When the CFTC charged Kraft Foods in 2015 with allegedly manipulating the wheat futures markets, the derivatives industry was abuzz with anticipation. Litigated manipulation cases are fairly rare for the CFTC, and legal practitioners looked forward to the first case to shed light on the agency’s new fraud-based anti-manipulation authority granted by the Dodd-Frank Act.
But instead of providing important guidance on manipulative conduct, the case that started out as a poster child unexpectedly went badly off the rails when a settlement blew up in spectacular manner, with an irate district court judge threatening to hold CFTC Commissioners and the Commission itself in contempt. After a petition for writ of mandamus to the Seventh Circuit soothed tempers and created clear guardrails, some conflicts were knitted up, but some tensions yet remain.
Now, with the case back on track and a settlement again in the offing, the Chicago Bar Association held a seminar to discuss this unusual case with important implications for both anti-manipulation law and the public’s right to know. The panel was chaired by Brad Rosen, a Wolters Kluwer analyst, and featured experts on both derivatives and media law. Neal Kumar, a former attorney in the CFTC Office of General Counsel and current Willkie Farr associate, addressed the anti-manipulation aspects of the case. Seth Stern, an attorney at Funkhouser Vegosen Liebman & Dunn Ltd. and former journalist, explored implications for transparency and public access.
Novel anti-manipulation action and unusual settlement. In 2015, the CFTC charged Kraft Foods Group and Mondelez Global LLC (“Kraft”) with manipulating futures prices for red winter wheat, a key ingredient in Kraft’s snack foods. The CFTC alleged that the defendants violated sections 6(c)(1) and 9(a)(2) of the Commodity Exchange Act, as well as CFTC Regulations 180.1 and 180.2.
The CFTC has brought cases over the years under “classical” price-based anti-manipulation provisions, but Kraft was the first case brought under the fraud-based anti-manipulation provisions in Section 6(c)(1) and Regulation 180.1, as amended by Dodd-Frank. The CFTC filed the complaint in the Northern District of Illinois and the matter was assigned to Judge Robert Blakey. (Separately, a parallel private action, Ploss v. Kraft, was filed the next day and assigned to Judge Edmond Chang.)
After slugging it out for several years, the CFTC and Kraft entered into a settlement in August 2019 that required Kraft to pay a $16 million civil monetary penalty. The consent order featured an unusual confidentiality or “gag” agreement, which read:
Novel anti-manipulation action and unusual settlement. In 2015, the CFTC charged Kraft Foods Group and Mondelez Global LLC (“Kraft”) with manipulating futures prices for red winter wheat, a key ingredient in Kraft’s snack foods. The CFTC alleged that the defendants violated sections 6(c)(1) and 9(a)(2) of the Commodity Exchange Act, as well as CFTC Regulations 180.1 and 180.2.
The CFTC has brought cases over the years under “classical” price-based anti-manipulation provisions, but Kraft was the first case brought under the fraud-based anti-manipulation provisions in Section 6(c)(1) and Regulation 180.1, as amended by Dodd-Frank. The CFTC filed the complaint in the Northern District of Illinois and the matter was assigned to Judge Robert Blakey. (Separately, a parallel private action, Ploss v. Kraft, was filed the next day and assigned to Judge Edmond Chang.)
After slugging it out for several years, the CFTC and Kraft entered into a settlement in August 2019 that required Kraft to pay a $16 million civil monetary penalty. The consent order featured an unusual confidentiality or “gag” agreement, which read:
8. Neither party shall make any public statement about this case other than to refer to the terms of this settlement agreement or public documents filed in this case, except any party may take any lawful position in any legal proceedings, testimony or by court order.Binding itself to a gag provision like this was atypical for the CFTC. But in announcing the settlement, the CFTC proceeded with business as usual, issuing a fairly routine press release. In addition to describing the violations and sanctions, the press release also included a quote from Chairman Heath Tarbert stating that market manipulation damages farmers and families.
Accompanying the press release, the CFTC issued a separate statement that the Commission did not consider the confidentiality provision to restrict statements by individual commissioners, and indicated that the Commission did not intend to enter into similar confidentiality agreements in the future except under limited circumstances. The same day, Commissioners Rostin Behnam and Dan Berkovitz issued a joint statement criticizing the confidentiality provision¾especially because the settlement did not include factual findings and conclusions of law, as CFTC consent orders typically do.
“[P]articularly in settlements where there are no evidentiary findings, it is critical that a Commissioner be able to speak publicly about his or her reasons for determining that the law has been violated, why the agreed penalties are appropriate, and why the agency did not obtain findings of fact or proceed to trial,” wrote the commissioners. “The public has a right to know whether federal agencies are obtaining appropriate remedies when the law is violated.”
Ensuing blowup and a furious judge. Kraft was outraged by the public statements of the Commission and Commissioners, believing that they violated the confidentiality provision. Kraft brought an emergency motion for contempt and sanctions, charging that the CFTC had engaged in a “deliberate, orchestrated effort” to violate the consent order.
Judge Blakey, too, was unhappy with the CFTC. At a hearing on the contempt motion, the judge ordered Tarbert, Berkovitz, Behnam, and James McDonald, the agency's director of enforcement, to personally appear and testify. Telegraphing his discontent, Blakey instructed the CFTC to brief the following issues:
- The relevance of an individual’s state of mind in determining scienter for purposes of civil contempt, and a possible referral of criminal contempt to the Department of Justice.
- Whether the civil monetary penalty imposed against the defendants could be reduced by a potential sanction amount imposed against the agency without violating principles of sovereign immunity.
- Whether the CFTC or individuals would assert various privileges, including the Fifth Amendment privilege against self-incrimination.
