CFTC Targets Price Manipulation in Agricultural Markets

At a time when consumers can least afford it, food prices have increased significantly.  Just last week, U.S. Bureau of Labor Statistics data revealed that grocery prices showed their biggest monthly increase in nearly 50 years.  While some of the price increases can be attributed to supply chain disruptions, reduced supply and other market conditions, the pandemic appears to offer an opportunity to profit from price manipulation.  For example, as beef rises prices increase to record levels, the price paid to cattle ranchers has plummeted.

Price manipulation violates Sections 6(c)(3) and 9(a)(2) of the Commodity Exchange Act (“CEA”), which is enforced by the U.S. Commodity Futures Trading Commission (“CFTC”).  In addition, the CEA proscribes attempted price manipulation, i.e., conduct that is specifically intended to cause artificial prices or prices that do not reflect the legitimate forces of supply and demand.  CFTC v. Donald Wilson & DRW Inv., LLC, 2016 WL 7229056 (SDNY Sept. 30, 2016).

Even before the pandemic, the CFTC announced that it would focus on combating market manipulation in agricultural markets.  In particular, Chairman Heath Tarbert stated: “America is the breadbasket of the world.  Market manipulation and similar wrongdoing inflicts real pain on farmers by denying them the fair value of their hard work and crops.  It also hurts American families by raising the costs of putting food on the table.  Protecting our agricultural markets from manipulation and abuse is a special focus for the CFTC.”

In addition, the CFTC has recently signaled a robust approach to enforcement.  The Fiscal Year (FY) 2019 report of the CFTC Division of Enforcement revealed:

• The number of actions filed by the CFTC during FY 2019 (69) marked an increase over the average of the five prior FYs (67.5);

• The total monetary relief awarded in CFTC enforcement actions in FY 2019 (more than $1.3 billion) marked a 39% increase over the prior FY; and

• Approximately 65 percent of all cases filed during FY 2019 involved charges of commodities fraud, manipulative conduct, or spoofing—violations that strike at the heart of market integrity and harm market participants.

CFTC Enforcement Actions for Agricultural Commodity Price Manipulation

Examples of enforcement actions for agricultural commodity price manipulation include:

• An enforcement action taken against Lansing Trade Group, LLC in July 2018 requiring it to pay a $3.4 million civil monetary penalty for the attempted manipulation of the price of certain wheat futures and options contracts that were traded on the Chicago Board of Trade and for aiding and abetting the attempted manipulation of the cash price for yellow corn by entering into a transaction with its counterparty at a price below the market price.  According to the order imposing sanctions, Lansing’s “strategy centered on acquiring and loading-out for delivery, by train or barge, wheat with 3 parts per million deoxynivalenol” and then cancelling wheat shipping certificates “to send a false or misleading signal to the market of a demand for 3 ppm Vomitoxin wheat in order to increase the value of its wheat spread and option positions.”

• A $16 million penalty and injunctive relief against Kraft Foods Group, Inc. and Mondelēz Global LLC, for manipulation and attempted manipulation of the prices of cash wheat and wheat futures. The CFTC’s complaint alleged “that Kraft and Mondelēz violated speculative position limits by holding wheat futures positions in excess of speculative position limits established by the CFTC and the Chicago Board of Trade (CBOT) without a valid hedge exemption or a bona fide hedging need, and engaged in numerous noncompetitive trades in CBOT wheat.”

Food Price Manipulation and the CFTC Whistleblower Program

If you have original information about commodity price manipulation, you could be eligible for a CFTC whistleblower award.  Since 2014, the CFTC has issued more than $100 million in awards to whistleblowers.  The largest CFTC whistleblower awards to date are $45 million, $30 million and $10 million.  Whistleblower disclosures have enabled the CFTC to recover more than $800 million.

Original information “leads to” a successful enforcement action if either:

1. The original information caused the staff to open an investigation, reopen an investigation, or inquire into different conduct as part of a current investigation, and the CFTC brought a successful action based in whole or in part on conduct that was the subject of the original information; or

2. The conduct was already under examination or investigation, and the original information significantly contributed to the success of the CFTC’s action.