UNITED STATES OF AMERICA

Before the

COMMODITY FUTURES TRADING COMMISSION

__________________________________________________
In the Matter of : )
)

CFTC Docket No. 97-1

GRAIN LAND COOP.,

)

Respondent.

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__________________________________________________ )

INITIAL DECISION

On Behalf of the Division of Enforcement:

Gary J. Dernelle, Esq.
Susan F. LaMarca, Esq.
Laura L. Flippin, Esq.
Commodity Futures Trading Commission
Division of Enforcement
1155 21st Street, NW
Washington, DC 20581

On Behalf of Respondent Grain Land:

James R. Crassweller, Esq.
John F. Kapacinskas, Esq.
David A. Meyer, Esq.
Doherty, Rumble & Butler, Professional Association
2800 Minnesota World Trade Center
30 East 7th Street
St. Paul, Minnesota 55101-4999

BEFORE: PAINTER, ALJ

PROCEDURAL HISTORY

The Commodity Futures Trading Commission ("Commission") issued the Complaint and Notice of Hearing ("Complaint") in this matter on November 12, 1996, pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act ("Act"), 7 U.S.C. 13a-1, 13a-2. The one-count Complaint alleges that respondent Grain Land Cooperative ("Grain Land") violated Section 4(a) of the Act, 7 U.S.C. 6, by offering to enter into and entering into off-exchange futures contracts from 1993 to 1996. Respondent filed its Answer and Affirmative Defenses on January 16, 1997, denying any wrongdoing, along with its Motion for Order to Show Cause ("Motion") as to why the proceeding should not be dismissed. The Division responded to the Motion on February 10, 1997, and the Motion was denied on February 11, 1997.

On April 8, 1997, respondent Grain Land filed Motions for Certification for Interlocutory Review and to Stay Proceedings, which were denied on April 11, 1997. Respondent then filed with the Commission, on April 16, 1997, its Motion for Interlocutory Review.

On May 20, 1997, respondent Grain Land filed its Motion to Amend its Answer, which was granted on April 4, 1997. Respondent's Amended Answer and Affirmative Defenses was filed on June 11, 1997.1

The Division of Enforcement ("Division") timely filed its Prehearing Memorandum on June 25, 1997. Respondent's Prehearing Memorandum was timely filed on July 29, 1997.

The Commission, on September 12, 1997, issued its Opinion and Order on Interlocutory Review denying respondent's Motion for Interlocutory Review filed in April. Respondent then filed in the United States District Court for the District of Minnesota its Petition for a Writ of Prohibition and/or Writ of Mandamus ("Petition for Writ") to enjoin this administrative action. The Petition for Writ was denied, in toto, by the Honorable Richard H. Kyle on January 7, 1998.

Grain Land Coop v. CFTC, [Current Transfer Binder] Comm. Fut. L. Rep. 9CCH) 27,240 @45,981 (D. Minn. Jan. 7, 1998).

The Division presented its case February 9-11, 1998. Respondent Grain Land presented its case on March 23, 1998. Post-Hearing Briefs were timely filed by the Division and respondent on May 6, 1998, and June 5, 1998, respectively. The Division's Reply to Respondent's Post-Hearing Brief was filed on June 26, 1998. This matter is now ready for disposition.

INTRODUCTION

Agricultural merchandising contracts, collectively referred to as "Hedge-to-Arrive" or "HTA" contracts, have been the subject of much controversy. Although the Hedge-to-Arrive label has become a term of art used to describe a type of hybrid grain merchandising contract, there are numerous and significant contractual variations within this group. Variations are most readily evident in the written provisions of the contract but also extend to the way in which the contracts are marketed and administered. The following discussion and determination is limited to the specific facts surrounding Grain Land's merchandising contracts.

The present case involves the use of particular grain merchandising contracts by a cooperative grain elevator, Grain Land Cooperative, which was formed in 1993 with the consolidation of six farmer-owned Minnesota cooperatives. The Complaint, issued by this Commission in November 1996, alleges that respondent, from its inception in 1993 until selling its assets in 1996, offered to enter into, and entered into, illegal off-exchange futures contracts in violation of Section 4(a) of the Commodity Exchange Act ("Act"). Grain Land entered into more than 2,000 Flex HTAs with its members during this time period.

Grain Land commenced piecemeal litigation in December 1996 against approximately 160 Producers who had "repudiated" their Flex HTA contracts. In re Grain Land Coop Cases, 978 F.Supp. 1267, 1270 (D.Minn. 1997). The claims were initially filed in various state courts but removed by the Producers to federal district court in Minnesota, based on federal question jurisdiction. Id. That court created a Master Docket, In re Grain Land Coop. Cases , Civil File No. 3-96-1209, and case file for efficiency. Id. Grain Land, along with Mr. Christensen and Mr. Burke ("Plaintiffs") filed a seven-count Master Complaint in January 1997 and filed a Third-Party Complaint against Farmers Commodities Corporation ("FCC") in February 1997, seeking contribution and indemnification from FCC to the extent the Plaintiffs were found liable. Id. at 1270-71. The producers filed their eleven-count Master Pleadings later that month. Id. at 1271.

In May 1997, the Plaintiffs filed a Motion for Partial Summary Judgment ("Motion"), requesting dismissal of a majority of the Producers' claims. Id. at 1271. It was ruled that the issue of whether the Flex HTA contracts were cash forward contracts or futures contracts needed to be first resolved. Id. at 1271. The parties thereafter had the opportunity to brief this preliminary issue and present oral arguments. Id. at 1271-72. Judge Magnuson ruled in October 1997 that the Flex HTA contracts were cash forward contracts excluded from regulation under the Commodity Exchange Act and granted Plaintiffs' Motion, in part. Id. at 1280.

PRELIMINARY MATTERS

Prior to discussing the merits of the case, it is necessary to address respondent's challenges to this Commission's jurisdiction. Respondent has advanced several arguments in support of their view that this case should be dismissed. As the following discussion will demonstrate, the arguments are without merit.

Respondent's Arguments for Dismissal

1. The Commission is Collaterally Estopped

Respondent argues the "complaint against Grain Land violates a fundamental principle of jurisprudence that the agency is bound by the district court's finding that Grain Land's contracts are excluded from regulation under the CEA [Commodity Exchange Act]." (Respondent's Post-Hearing Brief ["RBrief"] at 12). Grain Land argues that the Commission is collaterally estopped from bringing this administrative enforcement action and, therefore, this case should be dismissed because of the determination in In re Grain Land Coop Cases, 978 F.Supp. 1267, 1280 (D.Minn. 1997) in which the federal district court held that Grain Land's Flex HTA contracts were cash forward contracts excluded from regulation under the Commodity Exchange Act, and dismissed a majority of the Producers' claims on summary disposition.

Respondent has already advanced this exact argument, to no avail, to the United States District Court for the District of Minnesota.2 Grain Land Coop v. CFTC, Memorandum Opinion and Order, Civ. No. 97-2410 RHK/FLN (Jan. 1998)("Memorandum Opinion and Order"). Following Judge Magnuson's ruling, respondent proceeded to file with the district court its Petition for a Writ of Prohibition and/or a Writ of Mandamus ("Petition for Writ"), requesting that the Commission be ordered to dismiss its Complaint in light of the decision reached by Judge Magnuson regarding the Flex HTA contracts in In re Grain Land Coop Cases, 978 F.Supp. 1267 (D.Minn. 1997). In support of its petition, respondent argued that: (1) the Commission's administrative proceeding threatens the integrity of Judge Magnuson's ruling; (2) the Commission's administrative proceeding exceeds the jurisdiction of the Commission; and (3) the Commission is collaterally estopped from proceeding on account of Judge Magnuson's ruling. Id. at 45,982. As the reviewing federal district court noted, "[t]hese three arguments are, however, so inter-related as to be merely restatements of each other, and each rests on the premise that the CFTC is estopped from proceeding by the previous case before Chief Judge Magnuson to which it was not a party." Id. On January 7, 1998, the district court denied Grain Land's Petition for Writ, holding that the Commission is not collaterally estopped from pursuing the present administrative proceeding, stating that Grain Land's "...position is flatly rejected both by Supreme Court case law and by the very structure of judicial review." Id.. The court's opinion makes it abundantly clear that respondent's position is lacking in merit and it will not be discussed further.3

Town of Deerfield, N.Y. v. F.C.C., 992 F.2d 420, 428 (2nd Cir. 1993)(citations omitted). As such, Grain Land's request to "review" or "ignore" the federal district court's determination that the Commission is not collaterally estopped from pursuing this administrative enforcement action is inappropriate.

2. Official Notice Was Taken

Respondent contends that because this forum granted respondent's request to "...take official notice of Judge Magnuson's ruling as well as his factual findings . . . the complaint against Grain Land must be dismissed." RBrief at 11-12. Respondent is in error as to the use of official notice. Although this forum agreed to take official notice of In re Grain Land Coop Cases and the factual findings therein, in accordance with Regulation 10.67(b)(i), 17 C.F.R. 10.67(b) (1998), it neither bound by the judgment rendered in that case nor required to adopt the district court's factual findings. As the Division correctly points out, the notice taken was to allow the record in this proceeding to reflect that respondent has brought claims against the producers subject to the Flex HTA contracts at issue in this case as well as the outcome of that case. Such notice is "...not for the truth of the matters asserted in the other litigation, but rather to establish the fact of such litigation." Division's Reply to Respondent's Post-Hearing Brief ("DReply") at 31 (quoting Liberty Mut. Ins. Co. v. Rotches Pork Packers, Inc., 969 F.2d 1384, 1388 (2d Cir. 1992)); See General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1081-83 (7th Cir. 1997)); United States v. Jones, 29 F.3d 1549, 1553 (11th Cir. 1994). Moreover, as the Division notes, to do so would have the effect of collaterally estopping the government from litigating whether the Flex HTAs are futures contracts. DReply at 32 (citing Jones, 29 F.3d at 1553).

3. Improper Review

Respondent argues that dismissal is mandated since this forum is improperly attempting to "review" or "ignore" the decision by Judge Magnuson, In re Grain Land Coop Cases. RBrief at 10-11. Grain Land cites Town of Deerfield, N.Y. v. F.C.C., 922 F.2d 420 (2nd Cir. 1993) as the authority that this agency may not "review" a federal district court's opinion is misplaced since that case spoke to an attempt by a federal agency, the FCC, to hear a case between the same two parties who had already litigated their case in federal district court. In that instance the FCC was improperly providing an additional forum, a second chance, for a case that had already been litigated and decided between a private citizen and the Town of Deerfield. The case at bar differs in that this is the first forum to hear the case between Grain Land and the Commission. As such, the present case is in no manner an attempt to "review" the decision rendered in In re Grain Land Coop Cases - a private case between Grain Land and the Producers.

Respondent's primary reliance on Flores v. Secretary of Health, Education and Welfare, 228 F.Supp. 877, 877-78 (1964) to buttress its argument that this forum may not "ignore" Judge Magnuson's decision is also inapposite. RBrief at 12 n.11. In Flores, the statutory scheme provided that the decision of a hearing examiner of a federal government agency was to be reviewed by a federal district court. The district court, in that case, reversed and vacated the decisions of both the hearing examiner, who refused plaintiff's claims for benefits, and the Appeals Council, which denied plaintiff's request for review of said decision. The Flores court admonished the hearing examiner for his refusal to follow the district court's prior rulings mandating that benefits be paid in the particular situation. Unlike the procedural setup for review in Flores, the initial decision of an administrative law judge of this Commission is not subject to review by a federal district court, but subject to review by the Commissioners, whose decision is then subject to review by the United States Court of Appeals. Regulation 10.101, et seq., 17 C.F.R. 10.101, et seq. This forum is bound by what the Commission decides and, in turn, the decision of a particular federal court of appeals. As such, respondent's application of the Flores court's holding in this instance is inappropriate.

In sum, based on the aforementioned arguments, there is no merit in respondent's assertions that this case should be dismissed.3

FINDINGS OF FACT

The findings and conclusions4 set out below are well supported by the testimony and exhibits of record.5 The fact witnesses presented by the Division and Grain Land were credible and reliable on the whole. The testimony and exhibits demonstrate that the material facts in this case are well-settled.

It must be noted, however, that the expert witnesses presented by the parties were not persuasive, and no reliance has been placed on the testimony of the expert witnesses in determining findings of fact or conclusions of law.

Respondent Grain Land and its Employees

1. Respondent Grain Land Coop ("Grain Land") was a Minnesota agricultural cooperative at all times relevant to the activities described in the Complaint. Answer at 1. Grain Land was formed in April 1993 through a merger of six farmer-owned Minnesota cooperatives.6 Id.; Tr1 at 135; Tr4 at 9, 114. Grain Land operated through nine elevator locations.7 Tr1 at 160, 172; Tr4 at 13-14, 32, 114.

2. Michael Christensen ("Christensen") was employed as respondent's general manager at all relevant times. DX 416 at 003874. He had been employed as general manager of Wells Farmers Elevator prior to coming to Grain Land. Id.

3. Joseph Daly ("Daly") served as respondent's corn merchandiser from its inception until May 1995. DX 416 at 003875; Tr1 at 133-35, 170. Daly reported to Christensen. Tr1 at 134, 138-39. Daly testified that he had been employed by Wells Farmers Elevator as a grain merchandiser prior to coming to Grain Land. DX 416 at 003875; Tr1 at 134, 164-65, 176. It was Christensen who requested in May of 1995 that Daly leave Grain Land. Tr1 at 135.

