Ploss v. Kraft Foods Group, Inc. et al
Filing
113
MEMORANDUM Opinion and Order signed by the Honorable Edmond E. Chang. For the reasons stated in the Opinion, Kraft's motion to dismiss [R. 76] the Consolidated Class Action Complaint is denied as to Count One (Section 9(a)(2) long wheat futures manipulation); Count Two (Section 6(c)(1) long wheat futures manipulation); Count Three (principal-agent liability for long wheat futures manipulation); Count Six (Sherman Act claim); and Count Seven (unjust enrichment). The Court grants Kraft' s motion as to Count Four (Section 9(a)(2) EFP wash trading manipulation) and Count Five (Section 6(c)(1) EFP wash trading manipulation), but these claims are denied without prejudice. Ploss may seek leave to amend the Complaint for Counts Four and F ive. Kraft must answer the Complaint and its surviving counts by 07/18/2016. The parties shall issue their first-round of written discovery requests no later than 07/22/ 2016. At the 07/14/2016 status hearing, the Court will set the remainder of the discovery schedule. Signed by the Honorable Edmond E. Chang on 6/27/2016:Emailed notice(slb, )
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
HARRY PLOSS, as Trustee for the
HARRY PLOSS TRUST DTD 8/16/1993, on
behalf of Plaintiff and all others similarly
situated,
Plaintiffs,
v.
KRAFT FOODS GROUP, INC. and
MONDELĒZ GLOBAL LLC,
Defendants.
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No. 15 C 2937
Judge Edmond E. Chang
MEMORANDUM OPINION AND ORDER
Harry Ploss brings suit on behalf of himself and a proposed class, alleging
that Kraft Food Group, Inc. and Mondelēz Global LLC manipulated the market by
maintaining a large position of wheat futures in an attempt to influence prices, and
not for any legitimate need for wheat (the “long wheat futures scheme”).1 (For
simplicity, the Opinion will refer to the Plaintiffs collectively as “Ploss” and to the
Defendants collectively as “Kraft.”) Ploss also alleges that Kraft manipulated the
market by engaging in unlawful wash trades and reporting them to the public as
legitimate transactions, in order to create an impression of greater market activity
(the “wash trading scheme”). Ploss brings seven total counts: (1) manipulation
under Section 9(a)(2) of the Commodity Exchange Act (CEA) for the long wheat
1The
Court has subject matter jurisdiction under 28 U.S.C. § 1331; 7 U.S.C. § 1 et
seq. (Commodities Exchange Act); and 15 U.S.C. § 2 (Sherman Antitrust Act). The Court
also has supplemental jurisdiction over Ploss’s state law unjust enrichment claim under 28
U.S.C. § 1367(a), because it forms the same case or controversy as the federal claims.
futures scheme; (2) manipulation under Section 6(c)(1) of the CEA for the long
wheat futures scheme; (3) principal-agent liability under Section 2(a)(1)(B) of the
CEA for the long wheat futures scheme; (4) manipulation under Section 9(a)(2) of
the CEA for the wash trading scheme; (5) manipulation under Section 6(c)(1) of
CEA for the wash trading scheme; (6) violation of the Sherman Antitrust Act; and
(7) unjust enrichment.
Kraft now moves to dismiss the entire Complaint, arguing that Ploss has not
stated any viable claim. For the reasons explained below, the Court denies the
motion in part as to the CEA, Sherman Act, and unjust enrichment claims related
to the long wheat futures scheme (Counts One, Two, Three, Six, and Seven). The
Court grants Kraft’s motion as to the CEA claims involving the wash trading
scheme (Counts Four and Five) and dismisses those claims without prejudice.
I. Background
For purposes of this motion, the Court accepts as true the allegations in the
Consolidated Class Action Complaint. Erickson v. Pardus, 551 U.S. 89, 94 (2007).
(For simplicity, the Court will refer to the operative Consolidated Class Action
Complaint as the “Complaint.”) Defendant Kraft Foods Group is one of the largest
food and beverage companies in North America. R. 71, Compl. ¶ 23.2 In 2012, Kraft
changed its corporate structure and became Mondelēz International, Inc., which in
turn owned Mondelēz Global LLC; the latter operates the North American snack
foods division. Id. ¶ 25. Kraft, which needs a lot of wheat for its food products,
2Citations
to the record are noted as “R.” followed by the docket number and the
page or paragraph number.
2
processes 90% of its wheat at its primary flour mill in Toledo, Ohio. Id. ¶ 51. In
order to save on transportation costs, Kraft buys most of its wheat—in particular,
No. 2 soft red winter wheat—from the local Toledo cash wheat market. Id. ¶¶ 1, 51,
55. The Toledo mill allegedly processes around 15 million bushels of wheat every 6
months, but is not large enough to store that much wheat. Id. ¶¶ 51, 85-86. In
November 2011, Kraft allegedly had around 4.2 million bushels of wheat stored at
its Toledo mill, representing more than 80% of its storage capacity of about 5
million bushels. Id. ¶ 51.
A. The Alleged “Long Wheat Futures Scheme”
In addition to buying wheat from the local Toledo cash market, Kraft is also
able to obtain wheat from the futures market on the Chicago Board of Trade
(CBOT). Id. ¶¶ 56-57. A futures contract is an agreement to buy or sell a commodity
at some point in the future, but at a predetermined price. Id. ¶ 27. The trader who
purchases a futures contract has a “long” position and is obligated to take delivery
and pay for the commodity at the future date. Id. ¶¶ 27-28. The trader who sells a
futures contract has a “short” position and is obligated to make delivery of the
commodity at the future date. Id. End-users of a commodity like Kraft often use
futures markets to hedge against the risk of increasing prices—in other words, “to
offset price risks incidental to commercial cash or spot operations … .” Id. ¶ 43.3
3For
example, if Kraft believes that the price of wheat will go up in 6 months
(perhaps there is an anticipated drought), it could purchase a long futures contract now for
delivery in 6 months, so that it can obtain wheat at a price that will be lower than the
market price in 6 months. (Conversely, if a wheat seller believes that prices will go down in
6 months, she can obtain a short position, betting that she will sell at a price higher than
the market price in 6 months.)
3
Because Kraft is a commercial end-user of wheat, it can apply for an exemption that
releases it from the position limits that bind speculators (who, in contrast, have no
use for the underlying commodity). Id.4 Speculators are subject to a limit of 600
contracts (long or short) a month, while a hedge exemption allows commercial endusers like Kraft to maintain 5,460 long positions and 6,660 short positions in wheat.
Id. ¶¶ 2, 40, 44, 57-59; R. 77-1, 10/22/10 Hedge Exemption Letter. Traders must
apply for exemptions to CBOT’s Market Regulation Department, which approves or
denies the request. Id. ¶ 44. Hedge exemptions expire one year from the date of
issuance and must be renewed. Id. Ploss alleges that Kraft applied for an exemption
limit in October 2010 and was approved on December 1, 2010. Id. ¶ 57. That
exemption expired a year later on December 1, 2011, but Kraft did not submit a
renewal application until December 28, 2011. Id. ¶ 44, 59. So from December 2 to at
least December 28,5 Kraft did not have a hedge exemption and was bound by the
600-contract limit that applied to speculators. Id.
CBOT wheat futures contracts expire in March, May, July, September, and
December of each year, and the last trade date for a contract month is the business
day before the 15th calendar day of that month. Id. ¶ 33. By the date of expiration, a
party must close out, or satisfy its futures obligations. Id. ¶¶ 30, 33. One way that
4“Speculators
buy and sell futures contracts with the objective of profiting from
commodity price fluctuations,” rather than to hedge against risk. R. 77, Defs.’ Br. at 3.
Speculation is legal, but the CFTC imposes position limits on speculators in order “[t]o
protect futures markets from excessive speculation that can cause unreasonable or
unwarranted
price
fluctuations.”
See
http://www.cftc.gov/industryoversight/
marketsurveillance/speculativelimits/index.htm.
5Ploss does not allege when Kraft’s second hedge exemption was approved;
presumably, Kraft’s expired exemption period extended beyond December 28, 2011, which
was the date of its renewal application (and not the effective date of its exemption).
4
traders meet their obligation is by physically accepting or delivering the goods. Id.
¶ 28. A seller makes a delivery by issuing a “shipping certificate,” which is a
commitment by a facility to deliver the commodity to the buyer. Id. ¶ 46. Shipping
certificates themselves can also be traded or exchanged for futures positions. Id.
¶ 47. But the buyer, or holder of the shipping certificate, cannot specify the delivery
location of the commodity. Id.
In reality, however, physical deliveries from futures trades are rare. Id.
¶¶ 29-30. Instead, traders often close their positions by making an offsetting
trade—for example, a buyer of one futures contract (a long position) can liquidate
her position by selling one futures contract (a short position), and vice versa. Id.
“The difference between the initial purchase price and the sale price represents the
realized profit or loss for the trader.” Id. ¶ 30. The total number of futures contracts
that a trader has entered into but has not yet liquidated by an offsetting transaction
is called the “open interest.” Id. ¶ 31.
The Complaint alleges that in the summer and fall of 2011, Kraft “radically”
changed its wheat sourcing strategy when the cash price of No. 2 soft red winter
wheat in the Toledo market rose from $5.74 to $7.72 per bushel. Id. ¶ 55. During
that same time, the price of December 2011 wheat futures contracts increased from
$6.57½ to $7.97. Id. ¶ 55. Even though there was enough wheat in the Toledo
market to satisfy Kraft’s needs, senior management allegedly devised “a strategy to
use its status as a commercial hedger to acquire an enormous long position in
December 2011 wheat futures contract[s],” purchasing $90 million worth of
5
December 2011 contracts. Id. ¶¶ 55-56, 82. The purpose of obtaining this long
position was “to induce sellers to believe that Kraft would in fact take delivery, load
out, and use that wheat in its mill in Toledo.” Id. ¶ 56. In other words, by signaling
to the market that Kraft was satisfying its need for wheat from the futures market
rather than the cash market, Kraft caused the wheat price in the Toledo cash
market to drop, because that cash market now believed that there was greater
supply than demand. Id. ¶¶ 55-56, 82. On October 20, 2011, Kraft’s Senior Director
of Global Procurement allegedly wrote to the Chief Financial Officer:
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. ¶ 83. Ploss alleges that Kraft’s scheme worked: the price of wheat in the Toledo
market indeed dropped, and Kraft was able to obtain wheat in the cash market at
more favorable prices. Id. ¶¶ 82-83, 87, 89.
Ploss alleges that the $90 million long position was not a bona-fide futures
trade because Kraft never intended to use futures market wheat to meet its
commercial needs. Id. ¶¶ 51, 81. Before its 2011 purchase, Kraft had not accepted
delivery of CBOT wheat since 2002. Id. ¶ 3. Buying wheat on the futures market
was inconvenient and uneconomical (compared to buying wheat in Toledo); for one,
6
Kraft could not choose the delivery location of futures market wheat and would
have incurred substantial transportation and storage costs. Id. When Kraft
attempted a test run in September 2011 of accepting wheat from the futures
market, it concluded that this strategy was not viable because of the additional
costs. Id. ¶¶ 80-81. Another problem with futures market wheat was that it was of
lower quality, because it could have vomitoxin (fungus) levels of up to 4 parts per
million, while wheat on the cash market had vomitoxin levels of only 2 parts per
million. Id. ¶ 51. So to use CBOT wheat, Kraft would have had to buy additional
higher-quality cash wheat for mixing so that the CBOT wheat would meet baking
specifications. Id. ¶ 86. In fact, Kraft’s cash contracts typically specified that it
would not accept wheat from the futures markets because of the lower quality. Id.
¶ 51. In addition, Ploss alleges that the lack of storage capacity for $90 million
worth of wheat—or a 6-month supply of 15 million bushels—shows that Kraft did
not have a real commercial need for that much wheat. Id. ¶ 85. In November 2011,
Kraft already had 4.2 million bushels of wheat at its Toledo facility, occupying 80%
of its storage capacity of around 5 million bushels. Id. ¶ 86. Taking delivery of 15
million additional bushels would have meant paying to store almost all of it at an
additional cost of 5 cents a bushel. Id.
Because purchasing wheat from the CBOT market was practically and
financially unsound, Ploss alleges that there was only one reason for taking a long
position in December 2011 wheat contracts: to affect the market price of wheat in
ways that would benefit Kraft. Id. ¶ 87. In addition to profiting from the lower
7
prices of Toledo wheat, as detailed above, Kraft also allegedly intended to “inflate
the futures price of wheat” and benefit from the price differential between
December and March wheat. Id. ¶ 82. In December, Kraft held 3,150 long December
2011 wheat futures contracts and 87% of the December 2011 open interest in wheat,
causing these futures prices to be artificially high. Id. ¶¶ 49, 65, 82. Kraft
simultaneously obtained a “huge” short position in March 2012 wheat contracts. Id.
