In re Soybean Futures Litigation, Civ. A. No. 89 C 7009

• Decision Date: 09 June 1995
• Docket Number: Civ. A. No. 89 C 7009,90 C 1138.
• Parties: In re SOYBEAN FUTURES LITIGATION.
• Court: U.S. District Court — Northern District of Illinois

892 F. Supp. 1025

In re SOYBEAN FUTURES LITIGATION.

Civ. A. Nos. 89 C 7009, 90 C 1138.

United States District Court, N.D. Illinois, Eastern Division.

June 9, 1995.

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Marvin A. Miller, Miller, Faucher, Chertow, Cafferty & Wexler, Chicago, IL, for plaintiff.

Constantine L. Trela, Jr., Sidley & Austin, Chicago, IL, for defendant.

NORGLE, District Judge.

The court adopts Magistrate Judge Pallmeyer's Report & Recommendation. The court grants Defendants' motion for summary judgment (Doc. # 292) on Counts II and III but denies the motion on Count I. Defendants' objections (Doc. # 331) and Plaintiffs' objections (Doc. # 335) are overruled. Plaintiffs' fraud claims under Illinois common law in Count III are dismissed without prejudice so that Plaintiffs may pursue them on an individual basis in state court.

ORDER

Before the court are Defendants' and Plaintiffs' objections to Magistrate Judge Pallmeyer's Report and Recommendation ("Report"). Pursuant to 28 U.S.C. § 636(b)(1)(B), the court referred the motion for summary judgment to Judge Pallmeyer. Judge Pallmeyer issued a seventy-two page Report recommending that the motion be granted as to Counts II and III, and denied as to Count I.

The court has completely reviewed the Report and arguments of counsel on a de novo basis. 28 U.S.C. § 636(b)(1)(C); United States v. Rodriguez, 888 F.2d 519, 521 (7th Cir.1989). The Court finds the Report to be thorough, accurate, and the decision proper. The court further finds that the Defendants' objection are without merit. The Plaintiffs have presented evidence sufficient to create a genuine issue of fact on each of the elements of a claim for price manipulation under 7 U.S.C. § 25(a)(1)(D). Those four elements are: (1) the defendant possessed the ability to influence prices; (2) an artificial price existed; (3) the defendant caused the artificial price; and (4) the defendant specifically intended to cause the artificial price. Frey v. Commodity Futures Trading Comm'n, 931 F.2d 1171, 1177-78 (7th Cir.1991).

The court also rejects Defendants' attempt to cast Plaintiffs' claim under Count I as one for submission of false reports. As Magistrate Judge Pallmeyer clearly explained in her Report, the Plaintiffs have asserted that as part of their scheme to manipulate prices, Defendants misled regulators about Defendants' processing and export requirements for soybeans. In this manner, Plaintiffs contend Defendants were able to exaggerate the market's demand for "cash soybeans" and, consequently, inflate prices. See Cargill, Inc. v. Hardin, 452 F.2d 1154, 1163 (8th Cir.1971) (recognizing that floating false rumors which affect prices is a common manipulative device).

Plaintiffs' contention that they should be able to proceed on the common law fraud claim (Count III) based on a "fraud-on-the-market" theory, without proof of individual reliance, is also without merit. As Defendants accurately indicate, evidence of individual reliance is required to surmount a motion for summary judgment. Good v. Zenith Elec. Corp., 751 F.Supp. 1320, 1323 (N.D.Ill. 1990); see also Schwartz v. System Software Assoc., Inc., 813 F.Supp. 1364, 1368 (N.D.Ill. 1993).

Accordingly, the Court adopts and incorporates Magistrate Judge Pallmeyer's Report and Recommendation and the holdings contained therein pursuant to 28 U.S.C. § 636(b)(1).

REPORT AND RECOMMENDATION

PALLMEYER, United States Magistrate Judge.

Plaintiffs, two subclasses of buyers and sellers of soybean futures, have filed a consolidated amended complaint¹ against Ferruzzi Finanziaria, S.p.A. and subsidiaries Ferruzzi Trading U.S.A., Inc., Ferruzzi Trading International, S.A., and Central Soya Company, Inc. Plaintiffs allege that Defendants, collectively referred to as the "Ferruzzi Parties," reaped unlawful gains from the July and August 1989 soybeans futures markets by: (1) manipulating futures prices in violation of Section 9(a) of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 13(a); (2) engaging in "excessive speculation" in violation of Section 4a of the CEA, 7 U.S.C. § 6a; and (3) perpetrating common-law "fraud-on-the-market."²

Defendants have moved for summary judgment on all three claims. For the reasons set forth below, the court recommends that Defendants' motion be denied as to Count I because there are unsettled issues of material fact. Defendants' motion should be granted as to Counts II and III, however, because Plaintiffs lack standing and a cognizable cause of action.

