Commodity Futures Trading Commission 

CEA CASES 

NAME: INDIANA FARM BUREAU COOPERATIVE ASSOCIATION INC. AND LOUIS M. 

JOHNSTON 

CITATION: Comm. Fut. L. Rep. (CCH) P21,796; [1982-1984 TRANSFER BINDER] 

DOCKET NUMBER: 75-14; 234 

DATE: DECEMBER 17, 1982 

DOCUMENT TYPE: OPINION AND ORDER 

NOTE: FORMERLY CEA DOCKET # 234 

[P 21,796] In the Matter of Indiana Farm Bureau Cooperative Association, 

Inc. 

Commodity Futures Trading Commission. No. 75-14. December 17, 1982. 

Initial Decision in full text. 

Manipulation -- Futures Contracts -- Price. -- To prove the 

manipulation of a futures contract under Section 6(b) and 6(c) of the 

Commodity Exchange Act it must be shown that the accused acted or failed 

to act with the purpose or conscious object of causing or effecting a 

price or price trend in the market that does not reflect the legitimate 

forces of supply and demand. 

See P 10,025, "Liabilities -- Prohibitions" division. Volume 1. 

Manipulation -- Futures Contracts -- Price -- Trading Activity. -- Manipulation of the price of corn futures contract during a congested 

market could not be inferred from respondent's trading activities since 

respondent's long position was established as a hedge on which it took 

delivery in order to meet its legitimate commercial commitments, and the 

deliverable supply of corn was sufficient to permit the shorts to cover 

their positions without purchasing futures from respondent. Thus, the 

price reflected the legitimate forces of supply and demand. 

See P 10,065, "Liabilities -- Prohibitions" division. Volume 1. 

This enforcement proceeding was instituted on December 11, 1974, with 

the issuance of a "Complaint and Notice of Hearing" ("complaint") by the 

United States Department of Agriculture. The complaint charges that 

respondents Indiana Farm Bureau Cooperative Association, Inc. ("Indiana 

Farm") and Louis M. Johnston ("Johnston") n1 attempted to manipulate and 

did manipulate the price of the July 1973 corn future contract on the 

Chicago Board of Trade in violation of §§ 6(b) and 6(c) of the Commodity 

Exchange Act, as amended, 7 U.S.C. §§ 9 and 13b (the "Act"). 

Specifically, the complaint alleges that respondents manipulated the 

market by conducting a "squeeze" on July 20, 1973, the last day of 

trading on the July corn contract. After extensive discovery, 

evidentiary hearings were held in November 1976. February and March 

1977, and April, May and June 1978. Exhaustive post hearing briefs were 

filed by both sides. On December 12, 1979. Administrative Law Judge 

Arthur L. Shipe filed a ninety-two page Initial Decision ("I.D.") 

wherein he ruled that the Division of Enforcement ("Division") had 

failed to prove that respondents had attempted to manipulate or had 

manipulated the July 1973 corn contract. 
n1 Respondent Indiana Farm is a regional agricultural 

cooperative. Respondent Johnston has been the manager of the Grain 

Division of Indiana Farm since 1962. 

The Administrative Law Judge made extensive findings of fact (I.D. at 

pp. 4-48) and conducted a thorough analysis of the evidence in his 

discussion of the law and facts (I.D. at pp. 49-92). The judge's 

findings of fact are not in dispute and upon review of the entire 

record, the Commission finds them to be fully supported by the evidence. 

Although the judge's legal analysis of the evidence and conclusions of 

law are disputed by the parties, it is unnecessary for purposes of this 

opinion's discussion of the law to restate the facts in full detail. 

The following summary, as contained in the Administrative Law Judge's 

initial decision, accurately presents the operative facts and basic 

issues: 

The July 1973 corn futures contract expired on July 20, 1973 at about 

12:00 noon. On July 19, 1973, the CBOT Board of Directors voted to 

remove the 10-cent maximum daily limit on price fluctuation for the 

final day of trading in the contract. The midpoint of the closing range 

in the contract was 259 1/2 [cents per bushel] on July 19th. The 

settlement price on July 20th was 380, though trades had occurred at 390 

before the session closed. The contract did not reach 300 until 

approximately 11:24 a.m. 

It is contended that the sharpness of the increase resulted in 

artificial prices and that these prices are attributable to the trading 

activity of respondents. Respondents held a long position of 4,705,000 

bushels in the contract at the opening of trading on July 20th, and 

stood for delivery of 2,010,000 bushels upon expiration of the contract. 

They liquidated approximately 500,000 bushels at prices of 370 to 390 in 

the last 20 minutes of trading. 

On July 20, 1973, reported corn stocks in deliverable position in 

Chicago were 12,107,000 bushels, of which 4,511,000 bushels were 

reported to be deliverable. The Division of Enforcement (DE) claims, 

however, that only 511,000 bushels were in fact available for delivery. 

During the summer of 1973, there was a heavy movement of export grain 

to, among other countries the Soviet Union, resulting in a shortage of 

transportation and elevator facilities used for shipping grain. 

Additionally, quality problems with the corn crop of 1972-1973 developed 

in some areas of production. DE [Division of Enforcement] contends that 

the demand of respondents for delivery in these circumstances produced 

the alleged artificial prices, and thus constituted manipulation within 

the meaning of Sections 6(b) and 6(c) of the Act (7 U.S.C. §§ 9 and 

13b). 

Respondents assert that DE has failed to prove that the price of the 

July 1973 corn futures contract was artificial on July 20, 1973, or that 

the respondents caused the price rise that occurred on that day, or that 

the respondents intended that their actions would cause an artificial 

price. They further dispute DE's contention that there was an 

insufficient supply of corn available to satisfy delivery requirements 

on the futures contract. (I.D. at 2-3.) 

Judge Shipe concluded: 

In final summary, as the foregoing discussion has shown, prices in 

the CBOT 1973 corn futures contract reached artificial levels on July 

20, 1973. DE's claim that the standing for delivery by respondents was 

the legal cause of these artificial prices rests largely on DE's further 

claim that the bulk of the reportable deliverable supply was unavailable 

for delivery on the futures market. The evidence offered to support the 

latter contention consists 
mainly of data on the heavy corn export movements at the time. There 

were, however, cash transfers of ownership of corn throughout the period 

and futures deliveries were, in fact, made. Indeed, there were more 

deliveries made at prices under 300, which DE concedes were 

nonartificial prices, than DE claims were available for delivery. Thus, 

heavy export movements of corn are not proof that corn was unavailable 

for delivery on the futures market. At bottom, DE's claim is that the 

futures market cannot work where supply and demand are unusual. This 

cannot be concluded even on the basis of the events in issue here. 

DE argues that the entry by respondents of scaled-up spread orders 

during July 1973 reflects an intention to manipulate the market. 

However, as shown, the entry of these orders was entirely consistent 

with the theory of hedging now embraced by DE. DE also lays heavy 

emphasis on the liquidation orders entered by respondents in the last 

twenty minutes of trading. The circumstances in which these orders were 

entered belie DE's contention that they reflected an intent, formed 

earlier in July, to manipulate the market. 

The remainder of DE's claims are clearly makeweight, and without 

merit. Accordingly, the following conclusions are entered. 

Conclusions of Fact and Law

1. The prices in the CBOT July 1973 corn futures contract reached 

artificial levels on July 20, 1973. It is not possible to state 

precisely at what price this occurred. 

2. The trading of respondents was not a culpable or legal cause of 

the prices that were reached in that contract on July 20. 

3. Respondents did not attempt or intend to cause the prices that 

were reached, and could not reasonably have foreseen that such prices 

would be reached because of their activity. (I.D. at 91-92.) 

The Division of Enforcement has appealed these conclusions, arguing 

both by brief and at oral argument on May 21, 1982, that respondents 

did, indeed, manipulate the July option of this corn contract. The 

Division of Enforcement contends that respondents manipulated the 

congested market existing in the final half-hour of trading on July 20, 

1973, by standing for delivery on four times what the Division views as 

the deliverable supply of corn and by "squeezing" prostrate shorts, who 

had no recourse to the cash market, into paying artificial prices to 

offset their contracts. 

II. Manipulation and Attempted Manipulation

In order to consider and resolve the arguments raised, it is 

important to clarify at the outset the meaning the Commission attaches 

to various material terms. Neither manipulation nor attempted 

manipulation is defined in the Commodity Exchange Act. That task has 

fallen to case-by-case judicial development. The federal courts and 

judicial decisions of the Department of Agriculture have looked to the 

common understanding of manipulation in determining the essential 

elements of the offense. For example, in Cargill, Inc. v. Hardin, 452 

F.2d 1154, 1163 (8th Cir. 1971), cert. denied, 406 U.S. 932 (1972), the 

Eighth Circuit adopted the basic definition accepted by the Seventh 

Circuit in an earlier case: 

The Commodity Exchange Act itself does not define "manipulation", and 

definitions from other sources are of a most general nature One of the 

few judicial definitions is to be found in General Foods Corporation v. 

Brannan, 170 F.2d 220, 231 (7th Cir. 1948), where the court said: 

"We are favored with numerous definitions of the word 'manipulation.' 

Perhaps as good as any is one of the definitions which appears in the 

government's brief, wherein it is defined as 'the creation of an 

artificial price by planned action, whether by one man or a group of 

men.'" 
In Volkart Brothers, Inc. v. Freeman, 311 F.2d 52, 58 (5th Cir. 

1962), the court adopted the often cited definition of manipulation 

given by Arthur R. Marsh, a former president of the New York Cotton 

Exchange, in a hearing before a Senate subcommittee in 1928: 

Manipulation, Mr. Chairman, is any and every operation or transaction 

or practice, the purpose of which is not primarily to facilitate the 

movement of the commodity at prices freely responsive to the forces of 

supply and demand; but, on the contrary, is calculated to produce a 

price distortion of any kind in any market either in itself or in its 

relation to other markets. If a firm is engaged in manipulation it will 

be found using devices by which the prices of contracts for some one 

month in some one market may be higher than they would be if only the 

forces of supply and demand were operative . . . . 

Any and every operation, transaction, device, employed to produce 

those abnormalities of price relationship in the futures markets, is 

manipulation. 

In a 1971 Department of Agriculture decision. In re David Henner, 30 

Agric. Dec. 1151 (30 A.D. 1151) (1971) the Judicial Officer approved of 

this definition as being "consistent with the common understanding of 

the term." Id. at 1224 (footnote and citations omitted). 

In the only manipulation case heretofore decided by this Commission. 

In re Hohenberg Brothers, [1975-1977 Transfer Binder] COMM. FUT. L. REP. 

(CCH) P 20,271 (February 18, 1977) ("Hohenberg"), the Commission, 

addressed manipulation in terms that have yielded some differing 

interpretations, as is apparent in this case. Among other things, the 

Commission explained that the intent requirement, which is the same for 

a manipulation and an attempted manipulation, is "the performance of an 

act or conduct which was intended to effect an artificial price." Id. n2 

We adhere to this general description, but recognize that some 

refinement is in order. 

n2 In order to prove a successful manipulation, it is necessary 

to demonstrate that the accused caused an "artificial" price. An 

"artificial" or "distorted" price is a price which does not reflect 

the market or economic forces of supply and demand operating upon 

the price of the particular contract under scrutiny. It is, in 

economic language, a non-equilibrium price. 

