Market Regulator Heads Back to Court Against Kraft and Mondelez

By Dave Michaels 

WASHINGTON -- The country's primary regulator of derivatives markets is clashing in court again with some of the nation's biggest food companies, in a case that could reveal the extent of the government's power to go after market manipulation.

The Commodity Futures Trading Commission, Kraft Foods Group Inc. and Mondelez Global LLC announced a $16 million settlement last summer with an unusual feature: a gag order on both sides.

Kraft subsequently accused the CFTC and several of its commissioners of violating the order with a press release that touted the penalty and statements from the regulators explaining their views. In response, a federal judge scuttled the settlement.

Now the CFTC is headed toward a civil trial to try to prove its case, which dates to 2015, when regulators accused Kraft of illegally manipulating the price of wheat by amassing a huge position in futures contracts though it didn't intend to take delivery of the commodity. A trial date hasn't yet been set.

Kraft's strategy, the CFTC alleged, was to use its enormous trading position to drive down the price of wheat, which the company could then buy on the spot market, while increasing the price of the futures contracts it could later sell for a profit.

Kraft and Mondelez were originally part of the same company, Kraft Foods Inc. Kraft's grocery business was spun off in 2012 as Kraft Foods Group, and its snack-foods business took the Mondelez name. In 2015, Kraft Foods Group completed a merger with H.J. Heinz Co., forming Kraft Heinz Co. A spokeswoman for Kraft Heinz and a spokesman for Mondelez declined to comment.

The case would be the first involving manipulation claims to go to trial under an antifraud statute, passed in 2010, that was intended to make it easier for the CFTC to go after wrongdoing.

The CFTC has filed dozens of enforcement actions alleging manipulation of futures markets in recent years, but most of them involved a particular scheme known as spoofing that has been easier to pursue because Congress specifically outlawed that trading strategy. Kraft wasn't accused of spoofing.

"Historically it has been notoriously difficult for the CFTC to prosecute market manipulation," said Gina-Gail S. Fletcher, a professor at Indiana University Maurer School of Law.

The CFTC declined to comment about the Kraft case. But officials said they remain motivated to police harmful trading practices.

"Combating manipulative and deceptive conduct in our markets is crucial to our agency's mission to preserve market integrity and to protect market participants," said Jamie McDonald, the CFTC's enforcement director.

Under an older law, the CFTC was required to show that a defendant's trading created an "artificial price." Last year, a federal judge ruled against the CFTC in a market-manipulation case it brought under the older law against trading-firm founder Don Wilson and his DRW Investments LLC.

Legal experts said the outcome, which the CFTC didn't appeal, could curb the CFTC's appetite for complex market-manipulation cases. But the newer law has a lower bar to show harm: The CFTC doesn't have to prove the misconduct was intentional -- recklessness also qualifies -- and it doesn't have to show the creation of an artificial price, Ms. Fletcher said.

The stakes in the Kraft case are high because the two sides had reached a settlement in August. The settlement order didn't explain how the company's trading allegedly violated the law, an unusual omission in regulatory enforcement orders. The deal also didn't require the companies to agree with the regulator's claims that they had violated the law.

Two CFTC commissioners, Dan Berkovitz and Rostin Behnam, issued a statement that noted how unusual those terms were and insisted future deals shouldn't include such confidentiality provisions.

Kraft went to court, maintaining that the comments and separate press release violated the gag order in the deal. A federal appeals court ruled in October that the commissioners had a right to opine on the case.

But the CFTC's press release remained a question -- and a U.S. district judge said the settlement was off.

Heath Tarbert, the CFTC's chairman, said Dec. 10 that the agency wouldn't agree in the future to any settlement that "restricts the commission or our staff from publicly stating their views on the case."

"Affirming this right to speak ensures the CFTC can inform the public of our enforcement priorities," he said.

"The CFTC is probably going to drive a harder bargain given that Kraft blew this up, and I don't think they are inclined to settle," Ms. Fletcher said. "Both of them feel as though there is so much more to lose that they are going to fight that much harder."

Write to Dave Michaels at [e-mail]

(END) Dow Jones Newswires

January 03, 2020 08:14 ET (13:14 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.