UNITED STATES OF AMERICA
Before the
COMMODITY FUTURES TRADING COMMISSION
___________________________________
:
In the Matter of:
:CFTC Docket No. 97-1
:
GRAIN LAND COOPERATIVE,:COMPLAINT AND NOTICE
621 E. 7th Street, P.O. Box 65:OF HEARING PURSUANT TO
Blue Earth, Minnesota, 56013,:SECTIONS 6(c) and 6(d)
:OF THE COMMODITY EXCHANGE
Respondent.:ACT, AS AMENDED
___________________________________:
The Commodity Futures Trading Commission (the "Commission"), has received information from its staff which tends to show, and the Commission's Division of Enforcement ("Division") alleges:
I.
RESPONDENT
1.Grain Land Cooperative ("Grain Land") is a cooperative grain elevator with its main office address at 621 E. 7th Street, P.O. Box 65, Blue Earth, Minnesota, 56013. It was formed in 1993, through the combination of elevator facilities located in Minnesota, in the towns of Bricelyn, Delavan, Eston, Frost, Kiester, Mapleton, Minnesota Lake, Winnebago and Wells. Grain elevators purchase grain from local grain producers and resell the grain they receive to larger grain elevators, processors and end- users. Shortly before the filing of this Complaint, Grain Land transferred, assigned or sold certain of its assets and/or liabilities to one or more third parties. Neither Grain Land nor any of its current directors or employees are registered with the Commission.
II.
FACTUAL BACKGROUND
2.From its inception in 1993 through at least February 1996, Grain Land, in connection with the marketing of certain "hedge-to-arrive" contracts, offered to enter into and entered into illegal off-exchange futures contracts. The persons with whom Grain Land contracted were generally local grain or livestock producers. Grain Land's illegal futures contracts were marketed as allowing, and in fact did allow, persons to capture movements in the futures markets, at prices matched to the Chicago Board of Trade ("CBT") or the MidAmerica Commodity Exchange ("MCE"). The contracts themselves permitted offset and were marketed to some persons who had neither the intent nor the grain to deliver as "pledged."
3.Grain Land offered and entered into contracts it described as "flex hedge-to-arrive contracts," as well as "hedge- to-arrive contracts" with a "flex" delivery date (together referred to throughout as "hedge-to-arrive" contracts). Grain Land's hedge to arrive contracts included a price comprised of two elements: the "futures reference price" and "basis."
4.Under Grain Land's hedge-to-arrive contracts, producers purportedly "pledged" a stated number of bushels of corn or soybeans, in increments matching the quantities traded through futures contracts on the CBT and MCE. The delivery period was described in the contracts as "open," or in some cases "flex." The contracts allowed for the potentially indefinite deferral of delivery through "rolling" the futures reference price, and for the extinguishment of the initial delivery "pledge" through the use of a "cancellation" provision in the contract.
5.To establish the futures reference price for the hedge- to-arrive contracts, Grain Land created a form which was completed by producers (the "offer sheet"). Through an offer sheet, producers requested a particular price for a specific futures contract month traded on the CBT or MCE. Alternatively, producers could, in effect, place a "market" order by requesting the then- current CBT or MCE market price.
6.In most instances, Grain Land's main office contacted the elevator's futures commission merchant upon receipt of an offer sheet to place a corresponding order on the CBT or MCE, which, once filled, set the hedge-to-arrive contract's initial futures reference price and put the contract into effect. Grain Land then maintained in its own account exchange-traded futures positions corresponding to the hedge-to-arrive contracts. Grain Land paid margin requirements related to the exchange-traded positions.
7.Basis, the second contract pricing element, was the difference between the futures contract price and the cash delivery price offered by Grain Land for the same delivery period. Producers were given until the 25th day of the month preceding the month corresponding to the futures reference price in the hedge-to- arrive contract in order to set basis. Alternatively, producers were permitted to "roll" the contract. Indeed, if the producer did not indicate a desire to deliver by that date, Grain Land would automatically "roll" the contract.
8.By "rolling" the hedge-to-arrive contract, delivery was postponed. A request to roll worked in the same manner as the initial "offer" and a similar form was used by producers to make the request. In most cases, upon receiving a request to roll or after an automatic roll was triggered, Grain Land personnel placed an order for a position on the CBT or MCE offsetting the exchange- traded contract (which had established the original futures reference price) and placed another order to sell futures in the later contract month, to establish a new futures reference price. The gains or losses reflected in the spread between the old and new futures reference prices were credited or charged to accounts maintained for producers on Grain Land's books. Grain Land also charged producers a 2 cents per bushel transaction fee to effect rolls, which were also charged to producers' accounts. The contracts did not limit the number of times or the period over which a contract could be rolled.
9. The prices producers received for any grain actually delivered were equivalent to the original futures reference price, plus or minus gains or losses incurred in rolling, less the value of basis and rolling fees.
10. Grain Land marketed hedge-to-arrive contracts to some persons who clearly lacked the intent or the grain to deliver as "pledged." In marketing hedge-to-arrive contracts, Grain Land personnel demonstrated to producers how its hedge-to-arrive contracts functioned as devices for capturing futures gains or losses.
