On July 11, 1989, the Chicago Board of Trade (CBOT) issued an emergency order — the first of its kind — mandating that holders of large soybean contracts be forced to liquidate them.
The order sent shockwaves through the market and farm economies, causing soybean prices to tumble. Not long after, soybean farmers filed a class action lawsuit CBOT. The trial for the suit, bottled up for 13 years, is finally being heard in Chicago District Court before Judge Wayne R. Andersen.
Now that the trial has begun, the judge has lifted a gag order barring participants from discussing the case.
“We've known all about these shenanigans and illegalities but haven't been able to talk about them,” said Harvey Joe Sanner, one of the plaintiffs and a farmer from Des Arc, Ark. Sanner was president of the American Ag Movement when the lawsuit was filed.
“A lot of naysayers didn't think we had a case. It was frustrating that we couldn't talk. But it's all coming out now. Time for CBOT to come clean.”
“We submit to you that at the end of the day the evidence in this case is going to clearly establish three things,” Terrance Reed, lead attorney for the plaintiffs said in opening arguments in the trial in Chicago.
“One. The passage of that emergency order by CBOT, the defendant, caused the price of soybeans to drop.
“Two. The firms of the decision-makers at CBOT were affiliated firms, meaning they themselves had positions in the markets and they made money from the fact that those prices dropped.
“Three. The farmers, the men and women and families that were not in those rooms, were not behind those closed doors making those decisions, had to take their soybeans out and sell them in the market that artificially depressed.”
Reed said the defendants took that fateful step on July 11 and “put money into the pockets of their own firms and took money out of the pockets of the American soybean farmers who sold during July. The defendants are the directors of the CBOT.”
Following a severe drought in 1988, soybean stocks fell to a 12-year low. Market prices in east Arkansas were around $7.50 per bushel. Many farmers were long the market, still holding 1988 soybeans and expecting the prices to go even higher. All indications were prices were heading up due to short supplies up and down the pipeline.
At the same time, Reed said, established commodity companies like Cargill and ADM were feeling threatened by the arrival of a new company, Ferruzzi Finanziaria, in the soybean trading pits. Ferruzzi, an Italian company with in-roads into the Soviet Union, gave U.S. soybean farmers a new outlet for their crop.
As prices rose in the summer of 1989, Sanner says, companies like Cargill that were short the futures market began to get nervous. “This is where the damning paper trail starts,” he says.
In late spring, a low-level Cargill manager began sending letters to CBOT's Business Conduct Committee (the committee responsible for focusing on and monitoring the financial health of companies involved in trading).
In the letters, according to Reed, the manager claimed Cargill “is losing money on its short position and, more importantly, Cargill is going to have to deliver… soybeans, so (Cargill's) supplies of soybeans are being depleted.
“Cargill says, ‘Help us. The profits from our processing operations are going down because of the price of soybeans and, more importantly, the price of soybeans futures contracts.’”
Not getting results from the BCC, Cargill moved to the top of the corporate ladder. Reed says another Cargill employee approached Cash Mahlman, the CBOT's managing director. After explaining its tenuous position, the employee told Mahlman the blame for Cargill's problems lay at Ferruzzi's door.
But even after speaking with Mahlman, things didn't move fast enough for Cargill's liking, says Reed. At that point, a senior Cargill official, Dan Huber, asked for a meeting with his longtime acquaintance, Mahlman. The meeting was arranged for June 23, 1989, and was attended by Mahlman, Huber and CBOT president Tom Donovan.
The three men began devising an “action plan” and were joined at a second meeting that afternoon by Cargill's CBOT member, Hal Hansen. Over the next three days, Reed said, the men corresponded through notes and letters now in the possession of plaintiff's counsel. In one note from Huber, “Cash and Tom” are told Cargill is happy because action is to be taken.
Cargill wasn't the only one facing financial troubles. Mahlman had come to his CBOT position from a CBOT trading company, Stotler. For several years, Stotler had been in “severe financial difficulties,” says Reed. The company had “experienced problems satisfying its capital requirements for its futures trading activity. It kept getting notices that it didn't have enough capital to conduct — safely conduct — its business in the futures (markets).”
