US Commodity Futures Trading Commission v. Kraft Foods Group, Inc. et al

Filing 115

MEMORANDUM Opinion and Order Signed by the Honorable John Robert Blakey on 7/19/2016. Mailed notice(gel, )

UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
U.S. Commodity Futures
Trading Commission,
Plaintiff,

Case No. 15 C 2881

v.
Kraft Foods Group, Inc., and
Mondelēz Global LLC,

Judge John Robert Blakey

Defendants.
MEMORANDUM OPINION AND ORDER
This matter concerns the alleged misconduct of Defendant Kraft in
purchasing and selling wheat and wheat futures. On December 18, 2015, the Court
denied Defendants’ motion to dismiss Counts I and II. [87]. Currently before the
Court are two motions: (1) Defendants’ motion to certify issues for interlocutory
appeal and to stay proceedings [90]; and (2) Plaintiff’s motion to strike affirmative
defenses. [94], [95].

As explained in more detail below, Defendants’ motion is

denied, and Plaintiff’s motion is granted.
I.

Defendants’ Motion to Certify Issues for Interlocutory Appeal
Defendants ask that the Court certify two questions for appeal based upon

the Court’s Memorandum Opinion and Order denying Defendants’ motion to
dismiss. Those two questions are: (1) “whether a defendant’s large futures position,
coupled with an alleged intent to affect market prices but absent any other false
communications to the market, constitutes ‘false signaling’ market manipulation
under §§ 6(c)(1) or 9(a)(2) of the Commodity Exchange Act (“Act”) and corresponding

Regulations 180.1 and 180.2”; and (2) “whether, when a defendant’s purchases in
the futures market cause cash and futures market prices to converge, those
converging prices are ‘artificial’ for purposes of those same statutory provisions and
regulations.” [91] at 1.
To certify an order for interlocutory appeal under 28 U.S.C. § 1292(b), there
must be: (1) a question of law; and that question must be (2) controlling and (3)
contestable, and (4) promise to speed up the litigation.

Ahrenholz v. Board of

Trustees of University of Illinois, 219 F.3d 674, 675 (7th Cir. 2000). “Unless all
these criteria are satisfied, the district court may not and should not certify its
order to [the Seventh Circuit] for an immediate appeal under section 1992(b).” Id.
at 676. There also is a non-statutory requirement that the petition in this Court be
filed within a reasonable time after entry of the order sought to be appealed. Id. at
675. Interlocutory appeals are generally “frowned on in the federal judicial system,”
Sterk v. Redbox Automated Retail, LLC, 672 F.3d 535, 536 (7th Cir. 2012), and this
case is no exception. Both questions proposed by Defendants here fall short of the
Section 1292(b) requirements.
Before addressing each individual requirement, the Court first will examine
Defendants’ principle authority – Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d
857, 865 (7th Cir. 1995). In Sullivan & Long, the plaintiffs brought the following
claims: (1) wrongful price manipulation under Section 9(a)(2) of the Securities
Exchange Act of 1934; and (2) market manipulation under Section 10(b) of the same
act and its implementing regulation, Rule 10b-5. Their claims were based upon an

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alleged scheme by the defendant to manipulate the market through the
“unprecedented massive short selling” of common stock of LTV Corporation (“LTV”).
The Seventh Circuit described the factual background as follows: “LTV, a large steel
producer, entered bankruptcy in 1986.

In February of 1993, it announced a

proposed plan of reorganization under which existing stock in the company would
be replaced by new stock most of which would be issued to the bondholders and
other creditors of LTV.

Existing stockholders would receive warrants entitling

them to purchase some of the new stock. The plan contained an estimate that the
new shares would be worth only 3 or 4 cents. When the plan was announced, the
old shares were trading for more than 30 cents. There were 122 million old shares
outstanding. The plan was confirmed by the bankruptcy court on May 27, 1993,
and the court fixed June 29 as the last day on which the old shares would be
tradable.” Id. at 859.
Beginning before the date of confirmation, but greatly accelerating on that
date, the defendant sold short huge quantities of the old LTV shares. Id. It sold
short 170 million shares, far more than the 122 million old LTV shares then
outstanding. Id. A “short” sale is a sale at a priced fixed now for delivery later. A
trader “sells a stock short when he thinks the price of the stock is going to fall, so
that when the time for delivery arrives he can buy it at a lower price and pocket the
difference. If, for example, he sells the stock short at 50 cents a share, and the price
falls to 40 cents before he delivers the stock, he can buy the stock for 40 cents a
share, deliver it to the buyer, and have made a profit of 10 cents.” Id. The plaintiffs