¶ 1. This is called a “bull spread position,” where the holder is long in nearby
futures contracts and short in deferred futures contracts. Id. ¶¶ 35-36, 61. Because
Kraft’s long position caused December 2011 prices to rise artificially, Ploss alleges
that the spread between the December and March futures contract narrowed; in
other words, Kraft’s large long position “caused the market to shift from contango to
backwardation … as the prices of December 2011 CBOT wheat futures contracts
became more expensive than those for March 2012.” Id. ¶ 168.6 This price
6Ploss
does not define “contango” or “backwardation” or explain the mechanics of
how the price differential between December-March contracts actually narrowed.
Kraft cites the CFTC glossary, Defs.’ Br. at 4, which defines backwardation as a
“market situation in which futures prices are progressively lower in the distant delivery
months.” See CFTC Dictionary, available at http://www.cftc.gov/ConsumerProtection/
EducationCenter/CFTCGlossary/index.htm. It is the opposite of contango, where “prices in
succeeding delivery months are progressively higher than in the nearest delivery month.”
Id. Contango represents the ordinary pattern in the futures market; “typically, the further
in the future the delivery date, the greater the purchase price of the futures contract,”
because far-off prices reflect additional costs for “storage, insurance, financing, and other
expenses the producer incurs as the commodity awaits delivery.” In re Crude Oil
Commodity Futures Litig., 913 F. Supp. 2d 41, 48 (S.D.N.Y. 2012). Backwardation—or
higher prices in the near term—can happen when “there is a shortage or tightness in
immediate supply,” so “traders are willing to pay a higher premium for near-term supply
relative to long-term supply.” Id. Thus, Ploss seems to be alleging that there was originally
a normal gap between December and March futures prices, when the former was cheaper
and the latter was more expensive. But Kraft’s large long position caused December
contracts to artificially increase, thus closing the price gap between the December and
March contracts.
8
differential allegedly led to even larger profits. Id. ¶¶ 49, 61, 87.7 Kraft’s Senior
Director of Global Procurement wrote another email that month to explain its
spread 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 +80
cents to +50 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. ¶ 89.
Out of the 15 million bushels of wheat (equal to around 3,000 shipping
certificates) that it held in futures contracts, Kraft ultimately obtained only 1,320
shipping certificates of December 2011 wheat, or 6.6 million bushels. Id. ¶¶ 86, 91.
7Ploss
does not detail the mechanics of spread trading, but the general gist is that a
trader can profit from changes in “spreads,” or price differentials between two contracts
with different expiration dates. Compl. ¶ 26. Suppose a trader goes long on a December
contract at $700 and goes short on a March contract at $680. Suppose that as December
nears, the December contract rises to $710, and the March contract rises (at a slower pace)
to $685. The trader now offsets the positions by placing a trade that is equal and opposite to
her original trades. As to the December contract, the trader gains $10 (buys the contract for
$700 and sells the contract at $710). As for the March contract, the trader loses $5 (buys
the contract for $685 and sells for $680). Overall, the trader still gains $5.
By using a spread, a trader can profit even when the price of the futures contracts
drops. This is because traders profit from the widening or narrowing of the spread, and not
necessarily from the changes in the individual contract prices. Here, Ploss alleges that
because Kraft’s large long December 2011 position caused the December 2011 price to
artificially rise compared to the price of the March 2012 contract, Kraft was able to profit
from its December/March spread. Id. ¶¶ 66, 68. At this stage of the case, the Court is not
assessing the financial viability of this trading strategy; rather, it must accept these
allegations as true.
9
But Kraft only loaded out 660,000 bushels (132 contracts), which was less than 5%
of its original December 2011 wheat position; it sold the remaining 1,188 shipping
certificates for $35,725,074. Id. ¶ 91. And on December 9, Kraft offset its remaining
826 contracts of December 2011 wheat, amounting to 78.3% of the trading volume
that day. Id. ¶ 92. Ploss alleges that Kraft’s failure to purchase a similar quantity of
wheat in the cash market demonstrated that it did not actually need this wheat for
the Toledo mill. Id. In total, Ploss alleges that Kraft made more than $5.4 million in
trading profits and savings from this strategy of manipulating prices in the Toledo
wheat market and on the CBOT. Id. ¶ 78.
B. The Alleged “Exchange for Physical Wash Trading Scheme”
In addition to the alleged long wheat futures scheme, Ploss also alleges that
Kraft engaged in unlawful wash trades in violation of the CEA and caused
inaccurate trading information to be published to the wheat market. The Complaint
does not explicitly define a wash trade, but it suggests that they occur when the
same investor simultaneously buys and sells a financial instrument in order to give
the false appearance of higher trading volume. Id. ¶¶ 121-44.
More specifically, Ploss alleges that from 2003 to 2014, Kraft made non bonafide “exchange for physical” (EFP) transactions, where parties trade physical
commodities for an offsetting futures contract. Id. ¶¶ 45, 131. These transactions
happen off the Exchange and give the parties the option to change the delivery
period and location. Id. ¶ 122. Chicago Mercantile Exchange (CME) and CBOT
Rules regulate EFPs and require them to be bona-fide trades between separate
10
accounts under independent control. Id. ¶¶ 125-26. Parties to an EFP transaction
must document the trade and report certain information to the Exchange, such as
the volume of the physical commodity traded. Id. ¶¶ 127-29. This volume
information (but not price information) is then published daily on CME Group’s
website. Id. Ploss alleges that EFP volume “is an important element in the price
discovery function of the market, by reflecting supply and demand factors” and is
considered by traders when deciding whether or not to transact. Id. ¶ 130.
Ploss alleges that Kraft’s off-exchange EFP transactions between 2003 and
2013 were unlawful because they were between two of Kraft’s own accounts in
violation of Exchange rules. Id. ¶¶ 131-33. These were allegedly not bona fide
because Kraft was the counterparty to its own trades, and there was no physical
exchange of wheat. Id. Yet Kraft reported the trading volumes to CBOT, which in
turn reported them to the broader wheat market, allegedly because Kraft hoped to
drum up trading volume. Id. ¶ 134. Thus, “by reporting these EFP transactions,
Kraft duped the CBOT wheat market into believing that a bona fide ownership
transfer of CBOT wheat futures had occurred” and made the market believe that
there was a greater demand for wheat than there really was. Id. In turn, this
“caused the prices of CBOT wheat futures contracts to be artificial by injecting
artificial supply and fundamentals used to price these contracts.” Id. ¶¶ 134-36.
C. Claims in This Case
Plaintiff Harry Ploss (as the trustee of the Harry Ploss Trust) originally
brought this action in April 2015, R. 1, but later amended his individual complaint
11
into the Consolidated Class Action Complaint at issue in this motion, R. 71, Compl.
The Consolidated Class Action Complaint includes seven other plaintiffs: Richard
Dennis, Budiack Inc., Joseph Caprino, Kevin Brown, White Oak Fund LP, Henrik
Christensen, and Robert Wallace. Compl. ¶¶ 15-22. All of the Plaintiffs transacted
in December 2011 and March 2012 wheat futures and allege that they lost money
because of the artificial prices caused by Kraft’s unlawful December 2011 wheat
futures position—that is, the Plaintiffs allege that they either bought at a higher
price or sold at a lower price than they would have without Kraft’s allegedly
manipulative actions. Id.
Ploss, on behalf of all of the Plaintiffs, brings seven counts against Kraft: (1)
price manipulation under Section 9(a)(2) of the CEA for the long wheat futures
scheme, 7 U.S.C. § 13(a)(2); (2) use of a manipulative device under Section 6(c)(1) of
the CEA for the long wheat futures scheme, 7 U.S.C. § 9(1); (3) principal liability
under Section 2(a)(1)(B) of the CEA for the manipulative acts of its agents in
connection with the long wheat futures scheme, 7 U.S.C. § 2(a)(1)(B); (4) price
manipulation under Section 9(a)(2) of the CEA for the EFP wash trading scheme, 7
U.S.C. § 13(a)(2); (5) use of a manipulative device under Section 6(c)(1) of the CEA
for the EFP wash trading scheme, 7 U.S.C. § 9(1); (6) violation of the Sherman
Antitrust Act, 15 U.S.C. § 2; and (7) state-law unjust enrichment. Id. ¶¶ 102-76.
Kraft now moves to dismiss each of these claims for failure to state a claim. R. 76,
Defs.’ Mot. Dismiss.
12
Relatedly, at the same time that Ploss filed suit in April 2015, the
Commodity Futures Trading Commission brought a parallel enforcement action
against Defendants Kraft and Mondelēz, with substantially similar allegations
about Kraft’s participation in the wheat futures market. See Commodity Futures
Trading Comm’n v. Kraft Foods Grp., Inc., 2015 WL 9259885 (N.D. Ill. Dec. 18,
2015). That CFTC enforcement action contained only CEA claims for the long wheat
futures scheme, id., while this private action also includes CEA claims for the EFP
wash trading scheme as well as antitrust and unjust enrichment claims. The
district court in CFTC v. Kraft denied Kraft’s motion to dismiss late last year. Id.
II. Legal Standard
Under Federal Rule of Civil Procedure 8(a)(2), a complaint generally need
only include “a short and plain statement of the claim showing that the pleader is
entitled to relief.” Fed. R. Civ. P. 8(a)(2). This short and plain statement must “give
the defendant fair notice of what the … claim is and the grounds upon which it
rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (alteration in original)
(citation and internal quotation marks omitted). The Seventh Circuit has explained
that this rule “reflects a liberal notice pleading regime, which is intended to ‘focus
litigation on the merits of a claim’ rather than on technicalities that might keep
plaintiffs out of court.” Brooks v. Ross, 578 F.3d 574, 580 (7th Cir. 2009) (quoting
Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514 (2002)).
“A motion under Rule 12(b)(6) challenges the sufficiency of the complaint to
state a claim upon which relief may be granted.” Hallinan v. Fraternal Order of
13
Police Chicago Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). “[W]hen ruling on a
defendant’s motion to dismiss, a judge must accept as true all of the factual
allegations contained in the complaint.” Erickson, 551 U.S. 89 at 94. “[A] complaint
must contain sufficient factual matter, accepted as true, to ‘state a claim to relief
that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
Twombly, 550 U.S. at 570). These allegations “must be enough to raise a right to
relief above the speculative level.” Twombly, 550 U.S. at 555. And the allegations
that are entitled to the assumption of truth are those that are factual, rather than
mere legal conclusions. Iqbal, 556 U.S. at 679.
As will be discussed below, some of Ploss’s claims are subject to the
heightened pleading standard for fraud. Those claims must satisfy Federal Rule of
Civil Procedure 9(b), which requires that “[i]n alleging fraud or mistake, a party
must state with particularity the circumstances constituting fraud or mistake.” Fed.
R. Civ. P. 9(b) (emphasis added). Put differently, allegations of fraud “must describe
the who, what, when, where, and how of the fraud.” Pirelli Armstrong Tire Corp.
Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 441-42 (7th Cir. 2011)
(citation and internal quotation marks omitted).
III. Analysis
A. The Alleged “Long Wheat Futures Scheme”
1. Commodity Exchange Act Overview
Before diving into each of the anti-manipulation counts under the Commodity
Exchange Act, it will be helpful to provide an overview of the two relevant anti-
14
manipulation provisions of the CEA: Sections 9(a)(2) and 6(c)(1), which are codified
at 7 U.S.C. §13(a)(2) and 7 U.S.C. § 9(1), respectively. The former has been the
longstanding anti-manipulation provision of the CEA, and the latter was revised as
part of the 2010 Dodd-Frank Amendments. Section 9(a)(2) makes it a felony 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 of any swap … .” 7 U.S.C. § 13(a)(2). The CEA also provides a private cause of
action for price manipulation. 7 U.S.C. § 25(a) (“Any person … who violates this
chapter … shall be liable for actual damages resulting from” a prohibited
transaction, including “a manipulation of the price of any such [futures] contract or
swap or the price of the commodity underlying such contract or swap.”).
In addition, Congress more recently amended Section 6(c)(1) as part of the
Dodd-Frank Amendments, strengthening the anti-fraud and anti-manipulation
provisions of the CEA. The amended provision 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 such rules and
regulations as the Commission shall promulgate … .
7 U.S.C. § 9(1); see Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. No. 111-203, July 21, 2010, 124 Stat. 1376. The revisions are meant to
“augment the Commission’s existing authority to prohibit fraud and manipulation.”
76 Fed. Reg. at 41,398-401. Private parties can also sue to enforce Section 6(c)(1). 25
15
U.S.C. § 25(a)(1)(D)(i) (providing a private right of action for the use or attempted
use of “any manipulative device or contrivance in contravention of such rules”).
The CFTC also promulgated Regulation 180.1 under Section 6(c)(1). That
regulation, in turn, explains that that a person shall not “intentionally or
recklessly”
(1) Use or employ, or attempt to use or employ, any manipulative
device, scheme, or artifice to defraud;
(2) Make, or attempt to make, any untrue or misleading statement of a
material fact or to omit to state a material fact necessary in order to
make the statements made not untrue or misleading;
(3) Engage, or attempt to engage, in any act, practice, or course of
business, which operates or would operate as a fraud or deceit upon
any person; or,
(4) Deliver or cause to be delivered, or attempt to deliver or cause to be
delivered, for transmission through the mails or interstate commerce
… a false or misleading or inaccurate report concerning crop or market
information or conditions that affect or tend to affect the price of any
commodity in interstate commerce … .