FACTUAL BACKGROUND

Plaintiffs' lawsuit arises from the same set of events that led the Chicago Board of Trade ("CBOT") to issue an emergency order on July 11, 1989 directing the Ferruzzi Group to liquidate its holdings in the July 1989 soybean futures market. Although the CBOT's actions and its investigation into this matter are not directly at issue here, the court has found it helpful to rely on documents prepared by the CBOT and the Commodity Futures Trading Commission ("CFTC"), as well as other materials prepared and submitted by the parties in their Local Rule 12(m) and 12(n) statements.³ Other pertinent factual issues will be discussed in later sections of this report, as appropriate.⁴

A. Overview of commodity futures market⁵

A futures contract (or "future") is a specialized form of a forward contract, in which the parties agree to the price, quantity, quality, and date of delivery of a particular good in advance of the actual delivery. CHICAGO BOARD OF TRADE, COMMODITY TRADING MANUAL at 2, 4, 369 (7th ed. 1989). The distinguishing feature of the futures contract is that the contract terms are all standardized in order to facilitate the buying and selling of the contracts. Id. at 13, 369-70. The only remaining variable is the price, which is determined in an auction-like process by buyers and sellers of the futures who negotiate in organized commodity exchanges. Id.

The party selling the future — that is, the party promising to make delivery — is called a "short" and is said to hold a "short open position," whereas the party buying the future — i.e., promising to take delivery — is the "long" and holds a "long open position." Id. at 372, 377; Cargill, 452 F.2d at 1156-57. The longs and shorts do not interact directly; rather, they buy from (or sell to) the commodity exchange, which acts as a third-party clearinghouse to settle accounts, clear trades, regulate delivery, and ensure that market participants fulfill their contractual commitments. COMMODITY TRADING MANUAL, supra, at 15.

A party holding a future must satisfy (or "liquidate") her obligation in one of two ways: (i) she may make an equal and opposite transaction (an "offset") in the futures market prior to the expiration of trading on that contract; or (ii) she may take (or make) delivery of the commodity itself, as specified in the contract.⁶Id. at 372, 374; Cargill, 452 F.2d at 1156; Volkart Bros., 311 F.2d at 55-56. As a practical matter, the majority of futures obligations are offset in the futures market — fewer than one or two percent of all futures transactions are settled through actual delivery of the commodity, according to some sources. Cargill, 452 F.2d at 1156 n. 2, 1157; CHICAGO BOARD OF TRADE, EMERGENCY ACTION JULY 1989 SOYBEANS: THE STORY BEHIND THE ACTION (HEREINAFTER "EMERGENCY ACTION") at 8 (1990) (P.Ex. 20).⁷

The reason for this seeming imbalance is that the futures market is not intended to be the place to arrange for physical delivery of the commodity. EMERGENCY ACTION, supra, at 8. Delivery takes place in the "cash market," and the physical commodity is often referred to the "cash commodity." COMMODITY TRADING MANUAL at 12-13, 364. The primary purpose of the future market, on the other hand, is to provide a form of insurance against adverse changes in the price of the commodity prior to delivery. Id. This practice, called "hedging," requires that the trader take a position in the futures market equal and opposite to the position she expects to take in the cash market. COMMODITY TRADING MANUAL, supra, at 14, 89-91. For example, a soybean processor may enter into a contract to deliver a certain quantity of soybean oil to a food producer in six months and at a fixed price. If the soybean processor is worried that prices of his raw material will rise before he delivers on his contract, the processor will purchase an offsetting number of futures contracts, i.e., take a long position or adopt a long hedge. Id. at 376. Because prices in the cash and futures markets tend to move in the same direction, an increase in prices for cash soybeans will likely be accompanied by an increase in the price for soybean futures. Id. at 13-14. Thus, if prices do rise by the time the soybean oil contract comes due, the processor can sell his futures at a profit in order to offset the cost of procuring his needed supplies of soybeans in the cash market. Id. at 90-91. Conversely, a merchant who purchases soybeans to resell at some later date may wish to avoid the risk that prices will fall. The merchant will sell futures, i.e., take a short position or adopt a short hedge, and cover any losses he subsequently suffers in the cash market with the profits he can make by buying the lowerpriced futures. See Volkart Bros., 311 F.2d at 54.

Of course, prices do not always move as one anticipates, which is why the market attracts speculators. Speculators assume the risks that hedgers avoid in order to make a profit from unexpected price movements. Id. at 15, 109-10, 377. Although hedging is the main purpose of the futures market, hedgers benefit from the presence of speculators in the market. Speculators add liquidity and capital to the futures markets; bridge price gaps between longs and shorts; dampen extreme price movements by assuming risk and adding to demand; and facilitate market entry and exit by increasing trading volume. Id.; Cargil...