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in Sullivan & Long were buyers on the other side of the short sales, who
presumably thought the price of the old shares would rise before plunging to 3 or 4
cents on June 29. Id. According to the court, “on May 27 it was certain, or virtually
so (nothing is really certain), that shares of common stock in LTV would be worth no
more than 4 cents in just a month.” Id. (emphasis in original). However, many of
the plaintiffs did not realize that certainty, because they did not thoroughly read
the plan of reorganization. Id. at 860.
Following its description of the relevant facts, the court went into an
extended economic analysis. Its focus was plaintiffs’ failure: (1) “to identify any
harm to the objectives of the securities laws under which they [had] sued”; and (2)
to identify a specific rule the defendant violated. As to the first concern, the court
cited to an article from the Journal of Finance and explained that the central
objective of the securities laws is “to prevent practices that impair the function of
stock markets in enabling people to buy and sell securities at prices that reflect
undistorted (though not necessarily accurate) estimates of the underlying economic
value of the securities traded. An efficient stock market is one in which stock prices
reflect all potentially available information that is relevant to the economic value of
the stocks.” Id. at 861. The court went on, “we would think twice before concluding
that these laws prohibit ‘schemes’ that accelerate rather than retard the
convergence between the price of a stock and its underlying economic value and
therefore promote rather than impair the ultimate goals of public regulation of the
securities markets. Objectively, from May 27 on old shares of LTV stock were worth

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only 3 or 4 cents, and the defendant's campaign of short selling helped move the
market price toward that true value.” Id. at 861-62 (emphasis added).
Without focusing on a specific cause of action, the court next addressed
plaintiffs’ claim that defendant’s short selling had created an “artificial price” in the
market for LTV stock. The plaintiffs had alleged that the defendant’s short sales
were manipulative in that they created artificial prices. Citing to the Supreme
Court case Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976), the Seventh
Circuit explained that artificial prices are those “that do not reflect underlying
conditions of supply and demand.” Id. at 862. However, the court then analyzed
the allegedly artificial prices without any overt discussion of supply and demand,
but instead based on the objectives of securities regulation. It found that the “only
artificial prices . . . were the prices at which LTV stock sold between the
confirmation of the plan and the expiration of the old stock. They were artificially
high because they so greatly exceeded the stock's true value, which was only 3 to 4
cents.” Id. at 862 (emphasis added). What the defendant did was not manipulation,
said the court, but arbitrage, eliminating disparities between price and value (or –
in Sullivan & Long – between today’s price and tomorrow’s price where the
difference cannot be attributed to any prospective change in value). Id.

Defendant

had thus promoted “the convergence of market and economic values that [the court
had] suggested was the central objective of securities regulation.” Id. at 862.
Based upon the foregoing economic analysis, the court concluded that
“nothing alleged in the complaint is the kind of conduct that the securities laws are

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aimed at combatting.

It is therefore not surprising that none of the plaintiffs’

specific legal contentions has merit.” Id. at 864. It is at this point in the opinion
that the court began its legal analysis of the plaintiffs’ specific claims.
Regarding the Section 9(a)(2) claim, the Court noted that Section 9(a)(2)
forbids “transactions in any security registered on a national securities exchange
creating actual or apparent active trading in such security or raising or depressing
the price of such security, for the purpose of inducing the purchase or sale of such
security by others.” 15 U.S.C. § 78i(a)(2). The court explained that the “essence of
the offense is creating ‘a false impression of supply or demand,’ for example through
wash sales, where parties fictitiously trade the same shares back and forth at
higher and higher prices to fool the market into thinking that there is a lot of
buying interest in the stock.” Id. at 864 (citing Sante Fe Industries, Inc. v. Green,
430 U.S. 462, 476 (1997)). The court found that there was no such misconduct in
Sullivan & Long because there were real buyers on the other side of all of
defendant’s short sale transactions – and thus there were no “wash sales.” Id. It
also noted that defendant made no representations, true or false, actual or implicit,
about how many shares it would sell short. Id. Thus, there had been no “deception”
by the defendant. Id. In sum the court based its Section 9(a)(2) conclusion upon
two specific bases:
(1) That defendant had not created “a false impression of supply or
demand,” for example through wash sales, because there were real
buyers on the other side of all of defendant’s short sales; and
(2) That defendant had made no representations, true or false, and
therefore there had been no deception.
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The court next addressed plaintiff’s claim under Rule 10b-5.

Rule 10b-5

requires “proof of either deception or manipulation.” Id. at 865 (emphasis added).
The court found that there had been no deception, ostensibly based upon the lack of
representations by defendant. Id. As to manipulation, the court explained that
most forms of manipulation “involve deception in one form or another.” Id. at 865
(citing Santa Fe, 430 U.S. at 476-77).