7 C.F.R. § 180.1. The regulation added that “[n]othing in this section shall affect, or
be construed to affect, the applicability of Commodity Exchange Act section 9(a)(2).”
7 C.F.R. § 180.1(c). One of the differences between the older and newer provisions is
that Section 9(a)(2) requires the manipulation (or attempted manipulation) of
prices, but Section 6(c)(1) expands liability for any manipulative or deceptive device
regardless of whether the conduct intended to or did affect prices. Compare 7 U.S.C.
§ 13(a)(2) (it is a violation to “manipulate or attempt to manipulate the price of any
commodity”), with 7 U.S.C. § 9(1) (it is a violation to “directly or indirectly … use or
16
employ … in connection with any … contract of sale of any commodity … any
manipulative or deceptive device”).
The CFTC provided some additional guidance for the amended version of
Section 6(c)(1). In new regulations, the agency explained that the amended 6(c)(1)
was based on federal securities laws: “Given the similarities between CEA section
6(c)(1) and Exchange Act section 10(b), the Commission deems it appropriate and in
the public interest to model final Rule 180.1 on SEC Rule 10b–5.10.” 76 Fed. Reg. at
41,399. Section 6(c)(1)’s language parallels that of Section 10(b) of the Securities
and Exchange Act, which makes it unlawful “[t]o use or employ, in connection with
the purchase or sale of any security registered on a national securities exchange or
any security not so registered, or any securities-based swap agreement any
manipulative or deceptive device or contrivance in contravention of such rules and
regulations as the Commission may prescribe … .” 15 U.S.C. § 78j(b). And like
Regulation 180.1, SEC Rule 10b-5 clarifies that it is unlawful, “in connection with
the purchase or sale of any security”:
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state
a material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not
misleading, or
(c) To engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon any person[.]
17 C.F.R. § 240.10b-5. Finally, the CFTC explained that “[t]o account for the
differences between the securities markets and the derivatives markets, the
17
Commission will be guided, but not controlled, by the substantial body of judicial
precedent applying the comparable language of SEC Rule 10b–5.11.” 76 Fed. Reg. at
41,399.
2. Section 6(c)(1) Manipulation
The bulk of the parties’ dispute is over Count Two, Ploss’s manipulation
claim under Section 6(c)(1), so the Court starts there. As explained above, this
newer section of the CEA prohibits the use of “any manipulative or deceptive device
or contrivance” connected to any futures contract. 7 U.S.C. § 9(1). The gist of Ploss’s
claim is that Kraft violated this section “by putting on an enormous futures position
in order to force wheat futures and cash prices to move in a favorable direction.”
R. 87, Pls.’ Resp. at 25. In response, Kraft argues that the “(1) Plaintiffs do not
identify any misrepresentation or misleading omission by Kraft; (2) Plaintiffs fail to
allege facts supporting the inference that Kraft engaged in intentional or reckless
misconduct; and (3) Plaintiffs fail to allege reliance.” R. 77, Defs.’ Br. at 18-19. The
parties also dispute which pleading standard—Rule 8(a) or Rule 9(b)—applies. Id.
at 19; Pls.’ Resp. at 14. As explained next, the Court concludes that Ploss has stated
a manipulation claim under Section 6(c)(1) and denies Kraft’s motion to dismiss this
claim.
i. Misrepresentation Requirement
Kraft’s first argument is that a misleading misrepresentation or omission—
which Ploss does not allege—is necessary to state a manipulation claim under
Section 6(c)(1). Defs.’ Br. at 19. (This analysis is closely tied to the relevant pleading
18
standard, which the Court will address in the next section. See infra Section
III.A.2.ii.) Because Section 6(c)(1) is similar to federal securities laws, 76 Fed. Reg.
at 41,399, Kraft points to cases interpreting Section 10(b) and Rule 10b-5 of the
Securities and Exchange Act to argue that an explicit misrepresentation is required
in the Section 6(c)(1) context. Defs.’ Br. at 19. Kraft focuses on Sullivan & Long, Inc.
v. Scattered Corp., 47 F.3d 857 (7th Cir. 1995), where the Seventh Circuit explained
that aggressive short selling that decreased a stock’s price did not form “the basis
for a claim under Rule 10b-5, which requires proof of either deception or
manipulation,” because there were no “representations, true or false, actual or
implicit, concerning the number of shares that [the defendant] would sell short.” 47
F.3d at 864-65 (citations omitted). Sullivan involved the bankrupt LTV Corporation,
which had announced a reorganization plan where shareholders would receive new
shares worth 3 to 4 cents, compared to the previous share price of 30 cents. Id. at
859. Expecting that the price of the stock would fall after the announcement, the
defendant began aggressively shorting the stock in order to make a profit. Id.8 The
Seventh Circuit held that no deception was involved, because the defendant was
simply taking advantage of the publicly-available information in LTV’s bankruptcy
reorganization plan and was “bring[ing] market values into closer, quicker
8“A
short sale is a sale at a price fixed now for delivery later.” Sullivan, 47 F.3d at
859. As the Seventh Circuit explains, “[a] trader sells 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.” Id. For example, if a trader “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. In
Sullivan, the defendant shorted shares of LTV Corporation thinking that the price would
fall; plaintiffs, on the other hand, “were buyers on the other side of [the defendant’s] short
sales” and “thought the price of the old shares would rise … .” Id.
19
conformity with economic reality. The profit that such trading brings at the expense
of less knowledgeable traders provides the incentive for a private, for-profit firm,
such as [the defendant], to provide this economic service.” Id. at 860. In other words,
this was permissible price arbitrage—“identify[ing] and eliminat[ing] disparities
between price and value … where the difference cannot be attributed to any
prospective change in value.” Id. at 862.9 Because there was nothing unlawful about
making trades based on a better understanding of the bankruptcy plan, there could
be no liability. Id. at 865.
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.” (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
9Another
example of arbitrage is when “the identical stock is selling for different
prices on two exchanges at the same time. Since the value is the same, the prices should be
the same. By buying stock on the exchange where the price is lower and reselling it on the
other exchange, the arbitrageur brings about a convergence of price with value.” Sullivan,
46 F.3d at 862. This is not market manipulation; it is actually the “[t]he opposite of a
practice that creates artificial prices, [because] it eliminates artificial price differences.” Id.
20
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.
In addition, several courts have explained that an explicit misrepresentation
is not needed for a Section 10(b) securities action because “a transaction [that]
sends a false pricing signal to the market” can form the basis of a market
manipulation claim. ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 100 (2d
Cir. 2007). This is based on the theory that investors generally assume that they
are trading on “an efficient market free of manipulation” and “that prices at which
they purchase and sell securities are determined by the natural interplay of supply
and demand, not rigged by manipulators.” Id. (citation and internal quotation
marks omitted). Like Sullivan, ATSI acknowledged that high-volume short selling,
without “something more,” was insufficient to state a market manipulation claim.
Id. But when trading activity is “willfully combined with something more to create a
false impression of how market participants value a security,” a plaintiff can state a
market manipulation claim. Id. at 101; see also Frey v. Commodity Futures Trading
Comm’n, 931 F.2d 1171, 1175 (7th Cir. 1991) (“Manipulation, broadly stated, is an
intentional exaction of a price determined by forces other than supply and
demand.”). The district court in the enforcement version of this case, CFTC v. Kraft,
analyzed similar authorities and also concluded that like securities plaintiffs, CEA
21
plaintiffs may plead manipulation under Section 6(c)(1) by alleging that a defendant
had an improper motive in making its commodities transactions and that it
“misle[d] or cheat[ed] the market through [its] actions, rather than through [its]
representations.” CFTC v. Kraft, 2015 WL 9259885, at *9 (holding that a
manipulation claim may be based on misrepresentations or market manipulation).
Similarly, in In re Amaranth National Gas Commodities Litigation, 587 F.
Supp. 2d 513, 534 (S.D.N.Y. 2008), the New York district court applied the
principles established in Sullivan and ATSI to the commodities markets. Although
In re Amaranth analyzed the term “manipulation” under Sections 9(a) and 6(c)(1) of
the CEA before the enactment of the Dodd-Frank Amendments, the rationale is still
helpful here because the court was generally explaining the characteristics of
manipulation in the commodities context. Id. It explained that “[j]ust as with
securities, commodities manipulation deceives traders as to the market’s true
judgment of the worth of the commodities. Similarly, for the same reasons that
ATSI concluded that short selling, without more, cannot constitute securities
manipulation, entering into futures contracts or swaps, without more, cannot
constitute commodities manipulation.” Id. That is, “[i]f a trading pattern is
supported by a legitimate economic rationale, it cannot be the basis for liability
under the CEA because it does not send a false signal.” Id. Although the court
required “something more,” or “some additional factor that causes the dissemination
of false or misleading information,” that “additional factor need not be a
misstatement or omission.” Id. For example, “[b]ecause every transaction signals
22
that the buyer and seller have legitimate economic motives for the transaction, if
either party lacks that motivation, the signal is inaccurate,” id., and using that false
signal to manipulate commodity pricing can qualify as manipulation. The reasoning
of these cases are persuasive and analogous to the Section 6(c)(1) context, so the
Court holds that an explicit misrepresentation is not required for a Section 6(c)(1)
manipulation claim, which may be based on market activity that sends a false
pricing signal to the market.
ii. Pleading Standard: 8(a) or 9(b)?
Having concluded that a manipulation claim under Section 6(c)(1) can be
based on market activity short of an explicit misrepresentation, the next question is
whether market-manipulation claims are subject to the heightened pleading
standards for fraud. Rule 9(b) requires that “a party must state with particularity
the circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b) (emphasis
added). The rule requires a complaint to “state the identity of the person making
the misrepresentation, the time, place, and content of the misrepresentation, and
the method by which the misrepresentation was communicated to the plaintiff.”
Uni*Quality, Inc. v. Infotronx, Inc., 974 F.2d 918, 923 (7th Cir. 1992) (citations and
internal quotations marks omitted). Put differently, the plaintiff “must describe the
who, what, when, where, and how of the fraud.” Pirelli Armstrong Tire Corp. Retiree
Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 441-42 (7th Cir. 2011) (citation
and internal quotations marks omitted). Kraft argues that Section 6(c)(1) and Rule
180.1 only apply to fraudulent conduct, and thus are governed by Rule 9(b), Defs.’
23
Br. at 19, while Ploss argues that manipulation based on “market activity” does not
have to sound in fraud, so only Rule 8(a) applies, Pls.’ Resp. at 27.
Again, the only other court to have addressed this issue is CFTC v. Kraft in
the parallel enforcement action. CFTC v. Kraft, 2015 WL 9259885, at *6. There, the
district court concluded that Section 6(c)(1) reaches only fraudulent conduct because
the plain language of the statute, which prohibits “any manipulative device,
scheme, or artifice to defraud” can only mean that the “[CEA] prohibits: (1) the use
of manipulative devices to defraud; (2) the use of schemes to defraud; and (3) the
use of artifices to defraud.” Id. The district court also relied on Section 10(b) and
Rule 10b-5 of the Securities and Exchange Act, both of which use language similar
to Section 6(c)(1) and thus provide instructive precedent for Section 6(c)(1). 76 Fed.
Reg. at 41,399. The district court in CFTC v. Kraft explained that these securities
provisions have been interpreted to require a showing of fraud. 2015 WL 9259885,
at *7 (citing, e.g., Chiarella v. U.S., 445 U.S. 222, 234-45 (1980); Dirks v. SEC, 463
U.S. 646, 667 n.27 (1983)). Because securities manipulation involves “intentional or
willful conduct designed to deceive or defraud investors by controlling or artificially
affecting the price,” id. (emphasis in original) (quoting Ernst & Ernst v. Hochfelder,
425 U.S. 185, 199 (1976)) (internal quotation marks omitted), or “practices that are
intended to mislead investors by artificially affecting market activity,” id. (quoting
Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476 (1977)) (internal quotation marks
omitted), all manipulation must sound in fraud. See also 76 Fed. Reg. at 41,400
24
(CFTC
explaining
that
“Rule
180.1
prohibits
fraud
and
fraud-based
manipulations”).10
CFTC v. Kraft then went on to hold that, although manipulation requires
fraud, “the exact pleading requirements for a cause of action under Section 10(b)
[still] vary depending on the type of claim alleged.” 2015 WL 9259885, at *9. For
manipulation claims involving a material misrepresentation or omission, a plaintiff
must allege “(1) a material misrepresentation (or omission); (2) scienter; (3) a
connection with the purchase or sale of security; (4) reliance (transaction causation);
(5) economic loss; and (6) loss causation.” Id. (citing Dura Pharm., Inc. v. Broudo,
544 U.S. 336, 341 (2005) (explaining the elements of a fraud claim under Section
10(b) of the Securities Exchange Act). Like this Court, CFTC v. Kraft also held that
manipulation may be based on market behavior that does not depend on a specific
misrepresentation. Id. The court concluded that cases based on market
manipulation were also fraudulent, but could be alleged with less specificity. Id. In
those cases, a plaintiff must plead with particularity “what manipulative acts were
performed, which defendants performed them, when the manipulative acts were
performed, and what effect the scheme had on the market for the commodities at
10Although
it may seem incongruous that fraud, which requires intent to manipulate
or deceive, Ernst, 425 U.S. at 193, could be reconciled with the scienter requirement of
Section 6(c)(1), which permits recklessness, courts have held that in the securities context,
“reckless disregard of the truth counts as intent” under § 10(b) and Rule 10b-5. See S.E.C.
v. Jakubowski, 150 F.3d 675, 681 (7th Cir. 1998) (citing Ernst, 425 U.S. at 185); Rowe v.
