U.S. Commodity Futures Trading Comm'n v. Kraft Foods Grp., Inc.

• Decision Date: 19 July 2016
• Docket Number: Case No. 15 C 2881
• Citation: 195 F.Supp.3d 996
• Parties: U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. KRAFT FOODS GROUP, INC., and Mondelez Global LLC, Defendants.
• Court: U.S. District Court — Northern District of Illinois

195 F.Supp.3d 996

U.S. COMMODITY FUTURES TRADING COMMISSION, Plaintiff,

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

Case No. 15 C 2881

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

Signed July 19, 2016

Jennifer Ellen Smiley, Michael David Frisch, Robert Thomas Howell, III, Rosemary C. Hollinger, Susan J. Gradman, U.S. Commodity Futures Trading Commission, Chicago, IL, for Plaintiff.

Harry Ploss, pro se.

Timothy Andrew Karpoff, Dean Nicholas Panos, J. Kevin McCall, Nicole Amie Allen, Thomas Edward Quinn, Jenner & Block LLP, Chicago, IL, Aaron Stephenson Furniss, Sutherland Asbill & Brennan, LLP, Atlanta, GA, Charles Mark Kruly, Stephen Thomas Tsai, Gregory S. Kaufman, Sutherland Asbill & Brennan LLP, Washington, DC, Ronald W. Zdrojeski, Sutherland Asbill & Brennan LLP, New York, NY, for Defendants.

MEMORANDUM OPINION AND ORDER

John Robert Blakey, United States District Judge

This matter concerns the alleged misconduct of Defendant Kraft in purchasing and selling wheat and wheat futures. On December 18, 2015, the Court denied Defendants' motion to dismiss Counts I and II. [87]. Currently before the Court are two motions: (1) Defendants' motion to certify issues for interlocutory appeal and to stay proceedings [90]; and (2) Plaintiff's motion to strike affirmative defenses. [94], [95]. As explained in more detail below, Defendants' motion is denied, and Plaintiff's motion is granted.

I. Defendants' Motion to Certify Issues for Interlocutory Appeal

Defendants ask that the Court certify two questions for appeal based upon the Court's Memorandum Opinion and Order denying Defendants' motion to dismiss. Those two questions are: (1) "whether a defendant's large futures position, coupled with an alleged intent to affect market prices but absent any other false communications to the market, constitutes ‘false signaling’ market manipulation under §§ 6(c)(1) or 9(a)(2) of the Commodity Exchange Act ("Act") and corresponding Regulations 180.1 and 180.2"; and (2) "whether, when a defendant's purchases in the futures market cause cash and futures market prices to converge, those converging prices are ‘artificial’ for purposes of those same statutory provisions and regulations." [91] at 1.

To certify an order for interlocutory appeal under 28 U.S.C. § 1292(b), there must be: (1) a question of law; and that question must be (2) controlling and (3) contestable, and (4) promise to speed up the litigation. Ahrenholz v. Board of Trustees of University of Illinois , 219 F.3d 674, 675 (7th Cir.2000). "Unless all these criteria are satisfied, the district court may not and should not certify its order to [the Seventh Circuit] for an immediate appeal under section 1992(b)." Id. at 676. There also is a non-statutory requirement that the petition in this Court be filed within a reasonable time after entry of the order sought to be appealed. Id. at 675. Interlocutory appeals are generally "frowned on in the federal judicial system," Sterk v. Redbox Automated Retail, LLC , 672 F.3d 535, 536 (7th Cir.2012), and this case is no exception. Both questions proposed by Defendants here fall short of the Section 1292(b) requirements.

Before addressing each individual requirement, the Court first will examine Defendants' principle authority—Sullivan & Long, Inc. v. Scattered Corp. , 47 F.3d 857, 865 (7th Cir.1995). In Sullivan & Long , the plaintiffs brought the following claims: (1) wrongful price manipulation under Section 9(a)(2) of the Securities Exchange Act of 1934; and (2) market manipulation under Section 10(b) of the same act and its implementing regulation, Rule 10b-5. Their claims were based upon an alleged scheme by the defendant to manipulate the market through the "unprecedented massive short selling" of common stock of LTV Corporation ("LTV"). The Seventh Circuit described the factual background as follows: "LTV, a large steel producer, entered bankruptcy in 1986. In February of 1993, it announced a proposed plan of reorganization under which existing stock in the company would be replaced by new stock most of which would be issued to the bondholders and other creditors of LTV. Existing stockholders would receive warrants entitling them to purchase some of the new stock. The plan contained an estimate that the new shares would be worth only 3 or 4 cents. When the plan was announced, the old shares were trading for more than 30 cents. There were 122 million old shares outstanding. The plan was confirmed by the bankruptcy court on May 27, 1993, and the court fixed June 29 as the last day on which the old shares would be tradable." Id. at 859.