Commodities are priced in an aggregate market via transactions 

that reflect place, transportation, and convenience costs and even 

time of delivery. The futures market is a market within that 

larger market and is often referred to as a derivative market. A 

futures transaction is a substitute for transactions or positions 

which normally take place at a later time in the physical market, 

but a futures transaction is no less a part of the aggregate market 

structure or pricing system than is any other cash transaction. 

Futures transactions add a time dimension to the pricing of the 

physical. Thus, we cannot separate futures transactions from the 

aggregate commodity market. 

As the delivery time draws near, not only do the cash and 

futures prices converge, but the markets converge by virtue of the 

delivery mechanism. Depending on what else is going on in other 

segments of the aggregate market, the futures market may well 

define the aggregate market. If trading in the physical market is 

thin, in terms of quantity, quality or volume, the futures market 

may be the market. The traders in the pit are buying and selling 

the commodity. 

Thus, to determine whether an artificial price has occurred, one 

must look at the aggregate forces of supply and demand and search 

for those factors which are extraneous to the pricing system, are 
not a legitimate part of the economic pricing of the commodity, or 

are extrinsic to that commodity market. When the aggregate forces 

of supply and demand bearing on a particular market are all 

legitimate, it follows that the price will not be artificial. On 

the other hand, when a price is effected by a factor which is not 

legitimate, the resulting price is necessarily artificial. Thus, 

the focus should not be as much on the ultimate price, as on the 

nature of the factors causing it. 

Since intent is the essence of manipulation, we turn then to analyze 

more specifically the level of intent, or the state of mind, which must 

be found in order to support a finding of manipulation under the 

Commodity Exchange Act. The complaint in this case charges that 

respondents acted "for the purpose and with the intent of causing prices 

in the July 1973 corn future which were arbitrary and artificial . . . 

." (Complaint P 14). n3 This is the classic formulation of a charge 

requiring proof of "specific intent" as that term is generally 

understood in the criminal law. n4 While the charging terms of its 

complaint and its subsequent proffer indicated that it would introduce 

evidence of purposeful conduct, the Division of Enforcement later argued 

to the Administrative Law Judge that a less stringent standard of 

"general intent" was sufficient to meet the manipulative intent 

requirement. The Division argued ". . . it is sufficient, for purposes 

of manipulative intent, that the necessary consequence of their action 

was an unlawful result" (Division of Enforcement's Post Hearing Brief 

and Conclusions of Law at 40). The Administrative Law Judge apparently 

reviewed the evidence in light of general intent and a negligence type 

standard, see I.D. at pp. 56-58, and concluded that "[respondents] did 

not attempt or intend to cause the prices that were reached, and could 

not reasonably have foreseen that such prices would be reached because 

of their activity." (I.D. at 92.) 

n3 The Division later made the following "offer of proof" to the 

Administrative Law Judge prior to the hearing: 

Complainant will offer documentary and general and expert 

testimony evidence establishing Respondents' market activity during 

the period in question and that Respondents acted for the purpose 

and with the intent of causing, and did cause, the price of the 

July 1973 corn future to be abnormally and artificially high on 

July 20, 1973. [Pre-hearing Memorandum of November 25, 1975 at p. 

9 (emphasis added)]. 

n4 In United States v. United Gypsum Co., 438 U.S. 422, 445 

(1978), the Supreme Court discussed the difference between 

"general" and "specific" intent: 

The element of intent in the criminal law has traditionally been 

viewed as a bifurcated concept embracing either the specific 

requirement of purpose or the more general one of knowledge or 

awareness. 

It is now generally accepted that a person who acts (or omits to 

act) intends a result of his act (or omission) under two quite 

different circumstances (1) when he consciously desires that 

result, whatever the likelihood of that result happening from his 

conduct; and (2) when he knows that the result is practically 

certain to follow from his conduct, whatever his desire may be as 

to that result W. LaFave & A. Scott, Criminal Law 196 (1972). 

See also United States v. Bailey, 444 U.S. 394, 404 (1980). 

In its brief to the Commission on appeal, the Division adopted Judge 

Shipe's "reasonable forseeability" alternative formulation of intent, 

arguing that "intentional conduct which results in a manipulated price 

where that result was reasonably foreseeable, as a standard, protects 

the innocent while permitting the Commission to relieve more effectively 
'burdens on interstate commerce caused by manipulation and market 

control'" (Brief for Division at 91). At oral argument, however, 

counsel for the Division abandoned the "reasonably forseeable" argument 

(Transcript of Oral Argument at 138-139), and argued in favor of its 

original "general intent" standard which counsel defined as knowledge 

"that the likely effect of [respondents'] action would be to cause a 

futures price that would not accurately reflect the basic forces of 

supply and demand" (Id. at 4; see also 26-27, 133-140). 

Respondents counter that the negligence concept of "reasonable 

forseeability" cannot be the standard for manipulative intent, and 

regardless of whether specific intent or general intent is required, the 

Division's proof of intent was lacking under either standard (Brief for 

Respondents at 91-107). At oral argument, counsel for respondents 

maintained, as he had below, that specific intent is the level of intent 

required to prove manipulation (Transcript of Oral Argument at 62, 109). 

Upon review of the relevant federal caselaw and prior administrative 

decisions, n5 we conclude, consistent with this Commission's opinion in 

In re Hohenberg Brothers, supra, that the requisite level of mens rea

required to prove manipulation or attempted manipulation under the 

Commodity Exchange Act is that of "specific intent." or as that term is 

also commonly understood to mean today, "purposeful conduct." n6 See 

United States v. United States Gypsum Co., supra n. 2, 438 U.S. at 445. 

n5 See, e.g., Cargill, Inc. v. Hardin, supra, aff'g In re 

Cargill, Incorporated, 29 Agric. Dec. 880 (29 A.D. 880) (1970); 

Volkart Brothers, Inc. v. Freeman, supra, rev'g In re Volkart 

Brothers, Inc., 20 Agric. Dec. 306 (20 A.D. 306) (1961); G.H. 

Miller & Co. v. United States, 260 F.2d 286 (7th Cir. 1958) cert. 

denied, 359 U.S. 907 (1959) aff'g In re G.H. Miller & Co., 15 

Agric. Dec. 1015 (15 A.D. 1015) (1956); Great Western Food 

Distributors, Inc. v. Brannan, 201 F.2d 476 (7th Cir. 1953), cert. 

denied, 345 U.S. 997 (1953), aff'g In re Great Western Food 

Distributors, Inc., 10 Agric. Dec. 783 (10 A.D. 783) (1951); 

General Foods Corp. v. Brannan, 170 F.2d 220 (7th Cir. 1948), rev'g 

In re General Foods Corporation, 6 Agric. Dec. 288 (6 A.D. 288) 

(1947); In re David Henner, 20 Agric. Dec. 1151 (20 A.D. 1151) 

(1971). 

n6 Accord, Wolff, Comparative Federal Regulation of the 

Commodity Exchanges and National Security Exchanges, 38 Geo. Wash. 

L. Rev. 223, 235 (1969) (". . . market activity creating prices not 

responsive to the natural forces of supply and demand, accompanied 

by the specific intent so to affect prices, constitutes [commodity] 

manipulation . . ."); 1 A. Bromberg & L. Lowenfels, Securities 

Fraud & Commodities Fraud, § 4.6 at pp. 82.336-82.337 (1975 Supp.). 

In Hohenberg, supra, the Commission reviewed the law of manipulative 

intent in the context of an alleged attempted short-side manipulation. 

We define intent in terms of purposeful conduct and applied that 

standard to the evidence presented: 

Intent:

As recognized by the court in Great Western Food Distributors, supra,

201 F.2d at 479, the intent of the parties is a determinative element of 

a punishable 

manipulation. Intent is a subjective factor and since it is impossible 

to discover an attempted manipulator's state of mind, intent must of 

necessity be inferred from the objective facts and may, of course, be 

inferred by a person's actions and the totality of the circumstances. 

* * * 
We discern no difference in the intent required to accomplish a 

manipulation and that required by an attempted manipulation which is 

simply the performance of an act or conduct which was intended to effect 

an artificial price. Id. at 21,477 (footnote omitted). n7 

n7 Applying the specific intent standard to the facts the 

Commission concluded that "it is not clear nor inferable from the 

record before us. . . . that respondents intended their conduct to 

depress artificially the price of the December 1971 cotton future 

to a level not reflecting the basic forces of supply and demand." 

Id. at p 21,478. 

In so defining manipulative intent, the Commission adhered to the 

long line of federal court decisions and judicial opinions of the 

Department of Agriculture, cited supra, which have held that specific 

intent to create an "artificial" or "distorted" price is a sine qua non

of manipulation. n8 For example in Volkart Brothers, Inc. v. Freeman, 

supra, 311 F.2d at 58 the Fifth Circuit concluded: "there must be a 

purpose to create prices not responsive to the forces of supply and 

demand; the conduct must be 'calculated to produce a price distortion.'" 

In Cargill, Inc. v. Hardin, supra, 452 F.2d at 1163, the Eighth Circuit 

quoted with approval the definition of manipulation used by the Seventh 

Circuit in General Foods Corporation v. Brannan, supra, "'the creation 

of an artificial price by planned action, whether by one man or a group 

of men.'" n9 

n8 These are among the most common shorthand terms used in the 

caselaw to describe prices that do not reflect the basic forces of 

supply and demand. See n. 2, supra.

n9 In In re General Foods Corp., 6 Agric. Dec. 288, 310 (6 A.D. 

288, 310) (1947), the Judicial Officer of the Department of 

Agriculture had held that 

to hold a person responsible for a [manipulative] violation some 

intent must be shown either by the mere doing of a prohibited act 

or by the more exacting standard of a specific intent equivalent to 

the mens rea of criminal law. However questionable or undesirable, 

the holding of a large supply of rye by General Foods was not in 

itself prohibited, nor was its failure to liquidate the stock or 

part of it in such a way as to make rye available to elevators or 

other speculative interests. 

We are unable to discern any justification for a weakening of the 

manipulative intent standard which does not wreak havoc with the market 

place. It is the intent of the parties which separates otherwise lawful 

business conduct from unlawful manipulative activity. This being so, a 

clear line between lawful and unlawful activity is required in order to 

ensure that innocent trading activity not be regarded with the advantage 

of hindsight as unlawful manipulation. Many years ago, the Seventh 

Circuit observed in General Foods Corp. v. Brannan, supra, 170 F.2d at 

231, that "self-preservation has oftentimes been referred to as the 

first law of nature, and we suppose it applies to traders as well as 

others. We see no reason why the seller respondents as well as General 

Foods and Metcalf should not under the circumstances make an effort to 

protect their own interests." Similarly this Commission recognized in 

Hohenberg, supra at 21,478, that "[even] though respondents' activities 

may have involved a 'profit motive,' absent a finding of manipulative 

intent, trading with the purpose of obtaining the best price for one's 

[commodity] . . . does not constitute, in itself, a violation of the 

Commodity Exchange Act." Thus, market participants have a right to trade 

in their own best interests without regard to the positions of others as 

long as their trading activity does not have as its purpose the creation 

of "artificial" or "distorted" prices. Indeed, it is this very 

motivation which gives lifeblood to the forces of supply and demand, and 
makes the price discovery function of the marketplace viable. Moreover, 

since the self-interest of every market participant plays a legitimate 

part in the price setting process, it is not enough to prove simply that 

the accused intended to influence price. 

