo
region. Id. at ¶ 34.
to Plaintiff, Kraft executed a " trial run" of this
strategy in September 2011, taking delivery of 250,000
bushels of CBOT wheat, which constituted fifty total
certificates. Id. at ¶ 27. Thirty-one of the
fifty certificates were for wheat located on the Mississippi
River. Id. Kraft could not transport this wheat to
the Mill upriver via barge and, due to exchange rules, Kraft
could not require that the wheat be loaded directly on to
rail transport. Id. This meant that two separate
modes of transport were needed to get the wheat to the Mill.
Id. As a result of their test run, Plaintiff claims
that Kraft knew it could not assume that CBOT wheat would be
easily transportable to the Mill. Id. Around the
same time as the " trial run," Kraft submitted a
public comment to the CFTC requesting that the CBOT require
wheat delivery facilities be connected to rail service.
Id. at ¶ 28. Kraft's position was not
alleges that in October 2011, despite the results of its
trial run, Kraft wheat procurement staff proposed to Kraft
senior management a strategy of buying $90 million of
December 2011 wheat futures in order to depress the price of
cash wheat and inflate the price of futures wheat.
Id. at ¶ 29. In an October 20, 2011 email to
Kraft's Chief Financial Officer and other senior
management, the Kraft Senior Director of Global Procurement
explained the strategy as follows:
Given our proposal to 'take physical delivery in Dec'
of 15 mm bushels at 50 cents per bushel below the
commercially offered price results in the savings of $7mm.
In addition, there is a key market dynamic that is important
to understand: Once the market sees that Kraft is
'stopping' December wheat, we anticipate the futures
curve will begin to flatten, reducing the profitability of
wheat storage, thereby reducing the commercial wheat basis to
Kraft. We will then have the option of redelivering the wheat
acquired through the futures market. This will then quickly
reverse the negative cash flow impact. Id. at ¶
considering this proposal, Kraft senior management required
that the futures position not exceed $50 million by the end
of December, so Kraft procurement staff agreed to sell at
least $40 million of the proposed $90 million position by the
end of the month. Id. at ¶ 31. Kraft senior
management then approved the proposal to buy $90 million of
December 2011 wheat futures. Id.
according to Plaintiff, did not have a bona fide commercial
need for $90 million of wheat -- which would have amounted to
about 15 million bushels, or a six-month supply for the Mill.
Id. at ¶ 32. Kraft had never before possessed
that amount of wheat and its wheat storage facility at the
Mill, which could accommodate only 5 million bushels, was
already more than 80% full. Id. at ¶ ¶ 14,
32-33. To take delivery of 15 million additional bushels of
wheat, Kraft would have had to locate additional storage and
pay additional costs of approximately five cents per bushel
for nearly all of the 15 million bushels for up to six
months. Id. at ¶ 33. Kraft also would have had
to pay additional shipping costs for any wheat coming from
the Mississippi River area, including transport by rail and
barge. Id. at ¶ 27. In addition, in order to
use CBOT wheat to create flour that met its baking
specifications, Kraft would have had to buy and store higher
quality wheat from the cash market to blend with the
lower-quality CBOT wheat. Id. To do that, Kraft
would have needed to locate and pay storage costs for far in
excess of 15 million bushels. Id. Thus, according to
Plaintiff, Kraft did not really intend to take delivery of
the 15 million bushels of wheat. Id. at ¶ 34.
Kraft intended for the market to react to its huge long
position, which was an indication that Kraft's demand for
December wheat was being met through the futures market, by
lowering the price of cash wheat due to the lack of demand
from Kraft. Id. This would later allow Kraft to
obtain wheat in the cash market at lower prices. Id.
wheat procurement employees executed the strategy as planned,
ultimately accumulating 3,150 long December 2011 wheat
futures contracts by November 29, 2011, the first day of the
delivery period. Id at ¶ 35. Kraft's
position was equivalent to 15.75 million bushels, or
approximately $93.5 million of wheat. Id. at ¶
35. Kraft's position exceeded the speculative position
limit set by the CBOT of 600 contracts. Id. at
¶ 44. Specifically, on December 2, 5, 6, 7 and 8, Kraft
exceeded the position limits by 2,110, 2106, 1,666, 1,226 and
226 contracts, respectively. Id. at ¶ 49. As of
December 7, 2011, Kraft's long position constituted 87%
percent of the CBOT December 2011 wheat futures open
December 2, 2011 email between the Kraft Senior Director of
Global Procurement and Kraft senior management explained the
result of the strategy:
" As you may recall, we established a long Dec
Wheat/Short March Wheat spread at 35 cents (Mar premium to
Dec) for the purpose of taking delivery of CME wheat,
representing a $7MM saving over commercially sourced wheat.