4. Joseph Burke ("Burke") was employed by Grain Land in August 1994 to take over the grain origination program -- which controlled the type of merchandising contracts the elevator entered - as well as training. Tr1 at 158-59; Tr3 at 29. The grain origination program required Burke to work with employees and producers and instruct them on the various market alternatives available. Tr3 at 30-31. Burke eclipsed Daly in terms of educating producers about the Flex HTA as an alternative marketing tool. Tr1 at 158-59, 170; Tr2 at 17; Tr3 at 30-31. Burke also reported to Christensen. Tr3 at 31. In October 1996, Burke became interim manager of Grain Land and was responsible for running the day to day operations which included handling accounts and negotiations. Tr3 at 29-30. Burke left Grain Land in December 1997. Tr3 at 29.

5. Curt Miller ("Miller") was employed by Grain Land from April 1995 until December 1996 as grain merchandiser, taking over Daly's duties.8 Tr4 at 33-34, 60-61, 85-86. The grain merchandiser is responsible for hedging, storage, transportation needs, and cash bid prices, among other things. Tr4 at 86. Miller worked at the merchandising desk and was responsible for setting the basis for various locations. Tr4 at 33.

6. Fritz Bleess ("Bleess") was employed by Grain Land as soybean merchandiser and handled soybean Flex HTA contracts. DX 416 at 003867; Tr2 at 20, 63.

7. William Erickson ("Erickson") was employed as Grain Land's controller and chief financial officer, in charge of accounting, finance and administrative type activities, from January 1994 to September 1996. Tr4 at 26, 59. At hearing time he was employed by Wantonwan Farm Services Company ("Wantonwan")9, the agricultural co-op designated by Grain Land as its agent to receive grain on its behalf. Tr4 at 25-26, 78.

8. Neither Grain Land nor any of its directors or employees were registered with the Commission in any capacity when the Commission commenced this proceeding. Answer at 1.

Grain Land's Operation

9. Grain Land's "core business [was in] feed, seed, petroleum and agronomy services on the input side and grain marketing on the output side." DX 416 at 003877. Grain Land purchased corn and soybeans from its member producers, which it then resold to commercial intermediate or end users. Tr4 at 9-10. Grain Land made a profit by buying grain, subtracting a basis value and then reselling it with a smaller basis differential. Tr1 at 60, 62-63; Tr4 at 107. This differential varied throughout the year.10 Tr4 at 107. Grain Land's other sources of income included agronomy inputs and milling of feed. Tr1 at 60, 62-63. Grain Land also sold inputs such as fertilizer, feed and chemicals. Tr4 at 9. Grain Land also received income from charging rolling fees and cancellation fees.

10. To be a member of Grain Land cooperative, one needed to be a "producer," live within the trade territory of the cooperative, and conduct at least $1,000 worth of business with Grain Land. Tr4 at 11; GX 47 at 007197. A "producer" was defined as any entity "actually engaged in the production of any one or more agricultural products," which included either grain or livestock. GX 47 at 007197-7098.

11. Grain Land's gross receipts were first applied to offset the costs and expenses incurred by Grain Land, including operating expenses and additions to working capital, with the remainder being distributed to patrons. Tr1 at 36-37; GX 47 at 007207-007211. Remaining profits were returned to its members as patronage, computed to reflect the percentage of business a particular member conducted with a particular department (i.e. the feed or grain department). Tr1 at 36-37; Tr4 at 11-13; GX 47 at 007207-007211.

12. Grain Land had multiple ways to purchase grain: (1) "standard" forward delivery contracts; (2) basis contracts; (3) hedge-to-arrive contracts; (4) extended price later contracts; (5) minimum price contracts; and (6) deferred payment contracts. GX 228 at 12; Tr4 at 15.

Respondent's Facilities and Deliveries

13. Grain Land elevated approximately six million bushels of corn and one and a half to two million bushels of soybeans annually, from its inception in April 1993 until May 1995.11 Tr1 at 135-36.

14. Grain Land entered into in excess of 2,000 Flex HTA contracts. Tr4 at 58. At its peak, Grain Land had in excess of 21 million bushels of grain receivable pursuant to its Flex HTA program.12 DX 425 at 002513, 003240; Tr4 at 101.

15. Respondent asserts that three million bushels of grain were actually delivered to Grain Land during the life of the Flex HTA program. RBrief at 7. Erikson testified, however, that Grain Land received delivery of more than five and a half million bushels of grain during the life of the Flex HTA program.13 Tr4 at 43. The Court does not find it necessary to resolve this discrepancy.

Farmers Commodities Corporation

16. Farmers Commodities Corporation ("FCC") provides consulting services to elevators to assist them in grain merchandising. Tr1 at 177. FCC was a clearing futures commission merchant and cleared Grain Land's trades through the Chicago Board of Trade ("CBOT"). Tr1 at 165. There was no introducing broker used for these trades. Tr1 at 166.

17. FCC sent Grain Land a Grain Merchandising and Origination Proposal ("FCC Proposal") stating that it could provide respondent with "a complete merchandising staff, an extensive origination program, a farmer marketing and education program, and the Integrated Marketing Program." DX 412 at 003732-33.

18. The FCC Proposal stated that "[t]he cost of the proposal and programs would be primarily the personnel costs associated with staffing your merchandising group. This would be done on a cost recovery basis and billed monthly." DX 412 at 003733 (emphasis added). The merchandising staff, whose "primary responsibility would be to merchandise country origination and track or direct business when practical and profitable" would be headed by Daly. DX 412 at 003732.

19. Daly had been employed by FCC as a grain marketing consultant prior to working for Wells Farmers Elevator and then Grain Land. DX 416 at 003875; Tr1 at 134-35, 164-65, 176. Daly was never an "employee" of Grain Land, however - he served under the grain merchandising agreement Grain Land had with FCC. DX 414 at 002181. His paycheck while at Grain Land was written by FCC, who then billed Grain Land. Tr1 at 134-35, 165; Tr4 at 61; See Finding of Fact #18. It is undetermined whether Daly had the same arrangement with FCC while at Wells Farmers Elevator.

20. The FCC Proposal also offered to make Grain Land an introducing broker of FCC so that "members will have the ability to use all of the typical cash contracts and use the futures and options markets when applicable."14 DX 412 at 003732. It also stated "[i]n addition to cash and futures recommendations for Grainland [sic] members educational programs and seminars will be provided enabling them to make informed decisions about pricing their production. As the producer futures and options volume increase a full time broker can be added." DX 412 at 003732.

21. FCC submitted to Grain Land extensive information on "Marketing Alternatives" including discussion regarding twelve different types of marketing contracts along with sample forms, including a "Hedge to Arrive Contract" and "Forward Delivery Cash Flex Contract." DX 412 at 003660-01, 003694-95, 003698-99, 003700-01.

The Origins of Grain Land's Flex Hedge-To-Arrive Contract

22. Grain Land began offering Flex HTA contracts as a response to the grain marketing activities of its competitors. Tr1 at 137; Tr4 at 52-53, 83. Flex HTA contracts succeeded in attracting producers that had not previously or regularly marketed grain through Grain Land. Tr1 at 95; Tr2 at 44, 62; Tr3 at 8-9.

23. Grain Land offered, within a week of its inception in April 1993 through at least February 1996, what it referred to as "flex hedge-to-arrive" contracts and "hedge-to-arrive" contracts with "flex" delivery provisions (collectively referred to as "Flex HTA" contracts) for corn and soybean marketing. See generally DX 1-353; Tr1 at 136-37.

24. Daly developed Grain Land's Flex HTA contract by taking an "ordinary hedge-to-arrive" contract, such as the one used by other elevators or supplied by FCC, and adding "flexible privileges" which included a rolling provision and a cancellation provision.15 Tr1 at 137-41, 174-75, 185; DX 412 at 003692-95; GX 58 at 6550.

25. Daly presented to Christensen for his approval the Flex HTA contract he had developed. Tr1 at 138-39. The board of directors was never presented with the Flex HTA for approval and was not informed of the Flex HTA until early 1995, nearly two years after its creation and use. Tr4 at 17-18. The board of directors never reviewed any marketing materials. Tr4 at 18.

The Marketing of Flex HTA contracts

26. At Grain Land's formation, in April 1993, the board of directors and management held focus meetings at each elevator location to hear from its patrons. Tr4 at 14, 116. The patrons requested that Grain Land provide marketing program education. Tr4 at 14-15, 116-17.

27. Over a three month period, in early Spring 1995, Burke conducted at least sixty educational marketing meetings for producers. Tr1 at 95-96, 158, 170; Tr2 at 17; Tr4 at 132, 137; DX 414 at 001981-88, 002726-2728, 002112, 002129-2179; DX 416 at 003890. Meetings were advertised by the local division manager, on the Data Transmission Network (DTM), and in local papers. DX 416 at 003862; Tr1 at 24, 48. Grain Land had an email on the data line screen of the DTM. Tr1 at 24, 68-69; DX 416 at 003862.

28. Grain Land also held marketing meetings advertised "For Women Only," specifically for the wives of producers. DX 414 at 001982, 1983. Grain Land also conducted marketing meetings for entities lending money to producers. Tr4 at 131-32, 137.

29. Many producers met individually with Burke or Daly to discuss the use of Flex HTAs. Tr1 at 24-25, 76, 153; Tr2 at 4-5, 7, 45; Tr3 at 10.

30. The Flex HTA was marketed as a hedge tool to be used when the producer was satisfied with the price on the futures market - the producer would commit to a certain amount of bushels whose "delivery date is not set until basis is fixed" which then turned the flex HTA into a forward contract. DX 414 at 002100-01, 002113.

31. Grain Land marketed the risk of the Flex HTA being that basis could widen but the reward was that "good price levels are locked in on futures [with] flexibility to roll positions if wanting to defer deliver [sic] because of crop failure or to gain on carry in market [and] ability to lock in 1-3 years production." DX 414 at 002100-01, 002113. The Flex HTA was to be used "when profit goals are reached without committing to a specific deliver [sic] time." Id.

32. Producers viewed the Flex HTA contracts as a superior method of funding a futures position, one in which any costs associated with a futures position, such as margin, commissions and interest charged on funds financing margin, all of which were covered by Grain Land. Tr1 at 37, 97-98, 124-26, 154-55; Tr2 at 6, 18, 40.

33. Grain Land represented to producers that Flex HTA positions corresponded to short futures positions on the CBOT, saying that the futures reference price was equal to the price traded on the CBOT. Tr1 at 147, 154-55; Tr2 at 6, 13, 18, 40-41; Tr4 at 84.

34. Grain Land marketed the Flex HTA as a method of capturing futures trading gains and losses. DX 414 at 001989-1990, 002078-2079, 002113.

35. Form #1 and Form #3 of the Flex HTA contracts stated "BUYER [Grain Land] confirms the following futures transaction was made for seller [producer] today on the Chicago Board of Trade . . . . Buyer [Grain Land] shall be responsible for commissions and margin requirements of this transaction." DX 1, DX 5 at 100029, 100032, 100043; Tr4 at 63. Form #2 of the Flex HTA contract stated "The following futures pricing on the Chicago Board of Trade is being made at the Seller's request . . . ." DX 262 at 800433

36. Marketing materials stated that the producer would "Set price by fixing basis for a specific delivery month. The FHTA [Flex HTA] now becomes a forward contract." DX 414 at 002113. Producers were told that when the basis was set, their contract would become a forward contract. Tr2 at 6, 40-41.

37. Grain Land's Flex HTA contract was marketed as a "win-win" situation for producers, since the only risk was in the case of an inverted market, in which case the Flex HTA contract could be rolled out of an invert and into a carry. Tr1 at 77-79, 98; Tr2 at 6, 10, 18-19, 21, 63-64; Tr3 at 11; DX 414 at 002076.

38. The Flex HTA contract enabled producers to market multiple years of grain; Tr1 at 26-28, 155-57, 184; Tr2 at 6, 8, 17-18, 20, 46-47, 63, 72; Tr4 at 21, 139; DX 5, 70, 153, 208, 252; DX 414 at 002076, 002100, 002114; DX 416 at 003854. Grain Land marketing materials touted the Flex HTA contract as enabling producers to "lock in price for 1-3 years production." DX 415 at 003724. There is also evidence of delivery plans for five years or more. Tr1 at 26-27; Tr2 at 8, 20, 72. There is even evidence of a nine-year delivery plan. Tr4 at 21. Grain Land assisted producers in establishing "stair step", "inverted pyramid" or "scale-up marketing" plans to market multiple years of production (the producer would initially contract for a smaller number of bushels and, as the futures price increased, contract for a larger number of bushels in order to skew the price average higher). DX 416 at 003901; Tr1 at 26-27, 101, 155-56; Tr2 at 7-8, 46-47, 64-65, 72, 75.

39. Producers could "lock in prices at profit levels" while still taking advantage of favorable price movements in the futures (should futures contract prices in deferred months increase relative to the futures reference price). Tr2 at 63, 72; DX 414 at 002076, 002100, 002114; DX 416 at 003890.

40. Grain Land informed producers that they could "roll positions forward if producer wishes" and "take advantage of spreads" or "a carry in the market." DX 414 at 002076; DX 415 at 003724, 003915; Tr1 at 98. Grain Land told producers that if losses were incurred in the process of rolling a Flex HTA contract, the producer could continue to roll the contract forward until the market moved in the producer's favor or roll backward during an inverted market. Tr1 at 32-34, 77-78, 98; Tr2 at 6, 10, 18-19, 63-64; Tr3 at 15-16.

41. Grain Land told producers they had the option, when the cash price was higher than their price under the Flex HTA contract, to deliver their grain into the cash market (entering into a cash contract with Grain Land for their current production) and roll their Flex HTA contract forward. Tr1 at 105-06, 141-42, Tr2 19-20, 53-54, 63; Tr4 at 20-21, 82. This option was used by producers. Tr1 at 105-06; Tr2 at 19-20, 53-54; Tr4 at 20-21, 82.

