Manipulation of Commodity Futures Prices - The Unprosecutable Crime

Manipulation in the commodity futures market takes many forms. Prices may be manipulated through rumors or false information conveyed into the marketplace. Prices may also be manipulated through rigged trades or through “capping” or “pegging,” by which market prices are set at artificial levels, for margin purposes, price setting and other reasons. But the most significant form of manipulation is the market power manipulation. This type of manipulation requires large resources. The trader in such a manipulation is buying so many futures contracts and such large quantities of the underlying commodity that its market power is sufficient to create and sustain a manipulated or artificial price. One type of market power manipulation is the so-called “corner.” Here the trader has control of all or virtually all of the available supplies of the commodity that underlie the futures contracts held by the trader. In such a case, the sellers or “shorts” must pay prices dictated by the trader controlling the supply of the commodity. Another form of marketpower manipulation is the “squeeze” in which the trader acquires a large futures position in a situation where there is a shortage of the underlying commodity, thereby moving prices to a level dictated by the squeezer. Each type of manipulation, whether market power, rumor, or rigged trading practice, involves a common goal. The trader is seeking to create an artificial price by which he will profit. But here lies the rub: it is virtually impossible to determine what constitutes an artificial price. Prices fluctuate constantly in the futures markets. Indeed, futures contracts are selected for trading on commodities that have volatile prices. There is, therefore, no level of price that can be said to be a typical benchmark, non-artificial or “true” price. Instead, market conditions, which vary daily, or even by the minute, will determine the actual economic price of the commodity. Consequently, the determination of the “true” economic price will turn on an after-the-fact economic analysis of the price a willing buyer and a willing seller would have paid in the absence of the manipulation. But this economic analysis is so complicated and affected by so many factors that it is often impossible to determine what the “true” price was. Further complicating the issue, the government and the courts have engrafted an intent requirement onto the prohibition against manipulation, requiring a showing that the trader intended to create an artificial price. As a result, few prosecutions against manipulators have been brought, despite the fact that this prohibition is the centerpiece of the regulatory scheme. Moreover, even when prosecutions are brought, only rarely are significant sanctions imposed upon those found to have engaged in manipulation. This Article will argue that if manipulation is to be effectively prevented and prosecuted under the Commodity Exchange Act, the Act must be amended and the CFTC must take a more affirmative role in regulating the futures markets. In particular, Part I of this article will review early commodity price manipulations and early unsuccessful federal legislative efforts to stop manipulations. Part II describes the background of the prohibition against manipulation, and the many subsequent encounters by the government with large traders that have disrupted the markets. This part also examines unsuccessful legislative efforts to deal with manipulation in 1968. Part III reviews the overhaul of the Commodity Exchange Act in 1974, which created the CFTC to deal with manipulation and other disruptive market activities. It then traces the many unsuccessful encounters that the CFTC has with manipulation, and describes how the CFTC has effectively nullified the manipulation prohibition. Part IV examines the various theories of commentators on how to define manipulation in order to make its prohibition effective and why those efforts are inadequate to deal with the problem. Part IV then proposes the adoption of legislation and administrative actions that will require a “fair and orderly” market. Under this proposal the government will be able to prevent manipulative and disruptive trading activities without having to undergo the considerable expense and often fruitless effort to prove what is now a virtually unprovable offense.