Kraft Foods will need to continue to fight an action brought by federal commodities trading regulators after a federal judge refused to toss the U.S. Commodity Futures Trading Commission’s lawsuit alleging the food company improperly manipulated wheat prices to their benefit.
On Dec. 18, U.S. District Judge John Robert Blakey ruled in Chicago federal court, rejecting the request by Northfield-based consumer-packaged food maker Kraft’s to dismiss the Trading Commission’s legal action.
The CFTC had brought the action in early April against both Kraft and Deerfield-based food company Mondelez Global, alleging the two companies, which formerly operated under the same corporate umbrella, bought up large amounts of wheat futures contracts in the fall of 2011 to lower the price the companies would pay for wheat, saving them millions of dollars.
The alleged actions came at a time wheat prices were spiking worldwide. The complaint alleged Kraft, together with Mondelez, bought up more than $90 million in wheat futures contracts, equivalent to about a six-month supply of wheat for the companies, allegedly inducing wheat sellers to believe Kraft would take delivery of and refine that wheat for use in its food products. That would lead wheat sellers to lower their prices.
The actions allegedly marked a sharp departure from Kraft’s usual behavior, which, according to court documents, involved the company keeping on hand no more than a two-month supply of the grain, while using the futures markets to hedge its wheat costs.
According to court documents, the strategy worked, as Kraft’s futures contracts increased from $5.75 per bushel on Nov. 28, 2011, to $6.12 on Dec. 2, 2011, and the cash price declined from $6.16 per bushel on Dec. 2, 2011, to $5.86 on Dec. 9. The moves allegedly netted Kraft at least $5.4 million in profit.
In its motion to dismiss, Kraft had argued the CFTC had failed to state a strong enough case because the company said the regulators had failed to fully demonstrate how Kraft allegedly manipulated the market, that Kraft had the ability or intent to manipulate the market or that Kraft’s actions sent the signals to traders and wheat sellers the CFTC says they did.
Blakey, however, said Kraft’s arguments fell short at this stage. While later discovery and proceedings may back Kraft’s counterarguments to the CFTC allegations, the judge said, for now, the CFTC has done enough to sustain its legal action.
Blakey particularly pointed to an email, cited in the CFTC’s complaint, sent by senior Kraft management which the judge said “shows that Kraft ‘expected’ its actions to affect the market by lowering the cost for cash wheat and raising the cost for wheat futures. It also shows that Kraft had a ‘plan’ in place that it expected would allow it to save money on cash wheat and make money on wheat futures.”
“Kraft intended that the market would believe it would take delivery of the wheat for use in its mill and react to that belief by lowering the price of cash wheat,” Blakey said.
Kraft is defended in the CFTC action by attorneys with the firms of Jenner & Block, of Chicago, and Sutherland Asbill & Brennan, with offices in New York, Washington, D.C., and Atlanta.
The case is docketed in the U.S. District Court for the Northern District of Illinois as 1:15-cv-02881 U.S. Commodity Futures Trading Commission v. Kraft Foods Group, Inc. et al.
The regulatory civil action has spurred class actions against Kraft, as well. Those cases, brought by commodities investors and consolidated under docket 1:15-cv-02937 Ploss v. Kraft Foods Group Inc., are still pending in Chicago federal court, where U.S. District Judge Edmond Chang is expected to soon deliver a judgment on Kraft’s motion to dismiss those claims.