Accordingly, we hold that in order to prove the intent element of a 

manipulation or attempted manipulation of a futures contract price under 

§§ 6(b) and 6(c) of the Commodity Exchange Act, as amended, it must be 

proven that the accused acted (or failed to act) with the purpose or 

conscious object of causing or effecting a price or price trend in the 

market that did not reflect the legitimate forces of supply and demand 

influencing futures prices in the particular market at the time of the 

alleged manipulative activity. Since proof of intent will most often be 

circumstantial in nature, manipulative intent must normally be shown 

inferentially from the conduct of the accused. But once it is 

demonstrated that the alleged manipulator sought, by act or omission, to 

move the market away from the equilibrium or efficient price -- the 

price which reflects the market forces of supply and demand -- the 

mental element of manipulation may be inferred. n10 Further, while 

knowledge of relevant market conditions is probative of intent, it is 

not necessary to prove that the accused knew to any particular degree of 

certainty that his actions would create an artificial price. It is 

enough to present evidence from which it may reasonably be inferred that 

the accused "consciously [desired] that result, whatever the likelihood 

of that result happening from his conduct." See United States v. United 

States Gypsum Co., supra, 438 U.S. at 445. 

n10 Market participants are constantly entering and leaving a 

market based on their assessment of whether the relevant commodity 

is overpriced or underpriced. The aggregate of these participants' 

actions is the essence of supply and demand and each can contribute 

to the equilibrium pricing of a commodity. Some may be acting on 

good information or foresight and others may be acting on incorrect 

information or perceptions. As some turn out to be more "right" 

than others, prices will move in a manner which is more reflective 

of those who acted with good foresight. It should be noted that 

even in markets that are generally thought to be competitive, there 

are often lags in the dissemination of new information, making 

market participants price setters in the short-run dynamic process, 

even though they may be price takers in the long run. 

The intent question here must be analyzed in the context of an 

alleged manipulative squeeze. The term "squeeze," like manipulation, is 

undefined in the Act. However, the market condition giving rise to the 

term is a well-known phenomenon affecting the futures markets. An oft 

cited definition of 

"squeeze" is that offered by Senator Pope during debate on enactment of 

the Commodity Exchange Act: 

Squeeze (congestion): These are terms used to designate a condition 

in maturing futures where sellers (hedgers or speculators), having 

waited too long to close their trades, find there are no new sellers 

from whom they can buy, deliverable stocks are low, and it is too late 

to procure the actual commodity elsewhere to settle by delivery. Under 

such circumstances and though the market is not cornered in the ordinary 

sense, traders who are long hold out for an arbitrary price. 80 Cong. 

Rec. 8089 (1928). 

Baer & Saxon, Commodity Exchanges and Futures Trading, (1949) 

explains: "A squeeze is a relatively small corner ocurring in deliveries 

for some one month or some one grade. Some -- or, in fact, most -- 

squeezes are inevitable on both the physical and the exchange markets 
and are not the result of illegal manipulation." Volkart, supra, 311 

F.2d at 59. In its Report on the Grain Trade (1926) the Federal Trade 

Commission stated: 

A 'squeeze' suggests a much milder situation than a corner. It means 

that there is too large a line of short sales out and that the short 

sellers have been somewhat obstinate in carrying their trades into the 

delivery month, or possibly that the various long interests are unduly 

or unexpectedly obstinate in reducing their lines during the delivery 

month. A squeeze does not imply one long holder nor conspiracy among 

the long interests to enhance the price. A large long interest may 

exist which has not been built up for manipulative or even speculative 

purposes, but as a hedge, and may be a hedge on which the buyer expects 

to take delivery to meet cash grain committments. 7 FTC Report, pp. 

284-285. 

When, then, does it become unlawful to profit from a congested 

futures market? Or stated another way, when has unlawful intent to 

"squeeze" shorts during a period of congestion been proven? A 

significant problem in analyzing the caselaw and the briefs in this case 

is the inconsistent use of the term "squeeze." The caselaw and the 

arguments of the parties here appear to use the term "squeeze" sometimes 

simply to describe the condition of "congestion" and at others to 

describe the unlawful act of manipulation itself. We read the first 

sentence of Senator Pope's definition, supra, to describe a congested 

futures market generally; the second sentence to define what may turn 

such market congestion into an unlawful manipulation, i.e., a "squeeze," 

if manipulative intent is present. See The Report of the Federal Trade 

Commission on the Grain Trade (1926), at pages 243-244. For the sake of 

consistency, we shall hereinafter refer to the situation or "condition" 

in maturing futures described by Senator Pope's first definitional 

sentence as "congestion." We shall refer to the profiting from such 

congestion -- Senator Pope's second sentence -- as a "squeeze." This 

reading is consistent with the general principle that the essence of 

manipulative activity is "the creation [or attempted creation] of an 

artificial price by planned action," Cargill, supra 452 F.2d at 1163. 

Holding out for high prices is normally rational and lawful market 

behavior. See Hohenberg, supra at p.21,478; Volkart, supra, 311 F.2d at 

58-59; General Foods, supra, 170F.2d at 231. Such activity only becomes 

unlawful when it is accompanied by manipulative intent as generally 

manifested by conduct other than simply seeking the best price in a pit 

in which there may be supply shortages. The Seventh Circuit stated in 

Great Western Food Distributors v. Brannan, supra, n.5, 201 F.2d at 479. 

* * * the intent of the parties during their trading is a 

determinative element of a punishable corner. Unintentional corners can 

develop, 7 F.T.C. Report on the Grain Trade 243 (1926), and should not 

carry the pain of forfeiture of trading privileges. 

As the Fifth Circuit observed in Volkart, supra:

Certainly the term "manipulate" means more than the charging of what 

some may consider to be unreasonably high prices. Otherwise, there 

would be grave doubt as to the constitutionality of the statutes. 

As Mr. Marsh's testimony indicates, there must be a purpose to create 

prices not responsive to the forces of supply and demand; the conduct 

must be "calculated to produce a price distortion." There may be a 

squeeze not planned or intentionally brought about by the petitioners. 

Such a squeeze should not result in their being punished. 311 F.2d at 

58-59. (Footnote omitted.) 

Because intent must generally be inferred from conduct, we emphasize, 

as we said in Hohenberg, that seeking the best price for one's commodity 

is a legitimate, indeed critical, price-creating force in the futures 

markets that in-and-of-itself cannot be the basis for an inference of 

manipulative intent. It is 
imperative that each side of the market seek the best price in order for 

price discovery to occur and that "best" price is, of necessity, at the 

expense of the other side. This pricing process works in delivery 

markets only because a person with open positions -- if dissatisfied 

that the price bid or offered to liquidate an open position reflects the 

value of the underlying commodity at that point in time -- can make or 

force delivery of the actual product. Squeezes in general and 

manipulative squeezes in particular are possible only when the delivery 

option disappears and its tempering effect is lost. Thus, the adequacy 

of "deliverable supply," as distinguished from supply generally, n11 and 

the role of market participants in the supply scenario is of great 

significance in any analysis. For instance, where there is evidence 

that the deliverable supply was intentionally and significantly reduced 

by a market participant, the seeking of "unreasonably high prices," 

which otherwise would be lawful conduct, becomes susceptible to an 

inference that the true purpose of the activities of the accused is to 

create prices not responsive to the forces of supply and demand. For 

example, in Cargill, supra, and G.H. Miller & Co. v. United States, 

supra, the longs intentionally created the conditions which led to 

congestion in the delivery month by intentionally acquiring control or 

market dominance over the cash market (delivery) and the futures market 

(offset) for a particular commodity, and thereafter by virtue of their 

dominance were able to liquidate the long futures position at prices 

that would not otherwise have been reached under normal pressures of 

supply and demand. These manipulative squeezes were possible because, 

by assuring that the deliverable supply was inadequate to enable 

liquidation of the contracts through delivery, the longs assured that at 

least some shorts would either have to default or pay whatever price was 

dictated by the longs. 

n11 See Section III, at pp. 22-24 

The acquisition of market dominance is the hallmark of a long 

manipulative squeeze. For without the ability to force shorts to deal 

with him either in the cash or futures market, the manipulator is not 

able to successfully dictate prices because a short may buy grain from 

other sources and deliver against his committments. See, e.g., Cargill, 

supra, 452 F.2d at 1164-67; Great Western, supra, n.5, 201 F.2d at 478-

479. Where a trader builds up a cornering or near cornering interest in 

the cash market and a large long interest in the futures market, he has 

"laid the base for a squeeze," Cargill, supra, 452 F.2d at 1172, and 

subsequent trading activity must be scrutinized carefully. The 

intentional acquisition of market dominance, while it may be lawful in 

and of itself, is compelling evidence of manipulative intent where that 

dominance is subsequently used to "squeeze" shorts into offsetting 

contracts with the manipulator at prices considerably above the market. 

Thus, where the intentional acquisition of market dominance is coupled 

with a subsequent "squeeze" of shorts who are forced to deal with the 

accused, it may be inferred that the charging of high prices was done 

with the purpose of causing a price and reaping a profit beyond that 

which the legitimate forces of supply and demand would other wise have 

allowed. 

On the other hand, where a long does not intentionally create the 

conditions for a squeeze, and a congested futures market arises from 

other causes, often a "natural" corner or low deliverable supply, 

manipulative intent may not be inferred where a long does not 

exaccerbate the congestion itself, n12 but simply seeks the best price 

from the existing situation. See Volkart, supra, 311 F.2d at 58-59. n13 
n12 Seeking the optimum price from the futures market (risking, 

of course, the possibility of delivery) is not unlawful. 

Manipulative intent may be inferred, however, where, once the 

congested situation becomes known to him, the long exacerbates the 

situation by, for example, intentionally decreasing the cash supply 

or increasing his long position in the futures market. 

n13 Cargill is not to the contrary. That case did not consider 

the natural congestion problem because there was ample evidence 

from which to conclude that the accused "laid the base for a 

squeeze," 452 F.2d at 1172, by acquiring effective control of all 

the cash crop and 62% of the long interest in order subsequently to 

liquidate its entire long position at prices it purposely caused to 

become artificial in the last fifteen minutes of trading. While 

Volkart and Cargill disagree with respect to the obligation of 

shorts to exercise due diligence in making reasonable delivery 

preparations, they do agree that there must be evidence from which 

to conclude that the accused both intentionally acquired the 

ability to conduct a squeeze and thereafter exercised that ability 

to cause "artificial" prices. The difference in results in these 

cases was a function of the facts. The Eighth Circuit concluded 

that Cargill was guilty because "the squeeze was intentionally 

brought about and exploited by Cargill." 452 F.2d at 1172. The 

Fifth Circuit concluded that Volkart Brothers were not: "[It] must 

appear not only that they profited from a squeeze, but that they 

intentionally brought about the squeeze by planned action." 311 

F.2d at 59. 

