Securities Regulation Daily Judge vacates $16M Kraft-CFTC consent order and reopens manipulation case over wheat trades
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Thursday, October 24, 2019

Judge vacates $16M Kraft-CFTC consent order and reopens manipulation case over wheat trades

By Mark S. Nelson, J.D.

A federal district judge in Chicago vacated a consent order that settled the CFTC’s manipulation claims over Kraft’s wheat market trades following clarification by the Seventh Circuit of how the district court should handle related contempt proceedings against the CFTC.

U.S. District Judge John Robert Blakey vacated a consent order agreed to by the CFTC, Kraft Foods Group, Inc., and Mondelez Global LLC regarding alleged manipulation by Kraft of markets for red winter wheat, a key ingredient in Kraft’s snack foods. The district court’s latest order preserves part of the contempt proceedings that were ongoing against the CFTC before the Seventh Circuit was asked to clarify how the district court should proceed on the contempt issues. The district court also reopened the case and directed the parties to either reach a new settlement or to prepare to agree to a trial date at a hearing set for late November (CFTC v. Kraft Foods Group, Inc., October 23, 2019).

Contempt proceedings. Just days ago, the Seventh Circuit ruled on the CFTC’s petition for a writ of mandamus filed after the district judge had raised the prospect of CFTC officials being called to testify about public statements the Commission and individual commissioners made following entry of the original consent order that settled the CFTC’s case against Kraft for $16 million but without the court making any factual findings or conclusions of law. Kraft and Mondelez had asked the district court to find the CFTC and several of its commissioners in contempt of court for allegedly violating the consent order’s gag rule provision. The Commission’s public statement and a separate public statement by Commissioners Dan Berkovitz and Rostin Behnam asserted a right to speak on the matter based on a provision in the Commodity Exchange Act (CEA) and an interpretation of the consent order’s gag rule.

As the Seventh Circuit had noted, the district judge responded in the mandamus proceeding to the effect that criminal contempt was no longer a possibility for the CFTC or its individual commissioners or staff. That means the remaining contempt proceedings will focus on civil contempt issues. But Judge Blakey’s newest order makes clear that the civil contempt motion filed by Kraft is denied with respect "to any request for civil contempt personally against the CFTC Chairman, Commissioners, or staff members." The civil contempt proceeding, however, remains open to address other related issues.

Judge Blakey also clarified that CFTC commissioners and staff will no longer face the prospect of testifying in court in any further contempt proceedings. The judge will issue a separate order resolving the open contempt issues, including whether the CFTC violated the consent order and other alleged violations of prior court orders, such as one regarding the privacy of settlement conference discussions. Said the court: "Consistent with this Court's practice throughout these proceedings, no other aspect of this case has been made private, and no secret adjudication has been, or will be, authorized."

Consent order vacated. Judge Blakey also vacated the consent order previously agreed to by the CFTC, Kraft, and Mondelez, citing language in the Seventh Circuit’s opinion to the effect that the consent order’s gag rule was "ineffectual" at least regarding public statements made by individual CFTC commissioners. As a result, in combination with the view that the gag rule was material to the prior settlement, the court vacated the consent order, the court’s approval of the consent order, and the court’s judgment.

The Seventh Circuit had reasoned thus regarding the public statement by Commissioners Berkovitz and Behnam: "So if we understand the consent decree as an effort to silence individual members of the Commission, it is ineffectual, for no litigant may accomplish through a consent decree something it lacks the power to accomplish directly, unless some other statute grants that power—and no one argues that any other statute overrides §2(a)(10)(C)." The provision cited is CEA Section 2(a)(10)(C), which states: "Whenever the Commission issues for official publication any opinion, release, rule, order, interpretation, or other determination on a matter, the Commission shall provide that any dissenting, concurring, or separate opinion by any Commissioner on the matter be published in full along with the Commission opinion, release, rule, order, interpretation, or determination."

The statement issued by Commissioners Berkovitz and Behnam expressly relied upon the CEA provision as the basis for their speaking publicly on the CFTC-Kraft settlement. The Commission’s public statement on the settlement interpreted the gag rule in the consent order to apply only to a "party" (i.e., the Commission, Kraft, and Mondelez), but not to individual commissioners speaking on their own behalf.

Judge Blakey further explained the vacatur as follows: "Quite simply, the factual record undermines the notion that the parties ever agreed to the CFTC's recent legal theory that the Consent Order would somehow bind the CFTC as an entity, but not bind the very agents through which it acts, i.e., its Chairman, Commissioners or staff members."

Case reopened. Having vacated the consent order, Judge Blakey then reopened the CFTC’s case against Kraft and Mondelez and lifted the stay that had halted proceedings in the district court while the Seventh Circuit mulled the CFTC’s mandamus petition. That means numerous motions also have been reinstated and must be resolved as the case moves forward, including:

  • CFTC’s motion for summary judgment on Count III (speculative position limits) and Count IV (wash sales). The CFTC’s overall theory was that Kraft signaled the market not to store wheat such that sellers would be forced to sell wheat to Kraft at lower prices.
  • Kraft’s/Mondelez’s motion for summary judgment. The motion emphasizes the lack of evidence (while also seeking to exclude Dr. Wilson’s report on false signaling), the lack of an artificial price, the presence of a valid hedge exemption, and that wash sales claims fail as a matter of law.
  • Kraft’s/Mondelez’s motion to exclude testimony of Dr. William Wilson, the CFTC’s economics expert.
  • Kraft’s/Mondelez’s motion to strike Dr. Wilson’s report of August 31, 2018.
  • CFTC’s motion to compel Kraft/Mondelez to produce deposition transcripts and exhibits from the related private civil case of Ploss v. Kraft (N.D. Ill, No. 15-cv-2937). U.S. District Court Judge Edmond E. Chang is considering several motions and the next scheduled status hearing is set for November 25, 2019.

Judge Blakey observed that CFTC, Kraft, and Mondelez can enter into a new settlement agreement and submit a new proposed consent order to the court. But if the parties cannot agree to a settlement, they should be prepared on November 20, 2019 to set a trial date.

The case is No. 15-cv-2881.

Attorneys: Charles D. Marvine for the CFTC. Dean Nicholas Panos (Jenner & Block LLP) for Kraft Foods Group, Inc.

Companies: Kraft Foods Group, Inc.; Mondelez Global LLC; Mondelez International, Inc.

MainStory: TopStory CFTCNews CommodityFutures Derivatives DoddFrankAct Enforcement ExchangesMarketRegulation FraudManipulation RiskManagement IllinoisNews

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