As to the defendant’s supposedly

manipulative practices that were not based upon deception, the court found that
they were not actually manipulative because they did not bring about artificial
prices for LTV stock. Id. As the court explained throughout its opinion, the prices
of LTV stock created by defendant’s short sales were not artificial because they
moved the price of the shares towards their “true” or “objective” value as
determined by the reorganization plan (as opposed to the defendant’s alleged
misconduct). Based on the foregoing, the court affirmed the district court’s decision
to dismiss plaintiffs’ claims.
Having discussed the Defendants’ principle piece of authority, the Court will
now explain why this matter is inappropriate for interlocutory review.
a. Question of Law
Proposed “Question Two” fails because it is not a question of law. [91] at 1. A
district court may only certify an issue under Section 1292(b) if it turns “on a pure
question of law, something the court of appeals could decide quickly and cleanly
without having to study the record.” Ahrenholz, 219 F.3d at 676-77. This normally

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means “a question of the meaning of a statutory or constitutional provision,
regulation, or common law doctrine.” Id. at 676.
Question Two is: “whether, when a defendant’s purchases in the futures
market cause cash and futures market prices to converge, those converging prices
are ‘artificial’ for purposes of those same statutory provisions and regulations.” [91]
at 1. As their basis for Question Two, the Defendants cite to Sullivan & Long, 47
F.3d at 865.

They argue that an “essential point” of Sullivan & Long is that

“conduct that causes convergence as the contract nears expiration and the delivery
period does not create artificial prices—it eliminates them.” Id. As such, because
the prices of cash wheat and futures wheat converged, the theory goes, Defendants
claim the price was not artificial.
Question Two is not a question of law because there is an essential factual
predicate that must be determined by the appellate court before making any
meaningful decision regarding convergence. In Sullivan & Long, the Court made
its price artificiality decision based upon the understanding that the “central
objective of securities regulation” is to “promote the convergence of market and
economic values.” Sullivan & Long, 47 F.3d at 862. The court had access to the
reorganization plan in the record before it, see Brief of Appellees, 1994 WL
16179722, at *9 (C.A.7) (citing to the Reorganization Plan), and the Complaint
before the district court had specifically explained that the shares of LTV would be
worth 3-4 cents at most during the post-conversion time period. Am. Comp. ¶¶ 20,
21. Thus, the court had a record before it establishing that the “objective” or “true”

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value of the LTV stock was 3-4 cents. Using that information, the court could and
did find that because defendants’ actions had moved the stock price in the direction
of the “objective” or “true” value of the stock, those actions had not created an
artificial price. Instead, they had helped the market operate more efficiently by
bringing the market value of the stock in line with its true value. The court was
able to reach its decision because it possessed a clear factual predicate (i.e., the true
value of the stock).
Because such information is missing here, any answer to Defendants’ second
question would necessarily involve a factual determination. In other words, there is
no evidence before the Court (nor any allegation in the Complaint assumed to be
true for the purposes of a motion to dismiss) that either the price of cash wheat or
the price of futures wheat moved towards their objectively true value.

To the

contrary, the Complaint alleges the opposite. Consequently, if the Seventh Circuit
were to make a decision regarding price artificiality based upon Sullivan & Long’s
guidance concerning the convergence of market prices with true prices, it would
need some factual predicate to know what those “true” prices were. Ultimately,
that is a factual determination (and a complex one at that) which remains pending
in the litigation. As such, the Defendants’ Question Two is not a pure question of
law.
Before moving on, the Court must anticipate one potential response to its
reasoning here. The Defendants’ argument could ostensibly be as follows: (1) a
convergence between cash and futures prices is the equivalent in the futures

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market of a stock’s movement towards its true value for purposes of the Sullivan &
Long price artificiality analysis; and (2) the appellate court would not need to make
any factual determination regarding convergence because convergence is clear from
the face of the complaint.

This argument fails on its first supposition, as it

stretches the holding in Sullivan & Long beyond its breaking point and the facts
presented.
As this Court has explained, Sullivan & Long states two propositions as to
price artificiality. First, it cites the Supreme Court for the proposition that artificial
prices are generally those that “do not reflect the underlying conditions of supply
and demand.” Sullivan & Long, 47 F.3d at 862 (citing Hochfelder, 425 U.S. at 199.
Second, it finds that the specific prices at issue before it were not artificial, because
they were moving in the direction of the “objective” or “true” value of the stock as
set by the reorganization plan. Id. It appears from the court’s opinion that it
reached this decision not on any overt analysis of supply and demand, but rather
upon the basis that there existed an objectively true price value in the record. Id.
In fact, the court indicates that prices set by supply and demand that were
inconsistent with the “true” value were actually artificial. According to the court,
the “only artificial prices” were the prices “at which LTV stock sold between the
confirmation of the plan and the expiration of the old stock.” Id.