Maremont Corp., 850 F.2d 1226, 1238 (7th Cir. 1988) (“reckless disregard for the truth of …
representations” meets the scienter requirement of Rule 10b-5 (citation omitted)); Chu v.
Sabratek Corp., 100 F. Supp. 2d 815, 822 (N.D. Ill. 2000) (same).
25
issue.” Id. (citing ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 101 (2d
Cir. 2007)).
This holding of CFTC v. Kraft is persuasive and well-reasoned. The Court
agrees that manipulation based on explicit misrepresentations sound in fraud, but
declines to decide at this time whether manipulation claims based on market
behavior must also always be subject to Rule 9(b) in precisely the same way as a
misrepresentation
case.
When
manipulation
is
based
on
an
explicit
misrepresentation or omission, it is true that the allegations must meet the
heightened pleading standards of Rule 9(b). Thus, such a claim requires a material
misrepresentation (or omission), scienter, a connection with the purchase or sale of
security, reliance, economic loss and loss causation. Dura Pharm., 544 U.S. at 341;
see also Pugh v. Tribune Co., 521 F.3d 686, 693 (7th Cir. 2008) (same). But for
manipulation based on market activity rather than overt misrepresentations, there
is some support for the conclusion that Rule 8(a) could apply, depending on the
specific facts. In the CEA Section 9(a)(2) context, for example, which prohibits price
manipulation, 7 U.S.C. § 13(a)(2), some courts have held that a case-by-case
determination of the appropriate pleading standard is appropriate, depending on
the type of claim brought. That is, Rule 9(b) would govern manipulation claims
based on explicit misrepresentations, while Rule 8(a) would apply to manipulation
claims based on market activity. See, e.g., Premium Plus Partners, L.P. v. Davis,
2005 WL 711591, at *15 (N.D. Ill. Mar. 28, 2005) (explaining that “[a]lthough the
Court does not purport to endorse a rule that Rule 9(b) pleading requirements never
26
could apply to a CEA manipulation claim,” Rule 8(a) applied to the instant claim,
which did not “sound in fraud” and involved no allegedly false statements (emphasis
in original)); In re Term Commodities Cotton Futures Litig., 2013 WL 9815198, at
*10 (S.D.N.Y. Dec. 20, 2013) on reconsideration in part, 2014 WL 5014235 (S.D.N.Y.
Sept. 30, 2014) (“[T]he case specific approach” instructs courts to “appl[y] Rule 9(b)
where the allegations involve disseminating false or misleading information in the
market” but Rule 8(a) “[w]here a plaintiff has alleged a manipulative trading
strategy[.]” (citing cases)); U.S. Commodity Futures Trading Comm’n v. Amaranth
Advisors, L.L.C., 554 F. Supp. 2d 523, 531 (S.D.N.Y. 2008) (same). It is possible that
a similar analysis would apply in the Section 6(c)(1) context, even though there
arguably are “material differences” between the text and contextual background of
the two CEA sections. See CFTC v. Kraft, 2015 WL 9259885, at *8 (explaining that
the language in the two sections is different, and that “Section 6(c)(1) is nearly
identical to Section 10(b) of the Exchange Act.”).
In any event, the Court does not need to decide the pleading standard for
Section 6(c)(1) market-manipulation actions at this time, because Ploss has met, for
its long wheat futures claims, both Rule 8(a) and (more importantly) the tougher
pleading requirements of Rule 9(b). Under Rule 9(b), the plaintiff “must describe
the who, what, when, where, and how of the fraud.” Pirelli, 631 F.3d at 441-42
(citation and internal quotation marks omitted). CFTC v. Kraft held that in the
market-manipulation context, this requires a plaintiff to plead with particularity
“what manipulative acts were performed, which defendants performed them, when
27
the manipulative acts were performed, and what effect the scheme had on the
market for the commodities at issue.” 2015 WL 9259885, at *9 (citing ATSI, 493
F.3d at 101). As explained below, regardless of whether the appropriate pleading
standard is Rule 8(a) or 9(b), Ploss has met it.
iii. Market Manipulation
Applying the standards previously discussed, the Court concludes that Ploss
has successfully alleged a commodities-manipulation claim under Section 6(c)(1) by
pleading that Kraft misled the market with its actions, even absent an affirmative
misrepresentation. The Complaint’s detailed allegations provide more than “enough
to raise a right to relief above the speculative level,” Twombly, 550 U.S. at 555, and
they also sufficiently “describe the who, what, when, where, and how of the fraud”
as required by Rule 9(b), Pirelli, 631 F.3d at 441-42 (citation and internal quotation
marks omitted). (But remember, the Court does not definitely decide whether Rule
9(b) applies to all Section 6(c)(1) manipulation claims.)
Specifically, Ploss alleges that Kraft schemed to obtain a large long position
in December 2011 futures contracts not because of any bona-fide commercial need
for wheat, but because it wished to “depress cash market wheat prices and inflate
the futures price of wheat.” Compl. ¶ 82. According to Ploss, Kraft’s acquisition of
3,150 December 2011 contracts ($90 million worth) was not bona fide because Kraft
never intended to take delivery of futures market wheat, which required expensive
delivery, transportation, and storage solutions as compared to buying wheat from
the local cash market. Id. ¶¶ 51, 81-82, 160. The Complaint sets forth factual
28
allegations to support this: first, when Kraft attempted a test run in September
2011 of accepting delivery of futures market wheat, it concluded that this strategy
was not viable because of the additional costs. Id. ¶¶ 80-81. Plus, futures market
wheat was of a lower quality, and Kraft had not taken delivery of futures market
wheat since 2002. Id. ¶¶ 3, 51. To use CBOT wheat, Kraft would have had to buy
additional higher-quality cash wheat for mixing so that the CBOT wheat would
meet baking specifications. Id. ¶ 86. Finally, Kraft allegedly did not have the
capacity to store $90 million worth of wheat, or a 6-month supply of 15 million
bushels. Id. ¶ 85. In November 2011, Kraft already had 4.2 million bushels of wheat
at its Toledo facility, occupying 80% of its storage capacity. Id. ¶ 86. Acquiring 15
million additional bushels of wheat would have meant paying for more storage—an
additional cost of five cents a bushel. Id. Ultimately, Kraft only accepted delivery of
660,000 bushels of wheat, or less than 5% of its December 2011 position, showing
(at least as this stage of the case) that Kraft never really needed 15 million bushels
of wheat for its mill operations. Id. ¶ 91.
Even though the purchase of futures contracts seemed uneconomic, Ploss
alleges that Kraft ultimately benefited from this purchase. First, the large long
position made sellers in the Toledo market believe that Kraft would satisfy its need
for wheat from the futures market, and not from the local cash market. Id. ¶ 56.
This caused cash prices in the Toledo market to fall, and in turn, allowed Kraft to
purchase wheat in the Toledo market at lower prices. Id. Ploss alleges that Kraft’s
Senior Director of Global Procurement outlined this strategy in an email: “[T]here is
29
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.” Id. ¶ 83. Second, it is alleged that Kraft also intended for its
December 2011 acquisition to artificially increase December 2011 futures prices
relative to March 2012 futures prices; thus, when Kraft shorted its March 2012
futures contracts, it also benefited from the artificial increase of December 2011
futures and the narrowed spread between the December and March contract prices.
Id. ¶¶ 1, 49, 61, 64-70, 87. Ploss alleges that this trading strategy of purchasing
unneeded futures contracts ultimately yielded over $5.4 million in profits and
savings to Kraft. Id. ¶ 78.
In sum, Ploss alleges specific details about the scheme, suggesting that
Kraft’s high-volume futures acquisition was “willfully combined with something
more to create a false impression of how market participants value a security.”
ATSI, 493 F.3d at 101 (citing Sullivan, 47 F.3d at 861-62). That “something more”
was a false signal through its market behavior that Kraft intended to source its
wheat from the futures market, so that the transaction was not representative of
true supply and demand. Market manipulation has been adequately alleged.11
11Kraft
also claims that the Section 6(c)(1) claim must fail because Kraft has failed to
allege reliance. R. 89, Defs.’ Reply at 10. But reliance on a direct misrepresentation is not
necessary, because the Court has concluded that an explicit misrepresentation is not
required to state a claim. What has been adequately alleged on reliance—that the market
relies on the transactions to signal true, rather than manipulative, demand—is all that is
necessary.
30
iv. Scienter
Kraft also argues that Ploss has not alleged intentional or reckless
misconduct and that the allegation that “Kraft desired to make the market believe
that it would take delivery, load out, and store that wheat for use in its mill” is
conclusory. Defs.’ Br. at 23-24 (citing Compl. ¶ 87). As just explained, however, the
allegations of intent are not merely conclusory—Ploss alleges more than enough
concrete facts to support his contention that Kraft intentionally and knowingly
deceived the market. See supra Section III.A.2.iii. There is no need to rehash all of
those facts, but the main point is that Kraft allegedly obtained a huge long position
in wheat futures contracts even though it did not make financial sense to take
physical delivery of futures market wheat. Id. Kraft intentionally signaled to the
market that it would source its wheat from the futures market (despite knowing it
did not actually intend to do so), which caused the Toledo cash market prices to fall
and the December 2011 futures prices to rise, both of which financially benefited
Kraft. Id. All of the allegations previously discussed sufficiently describe how Kraft
intended to deceive the market, how it carried out this deception, and how it
benefited. Id.
Kraft also argues that the emails from its Senior Director of Global
Procurement actually demonstrate that Kraft did intend to take delivery of the
December 2011 wheat, and not the other way around. Defs.’ Br. at 24-25. The
October 20, 2011 email notes that “[Kraft’s] proposal to ‘take physical delivery in
Dec’ of 15 mm bushels at 50 cents per bushel below the commercially offered price
31
results in the savings of $7mm+.” Compl. ¶ 83. Sure, a factfinder ultimately might
believe Kraft’s interpretation of this email, after considering a full factual
presentation at trial and bearing in mind that Ploss will bear the burden of proof.
But at this stage of the case, the Court must accept the allegations in the Complaint
as true, and give all reasonable inferences to Ploss—in other words, the Court must
accept that this email reflects the intent to carry out the manipulative strategy.
Nothing in this email contradicts that allegation. Even though the email does
mention “the proposal to ‘take physical delivery in Dec,’” id., the part about taking
physical delivery is surrounded by quote marks, and when read in context, those
could be the written equivalent of air quotes. More significantly, the email goes on
to explain that “[o]nce 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.” Id. This directly
supports Ploss’s allegation—that as a result of obtaining a large long December
2011 futures position, Kraft intended that the Toledo cash market would be left
with a wheat surplus. Rather than storing the extra wheat, the Toledo market
reduced the cash wheat prices, and Kraft took advantage. With all this, Ploss has
adequately pled scienter and all of the elements of a manipulation claim under
Section 6(c)(1). The Court denies Kraft’s motion to dismiss this count.
3. Section 9(a)(2) Manipulation
Count One is also a claim for manipulation based on the long wheat futures
scheme detailed above, but under Section 9(a)(2) of the CEA. Remember, Section
32
9(a)(2) makes it unlawful for any trader 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 … .” 7 U.S.C. § 13(a)(2). The related
regulation includes the same prohibition. 17 C.F.R. § 180.2 (“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.”). Because the new Dodd-Frank
provisions were not intended to affect Section 9(a)(2), the four-part test that courts
have adopted for Section 9(a)(2) still stands. 7 C.F.R. § 180.1(c) (“Nothing in this
section shall affect, or be construed to affect, the applicability of Commodity
Exchange Act section 9(a)(2).”). That test requires a plaintiff to allege four elements:
“(1) the defendant[] possessed the ability to influence prices; (2) an artificial price
existed; (3) the defendant caused the artificial price; and (4) the defendant
specifically intended to cause the artificial price.” In re Dairy Farmers of Am., Inc.
