dairy farmers of amerca defend against cheese price manipulation allegations

UNITED STATES DISTRICT COURT

DISTRICT OF MINNESOTA

MARK ANDERSON, and KILLER WHALE HOLDINGS, LLC, a Minnesota limited liability company,

Plaintiffs,

v.

DAIRY FARMERS OF AMERICA, INC., a foreign corporation,

Defendant.

Civil Action No. 08-CV-4726 JRT/FLN

DEFENDANT DAIRY FARMERS

OF AMERICA, INC.’S

MEMORANDUM OF LAW IN

SUPPORT OF ITS MOTION FOR

SUMMARY JUDGMENT ON

PLAINTIFFS’ CLAIMS UNDER

COMMODITY EXCHANGE ACT

INTRODUCTION

Plaintiffs allege that Dairy Farmers of America, Inc. (DFA) manipulated the

price of cheddar cheese traded on the Chicago Mercantile Exchange’s (CME)

Cheese Spot Call in violation of the Commodity Exchange Act (CEA), 7 U.S.C. §

13(a)(2), § 9(a)(2) of the CEA. In order to prove manipulation, Plaintiffs must

demonstrate that DFA caused the price of cheddar cheese on the Spot Call to

become artificial. A price may be found to be artificial for purposes of § 9(a)(2) of

the CEA only when it is determined by forces other than supply and demand.

See, e.g., Cargill, Inc. v. Hardin, 452 F.2d 1154, 1163 (8th Cir. 1971) (defining an

artificial price as “a price that does not reflect the basic forces of supply and

demand”). But there is no evidence, or even allegation of fact, from which to

Case 0:08-cv-04726-JRT-FLN Document 103 Filed 11/02/09 of 21

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conclude that DFA created an artificial price for cheddar cheese under this

governing standard.

DFA did nothing more than make actual purchases of cheddar cheese,

opposite willing sellers, in an open and competitive auction market over a period

of weeks. Plaintiffs contend that DFA (1) purchased more cheese than

necessary to meet its customer demand (2) at higher prices than necessary (3)

to support the price of cheddar cheese and, in turn, the price of the Class III milk

futures contract traded on the CME.1 But Plaintiffs do not allege, and there is no

evidence to show, that DFA committed fraud, traded in a disorderly manner or

violated any applicable trading rules. Plaintiffs similarly do not allege, and they

cannot demonstrate, that DFA attempted to corner the markets for milk or

cheese.2 Rather, Plaintiffs rely on a manipulation theory expressly rejected by

every federal court that has considered the issue, including most recently in

United States v. Mark David Radley et al, 2009 U.S. Dist. LEXIS 85024 (S.D.

1 Plaintiffs’ claim that DFA manipulated the price of the Class III milk futures contract is based on its allegation that DFA manipulated the price of block cheddar cheese traded on the CME Spot Call, which in turn allegedly caused an artificial price for the Class III milk futures contract. 2 In a corner, a participant intentionally acquires a long futures position, very large relative to the physical supply that is available to be delivered at the expiration of the futures contract, and simultaneously acquires the means, by ownership or otherwise, to control the available physical supply, for the purpose of preventing delivery at reasonable prices and thereby forcing third parties who are short the futures to cover their positions by offset at higher prices. See Zimmerman v. Chicago Bd. of Trade, 360 F.3d 612, 616 (7th Cir. 2004).


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Tex. Sept. 17, 2009) – namely that purchasing a commodity with the intent to

influence the price is enough to establish price artificiality.3

Contrary to Plaintiffs’ wishes, transparent purchases in a competitive

market opposite willing sellers may not be labeled manipulation simply because

the purchases were intended to influence prices together with all other forces of

supply and demand. There are no genuine issues of material fact that would

prevent judgment as a matter of law rejecting Plaintiffs’ manipulation theory.

Summary judgment should be granted on the merits, as well as on the pending

motion based on the statute of limitations bar.

