Shearman & Sterling LLP | Securities Litigation Blog | Northern District Of Illinois Certifies Class In A Commodities Market Manipulation Suit, Holding That Proposed Class Made A Sufficient Showing Of Rule 23 Requirements<br >  
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  • Northern District Of Illinois Certifies Class In A Commodities Market Manipulation Suit, Holding That Proposed Class Made A Sufficient Showing Of Rule 23 Requirements

    On January 3, 2020, Judge Edmond E. Chang of the United States District Court for the Northern District of Illinois Eastern Division granted Plaintiffs’ motion to certify a class of investors in an action alleging that two major food companies (“Defendants”) manipulated the wheat futures market.  Plaintiffs asserted claims against Defendants under Sections 6(c)(1) and 9(a)(2) of the Commodity Exchange Act (“CEA”), under Section 2 of the Sherman Antitrust Act (“Sherman Act”), and for common law unjust enrichment.  Harry Ploss v. Kraft Foods Group Inc. et al., No. 1:15-cv-02937 (N.D. Ill. Jan. 3, 2020).     

    According to the complaint, Defendants allegedly used a “long wheat futures scheme” to manipulate the price of wheat in the cash market.  Specifically, Plaintiffs alleged that through buying and holding very significant positions in wheat futures, Defendants indicated to the market that they had satisfied their need for wheat from the futures market rather than the cash market, causing prices in the futures market to rise and prices in the cash market for wheat to drop.  As a result of the alleged scheme, Plaintiffs contended that those who transacted in the wheat futures market in December 2011 and March 2012 suffered losses.  On that basis, Plaintiffs sought to certify two classes under Rule 23(b)(3), one for purchasers of certain specified wheat futures, and another for purchasers of options on those futures.  Defendants opposed Plaintiffs’ motion for failing to meet Rule 23(a)’s and Rule 23(b)(3)’s requirements of typicality, adequacy, predominance, and ascertainability. 

    The Court first turned to typicality and adequacy, finding that both were satisfied because Plaintiffs, like each member of the proposed classes, allegedly purchased wheat futures during the relevant period and suffered losses as a result of Defendants’ scheme.  In opposition, Defendants argued that Plaintiffs were exposed to a unique defense and were therefore not typical of the class or adequate representatives.  Defendants contended that Plaintiffs admitted in discovery to not being aware that Defendants would take physical delivery of wheat under the futures contracts, which, according to Defendants, showed that Plaintiffs did not rely on representations from Defendants that their wheat requirements would be satisfied by the futures market rather than the cash market.  The Court disagreed, finding that this argument was irrelevant because Plaintiffs relied on a fraud on the market theory of liability, meaning that Plaintiffs, like all the other class members, were alleged to have “relied on ‘misrepresentations’ that were baked into the market price at the time of their transactions, rather than explicit misrepresentations directed at them specifically.”   
    The Court next turned to Rule 23(b)’s requirement that “questions of law or fact common to the class members predominate over any questions affecting only individual members,” which can be met by showing that “common evidence will be used to prove the class members’ claims.”  After carefully reviewing the elements of Plaintiffs’ claims under the CEA, the Sherman Act, and for unjust enrichment, the Court noted that there were at least two common questions in the case:  “(1) whether [the Defendants] engaged in the alleged long wheat futures scheme; and (2) whether that scheme inflated futures prices in the marketplace.” 

    The Court found that Plaintiffs had established that both questions would be answered by common evidence.  On the first, because Plaintiffs intended to rely on Defendants’ emails and trading history to prove the existence of the scheme.  On the second, because Plaintiffs intended to rely on an event study by their expert to show that Defendants’ alleged scheme “artificially inflated futures prices in the marketplace . . . [and] by how much.”  The Court explained than an event study “is a regression analysis that seeks to show that the market price of a stock (or here a commodity) tends to respond to pertinent publicly reported events, in an attempt to isolate the effect of a certain event on the price.”  In opposition, Defendants did not contest that an event study could be used to prove price inflation by the purported scheme, but instead argued that individual questions would nonetheless predominate because of:  (i) “differences in when class members traded wheat futures,” (ii) the need to identify a particular “signal” that the market received, (iii) individualized statute of limitations defenses, (iv) individualized damages issues, and (v) questions of “antitrust standing.”  The Court rejected each argument in turn. 

    On the first argument, the Court found that questions of timing would either be handled by the proposed event study, or would not be, for the class as a whole; meaning timing was not individualized.  On the second, Defendants argued that Plaintiffs had not identified a specific “signal” that the market had received and interpreted in a uniform way, meaning that the parties would need to investigate what information was known to the market and how market participants reacted.  The Court disagreed, finding that Plaintiffs’ proposed event study did not rely on a specific piece of market information but rather analyzed the entire “flow” of information.  Whether that was appropriate, in the Court’s view, was a merits question inappropriate for class certification.  It also found that individual trading strategies were not relevant given Plaintiffs’ fraud on the market theory of liability, which presumed reliance on market prices.  As to Defendants’ third argument, the Court found that the running of the limitations period would generally be framed by the “fraud on the market theory”—meaning it would be determined on a class-wide basis.  Moreover, while Defendants argued that three class members allegedly had notice that Defendants would not take physical delivery under the futures contracts, the Court found this unavailing because they did not establish that the notice issue extended to other class members.  Finally, as to Defendants’ fourth and fifth arguments—that Plaintiffs’ event study could not prove class members’ damages and that Plaintiffs lacked antitrust standing—the Court again found that these were essentially merits questions not relevant to class certification.    

    Regarding the issue of ascertainability, Defendants argued that because the proposed classes included “intraday and hedging traders,” who could have suffered no damages, the classes were not ascertainable in that they included persons who were not harmed at all.  The Court disagreed, holding that whether certain traders may have ultimately not suffered damages was a question of damages and not whether they were harmed at all.  Defendants also argued that the proposed classes were not ascertainable because Plaintiffs’ market definition should have been limited to a specific geographic region, which would render it impossible to identify class members.  The Court disagreed, finding that this was again an inappropriate merits argument going to the Plaintiffs’ chosen market definition. 

    In addition to granting the class certification motion, the Court rejected Defendants’ motion to exclude the causation opinions in Plaintiffs’ expert report and to strike the expert’s rebuttal, finding that Defendants’ arguments attacked Plaintiffs’ attempts to “prove” loss causation and were therefore not relevant to class certification.