42. Producers were told they could always cancel their Flex HTA. Tr1 at 25, 27, 76-77, 109, 120-21, 141, 146-47; Tr2 at 10, 18, 21, 34-37, 63, 65-66, 68-70; Tr3 at 10-11. Grain Land told producers that if their Flex HTA was worth more than the futures price on the CBOT, gains could be captured by canceling the Flex HTA contract. Answer at 4, 11; Tr2 at 8-9.

43. Burke stated that profit obtained from the futures position established and then offset could be added to the price of a subsequent, separate cash contract. DX 414 at 002079. The price received upon a producer's delivery of grain was the cash price plus or minus the futures gain or loss. DX 414 at 002078.

44. Grain Land also presented its Flex HTA contracts to livestock producers as a means to reduce feed costs by profiting in futures market trading via the Flex HTA and canceling out. Tr1 72, 75-77; Tr3 at 10-11.

45. Producers viewed the Flex HTA as obligating Grain Land to buy grain if the producer decided to set basis, and deliver in the futures reference price month, but not obligating the producer to deliver. Tr1 at 47, 64; Tr4 at 59, 119-20.

The Flex HTA contract

46. Each Flex HTA contract was separately entered into between Grain Land and a producer. Tr1 at 137-39, 153; Tr4 at 42.

47. The price a producer would receive under the contract was determined by (1) establishing a "reference price" for the grain at the time the contract was entered; and (2) setting "basis" at some later time. Answer at 3; Tr1 at 143, 173-74; GX 228 at 21.

48. There were three different standardized forms of Flex HTA contracts. The forms were entitled as either "Flex Hedge to Arrive Contract" or "Hedge-to-Arrive Contract" with "flex" delivery terms. DX 69; DX 81; DX 82; DX 97; DX 102; DX 104; DX 106; DX 117; See Generally DX 1-353; Tr1 at 137-38, 143.

49. The first type of standardized Flex HTA contract ("Form #1"') was entitled "Flex Hedge to Arrive Contract" and was used only for corn. DX 5. It had a rolling provision, a cancellation provision, an arrival period as "open," and a stated destination. This form had pre-filled blanks for "Grade & Grain," "Arrival Period," rolling fee, and cancellation fee, which did not vary from contract to contract and were pre-printed as "#2-Y-Corn," "OPEN," and "2 CENTS" per bushel and "5 CENTS" per bushel, respectively. The deadline for setting basis was pre-printed as on or before the "25th DAY PRECEDING THE FUTURES MONTH OF DELIVERY." DX 5.

50. The second type of Flex HTA contract ("Form #2") was also entitled "Flex Hedge to Arrive Contract" and was used only for corn. DX 12. It had a rolling provision, a cancellation provision, "Destination" filled in or left blank, and an "Arrival Period" as "open" or left blank. It specified fees for rolling and cancellation, and the deadline for setting basis - all of which were identical to Form #1. The cancellation fee, however, did change to "10 cents" per bushel on some of these forms in 1995 and 1996. DX 112.

51. The third type of Flex HTA contract ("Form #3") was entitled "Hedge to Arrive Contract" and was only used for soybeans. DX 7. The delivery date blank was always filled in as "FLEX." Although the contract did not have a provision for rolling or cancellation, the majority showed evidence of rolling through notation of "Rolled @" at the bottom with a two cent rolling fee subtracted. DX 7, DX 8; DX 47; DX 47-50; DX 56; DX 63; DX 64; DX 69; DX 72. There was also evidence of cancellation on some of these contracts through notations that the contract had been "bought back," with subtraction of the 5 cent per bushel cancellation fee also noted. DX 49.

52. Each form of the Flex HTA contract contained "flexible provisions" or notation on the contract that it was administered with such provisions. DX 5 at 100029, 100032, 100043; DX 262 at 800433; DX 10353; Tr1 at 143. It is unclear why one version of the contract was used in some instances as opposed to others - sometimes all three forms were used by the same producer in the same year. DX 69; DX 81; DX 82; DX 97; DX 102; DX 104; DX 106; DX 117; DX 239; DX 241; DX 260; DX 263; DX 266; DX 318; DX 325; DX 345; DX 349.

53. Form #1 and Form #3 of the Flex HTA contract was used in 1993, 1994, 1995 and 1996. DX 125; DX 145; DX 7; DX 63. Form #2 of the Flex HTA contract was used only in 1995 and 1996. DX 12; DX 2.

Establishing the Futures Reference Price

54. The initial price of the Flex HTA contract was the "futures reference price" (or "futures contract price") which the producer selected. DX 5 at 100029, 100032, 100043; DX 262 at 800433; Answer at 3; Tr1 at 25, 29-30, 80-82, 171-72, Tr3 at 12-13; Tr4 at 42. The futures reference price was the futures price of a specific futures contract month (in corn or soybeans) traded on the Chicago Board of Trade. DX 5 at 100029, 100032, 100043; DX 262 at 800433; Answer at 3; Tr1 at 25, 80, 97, 103-04, 143-44, 154; Tr2 at 47; Tr3 at 13; DX 414 at 002077.

55. The futures reference price selected for multiple year Flex HTA contracts was in the nearby crop year, requiring that the producer exercise the rolling provision if delivery was intended. DX 5, 70, 153, 208, 252; DX 414 at 002076, 002100, 002114-2115; Tr2 at 9-10, 46-49; Tr4 at 19-20, 139-40.

56. The producer also selected the number of bushels, although Grain Land required that this amount be in 5,000 increments for corn and 1,000 bushel increments for soybeans so as to correspond to the futures position Grain Land established on the CBOT (or Mid America). Answer at 4; DX 5 at 100029, 100032, 100043; DX 262 at 800433; DX 1-353; Tr1 at 28-29, 81, 171; Tr3 at 14, 22; Tr4 at 42.

57. The producer would notify Grain Land of his futures reference price selection in the form of an "offer" which meant that the producer was willing to enter into a Flex HTA with Grain Land at this particular price. Tr1 at 81-82, 102-04, 143-44; Tr3 at 13-15; Tr4 at 61-62. Grain Land personnel would fill out an "offer contract" which memorialized the producer's "offer." DX 5 at 100038; DX 34 at 200093; DX 153 at 500016; DX 230 at 100676; DX 252 at 200399; DX 262 at 001469; Answer at 5. Although some offer contracts had specific prices, other offer contracts stated "market." DX 42, 66, 68, 69.

58. The "offer contract" was then transferred to Grain Land's broker FCC, who would then place an open order for a position on the CBOT corresponding to the futures reference price requested by the producer. Answer at 6; Tr4 at 33-36, 69-71, 95-96.

59. The Flex HTA became effective the moment the futures position was established on the Chicago Board of Trade. Tr1 at 82; 103, 144; Tr3 at 22; Tr4 at 35-36. A producer could "pull back" an offer at any time prior to the offer being filled by Grain Land's broker. Tr2 at 68.

60. The futures position was held in Grain Land's name. DX 700; Tr1 at 179-80; Tr4 at 36-37, 62-63. All margin requirements were met and paid for by Grain Land. Answer at 6; DX 700; Tr4 at 37. Nevertheless, the producer was strictly liable to Grain Land for any loss sustained on the futures position. Conversely, any gain on the position would ultimately benefit the producer.

61. Once the futures position was established, Grain Land would complete a Flex HTA contract form, always filling in blanks for the futures reference price, the futures contract month and the number of bushels, which then was signed by the producer. Tr4 at 36; See Generally DX 1-353. The delivery period on the Flex HTA contract was always listed as "OPEN" or "FLEX" or left blank.16 DX 5 at 100029, 100032, 100043; DX 262 at 800433; DX 1-353; Tr4 at 100. The producer also selected which of Grain Land's local elevators as the delivery destination. Tr1 at 172; Tr4 at 42, 128. With Form #2 of Flex HTA contract, however, often the delivery destination was stated as "open" or left blank. See Generally DX 1-353.

62. Grain Land's Flex HTA contract permitted a producer to alter or avoid delivery through three methods: (1) a "rolling" provision; (2) a "cancellation" provision; (3) a "redelivery" provision. See Findings of Fact # 63-96.

Option #1: The Rolling Provision

63. The "rolling" provision entitled a producer to defer delivery from the reference price month by altering the futures reference price and corresponding delivery month under the Flex HTA contract. DX 5 at 100029, 100032, 100043; DX 262 at 800433; DX 414 at 002078, 002089; Answer 4, 7-8; Tr1 at 30-34, 76-78, 98, 105-06, 117, 140-42, 145-46, 171, 181, 185; Tr2 at 4-6, 10, 17-20, 45-46, 48-50, 62-64; Tr4 at 39-41.

64. The producer could unilaterally make the determination whether to exercise the rolling provision, so long as it was exercised prior to the 25th day of the month preceding the "delivery month." Tr1 at 30-34, 85, 98, 140-42, 145-46, Tr2 at 5-6, 17-20, 45-46, 53-54, 62-64, 73; Tr3 at 17; Tr4 at 21, 42; DX 700. See also DX 5 at 100029, 100032, 100043; DX 262 at 800433; GX 11 at 006004; Tr1 at 17-18, 47, 49-50, 67-68. After the 25th, Grain Land could set the basis automatically. Answer at 7; Tr4 at 42. Grain Land's written policy, however, was that the Flex HTA would be automatically rolled. GX 11 at 006004.

65. Producers were never told that Grain Land and the producers had to be in agreement. Tr1 at 51. There is no evidence that any producer's rolling request was ever denied.

66. The rolling provision did not limit the number of times a producer could exercise this option. Tr1 at 77, 145, 171. Grain Land's written policies stated that the Flex HTA was capable of "unlimited rolls." DX 700 at 006004; GX 11 at 006004; Tr4 at 22-24, 41.

67. The producer could roll the futures reference price forward, to a later futures contract month, or backward, to an earlier futures contract month, for any reason. DX 5 at 100029, 100032, 100043; DX 262 at 800433; DX 414 at 002076, 002078, 002080, 002100, 002114; DX 700; GX 11 at 006004; Tr1 at 25, 27, 33-34, 77-78, 98-99, 140-42, 145-46, 171; Tr2 at 5-6, 10, 17-20, 62-64; Tr4 40-41; Answer at 7-8. Producers were told in marketing classes that they "had the unfettered ability to roll both forwards and back."17 Tr1 at 33, 145.

68. The producer had the authority to direct Grain Land to roll his Flex HTA contract to a different futures contract month and price, either by means of a limit order or by market order. Tr1 at 51-52; Tr3 at 17; See generally DX 1-353.

69. To effect a roll, Grain Land would place an order through its broker to offset the existing futures contract position while simultaneously establishing a position in another futures contract month. A form was filled out by Grain Land, on behalf of the producer, and transmitted to its brokers who placed an open order on the CBOT. DX 5 at 001649, 100036; DX 34 at 003596; DX 153 at 003467; Tr1 at 145-46; Answer at 8. If the order was not filled, the Flex HTA contract would not be rolled.

70. The gain or loss reflected in the spread between the old and new futures contract months was credited or charged to the producer's Flex HTA futures reference price.18 DX 5 at 100029, 100032, 100043; DX 70 at 500011; DX 34 at 200087; DX 208 at 900226-235; DX 222; DX 252 at 2000421; DX 262 at 800433; DX 414 at 002076, 002078, 002080, 002100, 002100, 002114; Tr1 at 30-32; Tr2 at 47-50, Tr4 at 40-41, 130-31, 138; Answer at 7.

71. Each time a producer rolled his Flex HTA contract he had to pay a two cent per bushel rolling fee which was subtracted at that time from the new futures reference price. DX 5 at 100029, 10032, 100043; DX 70 at 500011; DX 34 at 200087; DX 208 at 900226-235; DX 252 at 200421; DX 262 at 800433; Tr1 at 31, 85; Tr2 at 17-18, 50. Grain Land asserts that the rolling fee was to reimburse Grain Land for costs associated with offsetting and reestablishing a futures contract position on the exchange. Tr1 at 142; Tr4 at 50-52. Grain Land testified that it did not make a profit by charging this fee. Tr4 at 51-52, 57. There is no probative evidence of record to prove or disprove this assertion. Daly testified that the rolling fee was "just a number we [Grain Land] pulled out of the air . . . approximately what it cost to take and do a futures position." Tr1 at 142. However, a two cent per bushel rolling fee amounts to $500 per futures position (futures contracts on the Chicago Board of Trade are in 5,000 bushel increments) which is considerably more than the commission for a round turn trade. It is entirely possible that Grain Land paid the entire amount to FCC. The record will not support a finding that Grain land did not profit from the two cent per bushel rolling fee.

72. Form #1 of the corn Flex HTA stated "SELLER agrees that this Flex Hedge Contract must be priced or rolled to another option month at a cost of 2 CENTS plus or minus the spread to that option, prior to the first notice day of the underlying futures shown above or at such time as Buyer elects to roll the underlying futures hedge position." DX 1

73. Form #2 of the corn Flex HTA contracts stated "During Chicago Board of Trade trading hours and prior to the 26th day of the month preceding the Futures Contract Month, Seller may roll the Futures Contract Month to a different futures option month at a cost of 2 cents per bushel plus or minus the spread . . . . " DX 2.

74. Form #3, the soybean Flex HTA contracts, had no written rolling provision but was administered with a rolling provision, evidenced by "Rolled @" notation at the bottom of the contract along with a 2 cent deduction memorialized. DX 7.

75. Rolling permitted a producer to lock in a gain or loss on an existing contract in hopes of capturing a gain on a new futures reference price. DX 414 at 002076, 002089, 002100, 002114-2115; Tr1 at 31-34, 66-67, 98; Tr2 at 5-6, 10, 18-19.