III. The Instant Case

Turning to the evidence presented, we conclude, consistent with the 

Administrative Law Judge's determination, that there was insufficient 

evidence to prove that respondents acted with the conscious object or 

purpose of causing an artificial or distorted price. The respondents 

did not lay the base for a squeeze and it has not been demonstrated that 

they took any action with the intent to effect an artificial price. 

Indeed, in exercise of our expertise, we conclude that no basis for a 

squeeze existed nor was any illegitimate factor present in the pricing 

aggregate in the instant case. 

Judge Shipe, who had the advantage of observing the demeanor of the 

witnesses, including respondent Johnston, concluded that "[respondents] 

did not attempt or intend to cause the prices that were reached . . . ." 

He so found based upon an exhaustive review of the evidence, wherein he 

generally refused to accept the adverse manipulative inferences sought 

to be drawn by the Division and generally accepted as credible 

respondent Johnston's testimony as to why he took the positions he took, 

traded when he did, and stood for delivery as he did. See I.D. at 65-

91. n14 We have examined the evidence and have found no reason to 

disturb these findings of fact or question the Administrative 

Law Judge's ultimate conclusion of law that there was no manipulative 

intent proven. n15 

n14 As the Commission recognized in Hohenberg, supra, at 21,477: 

It is important to note that in a case such as the case at bar, 

where we are asked to infer an intent to manipulate the price of a 

future contract from the facts and circumstances, the credibility 

of the witnesses is an important factor. The court observed in 

Great Western Food Distributors, supra, that the credibility and 

demeanor of the witnesses is "[often] the 'most telling part' of 

the evidence." 
n15 The Administrative Law Judge absolved respondents of having 

had any manipulative intent under standards of general intent and 

"reasonable forseeability." While these standards should not have 

been utilized, the failure of the evidence to pass muster under 

these less stringent tests serves to underscore the absence of 

manipulative intent. 

The Division does not contend, and there is no evidence from which to 

conclude, that respondents were responsible for the market congestion 

which occurred on the last day of trading or that they exaccerbated it. 

The evidence demonstrates that any relative overall cash corn shortfall 

that did occur in the Chicago area was the product of a "natural" 

corner, due to transportation shortages, heavy export shipments and 

quality problems. See I.D. at pp. 7-14. Apparently, a number of shorts 

who had made no delivery preparations stayed in the market speculating 

on the imposition of federal export controls on corn which had been 

threatened in June by the Department of Commerce and which would have 

brought prices down. This threat was not lifted until after the close 

of trading on July 18, and perhaps the uniqueness of this particular 

market situation is attributable to the confluence of these factors. 

See I.D. at pp. 14-15; 70 n. 5. 

In the absence of evidence that respondents were responsible for the 

market congestion, it cannot be inferred that respondents' trading 

activity, consistent with their hedging program and commercial 

commitments, was intended to produce an artificial price. Standing for 

delivery as they did was respondents' contractual right and was 

motivated by pre-existing commercial needs and the uncertainty of prices 

in the inactive cash market. Unlike Cargill, Indiana Farm Bureau did 

not deplete the local cash commodity late in the delivery month; did not 

establish a large long speculative position at a time it knew it held 

virtually all of the cash commodity; and did not increase its long 

position on the last day of trading. Nor did it liquidate a dominant 

speculative long position at prices already seven to eight cents over 

the market price. Indiana Farm's export contracts were entered into in 

January and April, 1973 and its long position was established as a hedge 

on which it expected to, and did, take delivery in order to meet its 

legitimate commercial commitments. Upon taking delivery, respondents, 

in fact, used virtually all corn received to fill existing contractual 

commitments. See I.D. at 87-88. No manipulative intent may be inferred 

from such activity which, moreover, was specifically cited by the FTC 

Grain Report as legitimate nonmanipulative activity during a congested 

market. 

We also note in this regard the irresponsible market behavior of the 

shorts here. A serious contributing factor to squeezes in general and 

to the congestion that occurred in the instant case is the behavior of 

shorts who remain in the futures market during the delivery month 

without having made any delivery preparations. Consistent with the 

views expressed in Volkart, supra, 311 F.2d at 60, the testimony of 

numerous trade witnesses in this case and the findings of the 

Administrative Law Judge (I.D. at 69-72), we find that it is 

irresponsible market behavior for shorts to enter the delivery month, 

especially where low cash supplies are evident, without making adequate 

delivery preparations. 

The decision to deliver or offset in the trading pit is one of time, 

price, distance and convenience. The fact that local supply of a 

commodity is scarce does not relieve the shorts from their obligation to 

honor their contractual commitment to deliver. A short who, for 

whatever reason, enters the delivery month unprepared or unable to 

deliver runs the risk that he will have to offset at the long's price. 

Where a long has not intentionally created or exploited a congested 

situation, the long has a contractual right to stand for delivery or 

exact whatever price for its long position which a short is willing to 

pay in order to avoid having to make delivery. 
We also wish to emphasize that historical price comparisons of the 

type relied upon by the courts in Cargill and G.H. Miller are of limited 

probative value here because of the unique combination of circumstances 

which led to the price rise in the corn pit on July 20, 1973. n16 The 

tight corn supply and Indiana Farm's standing for delivery were 

legitimate forces of supply and demand which caused futures prices to 

rise. The panic bidding of shorts who were totally unprepared to 

deliver caused the most dramatic spurt in prices. The threat of 

government export controls similar to those imposed on soybeans 

undoubtedly led to the large open short position late in the delivery 

month. When that possibility was removed after the close on July 18, 

shorts in no position to fulfill their delivery obligations bid the 

price up the limit on July 19 and beyond on July 20. While the 

resultant $ 1.20 price rise was the largest one day price rise ever 

recorded for corn, it must be remembered that the daily price limit had 

been removed allowing for such an unprecedented rise. Against the 

backdrop of an inert cash market, comparison 

of the futures price and nominal cash quotations is of little value in 

assessing the true economic value of corn in Chicago on July 20. In 

Cargill, the cash market was relevant to a determination of price. In 

the instant case, the pricing of corn was in the trading pit due to the 

inert cash market. Thus, given the unique market and economic forces of 

supply and demand operating on the July 1973 corn futures contract, 

while the prices reached on July 20 were high, we do not agree with the 

Administrative Law Judge who found that the price was artificial. To 

the contrary, based upon market factors we have noted, we conclude that 

the price trend on July 20 was indeed reflective of the legitimate 

forces of supply and demand. 

n16 Indeed, it may be of more benefit to look to related 

contemporaneous markets. For example, the General Accounting 

Office noted in a 1975 report that there were record high pices in 

many agricultural contracts in 1973 as the result of unprecedented 

demand and diminished supplies. U.S.G.A.O. Report to the Congress. 

"Improvements Needed in Regulation of Commodity Futures Trading" 

(June 24, 1975). To analyze only one of these markets without 

reference to the situation in the others operates to distort any 

under standing of the economic forces at work. 

Finally, while there may have been, overall, relatively less corn 

available than usual, we agree with Judge Shipe that there was adequate 

deliverable supply of corn in the cash market to allow responsible 

shorts to obtain corn to fulfill their delivery commitments without 

having to deal with respondents, thereby precluding a successful squeeze 

of the corn market by any market participant. 

Excluding corn "committed" to export sales, the Division calculated 

deliverable supply of corn available in Chicago on July 20, 1973, at 

what it describes as "non-artificial" prices, at no more than 511,000 

bushels. (See Division's Proposed Findings of Fact at 61-66 and Brief 

in support at pages 13-24.) Judge Shipe rejected the Division's 

calculation essentially on the basis that there was no evidence to show 

that respondents either knew or could have known how much corn was 

"committed" to export sales, Judge Shipe calculated the deliverable 

supply to be at a minimum, 4,616,000 bushels, see I.D. at 59-66, and 

concluded from the combined cash supply and respondents futures 

positions that respondents did not have the requisite market dominance 

at the time the Division alleged prices to have become artificial (11:24 

a.m.) to be able to "squeeze" the shorts. See I.D. at 58-59, 64-65. 

The Division argues on appeal: "Judge Shipe injects absolute 

uncertainty into its determination, making it a factor of a trader's 
subjective appraisal. Deliverable supply, on the contrary, is an 

objective fact to be determined by looking at the terms of the futures 

contract and the economics of compliance with them." [Brief for Division 

at 63 (citation omitted).] 

Respondents argue that the deliverable supply of corn was at all 

times sufficient to permit the shorts to cover their positions without 

purchasing futures from respondents (Brief at 110-119). They dispute 

the Division's position that deliverable supply is "an objective fact," 

contending, as the Administrative Law Judge found, that deliverable 

supply is determined on the basis of what information is known by or 

reasonably available to the accused. Id. at 119-123. 

The complaint in this case (Paragraph 10) charged that respondents 

new that there was an insufficient supply of deliverable grade corn in 

deliverable position on July 20 to allow shorts to satisfy their 

contracts except by purchasing corn futures from respondents. Judge 

Shipe concluded, and we agree, that there is no evidence that 

respondents had knowledge of "committed" corn stocks and, further, that 

in fact there was an adequate supply of deliverable corn in Chicago at 

the time, because the corn excluded by the Division was not irrevocably 

committed. n17 While we agree with the Division that the basic 

calculation of deliverable supply may be accomplished without regard to 

what is known by the accused, it is the deliverable supply known to the 

accused which must be looked to in determining whether respondent's 

purchase of contracts is susceptible to an inference of manipulative 

intent. Manipulative intent may be inferred, for example, "through the 

purchase of long contracts in excess of known deliverable supply . . . 

." Great Western Foods v. Brannan, supra, 210 F.2d at 478-479 (emphasis 

added), as in Cargill, where the accused knew it had a virtual corner on 

the existing deliverable supply. See Cargill, supra, 452 F.2d at 1159, 

1170. Conversely, no such unlawful intent may be presumed where a long 

purchases contracts in quantity generally consistent with published 

reports of available stocks. Since there is no evidence that the corn 

supply was in fact irrevocably committed to commercial contracts, such 

corn was "available" to shorts and cannot be excluded from the 

deliverable supply. n18 

n17 Since there was adequate deliverable corn in Chicago itself 

during July, we need not determine the extent to which supplies 

outside of the local market or the percentage of ungraded supply 

which could reasonably be brought up to contract specifications 

were "available" We do, however, agree with the view expressed in 

Volkart, supra, that, by entering into a contract to deliver, 

shorts must exercise due diligence to acquire or render supplies 

deliverable as they have contracted to do. 

n18 We note in this regard that there was no testimony from any 

short, unlike G.H. Miller & Co., supra, 260 F.2d at 289, that corn 

was not in fact obtainable in Chicago or its environs. Indeed, 

some shorts did make delivery. That shorts with no delivery 

capacity chose to bid up the price rather than seek cash corn is 

not evidence of manipulative activity on the part of longs. 