Further, through a wholly owned subsidiary, Stotler was also into the short game big-time. “What does that mean?” asks Reed. “That means Stotler would have lost money if prices of soybeans had gone up and made money if the price of soybeans went down.”
Reed says Mahlman's influence also extended to the Business Conduct Committee. In 1989, Mahlman nominated former Stotler banker Wallace Weisenborn to chair the BCC. Weisenborn's appointment was approved.
On June 26, a standard weekly report was released by CBOT's Market Surveillance Department — the entity responsible for keeping track of happenings in the commodity markets. Their report said all was well; there was no problem with the soybean market.
Despite that report, at the next BCC meeting on July 5 (a meeting chaired by Weisenborn), representatives of the Italian company were called in and asked to explain the company's market position. Two days later, Weisenborn sent a letter to Ferruzzi asking the company to quickly liquidate some of its July soybean positions.
Ferruzzi balked at the request. While admitting their July futures position, the company pointed out that the U.S. government agency — the Commodity Futures Trading Commission (CFTC) — overseeing the trades had approved the position a year earlier. In fact, the CFTC said Ferruzzi was allowed to acquire 120 million bushels of soybeans.
This is all backed up through papers and notes passed between defendants, says Reed.
Throughout June, Cargill, the plaintiffs' attorney said, began reducing its short positions. At the beginning of June, the company had 30 million bushels short. By June 26, they had none.
“But you know what started to happen? On June 29, the date of the phone call between Mahlman and Huber on their follow-up to the action plan, guess what starts to happen. Cargill starts picking up shorts again, goes back in the market, buys shorts. Why would it do that? Because it had an action plan,” says Reed.
Dawn broke on July 11 — soon to be a day of infamy among soybean farmers and market-watchers. That morning, Mahlman asked CBOT staff to conduct a “conflicts check.” The purpose of the check is to bring to light anyone potentially financially affected by a CBOT resolution.
“Why is that important? Because they're not supposed to participate in discussions and they're not supposed to vote on it. Why? Because they'd be voting themselves money,” says Reed.
“The staff is given the names of the directors, the names of their affiliated firms, and they're supposed to supply the missing ingredient on the conflicts check: the (market) positions of these affiliated firms. They dutifully go to their files where all this information is readily available and they write down each of these directors — whose names had been given by senior CBOT officials.”
As an example, Reed says, Mahlman would be lumped in with Stotler — which had a short position of some 3 million bushels. Reed also claims that the majority of directors who participated in the July 11 emergency order meeting “were shorts or their firms were shorts.”
The same day, the CFTC (the government entity that granted Ferruzzi permission to get heavy into the soybean futures market) sent Ferruzzi a “private” letter. This letter was also copied to CBOT. In the letter, CFTC instructs Ferruzzi to be “substantially out of your soybean positions, future positions, by the last three trading days of the July contract. So basically they're telling Ferruzzi to get down to 3 million bushels, which is the amount anybody can have without even CFTC approval,” says Reed.
With receipt of the letter, CBOT officials were atop a wealth of information. But a private message between a government agency and company still wouldn't drop the price of soybeans.
“So what do they do? Do they wait a day to see what happens? Do they wait two hours to see the effect of this private letter to Ferruzzi? Nah. What they do is they say we're going to issue an emergency order. We're going to make it public. We're going to tell the world.”
And so they did. The emergency order emanating from CBOT mandated that anyone with a substantial July soybean position was to liquidate it 20 percent per day for the following five days. What did that mean to the market?
“I'll give you an analogy,” said Reed. “What do you think would happen if the three major automobile manufacturers — Ford, GM and Chrysler — publicly announced that for the next five days all late model cars in their dealers' stock have to be sold, that the dealers can't hold on to any cars at the end of five days? The price of new cars would drop if that information was publicly disseminated,” says Reed.
The plaintiffs contend that CBOT officials profited mightily and illegally off soybean farmers' sweat and toil. For example, for Stotler and its customers' 3 million bushel short position, multiplied with an immediate price drop of 40 cents after the emergency order meant $1.2 million.
“For the 1-million-bushel position that Stotler personally owned, it's $400,000 (profit) in a day. That's more than they made the entire year. And for a company that was financially distressed, that was manna from heaven,” says Reed.
Editor's note: As of press-time, calls to CBOT attorneys for comment on this story had not been returned.