STATEMENT OF MATERIAL FACTS AND ALLEGATIONS4

DFA is the nation’s largest producer-owned dairy marketing cooperative

with more than 18,000 member-owners in the United States. Amended

Complaint ¶ 16. DFA’s primary role is to market the milk produced by its

members. Id. DFA helps its members market their milk by manufacturing

cheddar cheese, which DFA then sells to third parties. Id. ¶ 25. DFA generally

contracts to sell more cheddar cheese than it manufactures. Deposition of

Lavonne Dietrich, dated July 9, 2009, p.24 attached as Exhibit 1 to Declaration of

Anthony M. Mansfield (Mansfield Declaration). To meet its supply obligations,

3 On October 14, 2009, the government filed a notice of appeal, Criminal Action No. H-08-411 (S.D. Texas) (Docket No. 334).


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the cooperative therefore supplements its inventory of manufactured product with

cheddar cheese purchased on the open market. Id. p.27.

Among the locations that DFA purchases cheddar cheese is the CME Spot

Call. Amended Complaint ¶ 22. Cheddar cheese is offered on the Spot Call in

500 pound barrels and 40 pound blocks and is traded in 40,000 – 44,000 pound

quantities known as “carloads”. Id. ¶ 8. The Spot Call is typically open for fewer

than fifteen minutes daily. Id. Typically only a few transactions are completed

each day. Id. On occasion, no trades are completed on the Spot Call, in which

case the cheddar cheese price for the day is set based upon unfilled bid or

uncovered offer prices. Id. Less than two percent of the cheddar cheese

produced in the United States is traded on the CME. Id. ¶ 9. Buyers and sellers

of cheese in the remainder of the U.S. market typically price their forward cheese

contracts with differentials based on the prices established daily on the Spot Call.

Id. ¶ 12.

Cheese manufacturers report the prices of their over-the-counter spot

cheese transactions, as opposed to their CME or forward transactions, to the

United States Department of Agriculture’s (USDA) National Agricultural Statistics

Service (NASS) in connection with the weekly survey of dairy market prices

performed by the NASS. Id. ¶ 13. These survey prices are then used in the

4 For purposes of this motion only, DFA treats as undisputed the factual allegations from Plaintiffs’ Amended Complaint recited below. Plaintiffs filed the complaint with the Court on May 12, 2009 (Docket No. 83).


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USDA’s pricing formula for Class III fluid milk. Id. NASS survey cheddar cheese

prices are a component in the Class III fluid milk pricing formula. Id.

Among the products the CME lists for trading is a Class III milk futures

contract. Id. ¶ 10. The CME lists the milk futures contract 24 months out into the

future. See www.CMEgroup.com/trading/commodities/dairy/class-iii-

milk_product. Thus, a participant on the CME can buy a milk futures contract

today that will settle next month or any of 24 months out into the future. Id. Each

month, the near term or “spot” month futures contract expires on the contract’s

expiration date, at which point the CME no longer lists the contract for trading (as

an example, the November 2009 Class III milk futures contract expires on

December 3, 2009). Id. Upon expiration, the CME determines a final settlement

price, which reflects the value of the contract at expiration. Id. The final

settlement price for the Class III milk futures contract is settled against the USDA

Class III milk price. Amended Complaint ¶ 14. In the months leading up to May

2004, DFA purchased long June, July, and August 2004 Class III milk futures

contracts on the CME. Id. ¶ 21.

Over the first half of 2004, the price of cheddar cheese traded on the CME

Spot Call rose. Dietrich Dep. pp. 40-41. By mid-April 2004, the block price on

the Spot Call hit a record high for the year of $2.20. Amended Complaint ¶ 20.

By April 28, 2004, the price had started to decline, although it held at $2.19 from

April 28 through April 30, 2004. Id. On May 3, 2004, the price declined to $2.15

where it remained until May 12, 2004. Id. On May 12, the block price dropped to


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$2.00, staying at that price for the next six trading days. Id. On May 21, 2004,

the block price fell to $1.80. Id.