One final word is in order with respect to deliverable supply 

and the actions of the contract market in this case. There is no 

evidence that either the exchange or Commodity Exchange Authority 

ever expressed any concern to respondents over the size of their 

long position. Apparently concerned over the large open interest 

at the close of trading on July 19, the exchange chose to remove 

the daily price limits. Under the circumstances present here, and 

in light of the Exchange's practice in the past of "jawboning" 

respondents in the face of perceived market congestion, we infer 

that the Exchange had no concern that the deliverable supply was so 

inadequate that a manipulation was possible. However, we take this 
opportunity to remind designated contract markets of their 

statutory obligation to provide for the prevention of manipulation 

pursuant to Section 5(d) of the Commodity Exchange Act, and of 

their powers to take emergency action to increase the deliverable 

supply or other appropriate action whenever market congestion 

occurs and thereby make the prospect of manipulative action more 

remote. See Section 1.41(a)(4)(f) of the Commission's Regulations. 

17 C.F.R. § 1.41(a)(4)(f). 

Accordingly IT IS HEREBY ORDERED that the decision of the 

Administrative Law Judge is AFFIRMED and the complaint is DISMISSED. 

 

CHAIRMAN JOHNSON, concurring: 

This appeal affords the Commission an opportunity to clarify its 

prior ruling in Hohenberg Bros. Company et al., [1975-1977 Transfer 

Binder] Comm. Fut. Law Rep. (CCH), P 20,271 (February 18, 1977) 

regarding the standard of "intent" applicable in futures price 

manipulation cases brought under sections 6(b) and 6(c) of the Commodity 

Exchange Act [7 U.S.C. §§ 9 and 13b], and to elaborate upon the meaning 

of certain other legal elements, such as price artificiality, required 

to be established in such cases. This matter has also provided the 

Commission an opportunity to comment n1 on the rights and obligations of 

futures buyers (longs) in the market when, due to a natural market 

congestion, futures sellers (shorts) are impeded or foreclosed from 

delivering the underlying commodity in satisfaction of their contractual 

obligations. 

n1 In this case, the Division of Enforcement contended that 

deliverable supplies of cash corn were insufficient to satisfy the 

delivery needs of shorts, forcing them to seek offset of their open 

July 1973 corn futures contracts with longs at artificial prices. 

Respondents asserted that deliverable supplies were ample to meet 

any delivery needs of the shorts or, in the alternative, that the 

shorts acted irresponsibly and to their own detriment by carrying 

large July corn positions into the final trading session if 

deliverable supplies were inadequate. Judge Shipe concluded that 

sufficient cash corn existed at the time in question to meet the 

shorts' delivery needs. [1977-1980 Transfer Binder] Comm. Fut. L. 

Rep. P 20,964 pp. 23.862-63 (1979), and the majority affirms that 

finding. Since a natural market congestion was found not to have 

existed, the discussion contained in this concurring opinion and 

elsewhere regarding the longs rights and duties under such 

circumstances is not essential to the determination of this matter. 

I subscribe to the majority's legal conclusion that the intent 

standard for manipulation under the Act, as articulated in the case law, 

is "specific intent." In cases of the nature alleged here. I would 

define such intent as the conscious object or purpose to override the 

basic forces of supply and demand in the market by seizing control of 

prices and, in a successful manipulation, with the effect that prices do 

not accurately reflect those forces. n2 A mere showing that the 

respondents acted or failed to act under circumstances where an impact 

on market prices was likely or even certain to occur is not sufficient. 

Where an accomplished manipulation is alleged, it must be established by 

direct or circumstantial evidence that the respondents successfully 

sought to dictate prices and that the prices resulting from that 

undertaking were abnormal or artificial. n3 
n2 I do not read the precedents as requiring proof of positive 

knowledge on the accused's part that the price attained would be in 

fact artificial. The decided cases make abundantly clear that 

determining whether the resulting price was artificial frequently 

requires analysis of extensive economic data, often with the 

assistance of expert testimony, which may not have been within the 

possession or knowledge of the accused at the time when the 

decision to control prices was made. Moreover, to premise 

manipulative intent on the accused's actual knowledge that the 

resulting price would be artificial serves only to reward those who 

seize control of prices, exercise that control effectively, but 

remain ignorant of or indifferent to the relationship between the 

resulting price and the underlying supply/demand forces. Rather, 

the intent to cause price artificiality can be inferred from all of 

the surrounding circumstances and, in my view, it would be 

reasonable to infer that a person who deliberately seizes control 

of prices does so in order to substitute his own will in place of 

the basic forces of supply and demand, and thus can be presumed to 

have intended any artificial price that is caused by that conduct. 

n3 The pattern of trading by respondents during the last few 

trading days of the July corn contract could support an inference 

that they sought to test their market power. Repeatedly, 

rspondents placed liquidating orders at spread prices significantly 

higher than those present in the market. [1977-1980 Transfer 

Binder] Comm. Fut. L. Rep. (CCH) P 20,964, pp. 23.850-51 (1979) 

(I.D. Findings ## 68-77). And, near the end of trading on July 20, 

respondents placed "step up" orders ranging as high as 20 cents 

above the prevailing futures price. Id. at 23.851-52 (I.D. Finding 

# 78). Judge Shipe did not draw an inference of manipulative 

intent from this conduct. Deference to the trier of facts is 

generally appropriate when the inferences to be drawn from the 

evidence depend heavily on the credibility of witnesses. Great 

Western Food Distributors, Inc. v. Brannan, 201 F.2d 476, 479-80 

(7th Cir. 1953). Here, the majority has deferred to Judge Shipe's 

assessment, but I find it unnecessary to reach the issue since the 

evidence is insufficient to establish another essential element of 

the offense, namely, that respondents' conduct "caused" prices to 

be artificial, as discussed in the next textual paragraph. 

I further subscribe to the legal conclusion below, affirmed by the 

majority, that the presence of significant market forces in the July 

corn futures contract on July 20, 1973 that were beyond respondents' 

control militate against a finding that respondents were the legal or 

culpable cause of the prices reached on that date. Accordingly, I would 

not disturb the order below dismissing the complaint, except to correct 

the inappropriate intent standard applied in the initial decision. 

However, I am unable to join with the majority in its conclusion that 

July 1973 corn futures prices were not artificial on July 20. I believe 

that the factors cited by the majority as part of the basic or, in its 

words, the "legitimate" supply/demand equation at the time in question 

are broader than those recognized in the judicial precedents, and that 

Judge Shipe was correct in his finding of price artificiality when only 

supply/demand factors applied in previous cases are considered. 

In addition, I do not agree with the majority's resolution of the 

apparent conflict between Volkart Bros., Inc. v. Freeman, 311 F.2d 52 

(5th Cir. 1962), and Cargill Inc. v. Hardin, 452 F.2d 1154 (8th Cir. 

1971), concerning the rights and duties of longs in the futures market 

when forces or events beyond their control create a market congestion 

that interferes with the ability of shorts to deliver the commodity in 

satisfaction of their contractual obligations. I would seek to strike a 

balance between the valid premise of Volkart that the obligations of a 

futures contract must be enforceable even under adverse economic 

conditions, and the equally valid concern of Cargill that raw market 
power should not rule the day under such circumstances. Only a 

balancing of these interests, in my view, can assure that the contract's 

terms are honored by both parties, that a relationship is maintained 

between cash prices and futures prices during delivery periods, and that 

orderly markets are achieved. Because the majority has chosen to deal 

differently with this issue. I must demur. 

1. Price Artificiality.

In cases alleging an accomplished futures price manipulation, it must 

be proven that the price registered in the futures market was 

"artificial," that is, that the price deviated notably from the level 

reflecting the basic forces of supply and demand. Cargill, Inc. v. 

Hardin, 452 F.2d 1154, 1167-70 (8th Cir. 1971). Great Western Food 

Distributors, Inc. v. Brannan, 201 F.2d 476, 482-83 (7th Cir. 1953). 

This issue does not go to the culpability of any person, but merely 

relates the examined price to other relevant economic data. 

In Cargill the court of appeals considered a variety of comparative 

data introduced in evidence: historical prices of the same futures 

contract in previous years; current and past spread relationships 

between that contract and other futures in the same commodity; the price 

of the suspect contract as compared to futures in the same commodity 

traded contemporaneously on other markets; and cash prices of the 

underlying commodity 

in other periods as well as when the alleged manipulation occurred. n4 

n4 In Cargill, the Government also introduced an analytical 

study by USDA purporting to establish the "average economic value" 

of cash wheat in Chicago during May 1963, 452 F.2d at 1168. It is 

unclear, however, whether the court of appeals relied to any 

significant degree on this analysis, since the Government also 

presented evidence as to actual cash prices and quotations. 

While the Cargill decision considered futures prices in its analysis 

of price artificiality, it appears that those statistics were relied 

upon only when they were believed to reflect the basic forces of supply 

and demand for the commodity in the periods and locations examined. 

This assessment is confirmed by the fact that the court rejected one 

proffered statistic -- wheat futures prices in May 1958 -- because the 

Department of Agriculture had found in an earlier investigation that 

those prices, though not manipulated, were "artificial." 452 F.2d at 

1167-68. Thus, unique forces at work in the futures market at the time 

served to disqualify those prices for comparative purposes. Rather, the 

"supply" and "demand" forces deemed relevant appear to have been simply 

those operative in the various cash markets examined, as reflected in 

contemporaneous or past cash prices, or in other futures contracts 

performing compatibly with cash market forces. This is supported by the 

court's finding that prices of May 1963 wheat futures were artificial: 

The finding that the futures price was artificially high and did not 

reflect basic supply and demand factors for cash wheat is supported by 

the weight of the evidence. 452 F.2d at 1169 (emphasis added). n5 

n5 See also 452 F.2d at 1171: "The extraordinary price 

fluctuations of the futures market on May 20 and 21, 1963, on the 

Chicago Board of Trade were the largest in recent history and had 

very little relationship to basic supply and demand factors on No. 

2 soft red winter wheat." And compare section 8a(9) of the Act [7 

U.S.C. § 12a(9)], defining the Commission's market emergency 

powers, which refers to "the forces of supply and demand for such 

commodity" (emphasis added). 
The majority opinion, however, does not relate price artificiality 

solely to the forces of supply and demand in the cash corn market. 

Instead, it incorporated within the supply/demand equation certain 

additional factors that influenced futures prices on July 20, 1973 but 

evidently had a lesser if any effect on contemporaneous cash corn 

prices. It cites, for example, the Government announcement on July 18, 

1973 that previously threatened export controls on corn would not be 

implemented; the behavior of large shorts in the July contract during 

the final days of trading; n6 and the removal by the Chicago Board of 

Trade of daily price limits for July corn on July 20. If these 

influences affected July corn futures prices, but had no comparable 

impact on cash market prices for corn during that period, n7 my reading 

of Cargill is that those factors are not relevant to the narrow issue 

whether futures prices on July 20 reached artificial levels. n8 

n6 It may remain forever a mystery why the largest short in the 

expiring July 1973 corn futures contract. Sumitomo Shoji America, 

Inc., elected to offset its positions on July 20 at rapidly rising 

futures prices rather than to procure cash corn and make delivery. 