Since Monday we have " stopped" 2.2MM bushels of
wheat at a cost of $13.2MM. As expected, the Dec/Mar spread
has narrowed to app[roximately] 11 cents resulting in a
marked to market gain of $3.6MM on our open spread position.
Meanwhile, with the narrowing spread, the cash wheat basis
has declined from cents to cents over Dec futures. As
we begin purchasing this cheaper basis commercial wheat, we
will unwind the existing spread position. If all goes
according to plan, we will still save $7MM on the commercial
cost of wheat vs where it was a few weeks ago as well as make
$2-3MM on reversing out of the Dec/Mar wheat spread."
Id. at ¶ 36.
Kraft obtained 1,320 shipping certificates for December 2011
CBOT wheat, which represented a total of 6.6 million bushels.
Id. at ¶ 38. However, the shipping certificates
that it received were all for wheat located in warehouses on
the Mississippi River, which would have cost $1.21 per bushel
to transport to the Mill. Id. at ¶ 37. Kraft
ultimately took delivery of just 660,000 bushels (132
contracts) of that wheat, which was less than 5% of the wheat
position it carried in early December. Id. After
prices in the cash market fell, Kraft resold 1188 of its
December 2011 shipping certificates for $35,725,074.
Id. On December 9, 2011, Kraft offset all of its 826
remaining long futures contracts (80% of the open interest),
which amounted to 78.3% of the trading volume that day.
Id. ¶ 39. The Plaintiff claims that it is
telling of Kraft's improper motive that it did not
purchase a similar quantity of wheat in the cash market as it
had previously purchased in the December 2011 futures market.
Id. According to Plaintiff, if Kraft had really
needed all of the $90 million in futures wheat for its
operations, it would have bought the same amount of wheat on
the cash market. Id. at ¶ 39.
claims that, as a result of Kraft's actions, the December
2011 wheat futures prices increased from $5.75 on November
28, 2011 to $6.12 on December 2, 2011. Id. at ¶
40. Cash wheat prices in Toledo declined from $6.16 per
bushel on December 2, 2011 to $5.86 per bushel on December 9,
2011. Id. These price shifts resulted in Kraft
pocketing over $5.4 million in profits. Id.
Rule 12(b)(6), the Court must construe the Complaint in the
light most favorable to the Plaintiff, accept as true all
well-pleaded facts and draw reasonable inferences in its
favor. Yeftich v. Navistar, Inc., 722 F.3d 911, 915
(7th Cir. 2013); Long v. Shorebank Dev. Corp., 182
F.3d 548, 554 (7th Cir. 1999). Statements of law, however,
need not be accepted as true. Yeftich, 722 F.3d at
915. Rule 12(b)(6) limits this Court's consideration to
" allegations set forth in the complaint itself,
documents that are attached to the complaint, documents that
are central to the complaint and are referred to in it, and
information that is properly subject to judicial
notice." Williamson v. Curran, 714 F.3d 432,
436 (7th Cir. 2013). To survive a motion under Rule 12(b)(6),
the Complaint must " state a claim to relief that is
plausible on its face." Yeftich, 722 F.3d at
915. " A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable
for the misconduct alleged." Id.
arguments concerning the adequacy of the evidence, or based
on unsupported factual assertions not found in the Complaint,
are not properly resolved on a motion to dismiss.
See Geinosky v. City of Chicago, 675 F.3d
743, 745 n. 1 (7th Cir. 2012) (Rule 12(b)(6) motion must be
decided only on the complaint itself and information that is
subject to proper judicial notice); Corbett v.
White, 00 C 4661, 2001 WL 1098054, at *3 (N.D. Ill.
