UNITED STATES OF AMERICA
COMMODITY FUTURES TRADING COMMISSION
|In the Matter of:||)||CFTC DOCKET NO. 99-16|
|CARGILL, INC.||)||COMPLAINT AND NOTICE OF|
|15615 McGinty Road West||)||HEARING PURSUANT TO|
|Wayzata, Minnesota 55391||)||SECTIONS 6(c) AND 6(d) OF|
|)||THE COMMODITY EXCHANGE|
|)||ACT, AS AMENDED|
The Commodity Futures Trading Commission ("Commission") has received information from its staff which tends to show, and the Commission's Division of Enforcement ("Division") alleges that:
1. From approximately January 1998 and continuing through the present (the "relevant period"), Cargill, Inc. ("Cargill") has offered contracts that operate as call options in violation of Section 4c(b) of the Commodity Exchange Act, as amended ("Act"), 7 U.S.C. § 6c(b) (1994), and Commission Regulation 32.2, 17 C.F.R. § 32.2 (1998).
2. Cargill, Inc. is a Delaware corporation with its headquarters at 15615 McGinty Road West, Wayzata, Minnesota 55391. Cargill is an international marketer, processor and distributor of agricultural, food, financial and industrial products. Cargill operates grain elevators in at least twenty-one states. Cargill's Grain Division purchases corn, soybeans and wheat, among other agricultural products, from farmers (also referred to as "producers") and sells or merchandises grain to processors. Cargill is not registered with the Commission in any capacity, but is listed as a principal of Cargill Investor Services, Inc. ("CIS"), which is registered with the Commission as a futures commission merchant ("FCM").
3. Throughout the relevant period, certain producers have entered into contracts with Cargill to sell corn, soybeans and wheat to Cargill grain elevators, under arrangements known as "Premium Offer Contracts" ("POCs").
4. The terms and conditions of Cargill's POC are set forth in an addendum to Cargill's standard grain contracts, called a "Premium Offer Addendum." Attached hereto as Exhibit A is an example of a standard Cargill Purchase Contract and a blank form Premium Offer Addendum.
5. Under the terms of the POC, Cargill pays a non-refundable premium to the producer, which is added to the nearby grain delivery price. Cargill pays the premium in exchange for the producer's "firm offer" to sell Cargill grain for deferred delivery if, at a specified date, the futures price is at or above a specified strike price. More specifically, the POC provides that if the futures price closes equal to or higher than the strike price, the producer "shall have the obligation to sell to Cargill and Cargill shall have the obligation to purchase" the specified number of bushels on firm offer. If, however, the futures price closes below the specified strike price at the specified time, the producer has "no obligation to sell to Cargill, and Cargill shall have no obligation to purchase" the bushels on firm offer.
6. Cargill has offered producers a choice of as many as three pricing dates and five strike prices for each commodity. On occasion, Cargill has offered only one pricing date and one strike price for each agricultural commodity.
7. Cargill establishes the premium paid to producers by using a mathematical model, called a Black-Scholes European Option Model.
8. While the POC does not expressly prohibit the producer from entering into a "firm offer" to sell Cargill grain for deferred delivery in an amount greater than that committed under the underlying grain contract, Cargill's practice has been to limit the grain for deferred delivery to an amount equal to or less than the amount of nearby grain committed under the standard grain contract.
9. Cargill's promotional material for its POC expressly states that: 1) the producers "have no obligation to deliver the grain on firm offer if futures close below the strike price," and 2) "[t]he firm offer does not guarantee the sale of the deferred delivery grain on firm offer."
10. Cargill has marketed and continues to market the POC as an opportunity for producers to receive higher prices for their grain by adding the non-refundable premiums to the prices the elevators pay to producers for their nearby grain under standard grain contracts. When the POC expires without the producers delivering grain to Cargill, producers have no further obligations under the POC.
11. Cargill has marketed and continues to market the POC to producers through their grain elevators located in ten states: Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, Ohio, North Dakota and South Dakota.