They were

“artificially high because they so greatly exceeded the stock's true value, which was
only 3 to 4 cents.” Id. Yet these prices, though they exceeded the eventual postconversion “true” value of the stock, were presumably set by the natural supply and

10

demand of all traders active in the market during the time period prior to
conversion. Hence, the court in Sullivan & Long actually supports the proposition
that a price set by supply and demand can be an artificial price if, under certain
circumstances, it differs from some objectively “true” price. Id. Obviously, at this
stage, this Court is not reading the Sullivan & Long opinion as overturning the
generally accepted rule that artificial prices are those that do not reflect underlying
conditions of supply and demand. See Sullivan & Long, 47 F.3d at 862; Hershey v.
Pac. Inv. Mgmt. Co. LLC, 697 F. Supp. 2d 945, 955 (N.D. Ill. 2010); In re Soybean
Futures Litig., 892 F. Supp. 1025, 1044 (N.D. Ill. 1995); U.S. Commodity Futures
Trading Comm'n v. Wilson, 27 F. Supp. 3d 517, 533 (S.D.N.Y. 2014); Cargill, Inc. v.
Hardin, 452 F.2d 1154, 1163 (8th Cir. 1971).

Instead, this Court is simply

illustrating an additional way in which – under specific circumstances – a court
may need to evaluate price artificiality based upon a complete factual record and
the goals underlying securities regulations.
The Court declines to read Sullivan & Long, however, so broadly as to mean
that – where the price for wheat futures and cash wheat converged here – there can
never be an artificial price. This would fly in the face of the general rule that price
artificiality is based upon an analysis of supply and demand. Any such analysis in
this matter would involve factual determinations that would be improper at this
stage of the litigation.
The Court’s decision not to blindly impose an overly-broad reading of
Sullivan & Long on the specific set of facts here is supported by a comparison of the

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Securities Exchange Act of 1934 (at issue in Sullivan & Long) with the
Commodities Exchange Act (at issue here). The principle thrust of the Sullivan &
Long opinion was that the goal of securities regulation was to “promote the
convergence of market and economic values.” Because the defendant’s short selling
had brought the price of the LTV stock in line with the “objective” or “true” value of
the stock (3-4 cents), it did not violate the securities laws. According to the Court,
“the essential point” of the opinion was that “since the conduct in which [defendant]
engaged appears to have served rather than disserved the fundamental objectives of
the securities laws, we are not inclined to strain to find a violation of a specific
provision.” Id. at 865.
The Commodities Exchange Act, however, does not have the exact same
purpose as the securities laws addressed in Sullivan & Long. According to the
Eleventh Circuit, the CEA “is a remedial statute that serves the crucial purpose of
protecting the innocent individual investor—who may know little about the
intricacies and complexities of the commodities market—from being misled or
deceived.” CFTC v. R.J. Fitzgerald & Co., Inc., 310 F.3d 1321, 1329 (11th Cir. 2002).
This is supported by the language of the CEA itself, which lists its purpose as
follows:
It is the purpose of this chapter to serve the public interests described
in subsection (a) of this section [providing a means for managing and
assuming price risks, discovering prices, or disseminating pricing
information through trading in liquid, fair and financially secure
trading facilities] through a system of effective self-regulation of
trading facilities, clearing systems, market participants and market
professionals under the oversight of the Commission. To foster these
public interests, it is further the purpose of this chapter to deter and
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prevent price manipulation or any other disruptions to market
integrity; to ensure the financial integrity of all transactions subject to
this chapter and the avoidance of systemic risk; to protect all market
participants from fraudulent or other abusive sales practices and
misuses of customer assets; and to promote responsible innovation and
fair competition among boards of trade, other markets and market
participants. 7 U.S.C. § 5(b).
The purpose of the CEA, then, is broader than the purpose of the securities laws
examined by the court within the context of Sullivan & Long. This adds to the
Court’s hesitance to adopt the Defendants’ reading of Sullivan & Long’s fact-specific
holding to the matter currently at issue. For all of the foregoing reasons, the Court
finds that Defendants’ second question is not a pure question of law as required to
grant interlocutory appeal on that question.
b. Contestable
To prevail on their motion, Defendants must also show that the issues
addressed in their proposed questions are “contestable.”

