Securities Regulation Daily ADM charged with manipulating key ethanol benchmark in class action suit
Friday, September 6, 2019

ADM charged with manipulating key ethanol benchmark in class action suit

By Brad Rosen, J.D.

A Swiss firm claims ADM violated the CEA through its manipulation of ethanol prices that caused hundreds of millions of dollars in damages to entities trading in ethanol derivatives.

AOT Holding AG, a Swiss corporation with its principal place of business in Zug, Switzerland, has filed a class action complaint against Archer Daniels Midland Company ("ADM"), a Delaware Corporation headquartered in Decatur, Illinois, in the Central District of Illinois. AOT claims that ADM violated the Commodity Exchange Act ("CEA") by manipulating the Chicago Ethanol (Terminal) price, a key ethanol benchmark that is used to price and settle numerous ethanol derivatives traded on the New York Mercantile Exchange ("NYMEX") and Chicago Board of Trade ("CBOT"), both of which are operated by CME Group, Inc. (AOT Holding AG v. Archer Daniels Midland Company, September 4, 2019).

A scheme is hatched. According to the complaint, ADM is one of the largest ethanol producers in the United States. In late 2017, ADM faced increasingly low margins on its ethanol sales due to a supply glut. Rather than closing or idling some of its ethanol mills, which ADM’s competitors had already begun to do in response to lower prices and margins, ADM took a different course. Instead, ADM adopted a plan whereby it made huge bets via short derivatives positions that the price of ethanol would decline further. The value of these derivatives was tied directly to the benchmark Chicago Ethanol (Terminal) price, which is calculated daily by S&P Global Platts ("Platts") based on 30 minutes of ethanol trading activity at the Kinder Morgan Argo Terminal in Argo, Illinois. This 30-minute window is called the Market-on-Close ("MOC") window.

ADM sells at irrationally low prices. The complaint claims that ADM, beginning in November 2017, aggressively sold ethanol during the MOC window by reducing prices and filling the lower-priced bids of various ethanol purchasers in these critical 30 minutes of daily trading. This practice ensured that its derivatives bets would pay off handsomely.

On its face, ADM’s behavior appeared economically irrational because it chiseled away at ADM’s ethanol profit margins and even drove prices below ADM’s variable cost of production. ADM’s competitors were largely unwilling to sell at these low prices because they (and ADM) could sell their ethanol at significantly higher prices at other terminals in the U.S. or through private contracts, even after taking additional transport costs into account.

Prices manipulated downward. The complaint further alleges that the intended and actual effect of ADM’s aggressive pricing and filling of lower priced bids during the MOC window was to manipulate the Platts benchmark price downward. ADM’s downward manipulation of physical ethanol prices at the Argo Terminal in turn artificially increased the value of ADM’s massive short positions in ethanol derivatives based on those same prices—thus allowing ADM’s ethanol group to reap outsized profits despite low or negative margins on physical ethanol sales. ADM’s public financial filings credited this anomalous performance to "effective ethanol risk management."

Evidence supports manipulative scheme. According to the complaint, the evidence indicates that, starting in November 2017 and continuing through the present, much of ADM’s behavior was economically irrational and contrary to its self-interest as an ethanol producer, unless it was intending to manipulate physical ethanol prices at the Argo Terminal in order to benefit ADM’s large short positions in related ethanol derivatives. Items of evidence supporting claims of manipulation include:

  • before November 2017, when ethanol prices and profit margins were higher, ADM was one of the largest buyers of ethanol at the Argo Terminal. Starting in November 2017 and continuing thereafter, when ethanol prices were lower and profit margins were eroding or non-existent, ADM became the largest seller of ethanol at the Argo Terminal, and accounted for roughly 70 percent of all ethanol sales there;
  • before November 2017, ADM was one of the largest buyers of ethanol at the Argo Terminal during the MOC window. Starting in November 2017 and continuing thereafter, ADM became by far the largest seller of ethanol during the MOC window, as it accounted for roughly 90 percent of all such sales;
  • starting in November 2017 and continuing through at least March 29, 2019, ADM was only a seller during the MOC window, and never a buyer, and
  • starting in November 2017 and continuing thereafter, ADM routinely sold more ethanol at low prices than it could deliver, including during the MOC window. To satisfy its obligations for those sales, ADM bought ethanol at the end of trading months at higher prices than it had sold ethanol for earlier in the month. ADM made sure to never buy this ethanol during the MOC window, where its purchases might raise the Chicago Ethanol (Terminal) price and thereby negatively impact ADM’s short positions in ethanol derivatives.

ADM’s conduct caused damages. AOT asserts that ADM’s manipulation of ethanol prices at the Argo Terminal, including during the MOC window, resulted in hundreds of millions of dollars in damages to AOT and other entities that traded in derivatives tied to Argo Terminal prices. Accordingly, the AOT is seeking to represent a class of all similarly situated entities and to hold ADM accountable under the CEA for its alleged willful and intentional misconduct.

Relief Sought. The relief AOT is seeking includes:

  • the entry of an order declaring that ADM’s actions, as set forth in the complaint, violate the CEA;
  • an award to the plaintiff and class members of damages, punitive and exemplary damages, and/or restitution in an amount to be determined at trial, as well as pre- and post-judgment interest;
  • the issuance of appropriate injunctive and other equitable relief against ADM; and
  • an award to the plaintiff and class members of their costs of suit, including reasonable attorney fees and expenses.

The case is No. 19-cv-2240.

Attorneys: Michael E. Klenov (Korein Tillery LLC) for AOT Holding AG.

Companies: AOT Holding AG; Archer Daniels Midland Co.

MainStory: TopStory CommodityFutures Derivatives FraudManipulation IllinoisNews

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