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CFTC Settlement In Kraft Unwound Due To Ineffectuality Of Confidentiality Provisions, Setting Up Possible Key Legal Rulings On Market Manipulation
11/05/2019On October 23, 2019, Judge John Robert Blakey of the United States District Court for the Northern District of Illinois vacated the $16 million settlement consent order between the U.S. Commodity Futures Trading Commission (“CFTC”) and Kraft Foods Group Inc. (“Kraft”) that would have resolved allegations that Kraft improperly traded wheat futures and manipulated the commodity’s market price. The Court reasoned that a prior Seventh Circuit ruling on the same case rendered certain confidentiality provisions within the settlement agreement “ineffectual,” and further concluded that these provisions, which were highly unusual within a regulatory settlement, were a material aspect of the parties’ decision to settle. The decision reopens a closely watched case that, if it continues to dispositive motions or trial, could have significant implications for the CFTC’s interpretation of what constitutes market manipulation.
The case began in 2015 when the CFTC filed a civil action against Kraft and Mondelez Global LLC (“Mondelez”), claiming that Kraft and Mondelez improperly traded wheat futures and manipulated the good’s market price. See Commodity Futures Trading Commission v. Kraft Foods Group, Inc., No. 1:15-cv-02881 (ND Il. 2019). The parties settled in August 2019 and the consent decree included an unusual confidentiality provision, which stated: “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.” Consent Order, Kraft Foods Grp., Inc., No. 1:15-cv-02881, Dkt. No. 355 at 3. While it is common for respondents to be required to agree to such provisions (akin to a “neither admit nor deny” settlement), it is highly unusual for a regulator to agree to such a requirement. And, it appears, the CFTC had a very different interpretation of the provision’s significance than did the respondents.
On August 15, 2019, the CFTC issued a press release announcing the suit’s resolution. See Matter of Commodity Futures Trading Comm’n, No. 19-2769 at 2 (7th Cir. Oct. 22, 2019). In addition, two Commissioners filed statements explaining why they voted in favor of accepting the settlement. Id. Kraft and Mondelez immediately moved for sanctions against the CFTC, claiming that the press release and statements violated the confidentiality provisions of their settlement agreement. Id. After reviewing the CFTC’s response, Judge Blakey set the motion for a hearing and directed Chairman Heath Tarbert, Commissioners Berkovitz and Behnam, the Commission’s Director of Enforcement, and several of the CFTC’s other employees to appear in court and testify under oath; before the scheduled hearing, however, the CFTC filed a petition for writ of mandamus to the Seventh Circuit.
A Seventh Circuit panel reviewing the district court’s order intervened and sided with the CFTC, largely taking issue with the procedures contemplated by the district court for the contempt hearing, but not suggesting that a hearing was unnecessary. Id. The district court believed the hearing should be held under seal, in light of the confidentiality provisions, but the appellate panel disagreed; it ordered all of the papers that Judge Blakey had previously required to be kept secret to be made public and dismissed the district court’s order to keep further hearing proceedings under seal, noting that a “confidentiality clause in the litigants’ [settlement] agreement does not authorize secret adjudication,” and that such a notion is inconsistent with the law of the Seventh Circuit. Id. at 3. The Seventh Circuit further directed the district court to withdraw its demand that the Chairman and two members of the CFTC, plus members of the staff, appear to testify under oath, and directed the district court to cease any effort to hold the individuals personally in contempt of court or otherwise to look behind the CFTC’s public statements and the administrative record. Id. at 6.
In its reasoning, the Seventh Circuit stressed that individual members of the CFTC could not be held in contempt, because they “are not parties to the agreement and consent decree.” Id. at 4. The Seventh Circuit recognized that under Federal Rule of Civil Procedure 65(d)(2)(B), “the parties’ officers, agents, servants, employees, and attorneys” are bound by an injunction. Id. at 4. However, the Seventh Circuit held that the rule does not apply to this case, because every member of the CFTC, pursuant to 7 U.S.C. §2(a)(10)(C), has the right to publish an explanation of his or her vote alongside any official publication by the CFTC. Id. at 5. This statute, the panel reasoned, means that the CFTC does not have authority to bind its members and that Rule 65(d)(2)(B) is therefore inapplicable to this case. Because the CFTC is not able to silence its agents directly, a consent decree is likewise “ineffectual” at attempting as much. Id. Thus, the panel ruled that the individuals could not be personally punished for speaking their minds about the settlement agreement.
In regard to whether the CFTC as an institution could be held in contempt, the Seventh Circuit ruled that requiring testimony from the Chairman, Commissioners, and staff members in open court would produce subjective evidence, which is inconsistent with Supreme Court precedent that requires disputes about civil contempt be resolved objectively. Instead, the panel ruled that the contempt determination should be made “because of what the Commission itself said and did, not because of what any of its members or employees thought or planned.” Id. at 6. In doing so, the panel directed the district court to look only to the four corners of the agreement, consent decree, and press release to determine whether the CFTC should be held in contempt of court.
On October 23, following the Seventh Circuit’s decision, Judge Blakey sidestepped the contempt question by vacating the consent order, because portions of the confidentiality provision, as applied to the Commissioners’ actions in issuing the disputed press release, were deemed “ineffectual.” Minute Order, Foods Group, Inc., No. 1:15-cv-02881, Dkt. No. 355. Judge Blakey explained that “the factual record undermines the notion that the parties ever agreed to the CFTC’s recent legal theory that the Consent Order would somehow bind the CFTC as an entity, but not bind the very agents through which it acts.” Id. Thus, the case has been reopened and the prior stay of proceedings has been lifted.
In the event the parties fail to renegotiate a settlement, this case could have significant implications for the CFTC’s rules regarding the interpretation of Section 6(c)(1) of the Commodities Exchange Act (“CEA”).
The CFTC has recently argued that Section 6(c)(1) of the CEA does not require the CFTC to prove an artificial price existed when pursuing “fraud and fraud based manipulative schemes” under Rule 180.1, and will presumably continue to press such a theory in Kraft.
In CFTC v. DRW Investments, Judge Richard J. Sullivan of the Southern District of New York rejected the CFTC’s legal interpretation, holding that for both attempted and completed manipulation claims, the CFTC must prove that a defendant intended to create an artificial price, not merely to affect a price. See U.S. Commodity Futures Trading Comm’n v. Wilson and DRW Investments, 2018 WL 6322024, at *1 (S.D.N.Y. Nov. 30, 2018). But the CFTC has been undeterred. The activity at issue in DRW ended before amendments to the Dodd-Frank Act and expansions to the CFTC’s enforcement authority under Rule 180.1 went into effect, giving the CFTC a basis to claim that its holdings are of limited significance.
Therefore, now that the case is once again moving forward, CFTC v. Kraft Foods Group, Inc., if it proceeds to dispositive motions or trial, could provide key guidance as to how courts interpret the scope of market manipulation under Rule 180.1.