Allegedly to protect its long futures position, DFA purchased at least 12

million pounds of cheddar cheese blocks on the CME Spot Call at $1.80. Id. ¶

22. Between May 21, 2004 and June 22, 2004, DFA purchased 319 loads of

cheddar cheese blocks at the $1.80 price. Id. DFA was the sole purchaser of

block cheese on the Spot Call during this period. Id. There was a consistent

price of $1.80 per pound for block cheddar cheese and $1.77 per pound for

barrel cheese on the Spot Call for this entire period; DFA did not buy any barrel

cheese during this time period. Id. ¶ 23.

In their Amended Complaint, Plaintiffs allege as follows: DFA did not

purchase cheese on the CME Spot Call during this period to fill existing orders.

Id. ¶ 22. DFA did not have customer sales orders in May and June 2004 that

would have required DFA to purchase such substantial amounts of cheddar

cheese to meet the customer demand. Id. In addition, milk production was at its

seasonal peak nationwide at this time and school milk lines were shutting down

for the summer, pushing more milk into manufacturing channels. Id. Instead,

DFA allegedly purchased cheddar cheese on the Spot Call to stabilize the price

of cheese and milk and to thereby protect its long Class III milk futures positions.

Id. ¶ 22.

Plaintiffs further allege that, by supporting the price of cheddar cheese on

the Spot Call from May 21 through June 22, 2004, DFA caused the prices of


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May, June, July and August 2004 Class III milk futures contracts simultaneously

to be higher than they may have been if DFA had not purchased cheese. Id. ¶

27. This, in turn, allowed DFA to liquidate its long futures positions without

incurring the large losses it may otherwise have suffered had it not supported the

price of block cheddar cheese on the CME. Id. ¶ 28. By supporting the price of

cheese in May and June 2004, DFA allegedly increased the profits to its

members by millions of dollars. Id. ¶ 26.

Plaintiffs are traders in various commodity markets, including cheddar

cheese and Class III milk futures traded on the CME. Id. ¶ 18; Deposition of

Mark Anderson (Anderson Dep.), dated June 18, 2009, p.15 attached as Exhibit

2 to Mansfield Declaration. Throughout 2004, Plaintiffs purchased physical dairy

commodities such as milk, cheese, whey and butter. Anderson Dep. p.15.

Sometimes, Plaintiffs purchased physical dairy commodities to fulfill customer

orders. Id. p.79. On other occasions, Plaintiffs bought the commodities without

any customer order, believing that they could locate a potential customer at a

later date to whom they could sell the commodities for a higher price. Id. p.81.

Because Plaintiffs held physical commodities in inventory, they were exposed to

the risk that the prices for these commodities would fall between the time they

purchased them and the time they sold them. Id. pp. 15-16. To protect against

this price exposure, Plaintiffs sold May, June, July and August 2004 Class III milk

futures contracts on the CME in Spring 2004. Id. p.16; Amended Complaint ¶ 18.

Plaintiffs did so, allegedly speculating that the price of milk futures would


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decrease over the term of the contracts based upon usual market dynamics of

supply and demand and given that cheese prices were significantly higher at the

time of the short sales than they had previously been for a period of years.

Amended Complaint ¶ 18.

DFA’s actions in sustaining the price of cheese from May 21 through June

22, 2004, allegedly caused Class III milk futures prices to increase. Id. ¶ 29. The

increase in milk futures prices allegedly eroded the expected value of Plaintiffs’

short May, June, July and August 2004 Class III milk futures contracts. Id.

Plaintiffs state that they sustained a combined loss of over $6 million in out-of-

pocket losses and millions of dollars in lost profits on their Class III milk futures

contracts in May and June 2004. Id. If, as Plaintiffs allege, they were primarily

hedging their physical cheese purchases in the futures market, any decrease in

the price of their futures positions would have been offset by the increase in the

price of the physical commodity, resulting in no (or minimal) net loss to Plaintiffs.