Judge Shipe and the Commission's majority find that corn supplies 

in Chicago were adequate for that purpose. The hazy record on this 

subject suggests, however, that Sumitomo's large short position may 

have been placed by a company subordinate without authority from 

his superiors (T. 649-54). If so, the subordinate may have been 

reluctant to highlight his actions by making large purchases of 

cash corn for the company's account at that time. This is 

conjecture, of course, and no definitive conclusion can be reached 

from the record. 

n7 In some instances, of course, a party may gain control over 

both the cash and futures markets. See, e.g., Peto v. Howell, 101 

F.2d 353 (7th Cir. 1938); and G.H. Miller & Co. v. United States,

260 F.2d 286 (7th Cir. 1958). Under such circumstances, a similar 

price distortion in both markets may be achieved. Thus, the mere 

fact that both contemporaneous markets behave in a parallel manner 

is not conclusive proof of price normality. 

In other instances, the cash market may be dominated, and its 

price controlled, by certain interests while the futures market is 

operating in a freer and more competitive way Under these 

circumstances, futures prices may reflect the commodity's value 

more accurately than the cash market. There is no suggestion in 

the present case, however, that the cash market for corn in July 

1973 was under any such influence. 

n8 The majority's decision also poses an intellectual dilemma. 

On the one hand, if all influences in the futures market are 

absorbed into the supply demand equation, it would follow logically 

and almost automatically that no futures price could be considered 

artificial, even if it deviated dramatically from other prices for 

the same commodity. As the presiding officer stated in Volkart 

Bros., Inc., et al., CEA Docket No. 82, at pp. 26-27: "The 

intimation by intervenor New York Cotton Exchange that supply and 

demand for futures contracts as distinguished from actual cotton 

should be considered legitimate price-making factors for futures 

prices is patently lacking in merit. Such a position would justify 

as valid corners, squeezes and all kinds of manipulation both up 

and down" (court's emphasis). The majority does not go so far but, 

if less than all futures market influences are to be included, we 

should provide clearer guidance in identifying what the majority 

classifies as "illegitimate" factors, an arduous task that has not 

been undertaken here. 

Upon review of the findings below, I am satisfied that Judge Shipe 

was correct in his ruling that July corn futures prices on July 20, 1973 
became abnormal or artificial. The unprecedented one-day rise in those 

prices, up roughly $ 1.20 per bushel, is itself a strong suggestion that 

the futures price on July 20 was abnormal. And it appears that no 

similar movement in cash corn prices at Chicago occurred on that date or 

within a reasonable time thereafter. n9 On July 20, the critical date, 

the respondents themselves bid for physical corn in Chicago at $ 2.65 

per bushel, which was $ 1.25 less than the highest price attained by 

July futures on that date (I.D. Finding # 23). n10 Similarly, two other 

major commercial firms -- Cargill and Continental Grain -- bid under $ 

2.67 that day for physical corn in Chicago (I.D. Finding # 23). n11 

Cash corn quotations by the Department of Agriculture on July 20 were 

also under $ 2.67 per bushel (I.D. Finding # 19), n12 while USDA's 

Agriculture Stabilization and Conservation Service quoted Chicago cash 

corn on that date only slightly higher, at $ 2.703/8 (I.D. Finding # 

21). n13 While these prices may have been nominal, n14 it is unlikely 

that the experts at USDA would have underestimated the true value of 

corn in Chicago by nearly one-third on July 20. The record in this case 

also shows that, on the days of July following the final trading 

session, no commercial firm buying corn at Chicago for its own use paid 

more than $ 2.91that date or during the remainder of the month n16 and, 

thus, were not a part of the o not appear to have had a similar impact 

in the cash trade on that date or during the remainder of the month n16 

and, thus, were not a part of the supply/demand equation for cash corn 

during that period. 

n9 Whether Chicago cash prices would have risen to July futures 

levels on or after July 20 if Sumitomo had sought cash corn for 

delivery is problematical. It would not have been necessary for 

Sumitomo to satisfy all of its cash needs on July 20 since 

deliveries could be made on any business day during the remainder 

of that month. Thus, while an effort by Sumitomo to acquire cash 

corn on or after July 20 might have caused cash prices to 

strengthen, it is by no means certain that those prices would have 

approached the level reached in the futures market on the final 

trading day. The record discloses, in fact, that another 

commercial firm. CPC International, Inc., acquired 600,000 bushels 

of delivery grade corn at Chicago on July 31, 1973 at $ 2.78 per 

bushel. See note 10. infra, at p.23,844 (I.D. Finding # 24). The 

quantity purchased by CPC approximated the average daily amount 

that Sumitomo would have had to acquire between July 20 and the end 

of the month if it had chosen to make delivery on its entire short 

futures position. While not conclusive on the issue, this evidence 

suggests that the cash market was capable of handling transactions 

of this magnitude at prices well below the July 20 futures price. 

n10 [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH). P 

20,964, pp. 23,843-44 (1979). 

n11 Ibid.

n12 Id. at p.23,842. 

n13 Id. at p.23,843. 

n14 The Cargill decision recognized that it is frequently 

difficult to gauge the true value of a cash commodity. 452 F.2d at 

1168. In that case, the parties introduced largely nominal cash 

price quotations for wheat during a period when actual cash sales 

in Chicago were relatively infrequent. However, the discrepancy 

between nominal cash quotations and closing futures prices in the 

Cargill case was quite modest compared with the instant proceeding. 

See 452 F.2d at 1168, n. 13. Here, the deviation of roughly $ 1.20, 

or 30%, cannot be fully explained by any possible uncertainty over 

the true value of cash corn. 
Moreover, it is not a sufficient answer that the bids made for 

Chicago cash corn on July 20, 1973 may not have been a serious 

attempt to acquire supplies. At best, it would simply establish 

that demand for cash corn was weak on that date. If so, the 

nominal prices reported by USDA may well have reflected the real 

demand, or the lack thereof, for cash corn on that day. 

n15 Indeed, on the first business day after trading in July corn 

ended, respondents acquired 360,000 bushels of corn at Chicago for 

$ 2.76. See note 10, supra, at p.23,844 (I.D. Finding # 24). 

n16 After the expiration of trading in July futures, the prices 

of September 1973 corn futures rose significantly. However, the 

highest settlement price of the September future during July was $ 

2.88 per bushel on July 31, and peaked on August 14 at $ 3.47-3/4. 

See note 10, supra, at pp. 23,842-43 (I.D. Finding # 19). Thus, 

despite the rise. September futures never approached the highest 

price of the July contract on July 20, 1973. 

This is not to suggest, however, that the special influences on July 

corn futures prices near the end of trading lack relevancy to the merits 

of this case. They are pertinent to determining why prices became 

artificial on that date. Or, stated differently, those influences 

should be considered in deciding whether it was the respondents, or 

other factors, that "caused" prices to become artificial. See Cargill,

452 F.2d at 1169. And, as the majority correctly observes, the presence 

of various significant factors beyond respondents' control militate 

against a finding that respondents were the legal or culpable cause of 

the artificial prices reached on July 20. 

2. Manipulative Squeezes.

In his opinion below, Judge Shipe made brief reference to an apparent 

conflict between the rulings of Volkart Bros., Inc. v Freeman, 311 F.2d 

52 (5th Cir. 1962) and the Cargill case, supra, although he did not 

express a view on the matter. n17 Stated simply, 

 

the question on which Volkart and Cargill are said to differ is whether 

a long in the futures market during a shortage of deliverable cash 

supplies that was not intentionally contrived by the long as part of a 

planned "squeeze," can lawfully exact as high a price as possible when 

offsetting positions with a short who finds delivery either difficult or 

impossible. Natural market congestion can occur without any effort on 

the part of the longs to create the shortage of cash supplies. For 

example, the court in Cargill noted that a scarcity might be occasioned 

by low crop production or the inadvertent destruction of exisiting 

supplies. 452 F.2d at 1162. Some commentators have read Volkart as 

saying that longs are free to demand the highest possible prices from 

shorts under these circumstances, n18 whereas the Cargill decision 

assailed such conduct. 

n17 [1977-1980 Transfer Binder] Comm. Fut. L. Rep. (CCH), P 

20,964, p.23,865, n.6. Judge Shipe found that supplies of cash corn 

in Chicago were adequate to meet the delivery needs of the shorts. 

Id. at p.23,863. 

n18 See Note, The Delivery Requirement: An Illusory Bar to 

Regulation of Manipulation in Commodity Exchanges, 73 Yale L.J. 171 

(1963). 

A major concern of the court of appeals in Volkart was that futures 

contracts, which create a duty upon shorts to deliver the commodity, 

would cease to be legally binding if shorts were assured by law that 

their breach of that duty would carry no economic sanctions. 311 F.2d 

at 59-60. Specifically, the Volkart court found that shorts in that case 
had foreclosed themselves from delivery by neglecting to make 

preparations to acquire the necessary cotton, even though such 

preparations were possible and could have been completed as late as the 

day preceding the end of futures trading. The court appears to have 

held that, under such circumstances, the shorts should not be wholly 

immunized from the economic consequences of their dereliction of duty 

under the contract. It has been inferred from that premise (although I 

disagree, as discussed infra) that, under Volkart, shorts must expect to 

pay during offset in the futures market whatever prices the longs can 

successfully exact. This analysis was roundly criticized in the Cargill

case. 452 F.2d at 1172-73. 

In my view, both decisions address valid concerns. A futures 

contract is indeed a legally binding instrument, and breaches should not 

be excused without the other party's voluntary consent. At the same 

time, such a breach should not have unlimited consequences for the 

short. Recognizing the duty of shorts while avoiding undue exploitation 

of their plight, in my opinion, should be the objective of the Act. The 

majority opinion does not undertake to strike such a balance. 

The majority adopts a position similar to the broadest reading of the 

Volkart case. My colleagues hold that, where a long has not laid the 

base for a "squeeze" by intentionally creating a supply shortage, n19 

and has not exacerbated the market congestion during a natural scarcity 

such as by further depleting cash supplies or increasing his futures 

position, the long is free to exact as high a price as possible from 

shorts who find delivery impossible. I cannot reconcile that view with 

the teaching of either Cargill or Volkart, with the premise that a 

relationship between futures prices and cash prices should exist in 

delivery months, or with the traditional aim of the Commission and of 

the contract markets to maintain orderly futures trading. 

n19 The majority in the present case appears to distinguish 

between cash market transactions that deplete supplies but are 

conducted in the normal course of business, and transactions 

designed to reduce deliverable supplies for the purpose of laying 

the base for a planned "squeeze" of shorts in the futures market. 

The former, evidently, would not infer manipulative intent, while 

the latter would. Under the majority's hypothesis, this 

distinction would appear to be essential since, if all cash market 

activities that decreased supplies were made suspect, participation 

in the futures market could actually interfere with, rather than 

aid, the commerce in cash commodities. 

The majority states that its opinion conforms with the Cargill case. 