76. A majority of Flex HTA contracts were rolled numerous times. DX 1-353; DX 222 at 600342, 000603, 600340; Tr4 at 20, 129-30. Producers could roll a Flex HTA contract within a crop year as well as from one crop year to another. Tr1 at 146; Tr4 at 21, 138-39; DX 414 at 002114, 002115.

77. From December 1993 to April 1996, a total of 47,093,000 bushels of corn due under Flex HTA contracts were rolled at some point.19 GX 35 at 008034-8036. Grain Land earned a total of $941,860 in rolling fees during this time as a result. GX 35 at 008034-8036. Rolling figures pertaining to soybeans were not supplied.

Option #2: The Cancellation Provision

78. The "cancellation provision" entitled a producer to extinguish his contract by paying a cancellation fee in addition to paying to or receiving from Grain Land any losses or gains from the contract. DX 5 at 100029, 100032, 100043; DX 262 at 800433; Tr1 at 24-25, 27, 32-33, 76-78, 99, 102, 108-112, 120-21, 140-42, 146-52, 184; Tr2 at 5-8, 10, 16-18, 20-21, 45-46, 50-53, 62-71; Tr3 at 10-12, Tr4 at 55-59, 84, 140-41; Answer at 4, 11, 12.

79. When the producer exercised the cancellation provision and cancelled his Flex HTA contract, the amount the producer owed to Grain Land or that Grain Land owed to the producer was the difference between the "current" Flex HTA contract price -- which reflected gains or losses from past rolling as well as rolling fees deducted -- and the current price of the reference futures contract on the CBOT. DX 5 at 100029, 100032; DX 262 at 800433; Tr1 at 108-12, 120-21, 129-31, 146-48; Tr2 45-46, 50-53; Tr3 11-12; Tr4 at 56-59, 183-84; DX 34 at 200086; DX 208 at 900487, 900488; DX 242 at 100003-4.

80. The producer had the unequivocal right to exercise the cancellation provision and its exercise was not contingent on any conditions. Tr1 at 152; DX 5 at 100029, 100032, 100032, 100043; DX 262 at 800433; Tr2 at 7-8. Specifically, producers could cancel in accordance with their economic best interest. Tr1 at 122. Daly added the cancellation clause to provide the Flex HTA with the greatest level of "flexibility." Tr1 at 137-41.

81. Grain Land asserts that the cancellation fee charged to producers reimbursed Grain Land for administrative expenses associated with carrying the futures position underlying the Flex HTA contract price.20 Tr1 at 142; Tr4 at 50-52. There is no probative evidence of record to prove or disprove this assertion. Daly testified that the cancellation fee was "just a number we [Grain Land] pulled out of the air . . . approximately what it cost to take and do a futures position." Tr1 at 142. Nevertheless, the five cents per bushel charge amounts to $250 per bushel contract, an amount vastly in excess of any commission charge.

82. The cancellation clause in Form #1 in 1994 read:

Seller [producer] also has the right to cancel contract at a cost of 5 cents per bushel, plus or minus cancelled price of the futures and the contract price. DX 5 at 100029.

83. This cancellation clause in Form #1 was then modified in 1995 and 1996 to read:

SELLER [producer] also has the right to cancel futures contract at a cost of 5 CENTS per bushel, plus or minus cancelled price of the futures from the previously contracted futures price. SELLER also agrees that he/she must make a delivery of grain sometime to collect gains. DX 5 at 100032.

This version added conditions to realizing gains in that the producer was required to make a delivery at some future time. Tr1 at 146-49.

84. The cancellation clause in Form #2 of Flex HTA contracts read:

During a trading session at the CBOT Seller [producer] shall have the right to cancel this contract at a cost of [5 or 10] cents per bushel plus or minus the difference between the CBOT intrasession price of the selected futures and the Futures Contract Price. Any payment due Buyer [Grain Land] is due upon cancellation. Any payment due Seller shall be divided by the number of bushels canceled and added to the cash price of a like number of bushels physically delivered at a future date. Delivery of grain is a condition [sic] Seller's right to collect any such gains. DX2 at 800130, DX 262 at 800433.

This version added conditions to realizing gains in that the producer was required to make a delivery at some future time. Tr1 at 146-49.

85. Form #3 of Flex HTA contract did not have any written cancellation clause. The contract, however, was marketed and administered with a cancellation provision similar to the others, with notation on the contract that it was "bought back" along with the 5 cent cancellation fee deducted. DX 49 at 100131, 134, 137.

86. None of the forms contained a delivery requirement when the producer accrued losses. DX 5 at 100029, 100032, 100043; DX 262 at 800433.

87. Many producers entered Flex HTA contracts with the intention to cancel them since delivery was not feasible. Tr1 at 99, 102; Tr2 at 7-10; Tr3 at 11-12. Producers who articulated to Burke that they had no intention to deliver were told they could roll and cash out of their Flex HTAs. Tr1 at 76-77, 83-84.

88. More than 45 producers cancelled at least one of their Flex HTA contracts. DX 4, 21, 34, 40, 41, 44, 48, 49, 67, 71, 75, 96, 106, 123, 172, 175, 179, 181, 193, 212, 237, 238, 242, 244, 246, 251, 252, 253, 259, 270, 272-274, 281, 291, 294, 295, 297, 300, 301, 307, 315, 324, 331, 332, 340, 342, 353; Tr2 at 68-71.

89. Grain Land had written "policies for paying off producer" - those producers who terminated their Flex HTA contracts. DX 418 at 002686, 002683.

90. Between March and May of 1996 alone, at least 846,000 bushels of grain were canceled under Flex HTA contracts. DX 4, 21, 34, 40, 41, 44, 48, 49, 67, 71, 75, 96, 106, 123, 172, 175, 179, 181, 193, 212, 237, 238, 244, 246, 251, 253, 259, 270, 272, 273, 274, 281, 291, 294, 295, 297, 300, 301, 307, 315, 324, 331, 332, 340, 342, 353.

Flex HTA Gains

91. Although Grain Land initially told producers that Flex HTA gains could be disbursed by check, producers were later told in 1994 that this was not possible because Grain Land was not a "legalized broker." Tr2 at 5-8, 65-66, 69-70, 77-78; Tr3 at 12.

92. At least a dozen producers, however, received their Flex HTA gains in the form of a check without incurring any additional delivery requirements. DX 208 at 900487-488; DX208A, 251, 253; Tr1 at 148-49; Tr2 at 12-17, 50-51, 53; Tr4 at 58. Although respondent contends that only 12 producers cancelled their contracts, this is based on Erickson's identification of 12 "disbursements" (checks written by Grain Land) to producers as payment for gains earned on Flex HTA cancelled. RBrief at 6-7, 30; Tr4 at 58.

93. Other producers had their Flex HTA gains credited to their accounts. DX 242 at 100001, 02, 05; DX 252 at 200420-424. The gains could be applied against other expenses incurred by the producers when doing business with Grain Land, such as a bill for soil gritting services performed by Grain Land or for merchandise purchased from Grain Land. Tr2 at 66-71. Flex HTA gains could be redeemed through inflated prices for later grain deliveries on unrelated, subsequent cash and forward grain contracts, Grain Land paying enhanced grain prices. Tr1 at 148-50; Tr2 at 5-8, 65-66, 66-71, 69-70, 77-78; Tr3 at 12; DX 252 at 200420-423.

Flex HTA Losses

94. Between March and May of 1996, many producers cancelled their Flex HTA contracts, extinguishing their contracts at a loss. DX 4, 21, 34, 40, 41, 44, 48, 49, 67, 71, 75, 96, 106, 123, 172, 175, 179, 181, 193, 212, 237, 238, 244, 246, 251, 253, 259, 270, 272, 273, 274, 281, 291, 294, 295, 297, 300, 301, 307, 315, 324, 331, 332, 340, 342, 353; GX 1.

95. The producer could pay losses incurred by check. DX 281 at 400195; GX-1. The producer could also pay losses by signing a promissory note to Grain Land. DX 71 at 400063-64; DX 75 at 600091-95; DX 238 at 600358, 362, 364, 367; DX 273 at 400177; DX 274 at 400180; DX 291 at 400202; DX 301 at 600434; DX 332 at 400252.

Option #3: The Redelivery Procedure

96. The "redelivery procedure" entitled a producer to "buy back" the grain pledged under their Flex HTA and satisfy delivery without ever physically delivering grain to the elevator. Tr1 at 150-52. This procedure enabled producers to offset Flex HTA contracts by simultaneously "purchasing" grain from Grain Land and "redelivering" grain to Grain Land -- thereby effectuating a "delivery" without any physical movement of grain. Tr1 at 71-85, 150-52, 183-84; Tr3 at 6-20.

97. The redelivery procedure could be used by any producer for any reason although is was marketed specifically to livestock producers who produced grain as feed for their hogs, dairy cows or other livestock, and lacked the intent to make delivery of the grain contracted under the Flex HTA contracts. Tr1 at 71-85, 150-52; Tr3 at 6-20. It enabled livestock producers to capture gains in the futures market. Tr1 at 71-85, 150-52; Tr3 at 6-20.

Third-Party Alternative

98. A producer could purchase grain from third parties and deliver the purchased grain in satisfaction of the Flex HTA pledge. Tr1 at 183-84; Tr2 at 183-84. A producer could not assign his Flex HTA to another party. Tr1 at 170.

Setting "Basis" and Delivering

99. If a producer decided to deliver grain, he informed the elevator and set the "basis." DX 5 at 100029, 100032, 100043; DX 262 at 800433; Answer at 3, 7; DX 1-353; Tr1 at 25, 27, 47, 141-43; Tr2 at 14-15, 39-41, 56-57; Tr4 at 34-35, 119-20. Once the producer set basis, he would deliver grain to Grain Land during the futures reference month contained in his Flex HTA. Answer at 4; Tr4 at 67-68, 75, 77-78, 119-20.

100. Basis is the difference between an elevator's cash price on any given day and the price quoted on the Chicago Board of Trade for the nearest futures price (the difference between the then-current futures month price and the then-current cash price). DX 5 at 100029, 100032, 100043; DX 262 at 800433; Tr1 at 62, 172-73; Tr2 at 102; Tr4 at 38, 68-69.

101. Basis may vary from one elevator to another and is set daily by the grain merchandiser. Tr1 at 172; Tr4 at 32-33, 38, 68, 107-09. Basis reflects the cost of delivery to market of the commodity and fluctuates daily in response to such factors as local transportation costs, supply and demand, and operation costs; it is added to the reference price to adjust that price for local delivery. Tr1 at 62, 172-73; Tr2 at 6, 102; Tr4 at 107-09. Basis is also used to attract grain to one location versus another location. Tr4 at 69, 111.

102. Form #1 of the Flex HTA contracts stated "SELLER agrees to set the `Cash Basis' and determine the cash value of said grain on or before 25th DAY PRECEDING THE FUTURES MONTH OF DELIVERY. Unless other terms have been agreed upon by both Buyer and Seller prior the [sic] said date, and grain has not been price by seller. Buyer is authorized to set the Cash Basis and to set the cash price of contract."

103. Form #2 of the Flex HTA contracts stated that the "Seller shall set the Cash Basis and Cash Price on or before the 25th day of the month preceding the Futures Contract Month. If Seller does not set a price prior to this date, Buyer will roll the contract to the next futures option month available as outlined above." DX2 at 800130.

104. Form #3, the soybean Flex HTA contract, stated "Seller agrees to set the `Cash Basis' and determine the cash value of said grain prior to delivery or before --------, unless other terms have been agreed upon." This deadline date for setting basis was always left blank. In reality, the deadline date was treated identically to the other Flex HTA contract forms.

105. The producer could decide to establish basis at any time on or before the 25th day of the month preceding the contracted Flex HTA futures reference price month. DX 5 at 100029, 100032, 100043; DX 262 at 800433; GX 11 at 006004; Answer at 7. If the producer did not set the basis or roll the delivery date on or before this time, the Flex HTA contract stated that Grain Land could automatically set basis on that date and require delivery. Tr1 at 145-46; Tr2 at 101-02; Tr4 at 41-42. Grain Land's written internal policy, however, called for automatic rolling. DX 5 at 100029, 100032, 100043; DX 266 at 800433; DX 700; GX 11 at 006004.

106. The price was set by "fixing basis for a specific delivry [sic] month. The FHTA now becomes a forward contract." DX415 at 003917; DX 416 at 003820. The producer's actual obligation to deliver grain was then reduced to a separate cash or forward delivery contract entered into between Grain Land and the producer. DX 89 at 400038, 400077; DX 411 at 004012; DX 151 at 600298-300; DX 161 at 300019, 300307; DX 411 at 004077; DX 203 at 80097-98; Tr2 at 15-16, 40-41; Tr4 at 119-20.

107. This separate cash forward contract utilized by Grain Land designated which party pays for increases in freight rates, that the seller has an affirmative obligation to delivery which continues even if the buyer is not able to accept delivery at the time specified; that the contract binds the heirs of the parties; that it is "NON-ASSIGNABLE BY SELLER;" and that "In the event of default of seller in seller's performance of this contract, seller agrees to pay all costs of buyer's enforcement of this contract, including, but not limited to, reasonable attorneys' fees and court costs." DX 89 at 400077, DX 161 at 300307 (emphasis in original).

108. The price the producer received for grain he delivered was equivalent to the current Flex HTA contract price minus the basis. DX 5 at 100029, 100032, 10043; DX 262 at 800433; Tr1 at 143; Tr2 at 48-50; Tr4 at 37-38. The actual final price received by the producer may have fluctuated from the Flex HTA formula based upon the quality of grain delivered. Tr1 at 173-74; Tr4 at 38-39. Grain Land paid the producer when the grain was delivered. Tr4 at 46, 121.

