Judge Rules Against Kraft Heinz (KHC), Lawsuits Over Wheat Pricing May Proceed

Shares of The Kraft Heinz Company (KHC) were trading up +0.47 or +0.56 percent to $84.10 per share in Tuesday’s premarket after news that a federal judge in Chicago had refused to dismiss litigation brought forth against the company by options and futures traders for manipulating wheat prices. Kraft Heinz Company stock closed at $83.63, down -0.10 or -0.12 percent in Monday’s regular trading session.

Stock Analysis

Based both in Chicago, Illinois and Pittsburgh, Pennsylvania, The Kraft Heinz Company is the product of the merger of Kraft Foods and H.J.
Heinz & Company, which took place on July 2nd, 2015. The merger had a $10 billion investment by 3G Capital and Berkshire Hathaway, making the combined company worth approximately $46 billion. The combination of the two major food processors crated the world’s fifth largest food and beverage company. The company sells some of the most recognizable food brands including: Kraft, Heinz, ABC, Capri Sun, Classico, Jell-O, Kool-Aid, Lunchables, Maxwell House, Ore-Ida, Oscar Mayer, Philadelphia, Planters, Plasmon, Quero, Weight Watchers Smart Ones and Velveeta.

Yesterday, U.S. District Judge Edmond Chang in Chicago rejected Kraft Heinz Company and Mondelez International — another Chicago area food company which was part of Kraft before the merger with Heinz — attempt to dismiss a lawsuit filed by wheat futures and options traders that accused the companies of illegally manipulating wheat prices at their expense. The Commodity Futures Trading Commission accused the two companies of manipulating wheat prices last year.

Kraft Foods and Mondelez were cited as defendants due to the alleged suspicious activity that took place in 2011 before Kraft Foods split into two companies in 2012. Mondelez brands include Wheat Thins, Ritz Crackers and Oreo cookies.

In his 66 page ruling, Judge Chang said that traders may pursue their claims which cited an unusually large purchase of wheat futures contracts by Kraft Foods in late 2011 was unnecessary and violated the Sherman antitrust law and the Commodity Exchange Act. In addition, the judge dismissed claims that Kraft Foods conducted “wash sales” over a decade to offset their positions and create the illusion of increased market activity.

According to the CFTC, Kraft Foods purchased $90 million in December 2011 wheat futures, which gave the company a dominant position in the market despite Kraft never intending to take delivery of the wheat. The intention, according to allegations, was that Kraft could depress prices in the cash wheat market making sellers believe the company needed less grain, subsequently depressing futures prices and allegedly leading to a $5.4 million illegal profit.

The lawsuit filed by the trading group is: Ploss v. Kraft Foods Group Inc et al, U.S. District Court, Northern District of Illinois, No. 15-02937. The litigation alleges many of the same charges brought up by the CFTC lawsuit and has Vincent Briganti as the lawyer for the plaintiffs.  According to both companies, Mondelez International is expected to bear most of the costs in the case, nevertheless, spokesmen for both companies declined to comment on yesterday’s decision.

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Published on Jun 28, 2016
By Jay Hawk
Jay Hawk
Jay Hawk enjoyed a 12-year professional financial markets career incorporating extensive first hand futures and options experience obtained by trading in the stock, commodity and forex markets on U.S. exchanges. Since retiring as a full-time financial market professional, he has been actively trading stock, commodities, forex and options for his own account and managing funds for others, as well as writing financial market commentary and educational articles.

Copyrighted 2020. Content published with author's permission.

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