That decision is construed as finding that Cargill intentionally laid 

the base for the "squeeze" by its sales of wheat in the cash market 

during May of 1963. And yet, the court raised no question concerning 

the propriety of Cargill's cash sales. On the contrary, it held that 

Cargill's major sale of Chicago wheat to the Spanish Government during 

the period was "a good economic sale, which we may concede" and was 

"completely legal." 452 F.2d at 1171-72. There is no finding in Cargill,

as I read it, that the cash market activities of that firm were designed 

or intended to further a plan by Cargill to dictate artificial prices in 

the futures market. n20 And the principle enunciated in Cargill does 

not appear to depend upon proof of any such purpose: 

Many squeezes do not involve intentional manipulation of futures 

prices, but are casued by various natural market forces, such as unusual 

weather conditions which have caused abnormally low crop production or 

inadvertent destruction of a substantial volume of the commodity itself. 

However, given a shortage of deliverable supplies for whatever reason,

the futures price can be manipulated by an intentional squeeze where a 

long acquires contracts substantially in excess of the deliverable 

supply and so dominates the futures market -- i.e., has substantial 
control of the major portion of the contracts -- that he can force the 

shorts to pay his dictated and artificially high prices in order to 

settle their contracts. 452 F.2d at 1162 (emphasis added). 

n20 See also 452 F.2d at 1171: "The cash market in Chicago was 

to a limited degree cornered due to the depletion of local 

supplies. This small corner however does not appear to have been 

manipulated but came about normally from accelerated liquidation of 

the old wheat crop." 

Similarly, the Cargill case provides only the most limited support 

for the majority's view that, during a natural market congestion, the 

prohibitions of the Act apply only if a long exacerbates the existing 

congestion, 

 

such as by further depleting cash supplies or increasing the size of the 

long futures position held prior to that congestion. Cargill began 

accumulating a long speculative position in May 1963 wheat futures on 

April 15, 1963. Most of its long position -- 1,225,000 bushels -- was 

acquired by April 19, 1963, before the Spanish Government offered to buy 

large quantities of wheat. In re Cargill, Inc. et al., 29 Agric. Dec. 

877, 889 (29 A.D. 877, 889) (1970). Cargill increased its long holdings 

to 1,510,000 bushels by the end of April, still well before the Spanish 

sale was consummated. Ibid. That position reached 1,930,000 bushels by 

May 15, 1963, when Cargill's negotiations for the Spanish sale were in 

full swing before its offers were accepted. 452 F.2d at 1159. On May 

18, the Spanish Government agreed to buy Cargill's wheat, Ibid. On May 

20, Cargill sold 40,000 bushels of May wheat futures. Cargill bought 

100,000 bushels of futures on May 21, the final trading day. Id. at 

1160. These transactions resulted in a long futures position of 

1,990,000 bushels. 60,000 bushels or 3% more than was held by Cargill 

before the sales to Spain were completed. These events provide scant 

evidence that Cargill's moderate increase in its futures position 

following the Spanish sale was intended to or did exacerbate the market 

congestion that manifested itself on May 20 and 21, 1963. 

As for Volkart, supra, the court of appeals appears to have addressed 

a far narrower issue than the majority reaches in this case. There, the 

decision of the USDA's Judicial Officer was evidently read to mean that 

longs who offset with shorts during a natural market congestion must do 

so at or about the same futures price that would have prevailed if the 

shorts had been able to deliver the commodity. The court correctly 

observed that such a rule would effectively nullify the shorts' 

contractual duty to make delivery by immunizing them from any economic 

consequences for their breach. Stated differently, this rule would 

leave longs without a remedy under the contract. But Volkart did not 

specifically address or decide whether under those circumstances, longs 

may retaliate to the full extent of their market power. At best, 

Volkart rejected as contrary to the terms of the futures contract the 

concept that shorts are to be totally excused for their failure to make 

delivery as promised, but it did not necessarily hold that the recourse 

of the longs under these circumstances is unlimited. n21 

n21 It appears that the court in Volkart may not have confronted 

a fact situation where the highest possible prices were demanded by 

the respondents. There, a total of 5,000 bales of October 1957 

cotton futures on the New York and New Orleans exchanges were 

liquidated by Volkart on the final trading day at prices viewed as 

artificial. Of that amount, the greater part -- roughly 70% was 

liquidated at about three-tenths of a cent per pound above the 

previous session's closing price. The remaining position was 

liquidated as high as nearly-nine tenths of a cent above the 
previous close. In re Volkart Bros., Inc., CEA Docket No. 82, at 

pp. 12, 27 (1961). Had Volkart refused to offset its positions 

with shorts, and had a formal delivery default resulted, exchange 

rules provided that Volkart would receive one-quarter cent per 

pound in penalties as well as any actual damages incurred by it due 

to the delivery breach. 311 F.2d at 57. Thus, the preponderance of 

Volkart's position was liquidated at a premium over the previous 

close that was not appreciably more than the penalty (exclusive of 

damages) that it would have been entitled to if, instead of 

offsetting with shorts, it had stood for delivery and a formal 

default had occurred. 

The majority concludes that "Where a long has not intentionally 

created or exploited a congested situation, the long has a contractual 

right to stand for delivery or exact whatever price for its long 

position which a short is willing to pay in order to avoid having to 

make delivery" (p. 21). This would be a highly theoretical statement of 

the short's situation in speaking of the short's "willingness" to pay 

high offset prices and of his decision to "avoid" delivery if, in fact, 

the delivery alternative simply did not exist. But a more serious 

concern, in my view, is the majority's declaration that a long has the 

"contractual right" to exact the highest possible offset prices from the 

shorts during a natural market congestion. I can find no such 

contractual right. 

A short who cannot deliver the commodity has effectively defaulted on 

his obligation and agreement to schieve that capability. This default 

exists as of the moment when delivery is no longer feasible, whether or 

not the long has yet made a demand for the commodity. Under those 

circumstances, however, exchange rules recognize two distinct 

alternatives for the short: to offset in the market with the longs, or 

to not offset and be declared in default by the sponsoring contract 

market. While both Volkart and Cargill recognize offset, neither 

appears to have focused clearly on the latter alternative of formal 

default. 

Incorporated into the terms of every futures contract are all rules 

of the sponsoring contract market that bear upon the rights and duties 

of the parties. Daniel v. Board of Trade of the City of Chicago, 164 

F.2d 815, 818 (7th Cir. 1947); Cargill, Inc. v. Board of Trade of the 

City of Chicago, 164 F.2d 820, 822-23 (7th Cir. 1947); Cargill, Inc. v. 

Hardin, 452 F.2d 1154, 1156 (8th Cir. 1971); Case & Co., Inc. v. Board 

of Trade of the City of Chicago, 523 F.2d 355, 358 (7th Cir. 1975). 

Among those rules are provisions governing the consequences of a default 

on the futures contract. n22 Typically, those provisions contemplate 

the payment of penalties and/or damages by the defaulter to the opposite 

party. In Volkart, for example, exchange rules prescribed a 1/4 cent 

per pound penalty plus actual damages incurred. See note 21, supra.

These rules represent, in effect, an agreement between the long and 

short concerning the appropriate economic consequences of a default and 

are an integral part of the futures contract. 

n22 Such rules are generally subject to prior review and 

approval by the Commission under section 5a(12) of the Act [7 

U.S.C. § 7a(12)] and Regulation 1.41(b) [17 C.F.R. § 1.41(b)]. 

Consulting the actual terms of the futures contract, therefore, leads 

me to the conclusion that the resolution of delivery breaches -- 

defaults -- has not been left to raw 

 

market power, but is governed by a remedial system n23 established by 

contract market rules. The contractual rights of the long are found 

within that system. n24 The exaction of premiums by longs during offset 
that exceed the compensatory amount to which they would be entitled on 

default is not the recourse contemplated for breach of contract in 

exchange rules and is thus inconsistent with the contract's provisions 

governing that contingency. Accordingly, I cannot join in the 

majority's view that it is the "contractual right" of longs to demand as 

high an offset price as possible from the shorts during periods of 

natural market congestion. 

n23 The remedial provisions of default rules are those designed 

to compensate the injured party for losses resulting from the 

breach of contract, whether denominated as penalties or as damages. 

Other features found in some default rules, such as the right of 

the contract market to take disciplinary action against the 

defaulting party, do not relate to the rights of the contracting 

parties vis-a-vis each other and therefore are not remedial within 

the meaning of this discussion. 

n24 This is not to suggest that longs are required by law to 

force a formal default by shorts when ever it becomes evident that 

the latter are unable to make delivery. While that option is 

available to longs under the terms of the contract, offset in the 

market with shorts is not foreclosed. However, off set at prices 

that generate significantly more than what the longs could 

reasonably expect to receive in compensation if offset had been 

refused and formal default had resulted cannot, in my view, be 

reconciled with the contractual agreement between the parties. 

The majority opinion also raises concerns for traditional market 

surveillance. Contract markets have a duty under section 5(d) of the 

Act [7 U.S.C. § 7(d)] to provide for the prevention of manipulation, and 

this responsibility has been recognized to include a diligent effort to 

maintain orderly markets. Miller v. New York Produce Exchange. 550 F.2d 

762, 766 (2d Cir. 1977); Case & Co., Inc. v. Board of Trade of the City 

of Chicago. 523 F.2d 355, 362 (7th Cir. 1975). n25 Natural supply 

shortages, accompanied by substantial long positions in the market, are 

not uncommon, and they have always warranted special vigilance. The 

exchanges frequently notify large traders of their overriding 

responsibility to the marketplace under these circumstances and, in the 

main, traders act to avoid a major market disturbance. n26 The 

Commission encourages this procedure and follows a similar course. 

Under the majority's formulation, however, longs who do not 

intentionally create or exacerbate the market congestion might feel free 

to demand as high an offset price from shorts as possible. Should that 

attitude emerge, it may prove difficult for the Commission or for the 

contract markets, during natural market congestions, to credibly implore 

traders to maintain an orderly market in the face of a momentary 

bargaining advantage. n27 For this reason as well. I depart from the 

majority's assessment of this issue. 

n25 See also section 8a(6) of the Act. 7 U.S.C. § 12a(6), 

authorizing the Commission to share data with contract markets 

whenever any transaction or market operation "disrupts or tends to 

disrupt any market." Thus, the self-regulatory role of the contract 

markets clearly includes a duty to be attentive to market 

disruptions of every kind. 

n26 See section 8a(9) of the Act [7 U.S.C. § 12a(9)], which 

relates a major market disturbance to a variety of events (of which 

manipulation is only one) which prevent the market "from accurately 

reflecting the forces of supply and demand for such commodity." 

n27 It is true, of course, that the Commission will retain the 

power of persuasion that accompanies its right to declare a market 

emergency under section 8a(9) if the requisite preconditions for 

such a declaration exist. But where, as in this case, it is 
concluded that a long has the right to seek the highest possible 

offset price during a natural market congestion, unless he has 

created or exascerbated that condition, and that the resulting 

price cannot be viewed as artificial, it is unclear whether the 

Commission would have grounds under section 8a(9) to invoke or 

threaten to invoke a market emergency. 

 

 

Commissioner Stone, concurring: 

There is an asymmetry in the development of administrative law. When 

a government agency reads its enabling statute expansively in the 

exercise of its judicial duties, the courts are available to check 

excessive zeal. When an agency's judicial decisions contract its 

traditional powers, there is no appeal. And, unlike the explanations 

associated with rulemaking proceedings, 

 

the language of judicial opinion has a precedential force which may 

discourage agency staff from easily raising the issues for subsequent 

consideration by the same agency. The Enforcement Division of the 

Commodity Futures Trading Commission can neither appeal the Commission's 

decisions nor initiate new actions without the Commission's permission. 