Where, as here, a

controlling court has not “definitively decided an issue, the party requesting
certification must demonstrate that a ‘substantial likelihood’ exists that the district
court ruling will be reversed on appeal.” Padilla v. DISH Network L.L.C., No. 12CV-7350, 2014 WL 539746, at *5 (N.D. Ill. Feb. 11, 2014) (citing In re Brand Name
Prescription Drugs Antitrust Litigation, 878 F. Supp. 1078, 1081 (N.D. Ill. 1995)).
Defendants have not satisfied that test here.
i. Question One
As explained above, Defendants first proposed question is “whether a
defendant’s large futures position, coupled with an alleged intent to affect market
prices but absent any other false communications to the market, constitutes ‘false
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signaling’ market manipulation under §§ 6(c)(1) or 9(a)(2) of the Commodity
Exchange Act (“Act”) and corresponding Regulations 180.1 and 180.2.” In arguing
that this issue is contestable, Defendants claim that in “the closely analogous case
of Sullivan & Long, the court held that short selling is neither deceptive nor
manipulative absent other representations, actual or implicit, even where the
trader intends to depress the stock price.” Cite at 6. Defendants suggest that this
Court should have relied upon Sullivan & Long and found that some sort of false
communication or other misrepresentation is required to state a claim for market
manipulation under §§ 6(c)(1) or 9(a)(2).
Under Section 9(a)(2), manipulation has been described as: (1) the
“intentional exaction of a price determined by forces other than supply and
demand,” Frey v. Commodity Futures Trading Comm’n, 931 F.2d 1171, 1175 (7th
Cir. 1991), or (2) the “creation of an artificial price by planned action, whether by
one man or a group of men.” In re Soybean Futures Litig., 892 F. Supp. 1025, 1044
(N.D. Ill. 1995) (citing General Foods Corp. v. Brannan, 170 F.2d 220, 231 (7th Cir.
1948). Manipulation in practice, however, often “defies easy description” and thus
manipulation cases “tend to be characterized by fact specific, case-by-case analysis.”
In re Soybean Futures Litig., 892 F. Supp. 1025, 1044 (N.D. Ill. 1995); Frey, 931 F.2d
at 1175 (the “‘know it when you see it’ test may appear most useful”). Indeed,
“Congress’ decision to prohibit manipulation without defining it apparently arose
from the concern that clever manipulators would be able to evade any legislated list
of proscribed actions or elements of such a claim.” In re Soybean Futures Litig., 892

14

F. Supp. at 1044. Because the “methods and techniques of manipulation are limited
only by the ingenuity of man,” the test for manipulation must be a practical one
aiming to “discover whether conduct has been intentionally engaged in which has
resulted in a price which does not reflect basic forces of supply and demand.”
Premium Plus Partners, L.P. v. Davis, 653 F. Supp. 2d 855, 876 (N.D. Ill. 2009)
(citing Cargill v. Hardin, 452 F.2d 1154, 1163 (8th Cir. 1971)), aff’d sub nom.
Premium Plus Partners, L.P. v. Goldman, Sachs & Co., 648 F.3d 533 (7th Cir.
2011).
In light of the foregoing, courts have articulated a four part test for price
manipulation under Section 9(a)(2). Plaintiff must allege that: (1) the defendants
possessed the ability to influence prices; (2) an artificial price existed; (3) the
defendants caused the artificial price; and (4) the defendants specifically intended
to cause the artificial price. In re Dairy Farmers of America, Inc. Cheese Antitrust
Litigation, 801 F.3d 758, 764-65 (7th Cir. 2015).
Based upon such precedent, this Court rejects Defendants’ contention that
Sullivan & Long supposedly requires a fifth requirement to state a claim under
Section 9(a)(2), namely, some type of misrepresentation. Specifically, Defendants
misread Sullivan & Long and ignore the above cited case law describing the
requisite fact-specific approach. 1 First, Sullivan & Long explained that the essence
of the Section 9(a)(2) offense is “‘creating a false impression of supply or demand’ for

The Court again notes, as explained Section I(a) regarding “Question of Law,” that Sullivan & Long
was driven primarily by the facts presented and the purposes of the securities laws, and those facts
and purposes do not align conterminously with this case or the purposes of the CEA. As such, this
Court remains reluctant to adopt the Defendants’ broad reading of Sullivan & Long.

1

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example through wash sales.” Sullivan & Long, 47 F.3d at 864 (citing Santa Fe
Industries, Inc. v. Green, 430 U.S. 462, 476 (1977)). While the court confined its
analysis to wash sales, it did not hold or otherwise imply that the wash sales
example was the only way a party could create a false impression of supply or
demand. The court ultimately based its Section 9(a)(2) decision upon the following
facts: (1) that there had been no wash sales; (2) that no representations had been
made; and (3) that – more generally – defendant’s conduct helped achieve the goals
of the securities laws. As such, at the very least, there are two alternate ways to
plead a claim for price manipulation under Section 9(a)(2): (1) by alleging that
defendant created a false impression of supply and demand (through wash sales or
other means); or (2) by alleging that defendant made some sort of improper
representation.

This is in line with the case law cited earlier in this Opinion

explaining what types of conduct Section 9(a)(2) is intended to preclude, and what is
required to plead a claim under Section 9(a)(2). As the Court explained in detail in
its December 18, 2015 Memorandum Opinion and Order, [87], Plaintiff has
adequately plead each of those elements, and the Seventh Circuit opinion in
Sullivan & Long does nothing to alter that conclusion.
As to Plaintiff’s claim for manipulation under Section 6(c)(1), Defendants
advance the same argument as they did regarding Section 9(a)(2).