Sept. 5, 2001) (" purpose of motion to dismiss is to
test the sufficiency of the complaint, not to decide its
merits" ). This is especially true where those arguments
are directly contradicted by allegations in the Complaint. To
the extent any of Defendants' arguments suffer from those
flaws, they will not be considered here.
the parties dispute whether Count I must be pled with the
particularity required of a fraud claim under Federal Rule of
Civil Procedure 9(b). See  at 10;  at 12-13.
That issue is addressed below in the section concerning Count
Overview of Relevant Law
issue in the present motion are Plaintiff's two
manipulation based causes of action, Counts I and II. Because
there are multiple sections of the Act that prohibit
manipulation, and the differences between those sections are
crucial to the Court's analysis, it is useful to first
examine the provisions themselves and their relation to one
another. The provisions at issue break down into two groups,
which also map the Complaint's organization: (1) Count I
alleges violations of the new prohibitions of manipulation
(which are Section 6(c)(1) and Regulation 180.1); and (2)
Count II alleges violations of the old prohibitions of
manipulation (which are Sections 9(a)(2) and 6(c)(3), along
with Regulation 180.2).
9(a)(2) has long been a part of the Act, and makes it a
violation for any " person to manipulate or attempt to
manipulate the price of any commodity in interstate commerce,
or for future delivery on or subject to the rules of any
registered entity, or to corner or attempt to corner any such
commodity." 7 U.S.C. § 13(a)(2).
6(c)(3)'s operative language also has long been part of
the Act, and that section makes it unlawful for " any
person, directly or indirectly, to manipulate or attempt to
manipulate the price of any swap or of any commodity in
interstate commerce, or for future delivery on or subject to
the rules of any registered entity." 7 U.S.C. §
9(3). While Section 6(c)(3) was created as part of the 2010
Dodd-Frank amendments to the Act, its operative language was
taken from the version of Section 6(c) existing before those
amendments. Regulation 180.2 was passed following the passage
of Dodd-Frank, and also mirrors the pre-amendment version of
6(c). See 17 C.F.R. § 180.2. Regulation 180.2
is titled " Prohibition on price manipulation," and
reads: it " shall be unlawful for any person, directly
or indirectly, to manipulate or attempt to manipulate the
price of any swap, or of any commodity in interstate
commerce, or for future delivery on or subject to the rules
of any registered entity." 17 C.F.R. § 180.2.
applying Regulation 180.2, the Commission has stated that
" it will be guided by the traditional four-part test
for manipulation that has developed in case law arising under
6(c) and 9(a)(2)." Final Rule: Prohibition on the
Employment, or Attempted Employment, of Manipulative and
Deceptive Devices and Prohibition on Price Manipulation,
76 Fed.Reg. 41,398, 41,407 (July 14, 2011). The four part
test mentioned by the Commission was developed in case law
construing Section 9(a)(2) and the pre Dodd-Frank version of
Section 6(c), see In re Soybean Futures
Litig., 892 F.Supp. 1025, 1045 (N.D. Ill. 1995), which
did not include the newly added Section 6(c)(1) language.
See 7 U.S.C. § 9 (2009).
manipulation provisions, Section 6(c)(1) and Regulation
180.1, were added to the Act through the 2010 Dodd-Frank
Amendments and subsequent CFTC regulation. See Pub.
L. No. 111-203, July 21, 2010, 124 Stat 1376; 17 C.F.R.
§ 180.1. Section 6(c)(1) makes it " unlawful for
any person, directly or indirectly, to use or employ, or
attempt to use or employ, in connection with any swap, or a
contract of sale of any commodity in interstate commerce, or
for future delivery on or subject to the rules of any
registered entity, any manipulative or deceptive device or
contrivance, in contravention of" Commission
regulations." 7 U.S.C. § 9(1). This new authority
was intended to " augment the Commission's existing
authority to prohibit fraud and manipulation" under
Section 9(a)(2). Final Rule, 76 Fed.Reg. at 41,401.
Regulation 180.1, enacted pursuant to Section 6(c)(1),
further explains that under Section 6(c)(1) it is unlawful
for " any person, directly or indirectly, in connections
with any contract for future delivery on or subject to the
rules of any registered entity, to intentionally or
recklessly: (1) use or employ or attempt to use or employ,
any manipulative device, scheme, or artifice to defraud; . .
. (3) engage, or attempt to engage, in any act ...