Grain Land's Financing

109. Grain Land's ability to operate, take deliveries of grain and finance margin payments for its positions on the Chicago Board of Trade underlying the Flex HTA contracts was dependent upon financing from the St. Paul Bank for Cooperatives ("St. Paul Bank"). Tr3 at 35-40; DX 426 at 003169-003224; DX 401 at 002572-2574, 002575-2678; DX 425 at 003240-2523. The St. Paul Bank was informed of each Flex HTA contract in order to know Grain Land's futures positions and to anticipate Grain Land's borrowing needs if the market climbed. Tr3 at 36-39.

110. In late 1995 Grain Land requested a $10,000,000 increase in its seasonal loan package from the St. Paul Bank to fund its margin calls in connection with the Flex HTA contracts. DX 401 at 002572. This brought its total seasonal loan package to $53,000,000. Id.

111. In Spring 1996, the St. Paul Bank was concerned with Grain Land's dramatic increase in Flex HTA positions. DX 401 at 002572-2574. St. Paul Bank viewed Grain Land's Flex HTA contracts with producers as unsecured loans to producers with no set repayment date. DX 401 at 002573. It viewed the risks of the Flex HTA program to "include[e] credit extension to producers for margin deposits and the risk of non-delivery. We reviewed that risk of non-delivery is influenced by spread risk, financial risk and price increases that make delivery on the contract less attractive. DX 401 at 002572 (emphasis added).

Grain Land's Hedging Procedure

112. Grain Land's practice was to hedge any type of grain transaction involving a contract with a fixed price in order to protect itself against market fluctuations after the price was set. Tr4 at 27-28, 64. Grain Land had a "singular" hedging process that it followed with all types of contracts. Tr4 at 34-36. Its policy was to hedge in order to keep its risk position within 5,000-10,000 bushels of all purchases and sales netted, a policy ruled by the fact that the minimum hedge with a full contract was 5,000 bushels. Tr4 at 27-29, 88. Grain Land's open grain ("[c]ompany-owned cash grain not covered by a contract for sale or by a hedged position") was not to exceed 5,000 bushels per commodity at the close of market any day. GX 46 at 008336.

113. All contracts, including the Flex HTA, came to Grain Land's central merchandising desk to be aggregated, regardless of type, in order to determine the proper hedge for Grain Land. Tr4 at 34-35. Grain Land then placed the appropriate open offer contracts with its introducing broker, either Cargill or Advanced Trading, on the Chicago Board of Trade. Tr4 at 28, 35, 60. If the price was not hit, the connected offers would die. Tr4 at 35-36. If the price was hit, Grain Land entered the contracts with the appropriate producers with the person at the hedge desk would notifying each elevator location of the accepted offers from producers. Tr4 at 36. The local elevator would then prepare the appropriate contract for the producer's signature. Id. Grain Land held all hedges in its name and financed all hedges itself. Tr4 at 36-37, 88.

114. Grain Land employed standardized terms in its Flex HTA contracts (including a reference price tied to an exchange traded position, bushel increments to correspond to exchange traded positions, and a delivery period which reflected the exchange traded position) in order to facilitate precise hedging and reduce the expected cost to the elevator of entering into the Flex HTA contract. Tr4 at 34-35, 64-65.

Grain Land's Demise

115. From Fall 1995 through Spring 1996, grain prices for old crop corn continued to rise. Tr1 at 52; Tr4 at 53. This market resulted in lowered grain prices for producers who rolled their Flex HTA contracts during this time. Tr4 at 53. In Fall 1995, many producers who had Flex HTA corn contracts with Gain Land chose to deliver on the cash market and roll their Flex HTA to the Spring. Tr1 at 52.

116. In Spring 1996, Grain Land became aware that some producers had sold all or a significant portion of their 1995 crop for cash and had rolled their delivery obligation to sometime in early 1996 before any new crop would be available for harvest. Tr2 at 53, 73.

117. In March 1996, Burke contacted producers and indicated that a relatively large number of producers in the May futures contract month had a very bad contract price vis--vis the market which was costing Grain Land an enormous amount of money. Tr1 at 37-38. As a result, Grain Land was going to impose marketing policy changes since it was suffering a huge cash drain. Tr1 at 38. Producers needed to be reminded that even though they were not paying margin calls, they were still short futures. Tr1 at 38. Grain Land wanted producers to sign a contract which included a provision for a twenty cent buy-up of individual positions to help fund the cash needed by Grain Land. Tr1 at 38-39, 63, 182-83; Tr3 at 19.

118. In March 1996, the Board voted to accept new marketing policies as well as a new Flex HTA contract. DX 419 at 003643. On April 4, 1996, Grain Land announced "policy changes" as adopted by its Board of Directors and that it was "terminating the prior indefinite contract" with the end of the stated futures contract month. DX 417 at 002635; DX 418 at 003814; DX 419 at 003651. In addition, producers who wanted to roll the futures contract month had two alternatives - alternatives which modified present contractual provisions of the Flex HTA. DX 417. Grain Land also stated that a new contract had been developed to include the "obligation of setting delivery dates." DX 419 at 003651.

119. On April 15, 1996 counsel for the producers sent a response, arguing that Grain Land "has no power or authority to unilaterally terminate or modify the Contracts or force the Producers to agree to a modification or amendment, and that therefore Mr. Christensen's statements concerning the actions taken by the Coop have no force or effect." DX 417. The producers also demanded from Grain Land adequate assurance of due performance that Grain Land would honor Flex HTA in its present form. Id.

120. On April 16, 1996 counsel for Grain Land responded to the producers' demand, although arguing that reasonable grounds for insecurity do not exists, and stated that "Grain Land intends to honor its contractual obligations under each of the contracts until they are terminated which will include, specifically, Grain Land's obligation to roll each of the contracts each time the producer in question requests Grain Land to do so until the contract is terminated." DX 417 (emphasis added).

121. On April 17, 1996, Grain Land sent out a letter to all holders of Flex HTA contracts stating the requirements to continue in the Flex HTA program with Grain Land. DX 417 at 002632; DX 419 at 003650-53. Grain Land stated that it was extending the termination of Flex HTA contracts from the end of the current futures contract month until December 31, 1996, or the end of the futures contract month for which the cash price and basis were determined, whichever was earlier. DX 417 at 002632-34; DX 419 at 003652. Grain Land also stated that the cash price and basis had to be set by no later than November 25, 1996 otherwise it would be priced on the first business day thereafter. Id. If the contract holder did not notify Grain Land that it wants to roll to a new futures contract month, the position would be rolled to the next futures contract month, not later than December 1996, at which time delivery was due and had to be made within a reasonable time thereafter. Id. Producers who wanted to remain in the program beyond December 31, 1996, had to notify Grain Land before June 25, 1996 and enter into a new contract stating delivery dates. Id. (emphasis added.)

122. On April 25, 1996, Grain Land sent out a letter stating that 130 farmers had hired legal counsel and were in negotiations with Respondent and that the alternatives resulting from the negotiations had been offered to all contract holders. DX 417 at 002629-30. The letter also stated that "[b]y including delivery dates in the new contracts and offering alternatives to current contract holders, we have taken positive steps toward limiting losses to members, while staying within the limits of the established trading guidelines to keep Grain Land's balance sheet healthy into the future." DX 417 at 002631.

123. On June 21, 1996, counsel for the producers sent a letter to Grain Land notifying them that Grain Land had "failed to provide adequate assurance under the circumstances, given that the Coop's letters to the Producers dated April 4, 1996, and April 17, 1996, both stated that the Coop was unilaterally terminating the Contracts and limiting the Producers' ability to roll . . . . [which] constitute a repudiation of the Contracts." DX 417. The letter also stated that the aforementioned, in addition to the illegality of the contracts as off-exchange futures contracts, "have terminated the Producers' obligations to perform further under the Contracts." Id.

124. In September 1996, Grain Land was unable to continue operations in light of the cost of funding exchange traded positions, due to nondelivery by producers, and transferred a substantial portion of its fixed assets to a limited liability company which was leased, managed and operated by Wantonwan Farm Service Company. DX 417. Grain Land retained ownership of certain investments and all hedge-to-arrive related assets, hoping to eventually repay its remaining debt and then retire stockholder equities. DX 417.

125. Grain Land continues to receive deliveries of grain pursuant to its Flex HTA contracts through Wantonwan Farm Service, which receives the grain on Grain Land's behalf and then makes the appropriate financial arrangements. Tr4 at 43-44, 78-79. In 1997, Grain Land received approximately one million bushels of grain pursuant to Flex HTA contracts. Tr4 at 43.

126. In December 1996 Grain Land entered into litigation with 156 farmers who entered into Flex HTA contracts with Grain Land and have not delivered in excess of 15,000,000 million bushels of grain pledged under 796 Flex HTA contracts. Tr4 at 53-54; See In re Grain Land Coop Cases.

DISCUSSION

Background

The Commodity Exchange Act ("Act") serves to comprehensively regulate futures contracts and options on futures by requiring that they be traded on a board of trade designated as a contract market by the Commodity Futures Trading Commission ("Commission"). Salomon Forex v. Tauber, M.D., 8 F.3d 966, 970 (4th Cir. 1993)(citing Commodity Exchange Act, 7 U.S.C. 2, 6); see also Characteristics Distinguishing Cash and Forward Contracts and "Trade" Options, 50 Fed.Reg. 39656 (Sept. 30, 1985). The purpose of the Act is "...to ensure fair practices and honest dealing on the [futures exchanges] and to control manipulative activity and speculative excesses that undermine the markets." NRT Metals, Inc. v. Manhattan Metals (Non-Ferrous) Ltd., 576 F.Supp. 1046, 1050 (S.D.N.Y. 1983)(citing S.Rep. No. 850, 95th Cong. 2d Session 12, reprinted in 1978 U.S.Code Cong. & Ad.News 2087, 2100). To accomplish this, the Act provides the Commission with regulatory jurisdiction over "accounts, agreements . . . and transactions involving contracts of sale of a commodity for future delivery, traded or executed on a contract market . . . or any other board of trade, exchange, or market." Section 2(a)(1)(A)(i), 7 U.S.C. 2 (emphasis added). Such contracts, referred to as "futures contracts," which are not offered and sold on regulated boards of trade constitute illegal "off-exchange" contracts in violation of Section 4(a) of the Act. In re Bybee, 945 F.2d 309, 312 (9th Cir. 1991)(citing 7 U.S.C. 6(a)).

The Commission's jurisdiction turns on whether a futures contract is involved. The Act defines "future delivery" as not including "...any sale of any cash commodity for deferred shipment or delivery." Section 1a(11), 7 U.S.C. 1a(11). This exclusion, involving contracts referred to as "cash forward" contracts, means that such contracts are outside the purview of the Commission and its regulation. Commodity Futures Trading Commission v. Co Petro Marketing Group, Inc., 680 F.2d 573, 577 (9th Cir. 1982). Unfortunately, the Act does not further elucidate these terms.

The issue which must be resolved vis--vis respondent's Flex HTA contracts is whether they are cash forward contracts, as respondent contends, or futures contracts, as the Division argues. A determination that the Flex HTA contracts are futures contracts would mean that Grain Land's actions were in violation of Section 4(a) of the Act, 7 U.S.C. 6(a), as an illegal "off-exchange" futures contracts. Resolution of this issue requires that the definitions of cash forward contracts and futures contracts be given greater precision with respect to respondent's Flex HTA contract.

Although the courts and this Commission have on many occasions discussed the difference between a futures contract and a cash forward contract, there is a dearth of federal and state cases applying this analysis to the "hedge-to-arrive" contract. The present matter is the first administrative enforcement case brought by the Commission that has reached disposition.21

Legislative History of the Commodity Exchange Act

Any discussion involving the distinctions between a forward and futures contract must begin with the legislative history of the Act.22 The legislative history has been examined closely in the past in order to provide guidance as a direct result of the Act's failure to further define the terms "future delivery" or "cash commodity for deferred shipment or delivery," both pivotal to the Act and the case at bar. Commodity Futures Trading Commission v. Co Petro Marketing Group, Inc., 680 F.2d 573, 577 (9th Cir. 1982); Statutory Interpretation Concerning Forward Transactions, 55 Fed. Reg. 39,188, 39,190 (CFTC Sept. 25, 1990)("Statutory Interpretation"). The Commission and the courts have placed primary focus on the congressional intent underlying the original enactment of the cash forward exclusion. Statutory Interpretation Concerning Forward Transactions, 55 Fed. Reg. 39188, 39190 (CFTC Sept. 25, 1990).

The genesis of the forward contract exclusion was with the Futures Trading Act (1921), Pub.L. No. 67-66, 42 Stat. 187, the first statute passed by Congress to regulate boards of trade engaged in futures trading. Salomon Forex, Inc. v. Tauber, 8 F.3d 966, 970 (4th Cir. 1993); Co Petro, 680 F.2d at 577 (citing S.Rep.No. 212, 67th Cong., 1st Sess. 4-5 (1921)). Congress utilized its taxing power to enact a "prohibitive tax" on all futures contracts unless traded on regulated contract markets. In re Stovall at * 5; Salomon Forex, Inc. v. Tauber, 8 F.3d 966, 970 (4th Cir. 1993). Excluded from this tax, by direct exclusion from the term "future delivery," was "'any sale of cash grain for deferred shipment.'" Co Petro, 680 F.2d at 577 (citing S.Rep.No. 212, 67th Cong., 1st Sess. 1 (1921)(emphasis added)); In re Stovall at *5.