Plaintiffs have not produced documents showing the profit and loss for all of their

physical inventory held in 2004.

ARGUMENT

Summary judgment is warranted where, as in this case, Plaintiffs’ statutory

claim fails as a matter of law. Under Section 9(a)(2) of the CEA, it is a violation

for “[a]ny person to manipulate or attempt to manipulate the price of any

commodity in interstate commerce . . . .” 7 U.S.C. § 13(a)(2). The CEA does not

define manipulation. In the absence of a statutory definition, courts have


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construed the term to mean “the intentional exaction of a price determined by

forces other than supply and demand.” Frey v. Commodity Futures Trading

Commission, 931 F.2d 1171, 1175 (7th Cir. 1991). To prove manipulation, a

plaintiff must show that: “(1) the defendants possessed the ability to influence

prices, (2) an artificial price existed, (3) the defendant[s] caused the artificial

price, and (4) the defendant[s] specifically intended to cause the artificial price.”

United States v. Reliant Energy Servs., Inc., 420 F. Supp. 2d 1043, 1056 (N.D.

Cal. 2006) (citing In re Soybean Futures Litig., 892 F. Supp. 1025, 1044 (N.D. Ill.

1995)).

Plaintiffs allege that DFA intended to influence the price of cheese and milk

futures, but they do not allege, nor do they have evidence to show, that DFA

intended to or actually created an artificial price for cheese or milk futures.

Without proof of artificial price, there can be no manipulation under the CEA.

Cargill Inc. v. Hardin, 452 F.2d 1154, 1167 (8th Cir. 1971) (“if, despite the fact

that it had the power and opportunity to do so, [a trader] did not in fact cause an

artificial price it cannot be guilty of manipulation.”) (Emphasis added).

I. DFA’S PURCHASES OF CHEDDAR CHEESE WERE PART OF

LEGITIMATE SUPPLY AND DEMAND AS A MATTER OF LAW.

Plaintiffs base their entire case on allegations that DFA purchased more

cheese than it needed and at higher prices than necessary to influence the price

of cheese and milk futures. According to Plaintiffs, DFA’s continued purchases

of cheese at $1.80 in May and June 2004, despite the alleged acknowledgement


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of certain DFA personnel that it no longer needed to purchase cheese to meet

customer demand, means that DFA’s demand was not real and that the resulting

price was artificial. Plaintiffs’ theory of what constitutes legitimate market

demand is without legal basis.

DFA’s purchases of cheddar cheese on the CME Spot Call were part of

the demand for cheddar cheese as a matter of law. By definition, demand is

simply “the various quantities that buyers [are] willing and able to purchase at

different prices.” Mankiw, Principles of Microeconomics ch. 7 at 8 (2d ed. 2001).

The motivation underlying the demand makes it no more or less real. As Chief

Judge Frank H. Easterbrook of the Court of Appeals for the Seventh Circuit has

explained, “[p]eople demand what they demand and never mind the reasons

why. If people want to purchase wheat to admire its beauty rather than to mill it

into flour, that may be weird, but their demand is real.” Frank H. Easterbrook,

Monopoly, Manipulation, and the Regulation of Futures Markets, 59 J. Bus.

S103, S117 (1986). Indeed, market participants purchase commodities for a

variety of permissible reasons other than to fill supply contracts, such as to

hedge prices, manage inventory and speculate on price movements.