Cheese Antitrust Litig., 801 F.3d 758, 764-65 (7th Cir. 2015). The Court concludes
that Ploss has alleged each of these elements. These four elements overlap some,
but the Court will address each one in turn.12
12The
parties do not dispute the appropriate pleading standard for a Section 9(a)(2)
claim, but they do not explain whether Rule 8(a) or 9(b) applies. As already explained, some
cases suggest that the pleading standard would depend on the type of claim brought in the
Section 9(a)(2) context. See supra Section III.A.2.ii. That is, manipulation based on trading
behavior (or at least some forms of it) might be subject to Rule 8(a), but manipulation based
on misrepresentations is subject to Rule 9(b). Id. In any event, Ploss has met the pleading
standard for both Rule 8(a) and Rule 9(b) in this Section 9(a)(2) manipulation claim. The
allegations underlying this claim are the same as those supporting the Section 6(c)(1)
manipulation claim, and the Court has already explained that the latter allegations would
meet a heightened pleading standard. Id.
33
i. Ability to Influence Prices
First, Ploss alleges that Kraft was able to influence prices in two markets:
the Toledo cash market and the December 2011 futures market. Ploss’s allegations
are not merely conclusory; he explains that by obtaining a large December 2011
long position, Kraft “induce[d] sellers to believe that Kraft would in fact take
delivery, load out, and use that wheat in its mill in Toledo.” Compl. ¶ 56. As a
result, cash prices in Toledo indeed decreased because sellers believed that Kraft no
longer needed their wheat. Id. ¶¶ 87-89. Kraft was able to generate these false
impressions because it is one of the largest food companies and commercial endusers of wheat, and because it had historically sourced its wheat from the Toledo
cash market. Id. ¶¶ 23, 51. At the same time, Kraft’s long position in December
2011 wheat futures also artificially inflated the prices of those contracts, because
the large position indicated increased demand. Id. ¶¶ 1, 16, 82. Ploss alleges that
Kraft at one point had 87% of the open interest of December 2011 wheat contracts,
putting it in a dominant position where it could control prices. Id. ¶ 166.
Kraft first argues that Ploss cannot show ability to control prices because he
does not allege classic forms of manipulation, such as a “corner” or a “squeeze,”
which require either control of the deliverable supply or a shortage of that supply.
Defs.’ Br. at 12. In a corner, a trader “gains control of the supply or the future
demand of a commodity and requires the shorts to settle their obligations, either by
the purchase of deliverable quantities of the supply or offsetting long contracts, at
an arbitrary, abnormal and dictated price imposed by the cornerer.” Great W. Food
34
Distributors v. Brannan, 201 F.2d 476, 478 (7th Cir. 1953) (defendant purchased
eggs in the cash and futures market and demanded high prices from shorts when an
artificial shortage resulted). A squeeze is similar to a corner but does not require
the trader to control the cash crop; the trader takes advantage of a shortage in the
cash commodity and “force[s] shorts facing an inadequate cash supply to cover their
positions at unfair prices.” Frey, 931 F.2d at 1175 (defendants took advantage of low
supply conditions in the wheat market). The latter can occur when there is a
natural disaster, a strike, or other problems leading to a shortage. See In re Soybean
Futures Litig., 892 F. Supp. 1025, 1035 (N.D. Ill. 1995). In both cases, shorts in the
market are forced “into settling their holdings with the dominant long at abovemarket prices as the delivery date approaches.” Frey, 931 F.2d at 1175.
The Court, however, agrees with CFTC v. Kraft that a manipulation claim is
not bound to corners and squeezes. 2015 WL 9259885, at *14. As many courts
recognize, manipulation is not specifically defined in the CEA because “[t]he
methods and techniques of manipulation are limited only by the ingenuity of man.”
Premium Plus Partners, L.P. v. Davis, 653 F. Supp. 2d 855, 876 (N.D. Ill. 2009) aff’d
sub nom. Premium Plus Partners, L.P. v. Goldman, Sachs & Co., 648 F.3d 533 (7th
Cir. 2011) (internal quotation marks omitted) (quoting Cargill, Inc. v. Hardin, 452
F.2d 1154, 1163 (8th Cir. 1971)); see also Kohen v. Pac. Inv. Mgmt. Co. LLC, 244
F.R.D. 469, 485 (N.D. Ill. 2007) aff’d, 571 F.3d 672 (7th Cir. 2009) (explaining that
corners and squeezes are “by no means [the] exclusive” “situations in which
manipulative intent may be inferred”) (citation and internal quotation marks
35
omitted)). Rather, “the test of manipulation must largely be a practical one if the
purposes of the Commodity Exchange Act are to be accomplished,” Premium Plus,
653 F. Supp. 2d at 876 (citation and internal quotation marks omitted), and should
focus on whether there has been “an intentional exaction of a price determined by
forces other than supply and demand,” Frey, 931 F.2d at 1175. So manipulation can
exist whenever there is “[b]uying or selling in a manner calculated to produce the
maximum effect upon prices.” U.S. Commodity Futures Trading Comm’n v. Enron
Corp., & Hunter Shively, 2004 WL 594752, at *5 (S.D. Tex. Mar. 10, 2004) (citation
and internal quotation marks omitted); DH2, Inc. v. Athanassiades, 404 F. Supp. 2d
1083, 1092 (N.D. Ill. 2005) (“The gravamen of manipulation is deception of investors
into believing that prices at which they purchase and sell securities are determined
by the natural interplay of supply and demand, not rigged by manipulators.”
(quoting Gurary v. Winehouse, 190 F.3d 37, 45 (2d Cir. 1999) (internal quotation
marks omitted)).
Consequently, even though Ploss does not allege that Kraft controlled the
physical wheat supply or that Kraft exploited a supply shortage, Ploss’s allegations
of non-traditional manipulation techniques can still sustain a CEA violation. Ploss
alleges that wheat prices were driven by forces other than supply and demand. In
particular, Kraft allegedly obtained a large long position in December 2011 wheat
futures even though it had no intention of actually using futures market wheat for
its mill operations, so it could make the market believe that it was not going to
source its wheat from the Toledo market. Id. ¶¶ 1, 51, 55-56, 81-83. Ploss alleges
36
that this ruse worked; in response to Kraft’s purchase, prices in the Toledo market
fell as anticipated, and Kraft was able to take advantage of those lower prices. Id.
¶¶ 82-83, 87, 89. Meanwhile, Kraft also hoped that its long position would inflate
the price of futures contracts as the number of open long positions dramatically
increased. Id. ¶¶ 49, 65, 82. This holding “constituted a dominant position” that
“gave Kraft great influence or control over the prices of December 2011 CBOT
wheat futures contracts.” Id. ¶ 166. According to Ploss, Kraft again succeeded: the
prices of December 2011 wheat contracts rose, and Kraft was able to make more
money from its December-March spread position. Id. ¶¶ 35, 61, 87. So Ploss has
adequately alleged the “ability to influence prices,” when the allegations are viewed
on “a fact-specific, case-by-case analysis.” In re Soybean Futures, 892 F. Supp. at
1044.
Finally, Kraft argues that it had no ability to influence prices when it did not
disseminate any false information that would have affected market prices. Defs.’ Br.
at 12. But like Section 6(c)(1), manipulation under Section 9(a)(2) can be based on a
trader’s actions, not just her statements. See supra Section III.A.2.i. As In re
Amaranth put it, manipulation is based on sending false signals to the market,
which need not be in the form of a misstatement or omission. 587 F. Supp. 2d at
534. Rather, as noted above, “[b]ecause every transaction signals that the buyer and
seller have legitimate economic motives for the transaction, if either party lacks
that motivation, the signal is inaccurate.” Id. So again, the lack of a false statement
does not preclude a manipulation claim.
37
ii. Existence of an Artificial Price and Causation
Next, Ploss has adequately pled both the existence of an artificial price and
causation. “[A]rtificially high or low prices … do not reflect the underlying
conditions of supply and demand.” Sullivan, 47 F.3d at 862 (citing Ernst, 425 U.S.
at 199); see also In re Soybean Futures, 892 F. Supp. at 1053 n.28 (“[A] price is said
to be ‘artificial’ or ‘distorted’ if it does not reflect the market or economic forces of
supply and demand operating upon it.” (citing Sullivan, 47 F.3d at 861-62));
Hershey v. Pac. Inv. Mgmt. Co. LLC, 697 F. Supp. 2d 945, 958 (N.D. Ill. 2010)
(same). In deciding whether there is an artificial price, courts must “search for those
factors which are extraneous to the pricing system, are not a legitimate part of the
economic pricing of the commodity, or are extrinsic to that commodity market.” In re
Indiana Farm Bureau, 1982 WL 30249, at *4 n.2 (CFTC Dec. 17, 1982).
Here, Ploss alleges that the prices of cash wheat in Toledo and of December
2011 wheat contracts were caused not by legitimate forces of supply and demand,
but by Kraft’s purchase of $90 million worth of futures that falsely indicated that
Kraft was going to source its wheat from the futures market. Compl. ¶¶ 55-56, 8283. Ploss pleads causation by alleging that cash prices in Toledo went down as
sellers believed they would be left with a large supply, id., and that prices of
December 2011 wheat futures contracts went up in response to Kraft’s dominant
long position, id. ¶¶ 78, 163, 168. Ploss also alleges that an expert who analyzed
futures prices concluded that the “unexpected” increase in December 2011 prices
was likely not due to chance in a competitive market but rather to Kraft’s long
38
position. Id. ¶¶ 67-77. Although Kraft may challenge the expert’s conclusions later
in this litigation, for now the Court must accept these allegations as true.
Kraft admits that a $90 million purchase of wheat futures contracts could
have affected prices, but it argues that the resulting prices were not artificial
because the purchase reflected a bona fide commercial need. Defs.’ Br. at 12-13.
Kraft emphasizes that its purchase equated to 15 million bushels, or a 6-month
supply for Kraft’s mill, an amount that is not unreasonable given that Kraft is one
of the largest food companies and wheat consumers. Id. Kraft also points to its
hedge exemption, which allowed it to maintain a position equal to 12 months of
wheat. Id. at 14. Although a factfinder may ultimately believe Kraft’s version of the
facts, this is not an issue for a motion to dismiss. Again, at the pleading stage, the
Court must accept the plaintiff’s allegations as true, and Ploss has pled more than
enough facts to show that Kraft’s $90 million wheat acquisition was commercially
unfeasible. As noted earlier, futures market wheat is of a lower quality than cash
wheat, has higher fungus levels, and needs to be mixed with additional cash wheat.
Id. ¶¶ 51, 86. Sourcing wheat from the futures market also incurs substantial
transportation and storage costs, as the wheat is delivered from outside the Toledo
area. Id. “Accordingly, taking delivery on CBOT wheat futures contracts … involved
paying higher costs to obtain lower quality wheat in the wrong place.” Id. ¶ 52.
What’s more, in November 2011, Kraft had already filled more than 80% of its
storage capacity in its Toledo mill, which only had capacity for 5 million bushels. Id.
¶ 51. Ploss alleges that Kraft had never before stored 15 million bushels of wheat at
39
its mill, and that taking delivery of these contracts would have required additional
storage costs of approximately 5 cents per bushel for up to 6 months, as well as
additional purchases of high-quality wheat to blend in with the low-quality wheat to
make the latter fit for consumption. Id. ¶¶ 85-86. All of these facts support the
inference that the purchase of $90 million of wheat did not represent true
commercial demand, and thus caused artificial changes in wheat prices in both the
cash and futures markets.
iii. Intent to Cause an Artificial Price
The last element of a Section 9(a)(2) manipulation claim requires “specific
intent.” In re Dairy Farmers, 801 F.3d at 765. This means that “[m]ere knowledge
that certain actions might have an impact on the futures market is not sufficient
… .” In re Rough Rice Commodity Litig., 2012 WL 473091, at *7 (N.D. Ill. Feb. 9,
2012) (citing Hershey v. Energy Transfer Partners, L.P., 610 F.3d 239, 249 (5th Cir.
2010)). Rather, a plaintiff must make “a showing that the accused acted (or failed to
act) with the purpose or conscious object of influencing prices.” In re Soybean
Futures, 892 F. Supp. at 1058 (citation and internal quotation marks omitted).
Here, Ploss has successfully pled specific intent with allegations that Kraft
purposely obtained its long position to reduce cash market prices. The intent is
bolstered by emails from Kraft’s Senior Director of Global Procurement, in which he
stated that Kraft’s actions will “reduc[e] the commercial wheat basis to Kraft,”
Compl. ¶ 83, and allow Kraft to take advantage of “the cash wheat basis [that] has
declined from +80 cents to +50 cents over Dec futures,” id. ¶ 89. Ploss also alleges
40
that Kraft acquired the December 2011 long futures contracts in order to increase
those contracts’ prices and profit from “artificially mov[ing] the spread” between its
December and March positions. Id. ¶¶ 1, 87, 163. Kraft’s Senior Director of Global
Procurement wrote another email that “[a]s expected, the Dec/Mar spread has
narrowed,” and that “[i]f all goes according to plan, we will … make $2-3MM on
reversing out of the Dec/Mar wheat spread.” Id. ¶ 89. In total, these strategies
would “result[] in savings of $7mm+.” Id. ¶ 83. So according to Ploss, Kraft’s goal in
obtaining a large December 2011 futures position was to profit from resulting price
changes, not to fulfill any bona fide need for commercial wheat. Id. ¶¶ 82-83, 87, 89.
