Originally published April 27 2015
Kraft Foods defrauded $5.4 million from wheat market traders, CFTC alleges
by David Gutierrez, staff writer
(NaturalNews) The U.S. Commodity Futures Trading Commission (CFTC) has filed a lawsuit against Kraft Foods Group and Mondelez Global, alleging that the companies engaged in price manipulation of wheat and wheat futures.
The lawsuit concerns activities that took place in 2011, before the now-defunct company Kraft Foods Inc. split into two separate companies: Kraft Foods Group (which sells grocery products such as Kraft cheese, Oscar Meyer deli meats and Maxwell House coffee) and Mondelez Global (which owns snack food brands such as Oreos, Wheat Thins and Ritz).
"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," said CFTC Director of Enforcement Aitan Goelman. "A market participant who is not happy with cash prices available to it may not resort to manipulative trading strategies in an attempt to artificially lower that price."
"Illicit profits" According to the CFTC Complaint, filed in the U.S. District Court for the Northern District of Illinois, Kraft Foods Inc. deliberately drew up, approved and carried out a plan in early December 2011 in response to the high wheat prices that had started that summer. The company purchased $90 million worth of December 2011 wheat futures, the equivalent of a six-month supply of wheat. But according to the complaint, Kraft never actually planned to take possession of the wheat; the purchase of the futures was meant to make investors think that the company was buying wheat in huge volumes. This would then lead to a drop in current wheat prices and an increase in the price of wheat futures.
These price changes occurred, allowing Kraft to purchase more wheat at a low price and sell the excess futures (which the CFTC claims it never planned to use) at a new, higher price. These manipulative tactics made the company $5.4 million, the complaint alleges.
"Reading the allegations in the complaint, it looks like a traditional corner or squeeze," says finance professor Craig Pirrong of the University of Houston.
The CFTC complaint also claims that on five separate occasions in early December 2011, Kraft owned more wheat futures than is permitted in rules established by the CFTC and the Chicago Board of Trade.
Eight days after the CFTC suit was filed, futures trader Richard Dennis filed a proposed class action lawsuit against both Kraft Foods Group and Mondelez Global in federal court in Chicago. The suit, filed on behalf of wheat futures and options traders, makes similar accusations to the CFTC suit. The class action suit accuses Kraft of malfeasance over a wider time period, however, noting price manipulations between 2003 and 2014.
"While these illicit profits benefited defendants' bottom line, they caused harm to class members who transacted in CBOT wheat futures contracts at artificial prices," Dennis said.
Serious penalties unlikely But according to former CFTC lawyer Jerry Markham, the plaintiffs will have a hard time proving a case against Kraft and Mondelez in court.
Both companies have expressed little concern about the lawsuits. Kraft, based in Northfield, Illinois, said that it expected any financial costs of the suits to primarily be borne by Mondelz, which inherited the Kraft Foods Inc. brands that rely on large quantities of wheat.
Mondelz agreed that it would likely bear most financial costs due to settlements or court-imposed fines, but that such costs "will not be material to investors."
In March, Kraft Foods Group agreed to be purchase by H.J. Heinz Co, which in turn is co-owned by 3G Capital (a Brazilian company) and Berkshire Hathaway Inc. (run by Warren Buffett).
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