(Reuters) - The Commodity Futures Trading Commission’s attempt to resolve a long-running market manipulation case against Kraft Foods and Mondelez has been a giant headache for the agency: public bickering among CFTC commissioners, a threat of criminal contempt of court sanctions, a mandamus proceeding and, late last month, the dissolution of the CFTC’s $16 million deal with Kraft.
Now the law firm Kobre & Kim, which was not involved in the Kraft case but frequently represents traders overseen by the CFTC, is piling on. On Oct. 31, the firm filed a Freedom of Information Act complaint against the CFTC in federal court in Manhattan, seeking all documents and communications that would illuminate the agency’s unusual choices in the Kraft case.
The CFTC said via a spokeswoman that it has no record of receiving the law firm’s FOIA request. Kobre & Kim’s complaint attached a FedEx delivery slip indicating that the FOIA letter was delivered but the CFTC spokeswoman said the commission’s FOIA compliance office does not have any such record.
Kraft has denied any wrongdoing in the underlying CFTC case, arguing that the commission cannot show the company intended to manipulate the market for wheat futures. A Kraft lawyer at Jenner & Block did not immediately respond to a request for comment on the FOIA suit.
In the FOIA complaint, Kobre & Kim is seeking deliberative information that federal agencies typically balk at disclosing, including an explanation for why the agency agreed to settle the Kraft case without insisting upon findings of fact or conclusions of law. The FOIA request also asks for documents disclosing why the CFTC agreed as part of the settlement that it would make no public comment on the case beyond the consent order.
“We have an interest in clear, coherent standards,” said Kobre partner Benjamin Sauter, whose firm won a 2018 ruling (2018 WL 6322024) for defendants DRW Investments and Donald Wilson in a CFTC enforcement action alleging manipulation of the market for interest rate swaps.
Kobre & Kim’s complaint argues that the CFTC’s “unprecedented ‘gag’ settlement” in the Kraft case leaves market participants scratching their heads about how the commission has applied Dodd-Frank provisions intended to curb manipulation of commodities markets. “Beyond seeding concerns across the industry over arbitrary enforcement, the CFTC’s actions threaten to chill legitimate market behavior while failing to deter potential misconduct in the future,” the FOIA complaint alleged.
The so-called gag provision in the CFTC’s settlement with Kraft was controversial from the day it was disclosed. In the consent order, both sides agreed not to comment publicly on the settlement beyond filings in the case, which alleged manipulation of the market for wheat futures. But two CFTC commissioners immediately issued a public statement in which they said the CFTC should have insisted that the consent order include factual findings and legal conclusions, not only to deter misconduct but also to avoid chilling legitimate trading. They also said that CFTC commissioners must be allowed to speak publicly about their actions – especially when a settlement does not include factual conclusions.
The CFTC, meanwhile, issued a statement on behalf of the agency. The statement described the $16 million settlement as a “successful resolution” of the case, with a recovery of nearly three times the profits the agency accused Kraft of realizing from its allegedly illegal behavior. The CFTC statement said that the gag provision did not bar comments by individual commissioners and that the CFTC did not expect to include similar gag clauses in future consent agreements except in rare instances.
Kraft’s lawyers at Jenner & Block moved for Judge John Blakey to sanction the CFTC for violating the consent order, arguing that the CFTC breached the agreement by making a public statement about the case. The judge scheduled a hearing and called for testimony from CFTC commissioners. (He originally threatened the prospect of criminal contempt but eventually dropped that possibility.)
The agency brought a mandamus proceeding at the 7th U.S. Circuit Court of Appeals to shield the commissioners from testifying. In October, Judges Frank Easterbrook, Diane Sykes and Kevin Ripple concluded (2019 WL 5382228) that the commissioners were not required to appear individually before Judge Blakey. Judge Easterbrook’s opinion also held that CFTC commissioners have a right to explain their votes publicly, and that their right to speak freely cannot be stifled via a consent decree.
The 7th Circuit ruled on Oct. 23. On Oct. 24, Judge Blakey vacated his previous approval of the consent order and reinstating both sides’ motions for summary judgment. Unless Kraft and the CFTC reach a new settlement, Judge Blakey said, he plans to hold a hearing on those motions on Nov. 20.
The 7th Circuit said in its mandamus opinion that it wants case documents to be publicly disclosed. Redacted versions of most of the substantive filings are already in the docket. So I asked Kobre’s Sauter whether the summary judgment litigation will obviate his firm’s FOIA request.
He said that even if Judge Blakey ends up analyzing the CFTC’s market manipulation theory and fleshing out the facts of the case, Kobre & Kim still wants to know why the CFTC commissioners were prepared to settle the suit without a factual accounting or an explanation of the agency’s legal conclusions.
“We don’t know what it is they think Kraft did and what warranted the sanction,” Sauter said. “We have an interest in understanding what standards the CFTC is applying as it approaches people in the industry.”