Beginning before the date of confirmation, but greatly accelerating on that date, the defendant sold short huge quantities of the old LTV shares. Id. It sold short 170 million shares, far more than the 122 million old LTV shares then outstanding. Id. A "short" sale is a sale at a priced fixed now for delivery later. A trader "sells a stock short when he thinks the price of the stock is going to fall, so that when the time for delivery arrives he can buy it at a lower price and pocket the difference. If, for example, he sells the stock short at 50 cents a share, and the price falls to 40 cents before he delivers the stock, he can buy the stock for 40 cents a share, deliver it to the buyer, and have made a profit of 10 cents." Id. The plaintiffs in Sullivan & Long were buyers on the other side of the short sales, who presumably thought the price of the old shares would rise before plunging to 3 or 4 cents on June 29. Id. According to the court, "on May 27 it was certain, or virtually so (nothing is really certain), that shares of common stock in LTV would be worth no more than 4 cents in just a month." Id. (emphasis in original). However, many of the plaintiffs did not realize that certainty, because they did not thoroughly read the plan of reorganization. Id. at 860.

Following its description of the relevant facts, the court went into an extended economic analysis. Its focus was plaintiffs' failure: (1) "to identify any harm to the objectives of the securities laws under which they [had] sued"; and (2) to identify a specific rule the defendant violated. As to the first concern, the court cited to an article from the Journal of Finance and explained that the central objective of the securities laws is "to prevent practices that impair the function of stock markets in enabling people to buy and sell securities at prices that reflect undistorted (though not necessarily accurate) estimates of the underlying economic value of the securities traded. An efficient stock market is one in which stock prices reflect all potentially available information that is relevant to the economic value of the stocks." Id. at 861. The court went on, "we would think twice before concluding that these laws prohibit ‘schemes' that accelerate rather than retard the convergence between the price of a stock and its underlying economic value and therefore promote rather than impair the ultimate goals of public regulation of the securities markets. Objectively , from May 27 on old shares of LTV stock were worth only 3 or 4 cents, and the defendant's campaign of short selling helped move the market price toward that true value." Id. at 861–62 (emphasis added).

Without focusing on a specific cause of action, the court next addressed plaintiffs' claim that defendant's short selling had created an "artificial price" in the market for LTV stock. The plaintiffs had alleged that the defendant's short sales were manipulative in that they created artificial prices. Citing to the Supreme Court case Ernst & Ernst v. Hochfelder , 425 U.S. 185, 199, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), the Seventh Circuit explained that artificial prices are those "that do not reflect underlying conditions of supply and demand." Id. at 862. However, the court then analyzed the allegedly artificial prices without any overt discussion of supply and demand, but instead based on the objectives of securities regulation. It found that the "only artificial prices... were the prices at which LTV stock sold between the confirmation of the plan and the expiration of the old stock. They were artificially high because they so greatly exceeded the stock's true value , which was only 3 to 4 cents." Id. at 862 (emphasis added). What the defendant did was not manipulation, said the court, but arbitrage, eliminating disparities between price and value (or—in Sullivan & Long —between today's price and tomorrow's price where the difference cannot be attributed to any prospective change in value). Id. Defendant had thus promoted "the convergence of market and economic values that [the court had] suggested was the central objective of securities regulation." Id. at 862.

Based upon the foregoing economic analysis, the court concluded that "nothing alleged in the complaint is the kind of conduct that the securities laws are aimed at combatting. It is therefore not surprising that none of the plaintiffs' specific legal contentions has merit." Id. at 864. It is at this point in the opinion that the court began its legal analysis of the plaintiffs' specific claims.

Regarding the Section 9(a)(2) claim, the Court noted that Section 9(a)(2) forbids "transactions in any security registered on a national securities exchange creating actual or apparent active trading in such security or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others." 15 U.S.C. § 78i(a)(2). The court explained that the "essence of the offense is creating ‘a false impression of supply or demand,’ for example through wash sales, where parties fictitiously trade the same shares back and forth at higher and higher prices to fool the market into thinking that there is a lot of buying interest in the stock." Id. at 864 (citing Sant a Fe Industries, Inc. v. Green , 430 U.S. 462, 476, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977) )....