U.S. Commodity Futures Trading Commission v. Kraft Foods Group, Inc.
153 F. Supp. 3d 996
N.D. Ill.2015Background
- CFTC sued Kraft (and Mondeléz) alleging manipulation of December 2011 #2 Soft Red Winter Wheat futures and cash markets, excess speculative positions, and related violations; defendants moved to dismiss Counts I (Section 6(c)(1)/Reg.180.1) and II (Sections 9(a)(2)/6(c)(3)/Reg.180.2).
- Kraft is a major end-user of Toledo-region wheat; it usually hedged via futures and rarely took physical delivery. In late 2011 Kraft accumulated ~3,150 Dec 2011 CBOT long contracts (~15.75 million bushels; ~87% of open interest), then loaded out a small fraction and unwound the rest, realizing alleged profits.
- CFTC alleges Kraft’s procurement plan and internal emails show the intent: buy a large futures position (stated $90M) to signal demand/take delivery (though it lacked storage/need), thereby depressing local cash prices and inflating futures, then buy cheaper cash wheat and reverse futures positions.
- Key alleged facts: internal emails describing the plan and expected market effects, a September trial run showing delivery constraints, positions exceeded CBOT limits, price movements in early December consistent with the alleged scheme, and over $5M in alleged profits.
- The district court accepted the complaint facts as true for the motion-to-dismiss and evaluated sufficiency under Rule 12(b)(6) (and whether Count I must meet Rule 9(b)).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Section 6(c)(1)/Reg.180.1 (Count I) requires fraud pleading and is governed by Rule 9(b) | CFTC: 6(c)(1)/180.1 reaches manipulative conduct; not all claims require classic fraud pleading so 9(b) is inapplicable or less exacting | Kraft: 6(c)(1)/180.1 is an anti‑fraud provision; Count I must satisfy Rule 9(b) particularity | Court: 6(c)(1)/Reg.180.1 is a fraud‑based provision (modeled on SEC §10(b)/Rule10b‑5); claims under it must meet Rule 9(b) particularity standards. |
| Whether CFTC pled a manipulative "device, scheme, or artifice to defraud" under 6(c)(1)/180.1 (what acts, who, when, effect) | CFTC: alleged specific acts (plan, emails, accumulation of contracts, limited load‑out, timing, price effects) showing scheme and market deception | Kraft: complaint fails to allege how Kraft communicated false intent to market beyond taking large positions; position alone isn’t deceptive | Court: Complaint sufficiently alleges the manipulative acts, actors, timing, and market effects; buying massive futures to create a false signal can itself be the deceptive device. |
| Required scienter for Count I under Reg.180.1 | CFTC: plead intent or recklessness based on emails and circumstantial facts | Kraft: demands higher (intent or extreme recklessness) and looks to distinct securities precedents | Court: scienter requirement is intentional or reckless (Reg.180.1); CFTC adequately alleged intent and/or recklessness via emails and circumstantial facts. |
| Count II (9(a)(2)/6(c)(3)/180.2) — elements: ability to influence, artificial price, causation, specific intent | CFTC: alleged dominant market position, exceeded position limits, price moves, scheme motive and emails show intent and causation | Kraft: CFTC didn’t plead a corner/squeeze or other recognized method to show ability; alleged effects limited to local surcharge competition; no artificial price or causation | Court: the complaint pleads ability to influence (large position, % open interest, position‑limit breaches, price changes), artificial price (prices allegedly driven by false signal), causation, and specific intent; Count II survives. |
Key Cases Cited
- Chiarella v. United States, 445 U.S. 222 (1980) (§10(b) is catchall for fraud; manipulation claims must involve fraud)
- Dirks v. SEC, 463 U.S. 646 (1983) (to violate Rule 10b‑5 there must be fraud)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ("manipulative" connotes intentional or willful conduct designed to deceive or defraud)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (market‑manipulation fraud must be pled with particularity but allows certain flexibility where facts lie in defendant’s control)
- In re Soybean Futures Litig., 892 F. Supp. 1025 (N.D. Ill. 1995) (multi‑factor, fact‑specific approach to manipulation; common formulations of manipulation elements)
- In re Amaranth Nat. Gas Commodities Litig., 587 F. Supp. 2d 513 (S.D.N.Y. 2008) (large positions plus lack of legitimate motive supports manipulation inference)
- Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702 (7th Cir. 2008) (scienter for securities fraud includes recklessness)
- Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033 (7th Cir. 1977) (recklessness as relevant scienter standard under commodities/securities law)