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From this weeks Ag Journal
http://www.agjournalonline.com/
Issue: October 7, 2005
Cattle feeders accused of manipulating futures
By Candace Krebs, Regional Correspondent
Nebraska cattle feeders have been accused of conspiring with a commodities broker to manipulate the futures price for feeder cattle, allegedly boosting the futures price by almost $3 a hundredweight two years ago.
Jack McCaffery, president of North Platte Feeders, and John D. Lawless, feedlot manager of Imperial Beef, are accused of reporting phony sales of feeder cattle to the U.S. Department of Agriculture, which were then included in its public cash market feeder cattle report ultimately used by the Chicago Mercantile Exchange to calculate a Feeder Cattle Index and final settlement price for the October 2003 futures. They were allegedly conspiring with broker Todd Delay of Columbus, Ohio, who also exceeded speculative position limits by buying twice the legal number of contracts, according to reports from the Commodities Futures Trading Commission, which conducted the investigation.
Five sham transactions resulted in a $1.1 million profit for Delay and his clients on 550 contracts, according to the futures trading commission. "I know it's going to be a big issue," says Larry Hicks of cattlehedging. com in Centennial, Colo. "If the producer or trader believes or sees there's manipulation, the feeder cattle futures contract risks losing participants, especially the producer or rancher, as well as liquidity, and the risk is eventually you would lose the feeder cattle contract."
The delayed response to the abuse is also a concern. "They knew within days of when it happened, and it's only coming to light right now," he added.
The trading commission filed civil actions with the U.S. District Court in Chicago last week, an action they said did not prevent law enforcement authorities from seeking criminal charges, as well.
Joan Manley, deputy director of the division of enforcement for the agency, said from Washington that the investigation "commenced relatively soon after the manipulation occurred and there was a lot of evidence that had to be collected in order to assess whether or not we indeed had an effective manipulation."
"Given these were serious charges we wanted to make sure we had all the information," she added. She said she could not think of another case in the last twenty years where a scheme attempting to manipulate the futures price appeared to have actually succeeded.
The CFTC is seeking restitution for injured parties, as well as civil penalties and an injunction to prevent the accused parties from further violations. "The commission places much more importance on trying to obtain restitution as opposed to imposing the civil penalties," Manley said. "Our first order of business is to get restitution."
She refused to comment on whether any similar cases are currently under investigation. The scandal is likely to stoke ongoing concerns about the effectiveness and accuracy of mandatory price reporting, which expired at the end of September and is currently under review by the Government Accounting Office. In the U.S. legislature, the House has been working to extend the bill for another five years, while the Senate only wants it extended for another year.
"It has created enough loopholes that if you are a large producer making a sale on a Saturday, it wasn't included in the totals. There's all kinds of problems related to that," says Dave Kruse, a commodity broker who authors the CommStock Report in Royal, Iowa. "In actuality, part of the intent of the GAO investigation of mandatory price reporting is to improve the effectiveness of it by bringing in a government accountability agent. There were problems there."
He says obtaining accurate market information has always been a challenge, but the new act fails to accomplish its early objectives.
"The ones who wrote mandatory price supporting — like Senator Grassley (D-Iowa) say the bill was never implemented fully in the way it was intended," he says. "They ended up with all these confidentiality provisions in the areas where you needed market information the worst to know what transactions were taking place. In my personal opinion, the packers have undue influence, and this GAO investigation is at least an opportunity to revisit this. I guess I'm exposing my bias for a one-year extension."
Price reporting issues aside, he says the Futures Trading Commission announcement is positive, since it proves oversight is working, and should deter anyone else who might try to manipulate the boards. "Actually this is a good thing as far as I'm concerned because it tells me the CFTC people weren't asleep at the switch. It will be great for the future. If anybody thought they were asleep at the switch, this is good evidence that they weren't," he says.
The injured parties, however, may find that an empty consolation. "There was someone hurt by this," Kruse says. "For the producers who were hedged, it cost them; it came out of their pocket."