In essence,

Defendants claim that Sullivan & Long and other cases require some sort of “false
communication” in order to state a viable manipulation claim under Section 6(c)(1).
Their argument again overstates Sullivan & Long. The Seventh Circuit specifically

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explained that plaintiff’s Rule 10b-5 2 claim requires “proof of either deception or
manipulation.” Sullivan & Long, 47 F.3d at 865 (emphasis added). Based upon the
court’s analysis, it is clear that there is a class of manipulation claims that is not
based upon deception or misrepresentation. Id. The only reason Sullivan & Long
did not find such manipulation was because the record established that the
defendant’s conduct moved the price of the LTV stock towards its true or objective
value. This fact-specific finding does not apply to the case before this Court. The
Court cannot, based upon the clear language of Sullivan & Long, find that an
affirmative false communication or misrepresentation is somehow required to state
a manipulation claim under Section 6(c)(1).
This finding is supported by Judge Chang’s well-reasoned decision in the
Ploss class action matter brought against Defendants based upon the same dispute
at issue here. See Ploss v. Kraft Foods Grp., Inc., No. 15 C 2937, 2016 WL 3476678,
at *6 (N.D. Ill. June 27, 2016).

There, Judge Chang persuasively explained as

follows:
Sullivan, however, did not hold that a market manipulation claim in
the securities context always requires an explicit misrepresentation.
Although it is true that “most forms of manipulation involve deception
in one form or another,” Rule 10b-5 “requires proof of either deception
or manipulation.” 47 F.3d at 865 (emphasis added) (citations and
internal quotation marks omitted); see also Central Bank of Denver,
N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 177 (1994)
(“[Section] 10(b) . . . prohibits only the making of a material
misstatement (or omission) or the commission of a manipulative act.”
As the Court explained in its December 12, 2015 Memorandum Opinion and Order, [87], case law
interpreting Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 is generally
persuasive in interpreting Section 6(c)(1). This does not, however, dispel the significance of the
court’s focus upon the specific “purposes” of the securities laws in Sullivan & Long, especially when
the CEA does not share the exact same purposes.
2

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(emphasis added) (citation omitted)). This interpretation is consistent
with the text of Section 10(b), which plainly prohibits “any
manipulative or deceptive device.” 15 U.S.C. § 78j(b) (emphasis added).
Similarly, the corresponding regulation makes it unlawful “(a) To
employ any device, scheme, or artifice to defraud” or “(b) To make any
untrue statement of a material fact or to omit to state a material fact.”
17 C.F.R. 240.10b-5. The statute and regulations themselves thus
recognize a difference between two types of unlawful actions:
manipulative acts and explicit misrepresentations.
Based upon this Court’s analysis of the governing case law, including Sullivan &
Long, and its review of Judge Chang’s decision in Ploss, the Court cannot find that
there is a “substantial likelihood” its decision will be reversed. Thus, Question One
is not contestable under Ahrenholz and 28 U.S.C. § 1292(b).
ii. Question Two
Defendants’ second question is similarly unfit for immediate appeal because
it is not “contestable.”

Defendants argue that, again citing Sullivan & Long,

“conduct that causes convergence as the contract nears expiration and the delivery
period does not create artificial prices – it eliminates them.”

[91] at 8-9.

As

explained above in Section I(a), this is an unreasonable extrapolation of Sullivan &
Long’s fact-specific finding. There, the Court did not find that convergence between
cash wheat prices and futures wheat prices could never create an artificial price.
Nor did it find that market convergence generally could not create an artificial
price. The Court found that there was no artificial price when a pre-determined
“objective” or “true” value of a stock existed, and the actions of the defendant in that
case moved the price of the stock in that direction, thus aiding the objectives of the
securities laws to promote the convergence of economic and market value. Here,
there is no objectively correct price for either the cash wheat or the futures wheat
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established in the record. And the Court, as already explained, will not read the
fact-specific holding in Sullivan & Long to mean that convergence between cash
wheat and futures wheat can never create an artificial price. To do so would be to
improperly extend the reasoning in Sullivan & Long.

Thus, there is not a

substantial likelihood that the Court’s decision will be reversed.
c. Expedite Resolution of the Litigation
Question Two also fails the Ahrenholz test in that its resolution would not
“materially advance the ultimate termination of the litigation.” 28 U.S.C. § 1292(b).
Neither the “statutory language nor the case law requires that if the interlocutory
appeal should be decided in favor of the appellant the litigation will end then and
there, with no further proceedings in the district court.” Sterk v. Redbox Automated
Retail, LLC, 672 F.3d 535, 536 (7th Cir. 2012). What is required, however, is that
an immediate appeal will expedite rather than protract the resolution of the case.
Id. Here, the resolution of Defendants’ question would not expedite the resolution
of the litigation because it would not expedite Plaintiff’s claim for attempted
manipulation in Count II, nor would it do anything to resolve Counts III and IV.
Attempted manipulation under Sections 9(a)(2) and 6(c)(3) requires only
proof that Defendants: (1) intended to affect the market price; and (2) made some
overt act in furtherance of that intent. U.S. Commodity Futures Trading Comm’n
v. McGraw-Hill Cos., 507 F. Supp. 2d 45, 51 (D.D.C. 2007); CFTC v. Amaranth
Advisors, LLC, 554 F. Supp. 2d 523, 532 (S.D.N.Y. 2008); CFTC v. Johnson, 408 F.
Supp. 2d 259, 267 (S.D. Tex. 2005). Defendants’ proposed Question Two concerns