In response, Kraft argues that Ploss “ha[s] not alleged specific intent to
manipulate, only an effort to get the best price for wheat.” Defs.’ Br. at 15. In other
words, the “allegations amount to no more than a commercial end-user seeking to
acquire a commodity from the most cost-efficient supply channel through using
options available to any futures market participant, and responding to changing
market conditions.” Id. Kraft’s argument seems to be that it was just shopping
around for the best wheat prices by telling a seller—the Toledo cash market—that it
was going to a competitor—the futures market—and then returning to the first
seller, who decided to lower prices. According to Kraft, even if it did intend to affect
prices, its intent was not unlawful; any resulting change in prices would be the
result of natural convergence or arbitrage—that is, two markets moving towards
the same price. Id.
41
The problem with Kraft’s argument, however, is that it is unlawful
manipulation to use its market power “as one of the largest and most sophisticated
participants in the wheat market,” Compl. ¶ 134, to knowingly affect prices when it
had no bona-fide, commercial need for the physical wheat and no need to hedge
against potential risk. In those circumstances, the behavior is more than just
shopping around—it is manipulation. The Court has already explained why taking
delivery of the futures market wheat would be uneconomical, demonstrating (at
least at the dismissal-motion stage) that Kraft’s intent was not bona fide. See supra
Section III.A.2. In addition, the Complaint also shows that Kraft’s long position was
not a bona fide attempt to hedge against genuine risk, another signal of improper
intent. Id. ¶ 57. As a commercial end-user of flour, Kraft was able to purchase up to
5,460 long wheat contracts to cover its wheat needs. Id.; 10/22/10 Hedge Exemption
Letter. Ploss alleges that “[t]raders who are bona fide hedgers, such as producers or
end-users of a commodity, can apply for exemptions to speculative position limits by
showing a bona fide hedging need.” Id. ¶ 43 (emphasis added). And Ploss cites to
CFTC regulations, id., which permit only bona fide hedging, or “transactions or
positions [that] normally represent a substitute for transactions to be made or
positions to be taken at a later time in a physical marketing channel, and where they
are economically appropriate to the reduction of risks in the conduct and
management of a commercial enterprise.” 17 C.F.R. § 1.3(z) (emphasis added); see
also id. § 1.3(z)(iv) (“[N]o transactions or positions shall be classified as bona fide
hedging unless their purpose is to offset price risks incidental to commercial cash or
42
spot operations … .” (emphasis added)). Speculators who trade futures contracts for
profit and not to hedge against risk, Defs.’ Br. at 3, are subject to position limits in
order “[t]o protect futures markets from excessive speculation that can cause
unreasonable
or
unwarranted
price
fluctuations.”
See
http://www.cftc.gov/industryoversight/marketsurveillance/speculativelimits/index.ht
m; R. 89, Defs.’ Reply at 7 n.10. Presumably, hedge exemptions are limited to bona
fide hedging needs to prevent similar unwarranted price fluctuations that would
result if commercial end-users began using their hedging exemptions for any
purpose at all. Thus, Kraft was doing more than looking for the most “cost-efficient
supply channel.” Defs.’ Br. at 15. That Kraft’s futures purchase was not rooted in a
commercial need for the physical commodity or a genuine hedging risk both signal
the intent to manipulate prices.13
Relatedly, Kraft also argues that any lack of intent to take physical delivery
of the wheat is not evidence of manipulation when Ploss has already admitted that
physical deliveries are actually rare on the futures market. Defs.’ Reply at 4 n.5;
Compl. ¶ 29. But Ploss’s allegations are not necessarily contradictory. It is true that
the Complaint alleges that most trades do not end in physical delivery. Id. Perhaps
this is because most trades on the exchange are speculative. Or perhaps hedgers
13To
be clear, in discussing the hedging regulations, the Court is not suggesting that
a CEA manipulation claim rests upon a regulatory violation. Rather, these hedging
regulations cast light on Kraft’s improper intent. That is, by maintaining large positions
that do not represent true substitutes for transactions in the cash market and that are not
meant to truly hedge against the risk of the wheat price increases, Kraft’s intent was
unlawful and manipulative under the CEA. See also In re Soybeans Futures, 892 F. Supp.
at 1036 (suggesting that a hedge position that “far exceeded [the defendants’] actual needs”
could be “a ruse to mislead the commodities market and its regulators.”).
43
often do not end up taking physical delivery of the underlying commodity because
the risk disappears or the risk analysis changes, so they no longer need the futures
contracts and close out with an offsetting trade. So it is true that it might be
perfectly lawful to not have an intent to take physical delivery of wheat. At the
same time, however, the intent not to take delivery also might not be bona fide, as
was alleged in this case, when a person trades with the desire to influence prices
and has no need for the underlying commodity and no need to hedge against real
risk. Thus, the intent not to take delivery may indicate manipulation, as it does
here, when reasonable inferences are drawn in Ploss’s favor. Accordingly, Ploss has
adequately pled Kraft’s specific intent to influence prices, and with the other
elements also adequately alleged, Ploss has stated a claim for price manipulation
under Section 9(a)(2) of the CEA.
4. Principal-Agent Liability
Count Three is a principal-agent claim that is based on Counts One and Two.
Because the Court does not dismiss these counts, Count Three may stand as well.
Section 2(a)(1)(B) of the CEA is called “liability of principal for act of agent” and
provides that “[t]he act, omission, or failure of any [agent] within the scope of his
employment or office shall be deemed the act, omission, or failure of [the principal],
as well as of [the agent].” 7 U.S.C. § 2(a)(1)(B). This section “enacts a variant of the
common law principle of respondeat superior” and “makes an employer strictly
liable … for torts committed by his employees in the furtherance of his business.”
Rosenthal & Co. v. Commodity Futures Trading Comm’n, 802 F.2d 963, 966 (7th
44
Cir. 1986). Because the underlying manipulation claims under Sections 6(c)(1) and
9(a)(2) will move forward, see supra, this claim will too. Later in the litigation, Ploss
will have to establish vicarious liability for the defendant corporations by showing
that their employees violated the manipulation sections described above.
5. Statute of Limitations
Kraft’s final argument on the long wheat futures scheme is that the three
CEA claims are time-barred because the two-year limitations clock began to run in
December 2011, yet Ploss did not bring this action until 2015. Defs.’ Br. at 9-11.
This argument is rejected.
A private cause of action under the CEA has a two-year statute of limitations
period. 7 U.S.C. § 25(c) (“Any such action shall be brought not later than two years
after the date the cause of action arises.”). The limitations period begins to run
when the plaintiff has actual or constructive knowledge—that is, “when [she] knew
or in the exercise of reasonable diligence should have known of defendant’s alleged
misconduct.” Dyer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 928 F.2d 238, 240
(7th Cir. 1991) (citations omitted); see also Tomlinson v. Goldman, Sachs & Co., 682
F. Supp. 2d 845 (N.D. Ill. 2009) (same). Because statutes of limitations are
affirmative defenses, “plaintiffs need not anticipate and attempt to plead around all
potential defenses.” Xechem, Inc. v. Bristol-Myers Squibb Co., 372 F.3d 899, 901 (7th
Cir. 2004). Importantly, the defense is not appropriate as grounds for dismissal
when it depends on factual determinations. See Sidney Hillman Health Ctr. of
Rochester v. Abbott Labs., Inc., 782 F.3d 922, 928 (7th Cir. 2015). So “[a]s long as
45
there is a conceivable set of facts, consistent with the complaint, that would defeat a
statute-of-limitations defense, questions of timeliness are left for summary
judgment (or ultimately trial).” Id. (citations omitted). On the other hand,
“dismissal is appropriate when the plaintiff pleads himself out of court by alleging
facts sufficient to establish the complaint’s tardiness.” Cancer Found., Inc. v.
Cerberus Capital Mgmt., LP, 559 F.3d 671, 674-75 (7th Cir. 2009) (citation omitted).
Kraft’s main limitations argument is that Ploss pled himself out of court
because his “theory that Kraft deceived the market is predicated on allegedly public
signals sent by Kraft, public signals which also would put Plaintiffs on inquiry
notice of their potential claims.” Defs.’ Br. at 10. Kraft points out numerous facts
that should have provided notice of the fraud, including Kraft’s “abnormally large
long position” in December 2011 wheat contracts and the resulting increase in
futures prices, and Kraft’s failure to take delivery of the contracts (allegedly
showing that Kraft did not really need $90 million worth of wheat at its mill). Id. at
10-11. But these facts do not necessarily require a trader to conclude that Kraft was
manipulating the market. In fact, the crux of the Complaint is that Kraft’s
transactions were structured to deceive others into believing that Kraft would take
delivery and that its long position was reflective of Kraft’s true wheat needs. The
public could have believed, for example, that Kraft was executing a bona fide hedge,
or that Kraft did not ultimately take delivery of the contracts because it was able to
find cheaper wheat elsewhere. Any number of reasonable conclusions other than
manipulation would have been plausible from Kraft’s behavior. What’s more, this is
46
not a case where there was significant media coverage that exposed the scheme; on
the contrary, Ploss alleges that “[t]here was no public announcement more than two
years before this action was filed … [and] the facts of the manipulation were totally
concealed.” Compl. ¶ 93. Because there is more than “a conceivable set of facts,
consistent with the complaint, that would defeat a statute-of-limitations defense,”
dismissal on these grounds is inappropriate. Sidney Hillman, 782 F.3d at 928.
B. The Alleged “EFP Wash Trading Scheme”
1. Section 9(a)(2) Manipulation
Next, Ploss argues that Kraft violated the anti-manipulation provisions of the
CEA by carrying out the EFP wash trading scheme. Ploss is not bringing these
claims under Section 4c’s wash trade prohibition, which he admits cannot sustain a
private right of action.14 Pls.’ Resp. at 30-31. Instead, Ploss argues that the EFP
wash trades form the basis of a manipulation claim under Sections 6(c)(1) and 9(a)
of the CEA. In response, Kraft argues that Ploss’s market manipulation allegations
are conclusory and lack “basic information,” such as how the prices were artificial,
how the Plaintiffs were harmed as a result, and how Kraft benefited from the
scheme. Defs.’ Br. at 25-28. The Court agrees that the wash trading allegations fail
to state an adequate claim.
To review the facts: from 2003 to 2014, Kraft allegedly made non bona-fide
“exchange for physical” (EFP) transactions, which involves trading physical
commodities for an offsetting futures contract. Compl. ¶¶ 45, 131. These
14Section
4c of the CEA provides that “[i]t shall be unlawful for any person to offer to
enter into, enter into, or confirm the execution of a transaction” that includes “a ‘wash
sale.’” 7 U.S.C. § 6c(a).
47
transactions happen off the exchange, and the parties are permitted to change the
delivery period and location. Id. ¶ 122. Under CME and CBOT rules, bona fide
trades must occur between separate accounts under independent control. Id.
¶¶ 125-26. Parties to an EFP transaction must also document the trade and report
it to the exchange. Id. ¶¶ 127-28. The parties report the volume of the physical
commodity exchanged (but not the price), and this information is published daily on
CME Group’s website. Id. ¶¶ 128-29. Ploss alleges that EFP volume “is an
important element in the price discovery function of the market, by reflecting
supply and demand factors” and is considered by traders when deciding whether or
not to transact. Id. ¶ 130.
Ploss alleges that Kraft made off-exchange EFP transactions between two of
its own accounts from 2003 to 2013. Id. ¶¶ 131-33. These were illegitimate wash
trades because Kraft was the counterparty to its own trades, and there was no
physical exchange of wheat. Id. Kraft reported the trading volumes to CBOT, which
in turn reported them to the broader wheat market. Id. ¶ 134. Ploss alleges that “by
reporting these EFP transactions, Kraft duped the CBOT wheat market into
believing that a bona fide ownership transfer of CBOT wheat futures had occurred”
and made the market believe that there was greater demand for wheat than
actually existed. Id. In turn, this “caused the prices of CBOT wheat futures
contracts to be artificial by injecting artificial supply and fundamentals used to
price these contracts.” Id. ¶¶ 134-36.
48
Ploss comes close to stating a claim, but he does not allege some critical
elements of the wash trading scheme, including how the EFP transactions impacted
futures prices, how Kraft gained from the alleged manipulation, and how the
Plaintiffs were harmed. Thus, he has not adequately alleged the ability to influence
prices or the existence of artificial prices for the Section 9(a)(2) claim. First, as to
ability to influence, Ploss only alleges that Kraft reported its EFP transactions to
the exchange, which then published the volume information (but not price
information) to the broader market. Id. ¶ 129. And he alleges that “market
participants consider this information when transacting in the cash and derivative
markets for the commodity.” Id. ¶ 130. But “considering” this information does not
necessarily mean that the traders relied upon the information to trade and that this
information caused any change in prices. Although Ploss alleges that the volume
information “duped the CBOT wheat market,” id. ¶ 134 and caused artificial prices,
this conclusion is barebones because there are no allegations explaining the link
between the published volumes and the price changes. In fact, it is not actually
clear that the published information affected prices at all—Ploss alleges that “[t]he
EFP transactions were used or may have been used to …. determine the price basis”
of wheat futures. Id. ¶ 140 (emphasis added). For the same reasons, the Complaint
does not adequately say (with factual allegations, rather than conclusions) that
there were artificial prices, nor is there information about how the prices were
artificial, whether they went up or down, or how Kraft benefited from the scheme.
