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The Wheat and the Whale: Reckless Manipulation and the CFTC's use of the Dodd-Frank Anti-Manipulation Provisions

In a recent federal court enforcement action, the Commodity Futures Trading Commission charged Kraft Foods and its former affiliate Mondelez Global with manipulating and attempting to manipulate the price of cash wheat and wheat futures.

In a strategy approved by senior management, as alleged, Kraft purchased USD 90 million of wheat futures – about six months' supply – without intending to take delivery, correctly calculating that this would depress cash wheat prices and increase wheat futures prices. The strategy reportedly earned Kraft approximately USD 5.4 million in profits. In a press release, Aitan Goelman, the CFTC's director of enforcement, said "This case goes to the core of the CFTC’s mission: protecting market participants and the public from manipulation and abusive practices that undermine the integrity of the derivatives markets."

For the CFTC, the Kraft case is clearly an instance where the principle is more prominent than the penalty. The germ of this complaint was planted nearly 18 months earlier, in October 2013, when the CFTC dramatically employed its new authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to fashion a settlement with JP Morgan Chase Bank regarding the "London Whale" trading losses. There, the CFTC first deployed reckless manipulation as a standard to challenge claimed trading abuses in the swap market. With Kraft, the CFTC again employs the recklessness standard to extend the agency's anti-manipulation authority.

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Legal and Regulatory Risk Note
United States