Accordingly, courts and the Commodity Futures Trading Commission

(CFTC) have repeatedly held that market participants may legally purchase more

of a commodity than needed to fill customer orders or at apparently higher than

necessary prices. For example, in Weyerhaeuser Co. v. Ross-Simmons

Hardwood Lumber Co., Inc., 549 U.S. 312 (2007), the United States Supreme


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Court unanimously held that a commercial party can lawfully buy more of a

commodity than it needs and for a higher price than necessary unless the

purchaser engaged in predatory, loss-inducing behavior, and had the market

power to drive out its competitors and recoup its losses by demanding non-

competitive low prices in the input market or supra-competitive high prices in the

output markets or both. Id. at 323-24. Similarly, in In re Abrams, [1994-1996

Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 26,237, 1994 CFTC LEXIS 260

(Sept. 15, 1994), a case involving an alleged attempted manipulation under the

CEA, the CFTC held that Abrams could demand delivery of orange juice even

though he had no commercial need for it. The CFTC also underscored this point

in both Indiana Farm Bureau Cooperative Association and Hohenberg Brothers

Company, in which it held that “self-interest” and “profit motive” do not remove

purchases from the legitimate forces of supply and demand. See In re Ind. Farm

Bureau Coop. Ass’n, Inc., [1982-1984 Transfer Binder] Comm. Fut. L. Rep.

(CCH) ¶ 21,796, 1982 CFTC LEXIS 25, at *17 (Dec. 17, 1982); In re Hohenberg

Bros. Co., [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 20,271,

1977 CFTC LEXIS 123, at *28 (Feb. 18, 1977).

Most recently, in Radley, the district court for the Southern District of Texas

rejected the government’s manipulation theory and confirmed that buying more of

a commodity than needed to fill customer orders, with the intent of raising

transaction prices, does not remove the purchases from the legitimate supply

and demand for the commodity. In Radley, the government sought to restrict the


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scope of what could be considered the “real” demand for a commodity – as

Plaintiffs ask this Court to do – arguing that “the legitimate force[s] of supply and

demand are people that produce the [commodity] and people that consume the

[commodity]. That’s really all it is.” 2009 U.S. Dist. LEXIS 85024 *27. At issue in

the Radley case were the defendants’ purchases of physical TET propane.

According to the government, the defendants, former traders at BP North

America Production Company (BP), manipulated the price of TET propane by,

among other things, using BP’s resources to buy contracts for delivery of large

amounts of TET propane, even though BP had no commercial need for TET

propane. Id. at *6. As a result, BP held a dominant long position in TET propane

such that the company would benefit if the cost of propane went up because it

would be entitled to buy it at a previously negotiated lower price. Id. at *7. To

ensure that its long position would be profitable, BP set out to increase the price

of TET propane. Id. To do this, BP allegedly misled the market about the true

supply of TET propane by presenting “show” offers designed to create the false

impression that BP wished to sell propane. Id. Simultaneously, BP traders

presented multiple bids in the market to create the impression that multiple

counterparties wished to buy propane. Id. The court, assuming all these facts as

true for purposes of the defendants’ motion to dismiss, summarily rejected the

government’s arguments that BP’s trading behavior was manipulative.


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The Radley court held that the government’s limited view of what could be

considered real demand was flawed. In rejecting the government’s position, the

court explained:

If [the government’s position] is true, any activity in a market by parties other than producers or consumers would not be a legitimate force of supply and demand. This notion is without support in the law and in the marketplace. Today’s markets are filled with speculators attempting to make profits based on movements of prices of commodities and other products with no intention of ever consuming or producing them . . . . Making a profit is a legitimate commercial purpose, and is in fact the exclusive purpose of most corporations. It is not a requirement that an entity be interested in consuming [the commodity] before making a purchase. This simplified view of the market and of commercial motivations is not supported by the law.

