Budicak, Inc. v. Lansing Trade Grp., LLC
| Citation | 452 F.Supp.3d 1029 |
| Decision Date | 25 March 2020 |
| Docket Number | Case No. 2:19-CV-2449-JAR-ADM |
| Parties | BUDICAK, INC., Blue Marlin Arbitrage, LLC, and Prime Trading, LLC, individually and on behalf of all others similarly situated, Plaintiffs, v. LANSING TRADE GROUP, LLC, et al., Defendants. |
| Court | U.S. District Court — District of Kansas |
Anthony F. Fata, Pro Hac Vice, Brian P. O'Connell, Pro Hac Vice, Jennifer W. Sprengel, Pro Hac Vice, Cafferty Clobes Meriwether & Sprengel LLP—Wacker Dr., Gary D. McCallister, McCallister Law Group, LLC, Chicago, IL, Craig C. Maider, Pro Hac Vice, Geoffrey M. Horn, Pro Hac Vice, Raymond P. Girnys, Pro Hac Vice, Vincent Briganti, Pro Hac Vice, Lowey Dannenberg, PC, White Plains, NY, Eric I. Unrein, Cavanaugh, Biggs & Lemon, PA, Topeka, KS, for Plaintiffs.
J. Kevin McCall, Pro Hac Vice, Nicole A. Allen, Pro Hac Vice, Thomas E. Quinn, Pro Hac Vice, Jenner & Block LLC, Chicago, IL, Kirk T. May, German May PC, Kansas City, MO, for Defendant Lansing Trade Group, LLC.
Joseph M. McGroder, Nathan F. Garrett, Graves Garrett, LLC, Kansas City, MO, for Defendant Cascade Commodity Consulting, LLC.
Plaintiffs Budicak, Inc., Blue Marlin Arbitrage, LLC, and Prime Trading, LLC filed this putative class action on behalf of all purchasers, sellers, and holders of wheat futures or options on wheat futures contracts between February 1, 2015 and March 31, 2015 (the proposed "Class Period") against Defendants Lansing Trade Group, LLC ("Lansing"), Cascade Commodity Consulting, LLC ("Cascade"), and certain of their employees and unidentified others (John Does) (all three collectively, "Defendants"). Plaintiffs allege that during the Class Period, Defendants manipulated the prices of Chicago Board of Trade ("CBOT") wheat futures and options contracts in violation of the Commodity Exchange Act and the Sherman Antitrust Act. Lansing filed a Motion to Strike and Motion to Dismiss the Amended Complaint (Doc. 122).1 The motion is fully briefed, and the Court is prepared to rule. For the reasons provided below, Lansing's motion is denied .
The following facts are alleged in Plaintiffs’ Amended Complaint and are assumed to be true for the purposes of deciding Lansing's Motion to Dismiss.
The named plaintiffs in this case are business entities that purchased and/or sold wheat futures and/or options on the CBOT during the Class Period. Plaintiffs define the class they purport to represent as follows:
All persons or entities (other than Defendants and any parent, subsidiary, affiliate, or agent of any Defendant) that transacted in CBOT wheat futures or options contracts during the period February 1, 2015 through March 31, 2015 (the "Class Period").2
Plaintiffs bring claims against organizational defendants as well as "John Doe" defendants. Defendant Lansing is a commodities-merchandising firm that buys, handles, stores, and sells wheat. Certain of the John Doe defendants are suspected subsidiaries of Lansing, traders who discussed the alleged manipulative scheme with Lansing traders, others who acted in concert with Lansing traders, and unidentified market participants that Lansing traders contacted. Defendant Cascade is an entity that publishes a daily cash wheat newsletter (the "Cash Wheat Report"), which is read by a wide audience including hedge traders, private grain analysts, futures brokerage companies, cash brokerage companies, regional grain companies, international grain companies, flour millers, foreign procurement managers, and foreign wheat exporters.
Commodity markets permit traders to invest in physical substances such as metals, oils, livestock, and crops. The market is comprised of entities that manufacture or produce goods with the commodity and seek to mitigate the risk of price fluctuation in the future; broker-dealers who provide the markets with liquidity; and speculators who seek out opportunities to profit from their investments. Commodities are traded in two related, although distinct, markets: the cash market and the futures market. Cash market transactions are priced based on present supply and demand and result in physical exchange of the commodity. However, most commodity trading involves buying and selling futures and options contracts.