"We hear them. We know there will be interested parties for restitution and that is our first order of business," says the CFTC's Manley. "But no guarantees. Because if they don't have the money, they don't have the money."
http://www.agjournalonline.com/
Issue: October 7, 2005
Cattle feeders accused of manipulating futures
By Candace Krebs, Regional Correspondent
Nebraska cattle feeders have been accused of conspiring with a commodities broker to manipulate the futures price for feeder cattle, allegedly boosting the futures price by almost $3 a hundredweight two years ago.
Jack McCaffery, president of North Platte Feeders, and John D. Lawless, feedlot manager of Imperial Beef, are accused of reporting phony sales of feeder cattle to the U.S. Department of Agriculture, which were then included in its public cash market feeder cattle report ultimately used by the Chicago Mercantile Exchange to calculate a Feeder Cattle Index and final settlement price for the October 2003 futures. They were allegedly conspiring with broker Todd Delay of Columbus, Ohio, who also exceeded speculative position limits by buying twice the legal number of contracts, according to reports from the Commodities Futures Trading Commission, which conducted the investigation.
Five sham transactions resulted in a $1.1 million profit for Delay and his clients on 550 contracts, according to the futures trading commission. "I know it's going to be a big issue," says Larry Hicks of cattlehedging. com in Centennial, Colo. "If the producer or trader believes or sees there's manipulation, the feeder cattle futures contract risks losing participants, especially the producer or rancher, as well as liquidity, and the risk is eventually you would lose the feeder cattle contract."
The delayed response to the abuse is also a concern. "They knew within days of when it happened, and it's only coming to light right now," he added.
The trading commission filed civil actions with the U.S. District Court in Chicago last week, an action they said did not prevent law enforcement authorities from seeking criminal charges, as well.
Joan Manley, deputy director of the division of enforcement for the agency, said from Washington that the investigation "commenced relatively soon after the manipulation occurred and there was a lot of evidence that had to be collected in order to assess whether or not we indeed had an effective manipulation."
"Given these were serious charges we wanted to make sure we had all the information," she added. She said she could not think of another case in the last twenty years where a scheme attempting to manipulate the futures price appeared to have actually succeeded.
The CFTC is seeking restitution for injured parties, as well as civil penalties and an injunction to prevent the accused parties from further violations. "The commission places much more importance on trying to obtain restitution as opposed to imposing the civil penalties," Manley said. "Our first order of business is to get restitution."
She refused to comment on whether any similar cases are currently under investigation. The scandal is likely to stoke ongoing concerns about the effectiveness and accuracy of mandatory price reporting, which expired at the end of September and is currently under review by the Government Accounting Office. In the U.S. legislature, the House has been working to extend the bill for another five years, while the Senate only wants it extended for another year.
"It has created enough loopholes that if you are a large producer making a sale on a Saturday, it wasn't included in the totals. There's all kinds of problems related to that," says Dave Kruse, a commodity broker who authors the CommStock Report in Royal, Iowa. "In actuality, part of the intent of the GAO investigation of mandatory price reporting is to improve the effectiveness of it by bringing in a government accountability agent. There were problems there."
He says obtaining accurate market information has always been a challenge, but the new act fails to accomplish its early objectives.
"The ones who wrote mandatory price supporting — like Senator Grassley (D-Iowa) say the bill was never implemented fully in the way it was intended," he says. "They ended up with all these confidentiality provisions in the areas where you needed market information the worst to know what transactions were taking place. In my personal opinion, the packers have undue influence, and this GAO investigation is at least an opportunity to revisit this. I guess I'm exposing my bias for a one-year extension."
Price reporting issues aside, he says the Futures Trading Commission announcement is positive, since it proves oversight is working, and should deter anyone else who might try to manipulate the boards. "Actually this is a good thing as far as I'm concerned because it tells me the CFTC people weren't asleep at the switch. It will be great for the future. If anybody thought they were asleep at the switch, this is good evidence that they weren't," he says.
The injured parties, however, may find that an empty consolation. "There was someone hurt by this," Kruse says. "For the producers who were hedged, it cost them; it came out of their pocket."
"We hear them. We know there will be interested parties for restitution and that is our first order of business," says the CFTC's Manley. "But no guarantees. Because if they don't have the money, they don't have the money."
