Release: #4205-98 (CFTC Docket # 97-1)

For Release: November 17, 1998

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CFTC ALJ FINDS GRAIN LAND COOPERATIVE ENTERED INTO ILLEGAL OFF-EXCHANGE FUTURES CONTRACTS

Orders Grain Land to Cease and Desist From Violating the Commodity Exchange Act

WASHINGTON � On November 6, 1998, in the first litigated decision in a case brought by the Commodity Futures Trading Commission (CFTC) concerning "hedge-to-arrive" contracts, Administrative Law Judge (ALJ) George H. Painter issued an Initial Decision finding that Grain Land Cooperative (Grain Land), a Minnesota agricultural cooperative, in marketing "Flex HTA" contracts, violated section 4(a) of the Commodity Exchange Act (CEA) by offering to enter into, and entering into, illegal futures contracts with its members. The ALJ ordered Grain Land to cease and desist from violating the CEA. The CFTC's one-count administrative complaint, CFTC Docket No. 97-1, was filed on November 13, 1996 (see CFTC News Release 3965-96, November 13, 1996).

Following a hearing, the ALJ found that the CFTC's Division of Enforcement successfully demonstrated that Grain Land's contracts were illegal futures contracts. The ALJ found that "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." Because of such delivery flexibility, the ALJ concluded, "the Flex HTA contracts come up short as a cash forward contract." In concluding that the Flex HTA contracts are futures contracts, ALJ Painter noted that the contracts "when viewed as a whole, served 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." ALJ Painter also found that "the Flex HTA contract was offered as a means to provide producers with something that was not otherwise available through Grain Land's other merchandising contracts or other local elevators. Quite simply, the Flex HTA contract provided an opportunity for producers to obtain futures positions financed by Grain Land."

The decision will become final 15 days from the entry of the ALJ's order, unless an appeal is filed with the Commission. If the decision is appealed, or if the Commission chooses to review the decision on its own initiative, the decision does not become final and the sanctions do not take effect pending the outcome of the Commission's review.