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only the existence of an artificial price, which is not an element of a claim for
attempted manipulation. Thus, the resolution of the second question would not
affect Plaintiff’s attempted manipulation claim in Count II. This is particularly
problematic for the Defendants, because the conduct underlying the attempted
manipulation claim (which will survive regardless of the potential appellate
outcome regarding Question Two) is the same conduct that forms the basis for
Plaintiff’s Section 6(c)(1) manipulation claim in Count I, and the perfected
manipulation part of Count II. Thus, a great deal of the discovery that may be
saved if Question Two were to be answered favorably for Defendants on appeal
would nonetheless have to be completed in relation to Plaintiff’s attempted
manipulation claim. Thus, the Court finds that the resolution of Question Two
would not materially advance the ultimate termination of litigation.
In light of the foregoing, the Court finds that this matter is inappropriate for
interlocutory appeal. The questions proposed by the Defendants do not satisfy the
requisite elements for appeal, and their motion [90] is therefore denied.
II.

Plaintiff’s Motion to Strike Affirmative Defenses
Also before the Court is Plaintiff’s motion to strike all five of the Defendants’

affirmative defenses. [94]. In their response brief, Defendants have conceded that
their first, second and fifth affirmative defenses are improper. Those affirmative
defenses are stricken with prejudice.

Further, at the March 10, 2016 status

hearing, the Defendants indicated that they would withdraw their third affirmative
defense. That affirmative defense is also stricken with prejudice. This leaves only

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affirmative defense four to address in this Opinion.

Affirmative Defense Four

states that Plaintiff’s claims relating to “Count IV must fail because of Plaintiff’s
unclean hands and are barred by the doctrine of Laches.” [88] at 27.
Under Rule 12(f), the Court may strike “any insufficient defense or any
redundant, immaterial, impertinent, or scandalous matter.” Fed. R. Civ. P. 12(f);
Delta Consulting Grp., Inc. v. R. Randle Constr., Inc., 554 F.3d 1133, 1141 (7th Cir.
2009). “Affirmative defenses will be stricken ‘only when they are insufficient on the
face of the pleadings.’” Williams v. Jader Fuel Co., 944 F.2d 1388, 1400 (7th Cir.
1991) (quoting Heller Fin. v. Midwhey Powder Co., 883 F.2d 1286, 1294 (7th Cir.
1989)). It is appropriate, however, “for the court to strike affirmative defenses that
add unnecessary clutter to a case.” Davis v. Elite Mortgage Servs., 592 F. Supp. 2d
1052, 1058 (N.D. Ill. 2009). Also, because affirmative defenses are “subject to the
pleading requirements of the Federal Rules of Civil Procedure, they must set forth a
‘short and plain statement’ of all the material elements of the defense asserted; bare
legal conclusions are not sufficient.” Id. This Court – along with many others in
this district – examines affirmative defenses by reference to Twombly’s
“plausibility” pleading standard. See, e.g., State Farm Fire & Cas. Co. v. Electrolux
Home Products, Inc., No. 10 C 7651, 2011 WL 133014 (N.D. Ill. Jan. 14, 2011);
Edwards v. Mack Trucks, Inc., 310 F.R.D. 382, 386 (N.D. Ill. 2015) (“While the
Seventh Circuit has not addressed whether the Twombly–Iqbal standard applies to
affirmative

defenses,

judges in this district

have

generally

found these

requirements to apply”). District courts have considerable discretion under Rule

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12(f). See Delta, 554 F.3d at 1141-42. Here, the Defendants allege the affirmative
defenses of unclean hands and laches in their fourth affirmative defense. The Court
will address each in turn.
a. Unclean Hands
While the Seventh Circuit has not definitively addressed whether the
affirmative defense of unclean hands may be asserted against a government agency
in an enforcement action to protect the public interest, the great weight of authority
shows that it may not. See CFTC v. U.S. Bank, N.A., No. 13-cv-2041, 2014 WL
6474183, at *35 (N.D. Iowa Nov. 19, 2014); U.S. v. Philip Morris, 300 F. Supp. 2d
61, 75 (D.D.C. 2004); U.S. v. Am. Elec. Power Serv., 218 F. Supp. 2d 931, 938 (S.D.
Ohio 2002); SEC v. Hayes, No. CA 3-90-1054-T, 1991 WL 236846, at *2 (N.D. Tex.
July 25, 1991); SEC v. Weil, 79-440 CIV-T-H, 1980 WL 1417, at *1 (M.D. Fla. Feb. 7,
1980); SEC v. Rivlin, No. 99-1455, 1999 WL 1455758, at *5 (D.D.C. Dec. 20, 1999);
SEC v. Follick, No. 00 Civ. 4385, 2002 WL 31833868, at *8 (S.D.N.Y. Dec. 18, 2002);
Sonowo v. United States, No. Civ. A. 03-1122-GMS, 2006 WL 3313799, at *3 (D. Del.
Nov. 13, 2006). These decisions are based upon the principle – articulated by the
Supreme Court – that though the United States is subject to the general principles
of equity, equitable principles “will not be applied to frustrate the purpose of [the
United States’] laws or to thwart public policy.” Pan–Am. Petroleum & Transp. Co.
v. United States, 273 U.S. 456, 506 (1927).
As such, courts frequently grant government motions to strike unclean hands
affirmative defenses. See, e.g., SEC v. Cuban, 798 F. Supp. 2d 783, 797 (N.D. Tex.