Back at the district court, Judge Blakey vacated the settlement and reopened the underlying market manipulation case, opining that the public statements had rendered the consent order “ineffectual.” Finally, on Valentine’s Day 2020, Judge Blakey issued an order stating that the CFTC had engaged in “egregious misconduct” and granted in part Kraft’s motion for contempt and sanctions¾even though Kraft had indicated it would be withdrawing the motion as part of a new contemplated settlement. Judge Blakey indicated that the court would issue findings of fact and conclusions of law by separate order, which has not yet issued.
Discussion: where are we now? At this point, the case is more or less back on track. Major issues of transparency and contempt have been resolved, and the CFTC and Kraft have indicated they are close to a new settlement. But much remains to be decided.
Anti-manipulation. In anticipation of a possible forthcoming new settlement in the Kraft case - hopefully one with findings of fact and conclusions of law - Neal Kumar made the following points about fraud-based anti-manipulation:
- Neal “highly recommends” reading the adopting release for CFTC Regulation 180.1. Although the language is fairly general and does not identify the specific elements required, it does walk through what the new authority is. Neal said he finds something new to think about each time he reads it.
- The main thing that stands out to Neal about fraud-based manipulation is a lower standard of intent compared to price-based manipulation. The latter requires a showing of specific intent to cause an artificial price. This can be very challenging to prove, and contributes to the relatively low number of CFTC anti-manipulation actions. In contrast, fraud-based manipulation requires only recklessness.
- Neal likened the difference in intent to proving murder versus manslaughter. With price-based manipulation, it’s as if the CFTC had to prove that a drunk driver specifically intended to kill a person with their car. With fraud-based manipulation, it’s as if the CFTC merely had to prove that the driver happened to kill someone. Recklessness is much easier to prove, requiring only overall facts and circumstances, versus a specific email or instant message by the defendant.
- Unlike price-based manipulation, the CFTC must prove fraud in order to establish a fraud-based manipulation claim. Neal noted that the CFTC’s initial position was that it did not need to prove fraud, but an early Kraft ruling held that fraud did indeed need to be pleaded.
- It’s unusual to see a government agency agree to a confidential settlement, said Seth. Some agencies, like the DOJ, say they’re essentially never going to do that, or only under very limited and clear-cut circumstances. The CFTC does not have a regulation regarding this, but they do have a historic practice of issuing findings in these circumstances. And, the CFTC has said this is kind of a one-off thing and they don’t envision doing this again. Therefore, Seth does not see confidentiality provisions becoming a trend for the CFTC.
- Brad agreed with this assessment. He noted that Berkowitz and Tarbert suggested strongly at a recent open meeting that we are not going to be seeing these kind of confidentiality agreements.
- Seth did not find it particularly surprising that important portions of the record had been sealed before the Seventh Circuit ordered them unsealed. On the one hand, it is Seventh Circuit precedent that court filings are presumptively public and should only be sealed if a judge finds that closure serves higher values. And even then, the seal should be narrowly tailored. For example, filing portions containing trade secrets will be redacted, but not the rest of the filing. Despite this circuit policy, however, judges often believe that if the parties are agreeing to seal a filing, then why not? Judges tend to be more focused on the parties in front of them than on the public’s right to know, said Seth.
- Seth noted a peculiarity of the e-filing system is that a party can just click a box to designate a filing as sealed, without needing to show that the seal was approved by the judge.
- Judge Blakey’s decision to “partially grant” Kraft’s contempt motion, but defer findings of fact and conclusions of law, has a chilling effect, in Seth’s view. If someone is going to be held in contempt, it is preferable state the basis at the time of the holding, said Seth.
Given the guidance from the Seventh Circuit and the CFTC’s own stated preference, most likely the consent order will not contain a confidentiality provision. Further, self-imposed gag orders will remain rare for the CFTC, and the Commission and individual commissioners will be free to speak their mind in future cases.
It seems further likely that, at least to some extent, the settlement will spell out findings of fact and conclusions of law, as practitioners are hoping. And that really is the bottom line for this case. Practitioners are looking for guidance on what constitutes manipulative conduct under the fraud-based anti-manipulation provision in Section 6(c)(1) and Regulation 180.1. When it eventually issues, it seems likely that Kraft will shed at least some light in this area.
Finally, Judge Blakey stated that the court would issue findings of fact and conclusions of law explaining the finding of contempt. Therefore, at some point the public will find out exactly what aspects of the Commission’s public statements and subsequent conduct caused the finding of contempt, and whether there are any associated penalties or sanctions.
Again, the contempt ruling is unlikely to be broadly applicable since the CFTC has said it is not planning to regularly enter into confidentiality agreements, so there is little possibility of breaching such an agreement in the future and being held in contempt. But at least the public will know.
The case is No. 1:15−cv−02881.
It seems further likely that, at least to some extent, the settlement will spell out findings of fact and conclusions of law, as practitioners are hoping. And that really is the bottom line for this case. Practitioners are looking for guidance on what constitutes manipulative conduct under the fraud-based anti-manipulation provision in Section 6(c)(1) and Regulation 180.1. When it eventually issues, it seems likely that Kraft will shed at least some light in this area.
Finally, Judge Blakey stated that the court would issue findings of fact and conclusions of law explaining the finding of contempt. Therefore, at some point the public will find out exactly what aspects of the Commission’s public statements and subsequent conduct caused the finding of contempt, and whether there are any associated penalties or sanctions.
Again, the contempt ruling is unlikely to be broadly applicable since the CFTC has said it is not planning to regularly enter into confidentiality agreements, so there is little possibility of breaching such an agreement in the future and being held in contempt. But at least the public will know.
The case is No. 1:15−cv−02881.