Finally, the allegations do not establish the plausibility of actual damages, which
49
are required to sustain a private right of action under the CEA. 7 U.S.C. § 25(a)(1)
(“Any person … who violates this chapter … shall be liable for actual damages … .”).
Although Kraft allegedly made unlawful EFP wash transactions between 2003 and
2014, the Plaintiffs only allege that they were harmed from trading in December
2011 and March 2012 futures contracts as a result of Kraft’s long wheat futures
scheme. Compl. ¶¶ 15-22. None of the Plaintiffs have alleged that artificial prices
from the EFP wash scheme caused any injuries, whether the Plaintiffs traded at
prices that were higher or lower than they should have been, or how artificial prices
otherwise harmed their transactions. The lack of this information means that Ploss
has not even alleged a claim under the more generous Rule 8(a) standard, much less
Rule 9(b), because the Complaint does not provide Kraft with notice of how the
wash trades impacted prices or how the Plaintiffs were injured.
The Court thus grants Kraft’s motion on Count Four, which is dismissed
without prejudice. If the Plaintiffs believe that they can adequately re-plead this
claim, then they will have to seek leave to amend the Complaint.
2. Section 6(c)(1) Manipulation
Similarly, the wash trading allegations under Section 6(c)(1) fail for the same
reasons. Unlike the long wheat futures scheme, these allegations are based on an
explicit misrepresentation as opposed to market behavior. This EFP scheme is
based on a false report—that is, intentionally or recklessly “delivering, or causing to
be delivered … a false or misleading or inaccurate report concerning crop or market
information or conditions that affect or tend to affect the price of any commodity in
50
interstate commerce … .” 7 U.S.C. § 9(1)(A); 17 C.F.R. § 180.1(a)(4). Kraft allegedly
submitted false volume information to CBOT, which then published the information
to the market; this may form the basis of a false-report claim. Because claims that
are based on an explicit misrepresentation sound in fraud, the heightened pleading
standard of Rule 9(b) applies. See supra Section III.A.2.ii.
In addition to a material misrepresentation or omission, a fraud claim also
requires reliance, causation, and loss, Dura Pharm., 544 U.S. at 341, which Ploss
has not alleged. Again, Ploss has only alleged that traders “considered” the
allegedly misleading information in an unspecified way and that “[t]he EFP
transactions were used or may have been used to …. determine the price basis” of
wheat futures. Id. ¶¶ 130, 140.15 And the Complaint does not allege how the EFP
transactions impacted futures prices, how Kraft gained from the alleged
manipulation, and how the Plaintiffs were harmed. The Section 6(c)(1) claims fail
15Neither
party raises the fraud-on-the-market theory of reliance. In the securities
context, that theory relieves a plaintiff from alleging that she individually relied on a
misleading statement, based on the idea that “in an open and developed securities market,
the price of a company’s stock is determined by the available material information
regarding the company and its business … . Misleading statements will therefore defraud
purchasers of stock even if the purchasers do not directly rely on the misstatements.” Basic
Inc. v. Levinson, 485 U.S. 224, 241-42 (1988) (citation and internal quotation marks
omitted). See also, e.g., Schleicher v. Wendt, 618 F.3d 679, 682 (7th Cir. 2010) (“When
someone makes a false (or true) statement that adds to the supply of available information,
that news passes to each investor through the price of the stock.” (emphasis in original));
Ziemack v. Centel Corp., 856 F. Supp. 430, 433 (N.D. Ill. 1994) (“[F]raud on the market
theory allows a plaintiff who relied on the integrity of the market but never heard the
allegedly fraudulent statements to sue.” (citation omitted)).
Ploss has not made this argument, so it is waived. Even if he did argue it, it is
unclear whether it would have been successful. Asserting fraud-on-the-market “clearly
require[s] a plaintiff to specifically plead facts that show a well-developed, efficient
market,” Greenberg v. Boettcher & Co., 755 F. Supp. 776, 782 (N.D. Ill. 1991) (citing cases),
which Ploss has not done.
51
for many of the same reasons already described above in the Section 9(a)(2) context.
See supra Section III.B.1. So Count Five is also dismissed without prejudice.
C. Sherman Act
Ploss next alleges that Kraft violated the Sherman Act by gaining control of a
large interest in wheat futures at the end of 2012 in order to create anticompetitive
prices. Compl. ¶¶ 158-71. In response, Kraft argues that Ploss has failed to state a
claim of monopolization because Ploss does not allege (1) a relevant antitrust
market; (2) monopoly power; or (3) a predatory bidding claim. Defs.’ Br. at 31-34.
The Court disagrees, as explained below.
Section 2 of the Sherman Act makes it unlawful for anyone to “monopolize, or
attempt to monopolize, or combine or conspire with any other person or persons, to
monopolize any part of the trade or commerce … .” 15 U.S.C. § 2. This section of the
Sherman Act prohibits “the employment of unjustifiable means to gain that power”
and requires “two elements: (1) the possession of monopoly power in the relevant
market and (2) the willful acquisition or maintenance of that power … .” United
States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). Unlawful acquisition of
monopoly power is “distinguished from growth or development as a consequence of a
superior product, business acumen, or historic accident,” all of which are
permissible. Id.; see also Endsley v. City of Chicago, 230 F.3d 276, 282 (7th Cir.
2000) (“Section 2 forbids not the intentional pursuit of monopoly power but the
employment of unjustifiable means to gain that power.” (citation omitted)).
52
1. Monopoly Power in Relevant Market
The first element, possession of monopoly power, means “the power to
exclude competition or to control price[.]” Indiana Grocery, Inc. v. Super Valu
Stores, Inc., 864 F.2d 1409, 1414 (7th Cir. 1989) (citation omitted); see also MCI
Commc’ns Corp. v. Am. Tel. & Tel. Co., 708 F.2d 1081, 1198 (7th Cir. 1983)
(monopoly power “is the economic power to exclude or limit entry of competitors into
the relevant market or to control prices in the relevant market”). So this element
itself contains two sub-requirements: (1) a relevant market; and (2) possession of
monopoly power in that market.
i. Relevant Market
Kraft’s first contention is that Ploss has failed to identify a relevant market.
Defs.’ Br. at 29-31. “For purposes of § 2 of the Sherman Act, a market is defined by
the reasonable interchangeability of the products and the cross-elasticity of demand
for those products.” In re Dairy Farmers of Am., Inc. Cheese Antitrust Litig., 767 F.
Supp. 2d 880, 901 (N.D. Ill. 2011) (citing U.S. v. E.I. du Pont de Nemours & Co., 351
U.S. 377, 394-95 (1956)). Put another way, “the products in a market must have
unique attributes that allow them to be substituted for one another, but make them
difficult to replace with substitute products from outside the market.” Id. (citing
Todd v. Exxon Corp., 275 F.3d 191, 201-02 (2d Cir. 2001)). Ploss alleges that the
relevant market is December 2011 soft red winter wheat futures contracts. Compl.
¶¶ 163, 166. Kraft believes that this is not a relevant market because it does not
53
include the cash market; according to Kraft, wheat on the cash market is a
substitute for wheat on the futures market (and vice versa). Defs.’ Br. at 29-31.
The problem with Kraft’s argument is that when it comes to futures
contracts, a confined period of time indeed can define a relevant market for
antitrust purposes. In In re Dairy Farmers, the district court held that the June,
July, and August 2004 Class III milk futures markets were each relevant markets.
767 F. Supp. 2d at 902. The court explained that “there [was] a unique value to be
gained from trading in June 2004 Class III milk futures versus futures for another
month or another type of milk because futures positions can be used to hedge
against price changes for the underlying commodity during the same period of
time.” Id. In other words, cash-bought milk versus futures-bought milk have
distinct features and are not necessarily substitutes—the former is used for
immediate consumption, and the latter is used for hedging against risks. See id.
And each contract month satisfies a different hedging need. Id. What’s more, the
defendants in In re Dairy Farmers “[were] not accused of inflating the price of milk
futures by gaining control of the underlying commodity” through a corner or a
squeeze, and it was not a problem that the relevant market did not include the cash
crop. Id. at 904.16 Here, too, Ploss alleges that the wheat futures market is often
used for hedging, Compl. ¶¶ 43-44, suggesting that the December 2011 wheat
futures contracts also have a unique value for hedging purposes. So Ploss is not
16Although
the In re Dairy Farmers defendants allegedly “engage[d] in [a] related
scheme to bid up the price of cheese,” the court did not rely on this scheme or this physical
market to conclude that the plaintiffs had alleged monopoly power in the Class III milk
futures markets. 767 F. Supp. 2d at 904.
54
required to also include the cash wheat market in the market definition, because
cash wheat and futures market wheat are not necessarily interchangeable. Nor
must an antitrust violation be based on a corner or squeeze involving control over
both markets.
Another reason that counsels against dismissal is that “market definition is a
deeply fact-intensive inquiry, [and] courts hesitate to grant motions to dismiss for
failure to plead a relevant product market.” In re Dairy Farmers, 767 F. Supp. 2d at
901 (internal quotation marks omitted) (quoting Todd, 275 F.3d at 199-200). Courts
should dismiss antitrust claims based on a market argument only when it is certain
that “the alleged relevant market clearly does not encompass all interchangeable
substitute products or when a plaintiff fail[s] even to attempt a plausible
explanation as to why a market should be limited in a particular way.” Id. (citation
and internal quotation marks omitted). To be sure, facts unearthed in discovery
might prove otherwise, but it is plausible that December 2011 contracts are a viable
market for antitrust-analysis purposes, so dismissal on these grounds is not
appropriate at this time.
ii. Monopoly Power
On the next market-related issue—possession of monopoly power in the
December 2011 futures market—Ploss may allege either (1) “direct evidence of
anticompetitive effects”; or (2) indirect evidence of monopoly power with allegations
of “[the] relevant product and geographic markets and by showing that the
defendant’s share exceeds whatever threshold is important for the practice in that
55
case.” Toys “R” Us, Inc. v. F.T.C., 221 F.3d 928, 937 (7th Cir. 2000) (citations
omitted). Ultimately, the allegations must show that the defendant has the “power
to control prices or exclude competition in a relevant market.” MCI, 708 F. 2d at
1107 (internal quotation marks omitted) (quoting E.I. duPont, 351 U.S. at 391); see
also Grinnell, 384 U.S. at 571 (same). “[W]here plaintiffs fail to identify any facts
from which the court can infer that defendants had sufficient market power to have
been able to create a monopoly, their § 2 claim may be properly dismissed.” Endsley,
230 F.3d at 282 (citation and internal quotation marks omitted).
For example, in In re Dairy Farmers, the “Plaintiffs undoubtedly allege[d]
that Defendants’ actions caused the price of Class III milk futures to be artificially
inflated” and that “as a result of Defendants’ actions, some plaintiffs purchased
Class III milk futures at what were essentially noncompetitive prices.” 767 F. Supp.
2d at 903. The defendants exerted monopoly power by “[buying] up all of the
available long positions in three months’ worth of Class III milk futures contracts …
in an effort to gain control of those markets and sell their positions at an
unreasonably high price.” Id. at 886. This was sufficient to allege that the
defendants had the ability to control prices, which the defendants made
anticompetitive. Id. at 903.
Like the In re Dairy Farmers plaintiffs, Ploss has also alleged direct evidence
of anticompetitive effects by pleading Kraft’s ability to control prices and the
resulting anticompetitive prices. Kraft also obtained a large long position in
December 2011 wheat contracts not because it wanted to consume that wheat or
56
hedge against price risks, but to artificially inflate the prices of those futures
contracts with a massive increase in long open positions. Id. ¶¶ 1, 16, 82, 166-68.
Ploss further alleges that Kraft held a “commercially-unreasonable number of long
positions … that constituted a dominant position. This gave Kraft greater influence
or control over the prices of December 2011 CBOT wheat futures contracts.” Id.
¶ 166. At one point, its positions accounted for 87% of the open interest. Id. ¶¶ 5, 88.
Kraft then “used its position of control” to force up December 2011 wheat prices,
even “caus[ing] the market to shift from contango to backwardation … .” Id. ¶¶ 16768. In other words, although futures prices are usually higher for further-out
contracts, Kraft allegedly caused this trend to reverse so that near-term contracts
became more expensive, falsely signaling an increased demand in near-term
contracts. See id. At this stage, these allegations are enough to allege monopoly
power in the relevant market. Again, discovery might very well prove otherwise
(indeed, this is the closest question as to the survival of the antitrust claim), but
Ploss gets the benefit of assuming the allegations as true (and the benefit of
reasonable inferences) at this dismissal-motion stage.