The Futures Trading Act was declared unconstitutional the following year as an improper tax and prompted the Grain Futures Act of 1922, Pub.L. No. 67-331, 42 Stat. 998, which utilized the Commerce Clause as a means to the same regulatory ends. Tauber, 8 F.3d 966, 970 (citing Hill v. Wallace, 259 U.S. 44, 42 S.Ct. 453, 66 L.Ed. 822 (1922)); In re Stovall at *6 (citation omitted). The "future delivery" exclusion remained unchanged. Co Petro, 680 F.2d 573, 578 (citing Pub.L.No. 67-331, 2, 42 Stat. 998 (1922)); In re Stovall at *6. The Grain Futures Act was upheld in Chicago Board of Trade v. Olsen, 262 U.S. 1, 43 S.Ct. 470, 67 L.Ed. 839 (1923), since Congress was now directly regulating futures trading by prohibiting such trading if not conducted on a regulated contract market instead of attempting to do so indirectly through a prohibitive tax. Co Petro, 680 F.2d at 578 n.7.

The Grain Futures Act was followed by the Commodity Exchange Act, ch. 545, 49 Stat. 1491 (1936), in which the "future delivery" exclusion was redefined as "any cash commodity for deferred shipment or delivery."23 Co Petro, 680 F.2d at 578 (citing Commodity Exchange Act, Pub.L.No.74-675, 49 Stat. 1491 (1936)(emphasis added)). Even though numerous amendments of the Act have followed, the cash forward exclusion has not been altered in substance since that time. Co Petro, 680 F.2d at 578.

The forward contract exclusion, found in the both the Future Trading Act of 1921 and Grain Futures Act of 1922, was to ensure that the regulatory scheme would not "interfere with the cash grain" - a term of art used for the actual grain a farmer is actually selling. In re Stovall, 1979 WL 11475 at *3 (1979) (quoting Hearings on Futures Trading Before the House Committee on Agriculture, 66th Cong., 2d Sess. 213, 214 (1921); Hearings on H.R. 5676 Before the Senate Committee on Agriculture and Forestry, 67th Cong., 1st Sess. 463 (1921)).24 Although undergoing a slight definitional change in 1936, the cash forward exclusion which presently exists, over 70 years later, still places primary emphasis on a "cash commodity" - a contract revolving around actual delivery.

Why the Flex HTA Contract Cannot Be A Cash Forward

Respondent argues that its Flex HTA contracts fall outside the purview of the agency's jurisdiction since they are cash forward contracts, involving the sale of grain for deferred shipment or delivery. Respondent's Flex HTA contracts fail to constitute cash forward contracts as intended by Congress pursuant to the cash forward contract exclusion of Section 2(a)(1)(A) of the Act, 7 U.S.C. 2. Although there are numerous reasons for finding the Flex HTA contracts to be futures contracts, the first issue to be discussed will be the primary obstacle to finding the Flex HTA contract to be a cash forward.

The Fundamental Problem - Grain Land Provided The Producer With Optional Delivery

A producer who entered respondent's Flex HTA contract was not binding himself, at the time he signed the Flex HTA contract, to deliver grain - but only to deliver grain if the producer chose to set basis or, if the producer failed to set basis by a certain time, the respondent did. This distinction is of critical importance when coupled with the fact that the original Flex HTA contract gave the producer sole discretion to utilize the cancellation provision for any reason as a means to avoid setting basis. Respondent's contention that its approval was needed to effectuate a producer's request for cancellation is simply unsupported by the testimony and marketing materials submitted into evidence. Not only does the cancellation clause preclude a finding that the producer was obligated to deliver grain, it also precludes Grain Land from successfully arguing that it entered into the Flex HTA expecting delivery in the face of giving delivery discretion solely to the producer.

The Commission's hallmark case, In re Stovall, Comm. Fut. L. Rep. (CCH) 20,941, at (CFTC Dec. 6, 1979), addressed the distinction between a cash forward and futures contract and stated that

[t]he "cash commodity" exclusion was intended to cover only contracts for sale which are entered into with the expectation that delivery of the actual commodity will eventually occur through performance on the contracts . . . . Although the desire to acquire or dispose of a physical commodity is the underlying motivation for entering such a contract, delivery may be deferred for purposes of convenience or necessity.

Stovall, at *3.25 The cancellation provision as written and marketed by Grain Land is inconsistent with such a desire.

Co Petro, one of the hallmark federal court cases discussing the cash forward exclusion, focused its discussion on "the facts underlying the purchase agreement" and "required a subjective intent as well as an objective showing of the delivery obligation" in order to find a cash forward contract. In re Bybee at 313 (citing Co Petro, 680 F.2d at 578.) At that time, the Ninth Circuit placed primary focus on the "intent of the parties" to the contract - requiring that the parties contemplate physical transfer - as opposed to the legal obligation created by the contract. Id. at 313.

In 1991 the Ninth Circuit revisited the cash forward issue and focused on "the concept of delivery" to reflect the numerous interpretive releases issued by the Commission since Co Petro. In re Bybee, 945 F.2d 309, 313 (9th Cir. 1991). The Ninth Circuit found that the "real innovation" was with respect to the delivery obligation as contained in forward contract itself - making referencing to the Commission's articulation that the regulatory scheme "should not apply to . . . transactions which create enforceable obligations to deliver." Id. at 314-15 (quoting Statutory Interpretation Concerning Forward Transactions, 55 Fed. Reg. 39188, 39190 (CFTC Sept. 25, 1990)(emphasis supplied by court)). In that case, the Ninth Circuit found that both parties had "the legal obligation to make or take delivery upon the demand of the other." Id. at 315 (emphasis added).

This emphasis on the subjective intent of the parties, however, was reiterated again in 1995 by the Ninth Circuit, which stated that the forward contract exclusion "is predicated on both parties contemplating and intending future delivery of the actual commodity." Commodity Futures Trading Commission v. Noble Metals International, Inc., 67 F.3d 766, 772 (9th Cir. 1995)(citing Co Petro, 680 F.2d at 578)(emphasis added)).

Regardless of which aspect of delivery this Court focuses on, the Flex HTA contract comes up short as a cash forward contract. The Flex HTA contract, as written, simply permitted the producer to unilaterally and unequivocally avoid setting basis, and therefore avoid delivery, for any reason. Marketing materials entered into evidence make clear that only when the producer sets basis would the Flex HTA become a forward contract. Not surprisingly, the producers viewed the Flex HTA contract as always obligating Grain Land to buy grain if the producer decided to set basis but not obligating the producer to deliver.

Although the Division insists that the low occurrence of actual delivery versus contracted delivery over the life of the Flex HTA program is dispositive evidence that the contracts were not cash forwards, the Court does not think that the delivery percentages are as persuasive as the delivery flexibility evidenced by the plain language of the Flex HTA cancellation provision. As for the parties' subjective intent vis--vis delivery, the optional delivery provided to the producer in the Flex HTA contract, which Grain Land drafted, can only signify something less than Grain Land's intent that delivery occur.

It is not true, as respondent asserts, that its cancellation provision was really a liquidated damages provision similar to that used by "traditional" forward contracts. Specifically, respondent alleges that it was fundamentally "misled" by Commission pronouncements, citing the one issued in 1985 by the Office of General Counsel. RBrief at 13-14 (citing Characteristics Distinguishing Cash and Forward Contracts and "Trade" Options [1984-1986 Transfer Binder] Comm. Fut. L. Rep. (CCH) 22,718, at 31,024 (OGC Sept. 30, 1985)). Such is hardly the case. In that statement, the Office of General Counsel discussed agricultural contracts in which the "[d]elivery of the commodity is mandatory, absent an intervening event such as crop failure." Id. at 31,029 (emphasis added). Specifically, it noted that a liquidated damages provision in a cash forward contract does not change the nature of the contract because "it is intended that delivery of the physical crop occur, absent destruction of all or a portion of the crop by forces which neither party can control." Id. at 31,029 n.35 (emphasis added). As previously discussed, this was not the case with the Flex HTA contract which had a cancellation provision exercised at the producer's sole discretion for any reason. The Office of General Counsel went on to state explicitly that "a contract provision which permitted a producer to avoid delivery for a reason other than for an intervening condition not in the control of either party could change any conclusion about the nature of the contract."26 Id. It is clear that not all cash forward contracts result in delivery.27 The "failure to deliver," therefore, is not necessarily dispositive of whether a contract is a cash forward. These exceptions to delivery are premised on an intervening event out of the control of the parties. A contractual provision providing otherwise corrupts a cash forward contract.

Respondent also argues, without success, that the Flex HTA cancellation provision is analogous to those used with the 15-Day Brent contracts which were exempted as cash forward contracts by the Commission in 1990. Statutory Interpretation Concerning Forward Transactions, 55 Fed. Reg. 39188 (CFTC Sept. 25, 1990). This argument is also without merit. The Commission, in that situation, determined that these privately negotiated transactions between commercial parties in connection with a line of business did in fact fit within the cash forward exclusion "notwithstanding the fact that, in specific cases and as separately agreed to between the parties, the transactions may ultimately result in performance through the payment of cash as an alternative to actual physical transfer or delivery." Id. at 39189-90. See also In re Bybee. The Commission noted that these cancellation agreements, referred to as "'book-outs,' `close-outs' or `by-passes,'" exist in some forward contracts, and the Commission specifically stated that "[i]t is noteworthy that while such agreements may extinguish a party's delivery obligation, they are separate, individually negotiated, new agreements, there is no obligation or arrangement to enter into such agreements, they are not provided for by the terms of the contracts as initially entered into, and any party . . . is nevertheless entitled to require delivery of the commodity to be made . . . ." Id. at 39191-92. This is in marked contrast to respondent's Flex HTA contracts which contained standardized cancellation provisions in the original Flex HTA contract. The cancellation right of the producer was an integral part of the original "bargain" of the Flex HTA and not a subsequent and unrelated provision.

Respondent also contends, unsuccessfully, that the numerous cash buy-outs of Flex HTA contracts conducted with producers from March 1996 to May 1996 were entirely consistent with CFTC Interpretative Letter No. 96-41 and should not be considered as evidence that the Flex HTA contracts were not cash forward contracts. Division of Economic Analysis Statement of Policy in Connection With the Unwinding of Certain Existing Contracts for the Delivery of Grain and Statement of Guidance Regarding Certain Contracting Practices, Comm. Fut. L. Rep. (CCH) 26,691 (CFTC May 15, 1996). The Court disagrees. Once again, the statement by the Commission spoke to instances where parties to Hedge-to-Arrive or Flexible Hedge-to-Arrive contracts "mutually agree by a separately negotiated settlement, entered into subsequent to entry into the original contract, to unwind, arrange a work-out, or restructure the original transaction through cash payments, wholly or in part." Id. at 43,851. The producers in the present case were merely doing what the Flex HTA contract allowed them to do from the beginning - unilaterally cancel their Flex HTA contract by paying Grain Land, by check or promissory note, for any losses accrued under the contract, including a cancellation fee per bushel.

Grain Land makes much of the fact that the Flex HTA contract was not entered into with the "general public" but commercial parties who engaged in the purchase or sale of grain as part of their business. This argument is not persuasive: "While public involvement is certainly a factor to consider . . . it is not the sole determinant of the status of a transaction." In re Bybee, 945 F.2d 309, 313 (9th Cir. 1991). According to Grain Land's analysis, any contract entered into between an elevator and a producer would automatically be precluded from being a futures contract by sheer virtue of the status of the parties - in essence, "carv[ing] out a non-public commercial party exception to commodities regulation." In re Bybee, 945 F.2d 309, 313 (9th Cir. 1991). Needless to say, this would be unacceptable.

In sum, the contractual terms of respondent's Flex HTA contracts, consistent with the way they were marketed, readily allowed a producer to unilaterally and unequivocally avoid delivery for any reason.28 This "privilege" is fundamentally at odds with the rationale underlying a cash forward contract - the desire to dispose of or acquire grain. A necessary result of such a provision is that it precludes the Court from finding that Grain Land legitimately anticipated delivery from each producer, based on the contractual language of the Flex HTA. Such a cancellation provision is anathema to the cash forward contract exclusion. Grain Land asserts that the handful of federal and state courts which have found various hedge-to-arrive contracts to be cash forwards should be used as a model for this proceeding. Respondent's attempt to characterize its Flex HTA contract as "identical" to the hedge-to-arrive contracts in those cases is disingenuous at best. Respondent overlooks the fact that none of those hedge-to-arrive contracts contained a cancellation clause similar to Grain Land's Flex HTA.29 Even the Grain Land employee who created the Flex HTA contract testified that he constructed the Flex HTA by adding a cancellation provision to a "standard" hedge-to-arrive contract.30

Why The Flex HTA Contract is a Futures Contract

After careful consideration and analysis, the Court finds that respondent's Flex HTA contracts, based on the contractual language, respondent's marketing of the contract and the way in which the contracts were administered, served the functional equivalent of a futures contract.31 The Flex HTA contract, "when viewed as a whole, served substantially the same function as exchange-traded futures contracts: providing participants with an opportunity to assume or shift the risk of price changes in an underlying commodity without the forced burden of delivery." In the Matter of First National Monetary Corp. and Monex International, Ltd., 1985 WL 55299 *6. (citing Co Petro, 680 F.2d at 580).32

Both the Division and Grain Land readily acknowledge there is no definitive list or "bright line" definition as to what constitutes a futures contract. Co Petro, 680 F.2d at 581. The numerous federal and Commission cases which have addressed the characteristics of a futures contract have all been subject to the same qualifications or caveats - that the factors listed were not exclusive and that no particular factor was dispositive of a determination. When determining whether a futures contract exists, "the transaction must be viewed as a whole with a critical eye toward its underlying purpose." Co Petro, 680 F.2d at 581; See Regulation of Hybrid and Related Instruments, 52 Fed. Reg. 47022, 47023 (CFTC Dec. 11, 1987). This requires a review of the "overall effect" of the transaction and determining "what the parties intended." CFTC v. Trinity Metals Exchange, No. 85-1482-CV-W-3 (W.D. Mo. Jan. 21, 1986)(slip op. At 10)(citing CFTC v. National Coal Exchange, Inc., [ 1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) 21,424 at 26,046 (W.D. Tenn. 1982)).

