Ploss v. Kraft Foods Grp., Inc.

• Decision Date: 27 June 2016
• Docket Number: No. 15 C 2937,15 C 2937
• Citation: 197 F.Supp.3d 1037
• Parties: Harry PLOSS, as Trustee for the Harry Ploss Trust DTD 8/16/1993, on behalf of Plaintiff and all others similarly situated, Plaintiffs, v. KRAFT FOODS GROUP, INC. and Mondelez Global LLC, Defendants.
• Court: U.S. District Court — Northern District of Illinois

197 F.Supp.3d 1037

Harry PLOSS, as Trustee for the Harry Ploss Trust DTD 8/16/1993, on behalf of Plaintiff and all others similarly situated, Plaintiffs,

v.KRAFT FOODS GROUP, INC. and Mondelez Global LLC, Defendants.

No. 15 C 2937

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

Signed June 27, 2016

Christopher M. McGrath, Christopher Lovell, Gary S. Jacobson, Benjamin M. Jaccarino, Lovell Stewart Halabian Jacobson, LLP, New York, NY, Lori Ann Fanning, Marvin Alan Miller, Miller Law LLC, W. Joseph Bruckner, Heidi M. Silton, Kate M. Baxter-Kauf, Lockridge Grindal Naeun P.L.L.P., Minneapolis, MN, Douglas A. Millen, Freed Kanner London & Millen LLC, Bannockburn, IL, for Plaintiffs.

Bradley J. Demuth, Linda P. Nussbaum, Susan Rogers Schwaiger, Nussbaum Law Group, P.C., New York, NY, Anthony F. Fata, Jennifer Winter Sprengel, Cafferty Clobes Meriwether & Sprengel LLP, Chicago, IL, Christian Levis, Michelle E. Conston, Geoffrey M. Horn, Vincent Briganti, Peter D. St. Phillip, Jr., Raymond P. Girnys, Lowey Dannenberg Cohen & Hart, P.C., White Plains, NY, Donald Lewis Sawyer, Robert J. Wozniak, Steven A. Kanner, Freed Kanner London & Millen LLC, Bannockburn, IL, David Lesht, Law Offices of Eugene M. Cummings, P.C., Eugene J. Schiltz, Crotty & Schiltz, LLC, Chicago, IL.

Dean Nicholas Panos, Christopher Graham Wells, J. Kevin McCall, Nicole Amie Allen, Thomas Edward Quinn, Jenner & Block LLP, Michael Scott Davis, Michael Davis, Zachary Jayson Ziliak, Ziliak Law, LLC, Chicago, IL, Timothy Andrew Karpoff, Jenner & Block LLP, Washington, DC, for Defendants.

MEMORANDUM OPINION AND ORDER

Honorable Edmond E. Chang, United States District Judge

Harry Ploss brings suit on behalf of himself and a proposed class, alleging that Kraft Food Group, Inc. and Mondelez Global LLC manipulated the market by maintaining a large position of wheat futures in an attempt to influence prices, and not for any legitimate need for wheat (the "long wheat futures scheme").¹ (For simplicity, the Opinion will refer to the Plaintiffs collectively as "Ploss" and to the Defendants collectively as "Kraft.") Ploss also alleges that Kraft manipulated the market by engaging in unlawful wash trades and reporting them to the public as legitimate transactions, in order to create an impression of greater market activity (the "wash trading scheme"). Ploss brings seven total counts: (1) manipulation under Section 9(a)(2) of the Commodity Exchange Act (CEA) for the long wheat futures scheme; (2) manipulation under Section 6(c)(1) of the CEA for the long wheat futures scheme; (3) principal-agent liability under Section 2(a)(1)(B) of the CEA for the long wheat futures scheme; (4) manipulation under Section 9(a)(2) of the CEA for the wash trading scheme; (5) manipulation under Section 6(c)(1) of CEA for the wash trading scheme; (6) violation of the Sherman Antitrust Act; and (7) unjust enrichment.

Kraft now moves to dismiss the entire Complaint, arguing that Ploss has not stated any viable claim. For the reasons explained below, the Court denies the motion in part as to the CEA, Sherman Act, and unjust enrichment claims related to the long wheat futures scheme (Counts One, Two, Three, Six, and Seven). The Court grants Kraft's motion as to the CEA claims involving the wash trading scheme (Counts Four and Five) and dismisses those claims without prejudice.

I. Background

For purposes of this motion, the Court accepts as true the allegations in the Consolidated Class Action Complaint. Erickson v. Pardus , 551 U.S. 89, 94, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007). (For simplicity, the Court will refer to the operative Consolidated Class Action Complaint as the "Complaint.") Defendant Kraft Foods Group is one of the largest food and beverage companies in North America. R. 71, Compl. ¶ 23.² In 2012, Kraft changed its corporate structure and became Mondelez International, Inc., which in turn owned Mondelez Global LLC; the latter operates the North American snack foods division. Id. ¶ 25. Kraft, which needs a lot of wheat for its food products, processes 90% of its wheat at its primary flour mill in Toledo, Ohio. Id. ¶ 51. In order to save on transportation costs, Kraft buys most of its wheat—in particular, No. 2 soft red winter wheat—from the local Toledo cash wheat market. Id. ¶¶ 1, 51, 55. The Toledo mill allegedly processes around 15 million bushels of wheat every 6 months, but is not large enough to store that much wheat. Id. ¶¶ 51, 85-86. In November 2011, Kraft allegedly had around 4.2 million bushels of wheat stored at its Toledo mill, representing more than 80% of its storage capacity of about 5 million bushels. Id. ¶ 51.