Kraft responds that the 87% figure “is a shock tactic but not a plausible
allegation of monopoly power” because “open interest” reflects the total number of
outstanding (non-liquidated) futures contracts at a given time, but it does not reflect
the size of the market. Defs.’ Br. at 32. Put another way, Kraft says that it could not
have excluded competitors in a market with no barriers to entry and no cap in
trading capacity; Kraft contends that any other trader could have entered the
57
market, purchased December 2011 wheat futures contracts, and diluted Kraft’s 87%
share. Id. Kraft also repeats that it could not have monopolized the futures market
if it did not have a dominant position of physical wheat—essentially arguing that
corners and squeezes are the only forms of antitrust violations in the futures
markets. Id. at 33.
But In re Dairy Farmers persuasively rejected similar arguments—there, the
defendants contended that there were no barriers to entry in a cash-settled milk
futures market; relatedly, the defendants also argued that they could not have
executed a corner or a squeeze of the futures market if they could not control the
cash market. 767 F. Supp. 2d at 903. As to barriers to entry, the court explained
that in a cash market, a trader settles her obligations by paying cash to close out a
position, and not by physical delivery or acceptance of goods. Id. The defendants
argued that “because cash-settled futures do not have a deliverable supply, there
can never be a mismatch between demand and supply near the expiration [of the
futures contracts], or at any other time.” Id. (citation and internal quotation marks
omitted). In other words, because there could be no shortage of cash (like there
could be with physical goods), the defendants could not monopolize the milk futures
market because they could not take advantage of a supply shortage. Id. That also
meant, according to the defendants, that anyone could enter the futures market at
any time. Id. Although the court acknowledged that cash-settled markets often have
low (or no) barriers to entry, the plaintiffs’ claims nevertheless survived because
they alleged that “[defendants] conspired to bid up the price of milk futures in order
58
to buy up all of the long positions available in the relevant markets in spite of the
CME position limits. Moreover, by bidding up the price of futures, they were able to
control 100% of the markets for at least one day.” Id. at 904. Although it was true
that other traders theoretically could have entered the market, the plaintiffs alleged
that in reality, “Defendants had placed the rest of the competition in a position, at
least temporarily, where they would not be able to seize control of a meaningful
portion of the markets.” Id. Similarly, the court emphasized that the plaintiffs’
antitrust theory need not rely on a corner, squeeze, or traditional scheme involving
control over the supply of the physical commodity—rather, it was enough to allege
that the defendants excluded others from the market by obtaining a dominant long
position that “exceed[e]d what any one other investor could possibly control.” Id. at
904.
Likewise, the same type of monopoly power is at issue in this case. Ploss
alleges that Kraft succeeded in excluding competitors from taking a meaningful
position in the December 2011 wheat futures market. In particular, Kraft’s 87%
long position “constituted a dominant position” that “gave Kraft great influence or
control over the prices … .” Id. ¶ 166. And it allegedly “used its position of control to
force the spread between the December 2011 and March 2012 CBOT wheat futures
contracts,” to increase December 2011 prices, and to shift the pricing curve from
contango to backwardation. Id. ¶ 168. Like In re Dairy Farmers, even though it may
be true that other participants theoretically could have entered the market, Ploss
alleges that in reality, competitors were priced out of any meaningful ability to do
59
so. Id. Finally, as explained in In re Dairy Farmers, monopoly power does not have
to look like a traditional corner or squeeze, 767 F. Supp. 2d at 903-04, and case law
has not interpreted the statute in such a confined way. Ploss therefore has alleged
monopoly power in a relevant market.
2. Willful Acquisition
The second element of a monopolization claim under § 2 of the Sherman Act
requires “the willful acquisition or maintenance of that power as distinguished from
growth or development as a consequence of a superior product, business acumen, or
historic accident.” Grinnell, 384 U.S. at 570-71. The willful acquisition prong is
meant “[t]o safeguard the incentive to innovate, [so] the possession of monopoly
power will not be found unlawful unless it is accompanied by an element of
anticompetitive conduct.” Verizon Commc’ns v. Law Offices of Curtis V. Trinko,
LLP, 540 U.S. 398, 407 (2004) (emphasis in original). Willful acquisition of
monopoly power requires intent, not “to obtain a monopoly or to capture an ongoing
increase in market share,” which is “the aim of every business endeavor,” but rather
intent to “maintain or achieve monopoly power by anticompetitive means.” Endsley,
230 F.3d at 283. There are myriad examples of anticompetitive conduct, including
refusal to deal with competitors, Verizon, 540 U.S. at 408, predatory pricing or
bidding, Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 549 U.S. 312
(2007), or exclusive horizontal agreements (among competitors), Toys “R” Us, 221
F.3d at 935. The precise boundaries of anticompetitive conduct are sometimes
difficult to define, but as the Supreme Court put it, “[i]f a firm has been attempting
60
to exclude rivals on some basis other than efficiency, it is fair to characterize its
behavior as predatory [or exclusionary].” Aspen Skiing Co. v. Aspen Highlands
Skiing Corp., 472 U.S. 585, 605 (1985) (citation and internal quotation marks
omitted).
In the commodities context, some courts have explained that “an intentionally
manipulative trading strategy to raise the prices of [futures contracts] in order to
profit from [defendants’] long positions may constitute exclusionary conduct.” Shak
v. JPMorgan Chase & Co., 2016 WL 154119, at *17 (S.D.N.Y. Jan. 12, 2016)
(emphasis in original) (citing In re Crude Oil Commodity Futures Litig., 913 F.
Supp. 2d 41 (S.D.N.Y. 2012); In re Term Commodities Cotton Futures Litig., 2013
WL 9815198. And “to support such an inference, the allegations must be of conduct
that, were it not intended to obtain or sustain monopoly power, would be
uneconomic and irrational. In other words, the alleged conduct must be such that a
reasonable inference of intent to control prices and exclude competitors may be
drawn.” Shak, 2016 WL 154119, at *17. The Court has already explained how
Kraft’s behavior was uneconomic and financially irrational, and it need not repeat
the analysis here. See supra Sections III.A, III.C.1. Those allegations suggest that
Kraft “used [its] bidding tactics and [its] large market share ... to exclude
competitors” and that it “did not gain [its] monopoly power purely by chance or
through their superior business acumen.” In re Dairy Farmers, 767 F. Supp. 2d at
905. Because Ploss’s allegations suggest that price changes of December 2011 wheat
61
futures were driven by willful anticompetitive conduct, and not by chance or other
legitimate economic reason, Ploss’s monopoly claim stands.
Kraft nevertheless argues that Ploss has failed to allege a predatory bidding
claim, which is a type of exclusionary conduct. Defs.’ Br. at 34. Such a claim
“involves the exercise of market power on the buy side or input side of a market”; it
works when “a purchaser of inputs bids up the market price of a critical input to
such high levels that rival buyers cannot survive (or compete as vigorously) and, as
a result, the predating buyer acquires (or maintains or increases its) monopsony
power.” Weyerhaeuser, 549 U.S. at 320 (citation and internal quotation marks
omitted). In Weyerhaeuser, the Supreme Court reversed a holding that the
defendant drove a competitor out of business by artificially inflating the price of
sawlogs by overbidding and buying more logs than necessary. Id. at 314-15. Kraft
believes that the standards in Weyerhaeuser are applicable here, but Ploss has not
actually pled a predatory bidding scheme. Pls.’ Br. at 36 n.18. Ploss has not pled
that Kraft bid up prices of inputs, nor is there any explanation of what those inputs
would even be—as the In re Dairy Farmers court explained, a commodities antitrust
claim alleging a conspiracy to obtain a dominant share of the commodities markets
“do[es] not fit neatly into the prototypical descriptions of predatory pricing or
predatory bidding schemes laid out in Weyerhaeuser.” 767 F. Supp. 2d at 905-06.
Like the In re Dairy Farmers court, this Court also concludes that Weyerhaeuser
does not apply because the alleged anticompetitive conduct does not involve
predatory bidding, but rather obtaining a large market share of a futures market to
62
“place[] the rest of the competition in a position, at least temporarily, where they
would not be able to seize control of a meaningful portion of the markets.” Id. at
904. See supra Section III.C.1. Thus, the willful acquisition element is also
adequately alleged, and the Court denies Kraft’s motion with regards to Count Six.
D. Unjust Enrichment
Count Seven, the final claim, is one for unjust enrichment. That is a claim
against “a defendant [who] has unjustly retained a benefit to the plaintiff’s
detriment,” and whose “retention of the benefit violates the fundamental principles
of justice, equity, and good conscience.” Cleary v. Philip Morris Inc., 656 F.3d 511,
516 (7th Cir. 2011) (citation and internal quotation marks omitted). Ploss bases this
claim on the same underlying facts as the manipulation and antitrust claims,
seeking restitution and disgorgement. Compl. ¶¶ 172-76. Kraft argues that this
claim cannot stand because (1) it is based on the same underlying facts as the
statutory claims, which fail; and (2) the CEA preempts common law unjust
enrichment claims.
The first argument is readily rejected because the Court has already held
that the statutory claims related to the long wheat futures scheme are not
dismissed. It is true that “[i]f an unjust enrichment claim rests on the same
improper conduct alleged in another claim, then the unjust enrichment claim will be
tied to this related claim—and, of course, unjust enrichment will stand or fall with
the related claim.” Cleary, 656 F.3d at 517; see also In re Dairy Farmers, 801 F.3d at
765 (“When the plaintiff’s particular theory of unjust enrichment is based on alleged
63
fraudulent dealings and we reject the plaintiff’s claims that those dealings, indeed,
were fraudulent, the theory of unjust enrichment that the plaintiff has pursued is
no longer viable.”). But because the Court has held that the CEA manipulation
claims for the long wheat futures scheme survive Kraft’s motion to dismiss, Ploss’s
unjust enrichment claim based on those same underlying facts may also proceed.
But to the extent that Ploss’s unjust enrichment claim relies on the EFP wash
trading scheme, that claim is dismissed without prejudice. See supra Section III.B.
As to preemption, Kraft’s main argument is that the remedy of disgorgement
expressly “conflict[s] with the limited remedies Congress has prescribed” under the
CEA, which allows only for actual damages. Defs.’ Br. at 35 (citing 7 U.S.C. § 25(a)).
But Kraft’s argument is inconsistent with the statutory text. True, the CEA’s
provision for private rights of action does require actual damages, id., and provides
that “[t]he rights of action authorized by this subsection … shall be the exclusive
remedies under this chapter … .” 7 U.S.C. § 25(a)(2) (emphasis added). The key,
however, is the phrase “under this chapter”—nowhere does the provision suggest
that it limits remedies from other federal or state law actions. See Am. Agric.
Movement, Inc. v. Bd. of Trade of City of Chicago, 977 F.2d 1147, 1156-57 (7th Cir.
1992), abrogated on other grounds by Time Warner Cable v. Doyle, 66 F.3d 867 (7th
Cir. 1995) (the qualifier “under this chapter” “indicates that the exclusivity
provision extends only to private actions seeking redress under the CEA, and does
not curtail actions brought under other federal laws or state law”). Kraft has
pointed to no other source of the CEA that expressly preempts the unjust
64
enrichment claim, or to any other reason that “application of state law would
directly affect trading on or the operation of a futures market, [such that state law]
would stand as an obstacle to the accomplishment and execution of the full purposes
and objectives of Congress.” Am. Agric. Movement, 977 F.2d at 1156-57 (“[T]he
structure and history of the CEA indicate that the propriety of conflict preemption
depends upon the particular context in which a plaintiff seeks to bring a state law
action.” (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941) (internal quotation
marks omitted)); Holladay v. CME Grp., 2012 WL 5845621, at *2 (N.D. Ill. Nov. 16,
2012) (a state law claim that “envisions no administrative agency involvement
which might conflict with the jurisdiction of the Commodity Futures Trading
Commission” was not preempted). Therefore, Kraft’s motion to dismiss Count Seven
is also denied.
IV. Conclusion
For the reasons explained above, Kraft’s motion to dismiss [R. 76] the
Consolidated Class Action Complaint is denied as to Count One (Section 9(a)(2) long
wheat futures manipulation); Count Two (Section 6(c)(1) long wheat futures
manipulation); Count Three (principal-agent liability for long wheat futures
manipulation); Count Six (Sherman Act claim); and Count Seven (unjust
enrichment). The Court grants Kraft’s motion as to Count Four (Section 9(a)(2) EFP
wash trading manipulation) and Count Five (Section 6(c)(1) EFP wash trading
manipulation), but these claims are denied without prejudice. Ploss may seek leave
to amend the Complaint for Counts Four and Five.
65
Kraft must answer the Complaint and its surviving counts by July 18, 2016.
The parties shall issue their first-round of written discovery requests no later than
July 22, 2016. At the July 14, 2016 status hearing, the Court will set the remainder
of the discovery schedule.
ENTERED:
s/Edmond E. Chang
Honorable Edmond E. Chang
United States District Judge
DATE: June 27, 2016
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