Underlying Purpose of Flex HTA - Speculation

The Supreme Court has noted that "[t]he purchase or sale of a futures contract on an exchange is . . . motivated by a single factor - the opportunity to make a profit (or to minimize the risk of loss) from a change in the market price." Merrill Lynch, Pierce, Fenner & Smith v. Curran at 358. Quite simply, futures contracts serve to transfer price risk. Salomon Forex, Inc. v. Tauber, 8 F.3d 966 at 971; In re Stovall, [1980-1982 Transfer Binder] Comm. Fut. L. Rep. (CCH) 20,491 (CFTC Dec. 6, 1979); In re First National Monetary Corp. Delivery was not the main purpose of the Flex HTA contract. As Grain Land concedes, the Flex HTA contract was offered as a means to provide producers with an opportunity to have Grain Land finance futures positions.

Grain Land argues that the fact that over three million bushels of grain were delivered is proof that the Flex HTA contract is not a futures contract. A futures contract, however, enables a party to experience risks associated with price changes without necessarily making or taking delivery. CFTC v. Noble Metals International, 62 F.3d 766, 722 (9th Cir. 1995)(emphasis added). Actual delivery is not inconsistent with a futures contract.

There is disturbing the language in each of the Flex HTA contracts regarding the purchasing of futures positions by Grain Land. Form #1 and Form #3 of the Flex HTA contracts provide that "BUYER [Grain Land] confirms the following futures transaction was made for seller [producer] today on the Chicago Board of Trade . . . . Buyer [Grain Land] shall be responsible for commissions and margin requirements of this transaction." Form #2 of the Flex HTA contract provides that "The following futures pricing on the Chicago Board of Trade is being made at the Seller's request . . . ." Such language corroborates the testimony provided at the hearing, as well as the marketing materials submitted in evidence, that the Flex HTA contract was a superior means to fund a futures position, with profits or losses therefrom ultimately paid to, or by, the producer. .

Grain Land marketed its Flex HTA contracts by representing that Grain Land would provide all margin financing, interest on margin, and meet all margin calls on the underlying short futures positions. As previously discussed, the Flex HTA contract provided for delivery at the producer's sole option. The language contained in respondent's contracts, as well as the way the contract was marketed, makes it abundantly clear that the producer alone could decided to exit the Flex HTA contract at any time, for any reason. Producers could pay losses to Grain Land by check or by signing a multi-year promissory note. Accrued gains were initially paid outright by Grain Land to the producers by check. This practice stopped, however, since respondent explicitly acknowledged that it was not a "legalized broker." Grain Land still "paid" gains in the sense that they were applied to other costs the producer incurred while doing business at Grain Land, such as soil gritting charges, or purchases made, or by receiving inflated prices for subsequent, unrelated grain deliveries33. Although the form may have varied, the substance remained the same. Producers were directly accessing the futures market, and accruing gains and losses - albeit with Grain Land as the middleman.

Futures contracts provide a means to make a profit, or suffer a loss, based on differences in price between the initial and offsetting transactions. In re Stovall at *2; Noble Metals at 777. This is precisely how the Flex HTA contract accrued gains or losses. Each time the contract was rolled, the futures reference price was compared to the price of the futures contract used by Grain Land to offset the existing futures contract. This differential was then added to or subtracted from the cost of establishing a new futures position.34 Each roll of the Flex HTA, therefore, permitted customers "to deal in commodity futures without the forced burden of delivery" since rolling did not impact the producer's ability to use the cancellation cause. Co Petro at 580. The unilateral and unequivocal right to exercise the rolling provision is further proof that the Flex HTA contract served as a means for the producer to speculate. Grain Land touted the ability of the producer to roll the Flex HTA contract forwards or backwards, within the crop year and between crop years, specifically as a means to "earn gains."

Grain Land's attempt to characterize its rolling provision as requiring respondent's consent is unsupported by the plain language of the Flex HTA contract, the marketing material submitted into evidence and the testimony provided at the hearing. There is no evidence that a producer's request to roll his Flex HTA contract was ever denied. Moreover, on April 16, 1996, counsel for Grain Land stated in a letter to producers that "Grain Land intends to honor its contractual obligations under each of the contracts until they are terminated which will include, specifically, Grain Land's obligation to roll each of the contracts each time the producer in question requests Grain Land to do so until the contract is terminated." DX 417 (emphasis added).

Standardized Terms

One of the hallmarks of a futures contract is its standardized terms.

Futures contracts traded on the designated markets have certain basic characteristics. Except for price, all the futures contracts for a specified commodity are identical in quantity and other terms. The fungible nature of these contracts facilitates offsetting transactions by which purchasers or sellers can liquidate their positions by forming opposite contracts. The price differential between the opposite contracts then determines the investor's profit or loss.

Co Petro, 680 F.2d at 579-80 (citing Cargill, Inc. v. Hardin, 452 F.2d 1154, 1157 (8th Cir. 1971), cert. denied, 406 U.S. 932, 92 S.Ct. 1770, 32 L.Ed.2d 135 (1972))(other citations omitted)(emphasis added).

Grain Land's characterization of Flex HTA contracts as individualized and separately negotiated contracts is unsupported by any probative evidence. Even though the Flex HTA contract is markedly different than the contracts at issue in Co Petro, that court's analysis is still appropriate. The Co Petro court noted that although the contracts in that case "were not as rigidly standardized as futures contracts traded on licensed contract markets, neither were they individualized [there was] uniformity in the basic units of volume, multiples of which were offered for sale. Similarly, relevant dates . . . were uniform. The date on which an investor had to notify [respondent] of his intent to take delivery or . . . resell the contract was set." Co Petro, 680 F.2d at 580; In re Stovall, 1979 WL 11475, *4. In the case at bar, respondent's Flex HTA contracts were required to be made in increments of 5,000 bushels for corn and 1,000 bushels for soybeans, the grade of grain for corn was preset as #2-Y-Corn for every Flex HTA contract (DX 208 900226-232; DX 161 300019, 300307), the delivery month "selected" by a producer needed to be one of the futures contract months offered by the Chicago Board of Trade for the grain, notification of the producer's intent to roll the contract or set basis was preset as the 25th day of the month preceding the futures reference price month, the rolling fees and cancellation fees were preset and standardized, the delivery location selected by the producer had to be at one of Grain Land's elevators, with some Flex HTA contracts leaving the delivery location blank. See In re Stovall at * 4; NRT Metals, Inc., 576 F.Supp. 1046, 1051.

Even though less than 3% of futures contracts result in actual delivery, each of "the contracts provide for uniform delivery points and delivery dates." American Metal Exchange Corp., 693 F.Supp. at 192 (quoting Breyer v. First National Montetary Corp., 548 F.Supp. 955, 963 (D.N.J. 1982)(emphasis added)). That being said, the fact that 97% of futures contracts do not result in actual delivery does not prevent futures contracts from specifying delivery destinations, grade of grain, and other details which would only be relevant if delivery occurred. Those features do not preclude it from being a futures contract. Neither does occasional delivery convert a futures contract into a forward contract. Contrary to respondent's assertion a delivery point requirement in a Flex HTA contract does not make the instrument a forward contract.

The rationale for standardization in futures trading is to facilitate offsetting, something that is essential since the investor seldom takes delivery against the contracts. Co Petro at 580. Daly testified that Grain Land employed standardized terms in its Flex HTA contracts in order to facilitate precise hedging and reduce the expected cost to the elevator of entering into the Flex HTA contract. The real reason that standardized terms were imperative was because it was a rarity for producers to deliver against the contract as initially entered - a direct result of Grain Land providing unilateral rolling and cancellation privileges. From December 1993 to April 1996, a total of 47,153,000 bushels of corn alone were rolled and only 3,000,000 bushels were delivered. .

Delivery Unexpected

Grain Land entered into Flex HTA contracts with "producers" who lacked any intent to make physical delivery. "In general, if delivery of the commodity is not an expectation, the investment presumablly [sic] has the character of a futures contract." Commodity Futures Trading Commission v. American Metal Exchange Corp., 693 F.Supp. 168, 192 (D.N.J. 1988)(citing Commodity Futures Trading Commission v. Morgan Harris & Scott, Ltd., 484 F.Supp. 669, 676-77 (S.D.N.Y. 1979); Co Petro, 680 F.2d at 581).

There is credible testimony from multiple livestock producers who entered Flex HTA contracts that they had no intention to deliver any of the grain contracted - a fact explicitly articulated to respondent and accepted by respondent. In fact, such "producers" were the target of respondent's marketing of its "redelivery" procedure in addition to being told that these Flex HTA contracts could always utilize that cancellation clause and cash-out of their contract. Although such individuals were "producers" in the eyes of respondent (who defined a producer as a seller of "agricultural products" which includes livestock), the Flex HTA contract was used exclusively as a means to make money. The fact that these "producers" may have been few in number does not diminish the significance of their existence which attests to the fact that the Flex HTA was constructed and administered to function as a futures contract.

Violation of Section 4(a) of the Act

The Flex HTA contracts marketed by Grain Land were futures contracts, and Grain Land's actions were in violation of Section 4(a) of the Act, 7 U.S.C. 6, which makes it "unlawful for any person to offer to enter into, to enter into, to execute, to confirm the execution of, or to conduct any office or business . . . for the purpose of soliciting, or accepting any order for, or otherwise dealing in, any transaction in, or in connection with, a contract for the purchase or sale of a commodity for future delivery" unless such transaction is conducted on or subject to the rules of a board of trade which has been, among other things, designated by the Commission as a "contract market" for such commodity.

Successful demonstration by the Division of Grain Land's violation of Section 4(a) of the Act does not require proof of scienter. Noble Metals International, Inc., 67 F.3d at 773 (citing Co Petro, 680 F.2d at 582). Therefore, it is irrelevant that Grain Land may not have intended to do anything wrong - it is sufficient that Grain Land willfully did the acts proscribed. Id. at 774 (citing Lawrence v. CFTC, 759 F.2d 767, 773 (9th Cir. 1995)). Willfulness encompasses intentionally doing an act which is prohibited - irrespective of evil motive or reliance on erroneous advice. Id. at 774 (quoting Lawrence v. CFTC at 773); In re Stovall at *8 (citing Haltmier v. CFTC, 554 F.2d 556 (7th Cir. 1977). It is beyond dispute that Grain Land offered the Flex HTA and entered into the contracts in question with producers.

SANCTIONS

The severity of sanctions imposed in enforcement proceedings should be commensurate with the gravity of the offenses committed. 1998 WL 39409 (citing In re Brody, [1986-1987 Transfer Binder] Comm. Fut. L. Rep. (CCH) 23,081, at 32,181 (CFTC May 20, 1986)). The Division has requested the issuance of a cease and desist order and imposition of a civil monetary penalty of at least $110,000 based on respondent's violation of Section 4(a) of the Act. DBrief at 37-39.

Cease & Desist Order

The Division has established by a preponderance of the evidence that respondent Grain Land violated Section 4(a) of the Act as charged in the complaint. A cease and desist order is imposed when there is a reasonable likelihood that the wrong will be repeated or continued. Gorden, 1998 WL 39411 & 80513 (citing In re GNP Commodities, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,360, at 39,223 (CFTC Aug. 11, 1982)). In light of respondent's continued denial of any wrongdoing and continued efforts to collect grain pursuant to its Flex HTA contracts, through deliveries made to its agent Wantonwan, a cease and desist order is warranted.

Civil Money Penalty

A civil monetary penalty should relate to the gravity of the offense. As the Division noted, the Commission recently stated that while the assessment of the gravity of [a] respondent's wrongdoing must be based on the record as a whole, the financial benefit that accrued to the respondent and/or the loss suffered by the customers as a result of the wrongdoing are especially pertinent factors to be considered.

In re Grossfeld, Docket No. 89-23, slip op. At 32-33 (CFTC Dec. 10, 1996)(citation and footnote omitted)(emphasis added).. The evidentiary record does not show that respondent Grain Land accrued an overall benefit from its unlawful practice and respondent is presently engaged in litigation with produce rs who "repudiated" the contracts at issue. A civil monetary penalty would serve no purpose in the case and such a sanction will not be imposed.

CONCLUSION OF LAW

From 1993 to 1996 respondent Grain Land, by means of its Flex Hedge-to-Arrive contracts, violated Section 4(a) of the Commodity Exchange Act, 7 U.S.C. 6(a), by offering to enter into, and entering into, illegal off-exchange futures contracts with its members.

ORDER

Respondent Grain Land, including its agent Wantonwan, is hereby ORDERED to CEASE AND DESIST from violating Section 4(a) of the Commodity Exchange Act, 7 U.S.C. 6(a), as charged in the Complaint.