Id. at *27-28. As with the government’s position in Radley, Plaintiffs’ “simplified

view” of the forces of supply and demand in the market for cheese on the CME

Spot Call fails as a matter of law. Because there is no basis in the law for

Plaintiffs’ claim that DFA’s purchases were not part of true demand, Plaintiffs

cannot support a claim that DFA created an artificial price for cheddar cheese.5

5 Prior to the Radley decision, which held that BP’s trading behavior was not manipulative as a matter of law, the CFTC and the Department of Justice (DOJ) entered into a joint settlement with BP for $303 million on October 25, 2007, in which BP, without admitting or denying the allegation, settled on charges that it manipulated the price of TET propane. The DOJ then indicted several BP employees, including Radley, for the same conduct. Similar to Radley, DFA, without admitting or denying the allegations, entered into a settlement with the CFTC on December 15, 2008 for $12 million for attempted, but not actual manipulation, in response to the conduct at issue in this case. As in Radley, the DFA settlement does not control or even inform the legality of DFA’s conduct in this case.


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II. COURTS CONSIDERING THE ISSUE HAVE REJECTED THE THEORY

THAT ENTERING INTO TRANSACTIONS WITH INTENT TO

INFLUENCE A PRICE REMOVES THE TRANSACTIONS FROM SUPPLY

AND DEMAND.

Plaintiffs apparently confuse intent to influence a price with intent to create

an artificial price. Courts and the CFTC have consistently held that it is

permissible to attempt to influence price as long as one does not intend to create

an artificial price. For example, in General Foods Corp. v. Brannan, 170 F.2d

220 (7th Cir. 1948), the Seventh Circuit held that General Foods’ large purchase

of rye in the cash market for the purpose of stabilizing the price of its rye

inventory was not an attempted manipulation. The court explained:

Self-preservation has oftentimes been referred to as the first law of nature, and we suppose it applies to traders as well as others. We see no reason why the [respondents] should not under the circumstances [have] made an effort to protect their own interests. The facts concerning the sale were not secret. . . . It is our view that the term “manipulate” as it is employed in the [Commodity Exchange] Act was not intended and that it does not cover a transaction such as here disclosed.

Id. at 231. Noting the lack of fraudulent activity, the Seventh Circuit ruled in favor

of General Foods in part because “the common criteria usual in manipulation or

corner cases are deceit, trickery through the spreading of false rumors,

concealment of position, the violation of express anti-manipulation controls, or

other forms of fraud.” 170 F.2d at 224.

The CFTC later relied on General Foods in Indiana Farm Bureau

Cooperative Association, 1982 CFTC LEXIS 25 (Dec. 17, 1982), when it held


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that because “the self-interest of every market participant plays a legitimate part

in the price setting process, it is not enough to prove simply that the accused

intended to influence price.” Id. at *17. See also CFTC v. Delay, 2006 U.S. Dist.

LEXIS 85068 at *9-10 (D. Neb. Nov. 17, 2006) (“Simply stated, it is not a violation

of the statute to report [commodity] sales to the [federal agency] with the

intention of moving the CME index up or down – rather, to be unlawful, the

reported sales must be sham or nonexistent transactions, or the reports must be

knowingly false or misleading”).

More recently, the court in Radley held that “[a]cting in a manner that shifts

the price of a commodity in a favorable direction is the business of profit-making

enterprises, and if it is done without fraud or misrepresentation, it does not clearly

violate the CEA.” 2009 U.S. Dist. LEXIS 85024 *32 (Sept. 17, 2009). Radley is

particularly compelling in that one of the government’s allegations is very similar

to that made by Plaintiffs in this case and the court rejected the very same

arguments that Plaintiffs make here. In fact, the government in Radley alleged

that the defendants purchased more of a commodity (propane) than it needed at

higher than necessary prices. The government alleged that the defendants

made the purchases solely to influence the price of the commodity to benefit

BP’s positions in another market. Id. at 85024. Specifically, the government

alleged that:

the defendants repeatedly posted bids on [an electronic bulletin board] for the highest prevailing price. Since other parties accessing [the electronic bulletin board] considered


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these bids when determining their offers and bids, the “best bids” had the effect of increasing the price of TET propane. The government also alleges that defendants placed “stacked bids” on [the electronic bulletin board]. Stacked bids are multiple bids placed at the same time. The government alleges that this was done in order to give the impression that more than one person desired to purchase TET propane. The impression created by the presence of “best bids” and “stacked bids” allegedly caused the price of TET propane to increase artificially.

