Tuesday, August 09, 2016

Private action plaintiffs urge court to deny Kraft request for interlocutory appeal

By Lene Powell, J.D.

Plaintiffs in a private action alleging commodity price manipulation and antitrust violations by Kraft Foods urged a federal district court to reject Kraft’s request to certify three questions for interlocutory appeal. Pointing to the recent denial of interlocutory appeal in a similar case brought by the CFTC, the plaintiffs argued that the questions, involving the elements of manipulation and monopoly power, were not contestable or controlling and would not expedite the case (Ploss v. Kraft Foods Group, Inc., August 5, 2016).

Two cases against Kraft. In April 2015, the CFTC brought an enforcement action alleging that Kraft and a subsidiary manipulated wheat prices in the cash and futures markets. The CFTC alleged that Kraft took a very large, uneconomic futures position in a type of wheat it did not use in order to depress the cash price for the type of wheat it did use, and that this constituted price manipulation in violation of the Commodity Exchange Act (CEA).

Shortly thereafter, futures trader Harry Ploss filed a private action against Kraft based on the same alleged conduct. Like the CFTC, Ploss filed in the federal district court for the Northern District of Illinois. However, the CFTC case is being heard by Judge John Robert Blakey, whereas the Ploss case is being heard by Judge Edmond Chang. Ploss also added a claim of monopolization under the Sherman Act.

Kraft subsequently lost motions to dismiss in both the CFTC and Ploss suits, and moved to certify two issues for interlocutory appeal: whether a manipulation claim required some element of misrepresentation; and whether there could be an artificial price where prices converged between the cash and futures markets. In the Ploss case, Kraft also questioned whether a defendant’s open market purchases at open market prices could support a monopolization claim. Judge Blakey denied Kraft’s motion for interlocutory appeal in the CFTC case, ruling that the issues were not contestable questions of law for which the court’s decision was likely to be reversed on appeal.

Is misrepresentation an element of manipulation? Ploss encouraged Judge Chang to follow Judge Blakey’s ruling and reject Kraft’s assertion that some sort of false communication or other misrepresentation is required to state a claim for market manipulation under CEA Sections 6(c)(1) or 9(a)(2). To require this would undermine the congressional intent in enacting the CEA to deter and redress all forms of market manipulation, said Ploss, and no judge has ever held that an explicit misrepresentation is required to state a CEA claim. Last year, the Seventh Circuit articulated a four-part test for price manipulation in In re Dairy Farmers of Am., Inc. Cheese Antitrust Litig., and that test did not include an element of misrepresentation.

Moreover, said Ploss, the question was not contestable. Kraft was attempting to extrapolate the Seventh Circuit’s ruling in Sullivan v. Long (1995) to require a “false communication” in order to state a market manipulation claim under the CEA. However, Sullivan involved the short selling of securities in violation of the Securities Exchange Act of 1934, and it would be unreasonable to extend it to commodities manipulation. The federal securities laws and CEA have different purposes and interpretations, and unlike the federal securities laws, the CEA prohibits all price manipulation. And, in order to thwart crafty manipulators, Congress, the courts, and the CFTC have purposely refused to adopt safe harbors from the definition of manipulation under the CEA. Accordingly, Sullivan is not controlling, said Ploss.

Artificial price. Kraft’s second question also should not be certified, Ploss argued. Judge Blakey found in the CFTC case that the question of whether “artificial” prices existed requires a complex fact determination, because it needs some factual predicate to know what the “true” prices were. Therefore, it was not a question of law, as required for issues certified for interlocutory appeal. In addition, the holding in Sullivan did not preclude convergence between cash wheat and futures from creating artificial prices, Ploss asserted.

Monopoly power. The question of monopoly power was also a factual rather than legal question, asserted Ploss. Without a factual record, the Seventh Circuit could not evaluate whether Kraft could have monopoly power when the purchases were made on the open market at open market prices. Also, although the monopoly question had not been before Judge Blakey, the court had previously held in a 2011 case alleging manipulation of milk futures prices that monopolization could occur by open market purchases.

Further, Kohen v. Pac. Inv. Mgmt. Co. LLC (2009), cited by Kraft, actually undermined rather than bolstered Kraft’s argument by holding that unlike a cash-settled futures market, a commodities-settled futures market (like wheat) can plausibly be cornered. In addition, that case did not suggest that a corner or a squeeze are the only means available for a defendant to monopolize a futures market. A large dominant position like Kraft’s—an 87 percent long position—could exclude competitors from taking a meaningful position in the market and thus give Kraft great influence over the prices, Ploss contended.

Not dispositive. Finally, Ploss argued that the appeal would not expedite the case. None of Kraft’s proposed three questions were dispositive, and if Kraft prevailed, the ruling would not end the two cases, but rather would require the parties to wage two contemporaneous battles, one in district court and another in the Seventh Circuit. Accordingly, Ploss urged the court to deny Kraft’s motion for certification of the issues for interlocutory appeal.

The case is No. 15 C 2937.

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