A. The Alleged "Long Wheat Futures Scheme"

In addition to buying wheat from the local Toledo cash market, Kraft is also able to obtain wheat from the futures market on the Chicago Board of Trade (CBOT). Id. ¶¶ 56-57. A futures contract is an agreement to buy or sell a commodity at some point in the future, but at a predetermined price. Id. ¶ 27. The trader who purchases a futures contract has a "long" position and is obligated to take delivery and pay for the commodity at the future date. Id. ¶¶ 27-28. The trader who sells a futures contract has a "short" position and is obligated to make delivery of the commodity at the future date. Id. End-users of a commodity like Kraft often use futures markets to hedge against the risk of increasing prices—in other words, "to offset price risks incidental to commercial cash or spot operations ...." Id. ¶ 43.³ Because Kraft is a commercial end-user of wheat, it can apply for an exemption that releases it from the position limits that bind speculators (who, in contrast, have no use for the underlying commodity). Id.⁴ Speculators are subject to a limit of 600 contracts (long or short) a month, while a hedge exemption allows commercial end-users like Kraft to maintain 5,460 long positions and 6,660 short positions in wheat. Id. ¶¶ 2, 40, 44, 57-59; R. 77-1, 10/22/10 Hedge Exemption Letter. Traders must apply for exemptions to CBOT's Market Regulation Department, which approves or denies the request. Id. ¶ 44. Hedge exemptions expire one year from the date of issuance and must be renewed. Id. Ploss alleges that Kraft applied for an exemption limit in October 2010 and was approved on December 1, 2010. Id. ¶ 57. That exemption expired a year later on December 1, 2011, but Kraft did not submit a renewal application until December 28, 2011. Id. ¶ 44, 59. So from December 2 to at least December 28,⁵ Kraft did not have a hedge exemption and was bound by the 600-contract limit that applied to speculators. Id.

CBOT wheat futures contracts expire in March, May, July, September, and December of each year, and the last trade date for a contract month is the business day before the 15th calendar day of that month. Id. ¶ 33. By the date of expiration, a party must close out, or satisfy its futures obligations. Id. ¶¶ 30, 33. One way that traders meet their obligation is by physically accepting or delivering the goods. Id. ¶ 28. A seller makes a delivery by issuing a "shipping certificate," which is a commitment by a facility to deliver the commodity to the buyer. Id. ¶ 46. Shipping certificates themselves can also be traded or exchanged for futures positions. Id. ¶ 47. But the buyer, or holder of the shipping certificate, cannot specify the delivery location of the commodity. Id.

In reality, however, physical deliveries from futures trades are rare. Id. ¶¶ 29-30. Instead, traders often close their positions by making an offsetting trade—for example, a buyer of one futures contract (a long position) can liquidate her position by selling one futures contract (a short position), and vice versa. Id. "The difference between the initial purchase price and the sale price represents the realized profit or loss for the trader."Id. ¶ 30. The total number of futures contracts that a trader has entered into but has not yet liquidated by an offsetting transaction is called the "open interest." Id. ¶ 31.

The Complaint alleges that in the summer and fall of 2011, Kraft "radically" changed its wheat sourcing strategy when the cash price of No. 2 soft red winter wheat in the Toledo market rose from $5.74 to $7.72 per bushel. Id. ¶ 55. During that same time, the price of December 2011 wheat futures contracts increased from $6.57½ to $7.97. Id. ¶ 55. Even though there was enough wheat in the Toledo market to satisfy Kraft's needs, senior management allegedly devised "a strategy to use its status as a commercial hedger to acquire an enormous long position in December 2011 wheat futures contract[s]," purchasing $90 million worth of December 2011 contracts. Id. ¶¶ 55-56, 82. The purpose of obtaining this long position was "to induce sellers to believe that Kraft would in fact take delivery, load out, and use that wheat in its mill in Toledo." Id. ¶ 56. In other words, by signaling to the market that Kraft was satisfying its need for wheat from the futures market rather than the cash market, Kraft caused the wheat price in the Toledo cash market to drop, because that cash market now believed that there was greater supply than demand. Id. ¶¶ 55-56, 82. On October 20, 2011, Kraft's Senior Director of Global Procurement allegedly wrote to the Chief Financial Officer:

Given our proposal to "take physical delivery in Dec" of 15 mm bushels at 50 cents per bushel below the commercially offered price results in the savings of $7mm+.

In addition, there is a key market dynamic that is important to understand: Once the market sees that Kraft is "stopping" December wheat, we anticipate the futures curve will begin to flatten, reducing the profitability of wheat storage, thereby reducing the commercial wheat basis to Kraft. We will then have the option of redelivering the wheat acquired through the futures market. This will then quickly reverse the negative cash flow impact.

Id. ¶ 83. Ploss alleges that Kraft's scheme worked: the price of wheat in the Toledo market...