Id. at *29. Accepting all of these facts as true for purposes of the motion to

dismiss, the court rejected the government’s arguments. The court explained

“[w]hile these facts do successfully allege an increase in the price, they fall short

of alleging an artificial price because none of these bidding tactics is anything

other than legitimate forces of supply and demand.” Id. at *29-31 (emphasis in

original).

The Radley decision follows a long line of cases, including General Foods,

Abrams, Indiana Farm Bureau Cooperative Association, Hohenberg Brothers

Company, Delay and Reliant Energy Services, Inc., among others, that have held

that intent to influence a price is insufficient to prove manipulation. Because DFA

did not commit fraud, violate trading rules or engage in disorderly conduct or

cornering activity, there was no intent to create an artificial price and therefore no

manipulation.

As Radley observed, the few prior cases that have found manipulation or

denied defendant’s motion to dismiss manipulation claims involved allegations of


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fraud, violation of exchange rules or cornering of the market.6 For example, in

Reliant, the court denied defendant’s motion to dismiss because Reliant allegedly

spread false rumors about available supply of power with the intent to create a

false perception that there was a supply shortage. The court explained “[f]raud

and deceit are not legitimate market forces . . . . [A] specific intent to create an

artificial price implies fraud or deceit.” Reliant Energy Servs., Inc., 420 F. Supp.

2d at 1058. Rejecting the government’s more expansive theory of manipulation,

the court explained that it is not manipulation to sell one’s product at a price that

others might consider unreasonable. Rather, Section 9(a)(2) of the CEA

prohibits “intentional conduct aimed at preventing the basic forces of supply and

demand from operating properly . . . . [The] manipulation provision is concerned

less with the price itself than it is with the process by which the price is set.” Id.

at 1057 (citing Indiana Farm Bureau Coop. Ass’n., 1982 CFTC LEXIS 25, at *35

n.2). See also Radley, 2009 U.S. Dist. LEXIS 85024 *32.

Similarly, in In re Anthony J. DiPlacido, 2008 CFTC LEXIS 101 (Nov. 5,

2008), aff’d No. 08-5559-ag (2nd Cir. Oct. 21, 2009), the Second Circuit affirmed

the CFTC’s finding of attempted manipulation based on DiPlacido’s violation of

6 Another court found that a claim for manipulation could be stated when the defendants allegedly prevented the market from responding to rapid fire purchases and sales by waiting until the last minute of the 30 minute closing period on the expiration of a futures contract to offset a large position with the intent to create an artificial settlement price. See In re Amaranth Natural Gas Commodities Litig., 587 F. Supp. 2d 513 (S.D.N.Y. 2008). Plaintiffs do not allege, and there is no evidence to show, any such conduct in this matter.


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exchange rules. The CFTC found that DiPlacido’s demand was illegitimate, not

because he paid too much, but because he violated exchange rules when he

offered to sell electricity futures contracts at lower prices than buyers had bid to

purchase them and bid to purchase the futures contracts at higher prices than

sellers had offered to sell them on the floor of the New York Mercantile Exchange

(NYMEX). The CFTC held that these actions supported a finding that DiPlacido

intended to create an artificial price for electricity futures traded on the NYMEX.

“The illegitimate actions here are DiPlacido’s flagrant violations of exchange rules

established to maintain orderly markets through incremental price moves . . . .

When a price is affected by a factor which is not legitimate, the resulting price is

necessarily artificial.” Id. at *94.