Issued this 6th of November, 1998
____________________________
George H. Painter
Administrative Law Judge

APPENDIX A

Grain Land had the following amounts of grain (numbers in thousands of bushels) contracted pursuant to its Flex HTA contracts at the following points in time:

As of: Corn35 Soybeans36 Total

September 30, 1993 310,00037 318,00038 628,000

October 31, 1993 367,00039 63,50040 430,500

November 30, 1993 1,059,00041 115,50042 1,174,500

December 31, 1993 1,814,00043 138,00044 1,952,000

January 31, 1994 2,774,00045 176,00046 2,950,000

February 28, 1994 2,939,00047 216,00048 3,155,000

March 31, 1994 3,014,00049 219,00050 3,233,000

April 30, 1994 3,034,00051 234,00052 3,268,000

May 31, 1994 3,149,00053 293,00054 3,442,000

June 30, 1994 3,749,00055 360,00056 4,109,000

July 31, 1994 3,794,00057 365,00058 4,159,000

August 31, 1994 3,564,00059 365,00060 3,929,000

September 30, 1994 3,277,00061 331,00062 3,608,000

October 31, 1994 3,267,00063 234,00064 3,501,000

November 30, 1994 2,832,00065 228,00066 3,060,000

December 31, 1994 2,847,00067 151,00068 2,998,000

January 31, 1995 2,717,00069 123,00070 2,840,000

February 28, 1995 2,662,00071 75,00072 2,737,000

March 31, 1995 3,198,00073 155,00074 3,353,000

April 30, 1995 3,708,00075 200,00076 3,908,000

May 31, 1995 7,952,00077 392,00078 8,344,000

June 30, 1995 11,549,00079 395,00080 11,944,000

July 31, 1995 14,470,00081 622,00082 15,092,000

August 31, 1995 14,955,00083 607,00084 15,562,000

September 30, 1995 17,360,000 671,00085 18,031,000

October 31, 1995 19,080,000 692,00086 19,772,000

November 30, 1995 19,755,000 683,00087 20,438,000

December 31, 1995 20,755,000 780,00088 21,535,000

January 31, 1996 20,995,000 751,00089 21,746,00090

February 29, 1996 20,793,00091 700,00092 21,493,00093

March 31, 1996 20,758,00094(on 3/29) 677,00095 (on 3/29) 21,434,00096

April 30, 1996 19,123,00097 636,00098 19,759,00099

APPENDIX B

Grain Land rolled the following amounts of corn (numbers in thousands of bushels) pursuant to its Flex HTA contracts at the following points in time:

Month Bushels of corn rolled pursuant to Flex HTA contracts100

December 1993 0

January 1994 0

February 1994 334,000

March 1994 883,000

April 1994 550,000

May 1994 305,000

June 1994 622,000

July 1994 490,000

August 1994 147,000

September 1994 0

October 1994 0

November 1994 295,000

December 1994 0

January 1995 110,000

February 1995 65,000

March 1995 5,000

April 1995 32,000

May 1995 20,000

June 1995 292,000

July 1995 10,000

August 1995 30,000

September 1995 4,718,000

October 1995 1,840,000

November 1995 7,583,000

December 1995 125,000

January 1996 730,000

February 1996 13,164,000

March 1996 85,000

April 1996 14,658,000

Total 47,093,000

1 Respondent included two additional affirmative defenses.

2 Grain Land asked the Commission on two occasions in October 1997 to voluntarily dismiss the administrative complaint it had filed. Id. at 3. The Commission notified Grain Land on October 17, 1997, that it did not intend to do so. Id.

3 The Court has chosen to limit its discussion to respondent's arguments with the most merit.

4 The following abbreviations will be used:

Division Exhibit ("DX")

Grain Land Exhibit ("GX")

Transcript Volume 1 ("Tr1")

Transcript Volume 2 ("Tr2")

Transcript Volume 3 ("Tr3")

Transcript Volume 4 ("Tr4")

5 The Court rejected Division Exhibits 502, 503, 606, 607 and 701, among other exhibits, at the hearing in this matter. The Division renewed its request in its Post-Hearing Brief ("DBrief") to admit these exhibits as prior admissions of respondent Grain Land and respondent's employees, Mr. Christensen and Mr. Burke. The Court holds fast in its decision to keep earlier depositions excluded.

6 The elevators were located in: Wells, Winnebago-Delavan, Blue Earth, Frost, Easton, Bricelyn and Kiester. Answer at 1.

7 These locations were: Kiester, Bricelyn, Frost, Blue Earth, Winnebago, Delavan, Easton, Minnesota Lake and Wells. Tr4 at 13-14, 114.

8 Miller then took over Bleess's duties in July or August 1995. Tr4 at 95.

9 Wantonwan purchases grain from farmers and sells farm supplies. Tr4 at 25-26.

10 Grain Land's budget estimated an eight cent differential for corn and an eleven to twelve cent differential for soybeans. Tr4 at 107.

11 Anticipated corn and bean handling for 1994 was 6.1 million bushels and 2.695 million bushels, respectively. DX 414 at 002694. Grain Land had approximately 12 million bushels of permanent storage capacity at its facilities. DX 414 at 002693; GX 170; GX 171.

12 See Appendix A for a month-by-month breakdown of grain receivable pursuant to Flex HTA contracts.

13 Erickson's testimony was the following: in 1993, Grain Land received 30,000 bushels of corn pursuant to Flex HTA contracts. Tr4 at 43. In 1994, Grain Land received 1.7 million bushels of corn and soybeans pursuant to Flex HTA contracts. Id. In 1995, Grain Land received approximately 1.5 million bushels of corn and soybeans pursuant to Flex HTA contracts. Id. In 1996, Grain Land received 2.5 million bushels of grain pursuant to Flex HTA contracts. Id.

14 On May 10, 1994 Daly submitted to Christensen for review, a letter from FCC outlining the steps needed for Grain Land to become a branch office of FCC Futures, Inc. DX 412 at 003735.

15 Daly explained that the Flex HTA contract differed from other contracts that Grain Land offered because it allowed a producer to: (1) lock in futures price but establish basis later; (2) capture carries in the market; and (3) deliver in the cash market and roll the Flex HTA contract forward. Tr1 at 141-42. Grain Land marketed the goals of the Flex HTA as protecting price, capturing gains on basis, picking up a carry, and providing flexibility to defer delivery. DX 414 at 002089.

16 Grain Land used the futures reference price month as the delivery date. Answer at 4; DX 424 at 000051; Tr4 at 74-78.

17 In fact, there is evidence that Grain Land rolled a Flex HTA contract without the consent of the producer. Tr1 at 68.

18 Price changes which accrued to the producer's account reflected margin payment made by Grain Land. Tr1 at 166-67; GL 168-69. The costs ultimately paid by the producers when they offset their Flex HTA positions were identical to Grain Land's accrued margin payments. Tr1 at 97-98, 124-26, 130, 166-67; DX 425 at 003240-003241.

19 See Appendix B for a month-by-month breakdown.

20 Erickson testified that Grain Land only made a minimal amount of money through the exercise of the cancellation clause. Tr4 at 56-58; GX 35.

21 Although there have been a number of reparations cases filed with the Office of Proceedings that involve hedge-to-arrive contracts, none of these cases has reached full disposition on the merits.

22 Analysis of a legislative enactment begins with the language of the Act which, if it conclusively reveals the intent of Congress, ends the analysis. Salomon Forex, Inc. v. Tauber, 8 F.3d 966, 975 (4th Cir. 1993). Unfortunately, the statutory language provides minimal guidance in distinguishing the two, making it necessary to discern the intent of Congress through examination of the legislative history. Co Petro at 577 (citing United States v. Turkette, 452 U.S. 576, 580, 101 S.Ct. 2524, 2527, 69 L.Ed.2d 246 (1981)).

23 Congress also eliminated express application of this provision to "owners and growers of grain, owners and renters of land, and associations of such persons," having found that it was redundant. Co Petro, 680 F.2d at 578 (citing H.R.Rep.No.421, 74th Cong., 1st Sess. 4-5 (1935)).

24 The courts have found "no indication that Congress drew this exclusion otherwise than to meet a particular need such as that of a farmer to sell part of next season's harvest at a set price to a grain elevator or miller." Co Petro, 680 F.2d 577 (citing Hearings). "A cash forward contract . . . guarantees . . . a price but allows delivery to be deferred `until such time as he could process the wheat.'" Co Petro, 680 F.2d at 578 (quoting H.R.Rep.No93.-975, 93d Cong., 2d Sess. 129-30 (1974)(emphasis added)).

25 As the Commission noted in 1985, first and foremost "the contract must be a binding agreement on both parties to the contract: one must agree to make delivery and the other to take delivery of the commodity." Characteristics Distinguishing Cash and Forward Contracts and "Trade" Options, 50 Fed. Reg. 39656 (CFTC Sept. 30, 1985).

26 "Moreover, the Commission is aware that public marketing and sales presentations made to prospective purchasers of certain instruments sometimes differ markedly from the written offering material. Thus, the Commission and the courts have consistently looked beyond written materials and examined the day-to-day operations of a transaction to determine its underlying purpose." Id.

27 Under a valid cash forward contract, even though the purpose of the contract is to set the price for future delivery of harvest, "there is always the possibility that the farmer will be unable to deliver at the forward date, because of a crop failure or other intervening event. Absolute certainty of ability to perform in the future simply is not a requirement of a cash forward contract." Top of Iowa Cooperative v. Schewe, 1998 WL 267890, *13 (N.D. Iowa 1998)(emphasis added).

28 It is worth noting that Grain Land's "standard" forward contracts stated that "In the event of default of seller in seller's performance of this contract, seller agrees to pay all costs of buyer's enforcement of this contract, including, but not limited to, reasonable attorneys' fees and court costs." DX 89 at 400077, DX 161 at 300307.

29 Countrymark Cooperative, Inc. v. Smith, (Ohio App. 3 Dist. 1997); Farmers Cooperative Elevator v. Heyes (HTA had cancellation provision which explicitly required cancellation to be mutually agreed upon. The court found evidence that cancellation was in fact denied by the elevator.) Oeltjenbrun v. CSA Investors, Inc., 3 F.Supp.2d 1024 (N.D. Iowa, Apr. 19, 1998)(one form of an HTA had a cancellation clause but cancellation had to be agreed upon by both the producer and the elevator); Johnson v. Land O' Lakes, --- F.Supp.2d ---, 1998 WL 527284 (HTA had no express cancellation although the HTA was administered with one. The court found that the absence of such a provision in the contract itself meant that cancellation which transpired was a matter of forbearance by the elevator, not a matter of right by the producer); The Andersons, Inc. v. Crotser, 7 F.Supp.2d 931 (W.D. Mich. Apr. 2, 1998); Bunker v. Farmers Elevator Co. of Hopkins, (W.D. MO 1997); Barz v. Geneva Elevator Co., --- F.Supp.2d --- 1998 WL 4333305 (N.D.Iowa Jul 1, 1998); Top of Iowa Cooperative v. Schewe, 6 F.Supp.2d 843 (N.D. Iowa May 25, 1998).

30 See Findings of Fact # 24.

31 "When instruments have been determined to constitute the functional equivalent of futures contracts neither we nor the courts have hesitated to look behind whatever self-serving labels the instruments might bear." In the Matter of First National Monetary Corp. and Monex International, Ltd., 1985 WL 55299 (citing CFTC v. Co Petro Marketing Group, Inc., 680 F.2d 573, 581 (9th Cir. 1982)).

32 "Respondents' forwards obligate the parties to fullfill [sic] their contractual commitments, but, like other off-exchange instruments that have been found to be futures contracts, the forwards provide an opportunity to forgo delivery by means of offset or rollover (i.e., simultaneously entering an offsetting transaction or acquiring the same position in a forward contract with a more distant delivery month)." In the Matter of First National Monetary Corp. and Monex International, Ltd., 1985 WL 55299 *5 (emphasis added).

33 Some forms of the Flex HTA contract provided for a "condition" for producers to collect gains - requiring that delivery be made at some time for collection. Even then, however, such a delivery was made through subsequent, unrelated grain deliveries.

34 The rolling fee of two cents also needed to be subtracted before the new futures reference price computed.

35 DX 408 at 0030032-33; See also GX 35 at 008034-8037.

36 DX 409 at 003159; See also GX 35 at 008037.

37 DX 408 at 003036.

38 DX 408 at 003036.

39 DX 408 at 003032.

40 DX 409 at 003156.

41 DX 408 at 003031.

42 DX 409 at 003154.

43 DX 408 at 003029.

44 DX 409 at 003153.

45 DX 408 at 003026.

46 DX 409 at 003151.

47 DX 408 at 003022.

48 DX 409 at 003149.

49 DX 408 at 003018.

50 DX 409 at 003147.

51 DX 408 at 003013.

52 DX 409 at 003145.

53 DX 408 at 003009.

54 DX 409 at 003143.

55 DX 408 at 003004.

56 DX 409 at 003140.

57 DX 408 at 002998.

58 DX 409 at 003137.

59 DX 408 at 002991.

60 DX 409 at 003134.

61 DX 408 at 002986.

62 DX 409 at 003130.

63 DX 408 at 002980.

64 DX 409 at 003128.

65 DX 408 at 002976.

66 DX 409 at 003126.

67 DX 408 at 002972.

68 DX 409 at 003123.

69 DX 408 at 002967.

70 DX 409 at 003122.

71 DX 408 at 002962.

72 DX 409 at 003119.

73 DX 408 at 002955.

74 DX 409 at 003118.

75 DX 408 at 002947.

76 DX 409 at 003115.

77 DX 408 at 002937.

78 DX 409 at 003111.

79 DX 408 at 002915.

80 DX 409 at 003105.

81 DX 408 at 002886.

82 DX 409 at 003099.

83 DX 408 at 002848.

84 DX 409 at 003089.

85 DX 409 at 003081.

86 DX 409 at 003072.

87 DX 409 at 003063.

88 DX 409 at 003054.

89 DX 409 at 003045.

90 DX 425 at 002513, 003240.

91 DX 425 at 002520.

92 DX 425 at 002520.

93 DX 425 at 002513, 003240.

94 DX 404 at 001015.

95 DX 404 at 001021.

96 DX 425 at 003240.

97 DX 425 at 003248.

98 DX 425 at 003248.

99 DX 425 at 003240.

100 GX 35 at 008034-8036.