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2011); U.S. v. Cushman & Wakefield, Inc., 275 F. Supp. 2d 763, 774 (N.D. Tex.
2002); Rivlin, 1999 WL 1455758, at *5-7; Hayes, 1991 WL 236846, at *2; SEC v.
Lorin, No. 90 Civ. 7461 (PNL), 1991 WL 576895, at *2 (S.D.N.Y. June 18, 1991).
This Court is persuaded by the vast majority of case law that – as a matter of law –
the unclean hands defense is not available in actions brought by the government in
the public interest.

To the extent it alleges the affirmative defense of unclean

hands, affirmative defense four is stricken.
Defendants attempt to counter this holding by citing to two cases from the
Northern District of Indiana. Those cases, however, are readily distinguishable.
Although the court in United States v. Martell, 844 F. Supp. 454 (N.D. Ind. 1994),
initially declined to strike defendants’ equitable affirmative defenses (including
unclean hands), the court later struck them as a matter of law after the Seventh
Circuit ruled that they are not available against the government.

The Court

explained: “In his Answer, Martell also asserted a number of equitable defenses to
this CERCLA action. However, such defenses clearly have been foreclosed with the
Seventh Circuit's pronouncement in Town of Munster v. Sherwin–Williams Co., 27
F.3d 1268, 1270 (7th Cir.1994), that equitable defenses are insufficient and
unavailable as defenses to a liability claim under CERCLA section 107.
Accordingly, these defenses must be stricken as a matter of law from the Answer.”
U.S. v. Martell, 887 F. Supp. 1183, 1192 (N.D. Ind. 1995).
Likewise, United States v. Walerko Tool & Eng’g Corp., 784 F. Supp. 1385
(N.D. Ind. 1992), involved claims brought under section 107 of CERCLA, and a

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motion to strike equitable affirmative defenses as in the Martell case. Walerko’s
decision not to strike the equitable affirmative defenses occurred in 1992, prior to
Martell and the Seventh Circuit’s ruling in Town of Munster. Consequently, the
Walerko ruling is no longer good precedent, nor is it persuasive here. Therefore, an
unclean hands affirmative defense is unavailable here as a matter of law, and
affirmative defense four is stricken to the extent it relies upon unclean hands.
b. Laches
Laches “bars a party’s rights when the party has unreasonably delayed their
assertion so as to cause prejudice to the opposing party.” Hawxhurst v. Pettibone
Corp., 40 F.3d 175, 181 (7th Cir. 1994).

When the action brought by the

government, however, is “an enforcement action where the government asserts its
own rights, it falls within the general rule that ‘the United States is not subject to
the equitable defense of laches in enforcing its rights.’” S.E.C. v. Fisher, No. 07 C
4483, 2009 WL 780215, at *2 (N.D. Ill. Mar. 20, 2009) (quoting Martin v.
Consultants & Administrators, Inc., 966 F.2d 1078, 1090 (7th Cir.1992)). The cases
cited by the Defendants allowing the defense of laches are distinguishable in that
they involved, or were based upon cases analyzing, the government’s pursuit of a
private right of action. See NLRB v. P*I*E Nationwide, Inc., 894 F.2d 887 (7th Cir.
1990); Resolution Trust Corp. v. Vanderweele, 833 F. Supp. 1383 (N.D. Ind. 1993)
(citing FDIC v. Knostman, 966 F.2d 1133, 1139 (7th Cir.1992)). That is not the case
here. Precedent clearly shows that the general rule articulated above applies to

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enforcement actions such as this. Therefore, affirmative defense four is stricken to
the extent it relies on laches.
III.

Conclusion
As explained above, Defendants’ motion for interlocutory appeal and stay [90]

is denied, and Plaintiff’s motion to strike affirmative defenses, [94] [95], is granted.
All of Defendants’ affirmative defenses are hereby stricken. Pursuant to the Court’s
July 8, 2016 minute order, [112], the close of written discovery is set for September
8, 2016. This matter is set for a status hearing on at 9:45 a.m., on September 8,
2016 in Courtroom 1725. The parties should come prepared to set additional case
management dates.
IT IS SO ORDERED
Dated: July 19, 2016
John Robert Blakey
United States District Judge

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