Against this legal backdrop, Plaintiffs’ theory of manipulation fails as a

matter of law. As in Reliant and DiPlacido, Plaintiffs assert that DFA engaged in

conduct that had no commercial purpose – specifically, purchasing cheese it did

not need, at higher than necessary prices in order to influence the price. But

unlike Reliant, Plaintiffs have failed to identify, and there is no evidence of, any

independent acts of fraud or deceit. Also unlike DiPlacido, Plaintiffs have failed

to identify, and there is no evidence of, any violation of applicable trading rules.

As in Radley, this Court should rule in favor of DFA as a matter of law.

“Since defendants have not been accused of making false or misleading

statements, the effect of their actions on the market was part of the legitimate

forces of supply and demand.” Radley, 2009 U.S. Dist. LEXIS 85024 at *32.


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The Court should reject any contention that DFA’s purchases themselves could

have misled other market participants who may have believed that DFA was

buying cheese because it needed it to meet customer orders. As the Radley

court explained, “[o]ther counterparties may have assumed that the ‘stacked bids’

came from multiple parties, but defendants did not perpetuate or cause this

misconception. Since defendants were willing and able to follow through on all of

the bids, they were not misleading.” Id. at *31. Simply stated, to the extent that

market participants drew inferences from observed activity on the CME Spot Call

in May and June 2004, they did so at their own risk.

If this Court were to expand the meaning of manipulation as Plaintiffs urge,

the holding would create an unworkable standard that is likely to damage

markets. All large traders have knowledge that their trading activity likely will

influence prices, particularly in illiquid markets. Under Plaintiffs’ proposed

standard, such traders would have to exit certain markets to avoid being held

liable for manipulation. Similar arguments also could be made against entities

simply for engaging in speculative and other market-making activity. A decision

accepting Plaintiffs’ manipulation theory would not only be contrary to decades of

manipulation precedent, but also likely would have far reaching and unintended

negative effects on the markets.

In contrast to the standard that Plaintiffs would have this Court forge, the

Radley decision is based on settled law. This long line of federal court and

CFTC decisions provides an objective and predictable framework for


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understanding price artificiality and manipulation under the CEA. In order to be

manipulative, one must commit fraud, engage in sham or otherwise fictitious

transactions or cornering activity, or trade in a manner that disrupts orderly

trading processes or violates applicable trading rules.

CONCLUSION

In 2004, DFA made actual purchases of cheddar cheese by accepting

offers made by willing sellers in an open and competitive market. DFA did not

trade in a disorderly manner or violate any applicable trading rules on the CME.

DFA did not engage in fraud, deceit or collusion. DFA did not attempt to corner

the market for cheese or milk. Based on the facts as alleged by Plaintiffs, DFA’s

trading activity as a matter of law could not have caused an artificial price as

required in a CEA manipulation claim. Summary judgment should be granted in

favor of DFA and against Mark Anderson and Killer Whale Holdings, LLC,

dismissing their amended complaint with prejudice.


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Dated: November 2, 2009

Respectfully Submitted,

s/ Nicholas O’Connell

Thomas A. Gilligan, Jr. (MN ID #202150) Nicholas O’Connell (MN ID # 0340832) MURNANE BRANDT 30 East 7th Street, Suite 3200 St. Paul, MN 55101 Telephone: (651) 227-9411 Facsimile: (651) 223-5199 Joel G. Chefitz (admitted pro hac vice) Bryan M. Webster (admitted pro hac vice) MCDERMOTT WILL & EMERY LLP 227 West Monroe Chicago, IL 60606 Telephone: (312) 984-7000 Facsimile: (312) 984-7700 Anthony M. Mansfield (admitted pro hac vice) Amandeep S. Sidhu (admitted pro hac vice) MCDERMOTT WILL & EMERY LLP 600 Thirteenth Street N.W. Washington, D.C. 20005 Telephone: (202) 756-8000 Facsimile: (202) 756-8087

Attorneys for Defendant Dairy Farmers of America, Inc.


dairy farmers of amerca defend against cheese price manipulation allegations

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