Futures contracts, sometimes simply called "futures," are specialized forward contracts. Parties agree to the key contract terms—price, quantity, quality, and date of delivery—of a product prior to actual delivery. To facilitate the purchase and sale of futures, all contract terms other than price are standardized. The price of a future is determined through a quasi-auction setting, where buyers and sellers negotiate through an organized exchange. The party selling a future holds a short position; the party purchasing a future holds a long position. A party who is short is responsible for making delivery of the commodity; a party who is long is responsible for taking delivery of the commodity. Holders of futures satisfy their contractual obligations in two ways: (1) through an offsetting transaction in the futures market prior to the expiration of trading on that contract; or (2) through either making delivery or taking delivery of the commodity.
A related tool for trading is options contracts, which permit buyers the right to buy or sell a commodity at a specified price and at a specified time. A party who has the right to buy a commodity has a call option; a party who has the right to sell a commodity has a put option.
Parties to futures and options contracts do not deal directly with one another. Instead, their transactions are facilitated through a third-party clearinghouse known as a commodity exchange. Commodity exchanges perform a variety of functions, including settling accounts, clearing trades, regulating delivery, and ensuring that market participants meet their contact obligations. These exchanges are certified as boards of trade by the Commodity Futures Trading Commission ("CFTC") and subject to its regulation. The Chicago Board of Trade (the "CBOT") is one such exchange. To maintain its status and receive permission to trade certain contacts, the CBOT must establish that the proposed contracts are not prone to price manipulation. Members of the CBOT must follow the CBOT's rules and the rules of the CBOT's parent organization, the Chicago Mercantile Exchange (CME). At each level—the CFTC, the CBOT, and the CME—there are rules and regulations governing the behavior of market participants.
Wheat futures and options are bought and sold through the CBOT. The CBOT predetermines and standardizes wheat grade differentials, location differentials, and delivery points, among other components of the contracts. Wheat futures and options are traded both on an electronic trading platform and through open outcry on the trading floor of the CBOT, which is a form of public auction. All contracts are priced in "cents per bushel" of wheat. Each CBOT contract, including futures and options, represents 5,000 bushels of wheat or approximately 136 metric tons.
Wheat futures are traded for delivery in March, May, July, September, and December each calendar year. Traders can continue to buy and sell futures until the end of the business day before the 15th calendar day of the contract month. If a trader is settling a contract by physical delivery, delivery must occur by the second business day after the final trading day of the delivery month.
A party's delivery instrument for futures is called a shipping certificate. Shipping certificates are issued by exchange-approved facilities; unlike a warehouse receipt, the issuing facility is not obligated to store the commodity until the delivery date of the contract. When shipping certificates are registered, it typically indicates excess supply of the commodity and results in a price decline. At 4:00 p.m. on each trading day, the CBOT reports the total number of registered shipping certificates on its website. The owner of a shipping certificate can buy or sell shipping certificates to other market participants; exchange the shipping certificate for futures positions; hold the certificate and pay storage fees starting on the delivery date of the underlying contract; or cancel the shipping certificate. When a shipping certificate is cancelled, the commodity is loaded out for transport. This act is commonly referred to as "cancellation for load-out" or simply "cancellation." Because cancellation is associated with an entity taking possession of a commodity for use, cancellation signals immediate demand for the commodity and typically results in higher prices because of the perceived increase in demand.
Plaintiffs’ claims against Defendants involve the relationship between the cash market and futures market, the registration and cancellation of shipping certificates, the purchase and sale of futures contracts, and the publication of Lansing's activities. Together, these actions will be referred to as the "Scheme." The description of the Scheme is based on Plaintiffs’ well-pled allegations, which must be taken as true at the motion-to-dismiss stage of litigation.
On February 3, 2015, a trader at Lansing, Adam Flavin, had a phone call with the CEO of Cascade, Al Conway. During that call, the two men discussed the relationship between the cash wheat market and the futures wheat market. They agreed that the spread—the price differential between the cash and futures market—in the wheat market could be manipulated through use of the cash market because of the high correlation in price movement between the cash and futures markets.
At the start of March 2015, Lansing held 134 registered shipping certificates. On Tuesday, March 3, Lansing received advance information that another market participant was preparing to register a large number of shipping certificates. Once...
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