12. As of January 4, 1999, Cargill had written 2,670 POCs, covering 13,462,481 bushels of grain. As of April 22, 1999, the number of POCs outstanding was 1,721.
13. As of August 6, 1999, no producers had delivered grain to Cargill under the POC addendum. Therefore, all POCs entered into between Cargill and the producers during the relevant period have expired without exercise of the delivery option.
14. Cargill's POC operates as, and in fact is, a call option on agricultural commodities.
VIOLATIONS OF SECTION 4c(b) OF THE ACT
AND REGULATION 32.2:
ENTERING INTO PROHIBITED OPTION TRANSACTIONS
15. Paragraphs 1 through 14 are realleged and incorporated herein by reference.
16. From approximately January 1998 and continuing through the present, Cargill has offered to enter into, entered into, confirmed the execution of or maintained positions in transactions in interstate commerce involving corn, soybeans and wheat, which are of the character of, or are commonly known to the trade as call options, in violation of Section 4c(b) of the Act, 7 U.S.C. § 6c(b) (1994), and Regulation 32.2, 17 C.F.R. § 32.2 (1998).
By reason of the foregoing allegations, the Commission deems it necessary and appropriate, pursuant to its responsibilities under the Act, to institute public administrative proceedings to determine whether the allegations set forth in Section I above are true and, if so, whether an appropriate order should be entered in accordance with Sections 6(c) and 6(d) of the Act, 7 U.S.C. §§ 9 and 13b (1994).
Section 6(c) allows the Commission to enter an order (1) prohibiting a respondent from trading on or subject to the rules of any contract market and requiring all contract markets to refuse such person all trading privileges thereon for such period as may be specified in the Commission's Order, (2) assessing against the respondent a civil penalty of not more than the higher of $110,000 or triple the monetary gain to the respondent for each violation of the Act or Regulations committed after November 27, 1996, and (3) requiring restitution to customers of damages proximately caused by the violations of the respondent.
Section 6(d) allows the Commission to enter an Order directing that the respondent cease and desist from violating the provisions of the Act and Regulations found to have been violated.
WHEREFORE IT IS HEREBY ORDERED that a public hearing for the purpose of taking evidence on the allegations set forth in Section I above be held before an Administrative Law Judge in accordance with the Commission's Rules of Practice under the Act ("Rules"), 17 C.F.R. §§ 10.1 et seq. (1998), at a time and place to be fixed as provided by Section 10.61 of the Rules, 17 C.F.R. §10.61, and that all post-hearing procedures shall be conducted pursuant to Sections 10.81 through 10.107 of the Rules, 17 C.F.R. §§ 10.81-10.107.
IT IS FURTHER ORDERED that the Respondent shall file an Answer to the allegations contained in this Complaint within twenty (20) days after service pursuant to Section 10.23 of the Rules, 17 C.F.R. § 10.23, and shall serve two copies of such Answer and of any documents filed in this proceeding upon Susan Berkowitz, Regional Counsel, and Diane M. Romaniuk, Trial Attorney, Commodity Futures Trading Commission, 300 South Riverside Plaza, Suite 1600-North, Chicago, Illinois 60606. If the Respondent fails to file the required Answer or fails to appear at a hearing after being duly served, it shall be deemed in default and the proceedings may be determined against it upon consideration of the Complaint, the allegations of which shall be deemed to be true.
IT IS FURTHER ORDERED that this Complaint and Notice of Hearing shall be served upon the Respondent personally or by registered or certified mail, pursuant to Section 10.22 of the Rules, 17 C.F.R. § 10.22.
In the absence of an appropriate waiver, no officer or employee of the Commission
engaged in the performance of investigative or prosecutorial functions in this or any factually related proceeding will be permitted to participate or advise in the decision in this matter except as a witness or counsel in a proceeding held pursuant to notice.
By the Commission:
|Jean A. Webb|
|Secretary to the Commission|
|Commodity Futures Trading Commission|
|Date: August 26, 1999||___________________________________|
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