11.Grain Land's hedge-to-arrive contracts permitted producers to extinguish their delivery obligations by means other than the actual delivery of grain. Between 1993 and at least February 1996, Grain Land's hedge-to-arrive contracts contained a "cancellation clause," which was an integral part of the original contract. The contracts permitted cancellation with a corresponding accounting for gains or losses resulting from the difference between the futures reference price in the contract and the current CBT or MCE futures price for that futures month, less a five cents per bushel cancellation fee, and plus or minus gains and losses incurred in rolling the contract, less rolling fees. Such an accounting upon cancellation was reconciled through a credit or debit to producers' accounts at the elevator.
12. The "cancellation clause" was incorporated into the original contract in one of three versions. Each of these cancellation provisions was marketed by Grain Land and interpreted by the parties to permit the permanent cancellation of the "pledge" to deliver bushels of grain under the original contract. Each version of the cancellation provision permitted producers to effect an offset of the hedge-to-arrive contracts.
13.Credits due to producers who exercised the cancellation provision at a gain were kept on account at the elevator. Those credits could then be applied toward deliveries at some unspecified later date for unspecified amounts of grain under an as yet unwritten cash-forward or spot delivery contract. The cancellation of the contract also could, and in some cases did, result in the issuance of checks by Grain Land to producers. Producers were not thereafter expected to deliver grain to Grain Land relating to those gains.
14.Many producers utilized the cancellation provision to "buy back" contracts that represented a loss. Grain Land accounted for the debit by charging producers' accounts with Grain Land. Thereafter, producers were permitted to either pay the elevator for those losses or have the value of the debit subtracted from later grain sales to, or other business with, the elevator.
15.Under Grain Land's contracts, it was not required that the deferment or avoidance of delivery be to accommodate commercial convenience or necessity.
16.Among the persons who entered into hedge-to-arrive contracts with Grain Land and lacked the intent or the grain to deliver as "pledged" were livestock producers who grew or purchased grain solely or primarily to feed their own hogs, dairy cows or other livestock. Under the same hedge-to-arrive contracts that Grain Land offered to grain producers, livestock producers would "pledge" a number of bushels of grain. That "pledge" could be satisfied by offsetting "paper transactions," which would be represented by book entries in producers' accounts with Grain Land. Grain Land would thereby consider livestock producers to have "bought back" grain which they had never delivered. Grain Land would calculate the difference between the futures reference price in the contract and the current CBT or MCE futures price for that futures month, plus or minus gains or losses incurred through rolling the contract, and less rolling fees and the cancellation fee of five cents per bushel. The resulting gains or losses would be recorded to the producer's account at the elevator and handled in the manner described in paragraphs 13 and 14 above.
17.The parties to these hedge-to-arrive contracts included persons or entities that were not "eligible swap participants" as that term is defined in Part 35 of the Commission's Rules, 17 C.F.R. 35 et seq.
III.
COUNT ONE
VIOLATIONS OF SECTION 4(a) OF THE ACT: UNLAWFUL OFFER OF AND ENTRY INTO CONTRACTS FOR THE PURCHASE OR SALE OF A COMMODITY FOR FUTURE DELIVERY
18.Paragraphs 1 through 17 are realleged and incorporated herein by reference.
19.Based upon the foregoing facts and circumstances, from its inception in 1993, through at least April, 1996, in connection with the marketing, offer and sale of certain hedge-to-arrive contracts which conform to the facts as described in Part II above, Grain Land offered to enter into, entered into, executed, confirmed the execution of, or conducted an office or business in the United States, its territories or possessions, for the purpose of soliciting, or accepting orders for, or otherwise dealing in, transactions in, or in connection with, contracts for the purchase and sale of a commodity for future delivery (other than a contract which is made on or subject to the rules of a board of trade, exchange, or market located outside the United States, its territories or possessions), and such transactions and contracts were neither conducted on or subject to the rules of a board of trade which has been designated by the Commission as a "contract market" for such commodity nor executed or consummated by or through a member of a contract market, in violation of Section 4(a) of the Act, 7 U.S.C. 6(a) (1994).
IV.
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 Parts I, II and III 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:
(A)Directing that Grain Land cease and desist from violating Section 4(a) of the Act, 7 U.S.C. 6(a), as specifically alleged in Parts I, II and III of the Complaint; and
(B)Assessing Grain Land a civil penalty as provided for by Sections 6(c) of the Act, 7 U.S.C. 9.
V.
WHEREFORE IT IS HEREBY ORDERED that a public hearing for the purpose of taking evidence on the allegations set forth in Sections I, II and III 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., at a time and place to be set as provided by Section 10.61, 17 C.F.R. 10.61, and that all post- hearing procedures shall be conducted pursuant to Sections 10.81 through 10.107, 17 C.F.R. 10.81 through 10.107.
IT IS FURTHER ORDERED that 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 Commission's Rules, 17 C.F.R. 10.23, and shall serve two copies of such Answer and of any documents filed in these proceedings upon Gary Dernelle and Susan LaMarca, Trial Attorneys, Division of Enforcement, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581. If Respondent fails to file the required Answer, or fails to appear at a hearing after being duly notified, Respondent 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 on Respondent personally or by registered or certified mail, pursuant to Section 10.22 of the Commission's 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 proceedings will be permitted to participate or advise the decision in this matter except as a witness or counsel in a proceeding held pursuant to notice.
By the Commission.
Jean Webb
Secretary to the Commission
Commodity Futures Trading
Commission
Date: November 13, 1996