In yet another strange and bizarre development in connection with the CFTC’s ill-fated resolution of its market manipulation enforcement action against Kraft Foods Group and Mondelēz Global, New York law firm Kobre & Kim has sued the agency in the Southern District of New York. The law firm alleges that the Commission refused to respond to its Freedom of Information Act (FOIA) request seeking information with regard to the attempted settlement of that case. Kobre & Kim asserts its request will shed light on the unusual and unprecedented terms the agency agreed to in its attempted settlement of the matter, which included a “gag” provision by which the parties agreed to make no public statements about the case, other than those already in the public record (Kobre & Kim LLP v. CFTC, October 31, 2019).
Seeking to solve the mysteries around the CFTC-Kraft settlement. At the onset, Kobre & Kim raises a central question which is at the core of its FOIA complaint and quest for documents: “[W]hy did the CFTC, the nation’s principal regulator of commodities and derivatives markets, try to conceal the factual and legal bases for its litigation settlement with Kraft Foods Group Inc. and Mondelēz Global LLC … and agree never to discuss that settlement in public?” Some other public policy-oriented concerns raised by the law firm include:
- The CFTC has left the public in the dark about how the CFTC applied its anti-manipulation authority to a fact pattern it litigated for over four years. Beyond seeding concerns across the industry over arbitrary enforcement, the CFTC’s actions threaten to chill legitimate market behavior while failing to deter potential misconduct in the future.
- Unless and until the CFTC provides a full accounting of the attempted Kraft settlement, the public cannot have reasonable confidence that the agency is discharging its core mission of fostering open, transparent, and competitive markets.
- The CFTC’s secret settlement in the Kraft case, like its handling of other recent market manipulation cases, is a disservice to the industry the CFTC oversees. This is the latest example of the CFTC obfuscating the law on market manipulation by pressing legal theories that are inconsistent with what the courts have articulated and using its leverage to secure private settlements purportedly validating the CFTC’s own theories.
The Kraft case took on heightened importance following the CFTC’s loss in another market manipulation case, CFTC v. DRW Investments, LLC, in November 2018. Following a bench trial in the DRW case, the judge rejected the CFTC’s theory of manipulation, stating that it was “only the CFTC’s Enforcement Division that has persisted in its cry of market manipulation, based on little more than an ‘earth is flat’-style conviction that such manipulation must have happened because the market remained illiquid.” In a stinging rebuke to the CFTC in that matter, the court also observed, “It is not illegal to be smarter than your counterparties in a swap transaction, nor is it improper to understand a financial product better than the people who invented that product.” Kobre & Kim represented the defendants in that litigation.
The central importance of the Kraft case. According Kobre & Kim’s complaint, following the court’s rejection of the CFTC’s manipulation theory in DRW, the industry was at a loss regarding what the CFTC would (or would not) deem to be manipulation in the future. Many in the industry were looking to the Kraft case for that guidance. Kobre & Kim asserts that the CFTC responded to its defeat in DRW by further obscuring the law and abandoning its four-year litigation against Kraft in favor of a settlement in which the defendants ultimately paid $16 million to resolve the matter, but where the Commission made no public findings of fact or conclusions of law.
According to the law firm, the CFTC’s agreement not to make any public statements about the case in the future as part of its resolution ensured that large swaths of the rationale for the settlement would remain insulated from public oversight. In effect, the Kobre & Kim contends that the CFTC negotiated a private resolution that left the industry without any intelligible guidance and with a potential misimpression that the legal theories asserted against Kraft had a sound legal basis.
Legal claims and relief requested. According to the four-count complaint, the CFTC’s violation of FOIA includes its:
- failure to comply with statutory deadlines;
- failure to conduct a reasonable search;
- improper withholding of agency records; and
- failure to produce reasonably segregable information.
CFTC officials did not respond to a request for comment on this lawsuit. As is practice in these types of matters, the Department of Justice will respond to the complaint.
The case is No. 19-cv-10151.