The majority's reasoning in the matter now before the Commission is of 

special concern in this regard. One can only hope that the sharp 

division of the Commission will be duly noted by the Enforcement 

Division and future Commissions. 

The ultimate disposition of the matter is not at issue. The 

Admministrative Law Judge and all five Commissioners concur that the 

respondents can not be held causally responsible for the abrupt price 

increases which occurred during the liquidation of the July 1973 corn 

futures contract on the Chicago Board of Trade. Causality, though, is 

only one of the three essential elements that comprise a futures 

manipulation under the Commodity Exchange Act. n1 The majority's 

pronouncements with respect to the other two elements, artificial price 

and intent, represent a departure from a tradition and a body of case 

law protecting the integrity of futures market pricing. 

n1 Commodity Exchange Act, 7 U.S.C. § 1 et seq. Causality, which 

is viewed here as a single element, has been divided elsewhere into 

two separate elements: dominance or ability to influence prices, 

and exercise of such capacity. P. Johnson, Commodities Regulation,

Little, Brown & Co., Boston, § 5.05, 5.21 (1982). This opinion 

treats these as sub-elements of an overall causality analysis. 

The case before the Commission involves an alleged manipulative 

squeeze in an expiring futures contract. Precedential value is limited 

accordingly. It is important that neither the majority opinion nor the 

concurring opinions in this case be read as necessarily dispositive of 

matters in which cash market manipulation, illicit control of deferred 

prices, or manipulation by means other than a squeezing of the shorts 

has been alleged. Each such situation has its own pecularities, and 

none have been examined here. Still, the matter before us is of great 

significance. The manipulative squeeze is generally regarded as the 

most tempting and historically common form of futures manipulation. The 

Commodity Exchange Act is severely damaged when its ability to deter and 

punish the manipulative squeeze is weakened. 

BACKGROUND
The elimination of price manipulation has been judicially described 

as the very purpose of commodity market regulation. n2 Long before 

there arose the parallel statutory goals of customer protection and 

systemic solvency assurance. Congress expressed its desire for a market 

free from the threat of manipulation. Dozens of legislative proposals 

were spawned by the futures markets manipulations at the end of the last 

century and these eventually culminated in the passing of the Grain 

Futures Act of 1922. n3 Price manipulation was referred to in the 

legislative history of that Act as an "overshadowing evil that must be 

eliminated." n4 The purpose clause of the present Commodity Exchange Act 

gives the same central focus to the prevention of the "sudden or 

unreasonable fluctuations in prices" which may result from 

manipulations. n5 

n2 "The present act, which is amendatory of the Grain Futures 

Act . . . . is of the same general character as that directed to 

the same general purpose; to wit, to remove burdens on interstate 

commerce caused by manipulation and market control." Board of Trade 

of Kansas City v. Milligan, 90 F.2d 855, 857 (8th Cir. 1937). 

n3 Grain Futures Act of 1922, Pub. L. No. 67-331. 42 Stat. 988, 

Sep. 21, 1922. 

n4 Remarks of Representative Purnell, Cong, Rec., 67 Cong. 1st 

Sess. p. 1317. 

n5 7 U.S.C. § 5. 

Concern about the pricing integrity of futures markets stems from 

their economic nature as well as their history. A heightened 

susceptability to price manipulation follows necessarily from the 

characteristics that distinguish futures markets from the underlying 

cash markets. Futures markets are useful in ways that cash markets are 

less so largely because of their standardization. Standardization 

permits a greater flow of information into a centralized marketplace; it 

leads to greatly enhanced liquidity: and it reduces transaction costs 

that necessarily accompany personally negotiated contracts. 

Standardization, however, has never been an unmixed blessing. Narrowing 

of contract terms raises the risks of market; congestion, which in turn 

can set the stage for manipulation. Restrictions with respect to 

deliverable product, therefore, give rise to countervailing rules 

designed to minimize the danger of price distortion through manipulative 

activity. Holbrook Working, the dean of futures market economists, has 

written that their "special regulations and conventions, more 

restrictive than those applied to any other class of commodity 

transactions . . ." actually define the existence of futures markets. n6 

n6 H. Working, "Futures Trading and Hedging," American Economic 

Review, Vol. LXIII, p. 314 (1953). 

Futures markets do not narrow their participation to match delivery 

restrictions. On the contrary, they seek to broaden participation as an 

aid to price discovery and liquidity. It is normal and expected in 

futures markets that open interest may be many times larger than the 

deliverable supply. Well over ninety percent of short obligations are 

settled by the establishment of offsetting long positions rather than by 

delivery. n7 Offset by shorts, however, can not occur without 

cooperation from the longs or entry by new shorts. It has been 

recognized for at least a hundred years that, when imperfect competition 

offers market power to large longs and conditions of shortage makes 

delivery infeasible for the short, a short 

 
must either default or offset at an arbitrary price set by the longs. 

n8 Classic corners and squeezes are ordinarily of this variety, and the 

exchanges have long been aware of their obligation to lessen their 

incidence. n9 

n7 T. Hieronymous, Economics of Futures Trading, Commodity 

Research Bureau, p. 39 (1971). 

n8 See I Taylor, History of the Board of Trade of the City of 

Chicago, p. 370 (1917). See also United States v. Patten, 226 U.S. 

525, 539-40 (1913). 

n9 Great Western Food Distributors v. Brannan, 201 F.2d 476, 

478-479 (7th Cir.) cert. denied 345 U.S. 997 (1953). Cargill, Inc., 

v. Hardin, 452 F.2d 1154 (7th Cir.) cert. denied, 406 U.S. 932 

(1972). See also History of the Board of Trade of the City of 

Chicago, supra, note 8, for exchange efforts to curtail cornering 

in 1867. 

A futures market in which shorts were too often called on to deliver 

would lose much of its short interest. A futures market which permitted 

too easy a substitution with respect to the timing, location or grade of 

of deliveries would lose much of its long interest. The task 

confronting the regulatory and self-regulatory authorities is generally 

seen as one of preventing squeezes and other forms of manipulation 

without unduly altering the configuration of the markets. 

A classic squeeze can always be countered with a default, but it is 

seldom attractive for a short to consider this option. To protect their 

own reputations and interests, contract markets set very harsh penalties 

for default. Provision is typically made for stiff minimum damages, 

with additional monetary penalties to be assessed at the discretion of 

exchange authorities. n10 A defaulting member may also be subject to 

suspension or expulsion from the exchange as well as diminished status 

in the trade. n11 Most futures traders will be willing to pay a 

substantial premium for the right to offset their futures contracts 

rather than face default. The premiums a squeezed short will assent to 

may easily rise to levels in excess of the contract damages for which 

the responsible party in a cash default would be liable under most 

circumstances. 

n10 Volkart Brothers, Inc., v. Freeman, 311 F.2d 52, 57 (5th 

Cir. 1962). For example, See Chicago Mercantile Exchange Rules 715, 

724, 737B. 

n11 Volkart Brothers, supra 311 F.2d at 57. For example, See

Chicago Mercantile Exchange Rules 132, 432(f), 430 and Chicago 

Board of Trade Rule 278. 

Even where delivery can be effected to frustrate a squeeze, it is not 

always desirable. The costs of transporting and storing commodities for 

no commercial reason other than to make a forced delivery on a futures 

contract are a deadweight loss to the economy. Diversion of commodities 

from the efficient stream of commerce undermines the economic purpose of 

futures trading. n12 The systemic cost of uneconomic delivery is just 

as real as the cost of price distortion. It must be a primary purpose 

of manipulation law to prevent distortion of futures prices from the 

underlying forces of supply and demand in the cash market without resort 

to uneconomic delivery. 

n12 In Peto v. Howell, 101 F.2d 353 (7th Cir. 1938), the court 

noted that a corner on corn had disrupted the normal flow of 

commerce. "The proof was that this corn would normally go to the 

other markets, but because of the tightness of the market brought 

about by the defendant, came to Chicago. This diversion was 
clearly an interference with the current of interstate commerce . . 

." Similarly, in Cargill, Inc., v. Hardin, 452 F.2d 1154, 1173, 

(8th Cir. 1971); cert. denied 406 U.S. 932 (1972) the court put it 

most succintly. "[We] have been shown no good reasons why the 

futures price should reflect the cost of bringing in a higher price 

and grade of wheat for which there is no demand in the local area. 

It is this price which was artificial and therefore useless to the 

trade and nation." See also Chicago Board of Trade v. Olsen, 262 

U.S.1, 39 (1923) noting that manipulations "exert a vicious 

influence and . . . disturb the normal flow of actual 

consignments." 

The harm that accompanies the extraction of a futures premium 

unreflective of cash market economics transcends the immediate parties. 

The Commodity Exchange Act explicitly notes that futures prices are 

widely disseminated for use "as a basis for determining the prices to 

the producer and the consumer" and that futures trading is used as a 

"means of hedging against possible loss through fluctuation in price." 

n13 Both of these functions depend upon an economic relationship between 

cash and futures prices. Writing just prior to the passage of the 1936 

Act, one observer declared that in the absence of a "necessary and 

continuing relationship between cash and futures prices there would be 

no economic justification whatsoever for futures trading." n14 The Act, 

in a similar spirit, premises the national interest in futures market 

operations specifically on their useful economic purposes in hedging and 

price discovery. n15 

n13 7 U.S.C. § 5. 

n14 G. Hoffman, Future Trading Upon Organized Commodity Markets,

University of Pennsylvania Press, p. 249 (1932). 

n15 7 U.S.C. § 5. 

Quotation of futures prices have long been understood to play a price 

discovery role for the cash markets. Justice Holmes, writing for the 

Supreme Court in 1904 in Board of Trade v. Christie, characterized these 

quotes as "of utmost importance to the business world, and not least to 

farmers." n16 The futures prices under scrutiny in that case were called 

the basis for world cash prices. A 1976 Commission staff survey 

indicated that among commercial handlers of grain, over fifty percent of 

the export elevators, terminal elevators and feedlots often bought or 

sold by reference to futures prices. n17 In the words of an even more 

recent author: "The world's agricultural chain rattles when the Board in 

Chicago posts its prices." n18 

n16 Board of Trade v. Christie, 198 U.S. 236, 249 (1904). 

n17 "Grain Pricing," Economic Bulletin No. 1, published by and 

on file with the Economics Division, Commodity Futures Trading 

Commission. Washington, D.C., p. 17 (Sept. 1977). 

n18 R. Gilmore, A Poor Harvest, Longman, New York, p. 18 (1982). 

The role of futures markets in this respect is correctly described as 

one, not of making prices for the world, but of discovering prices by 

reflecting otherwise obscured forces of cash market supply and demand. 

n19 Consistent with this view. Holbrook Working has described futures 

and cash prices as being "determined as a single market," the underlying 

supply and demand market for the actual commodity. n20 Price discovery 

is weakened to the extent, if any, that futures markets become unhinged 

from cash markets and futures prices come under the influence of factors 

unique to the futures market and not reflective of cash market supply 

and demand conditions. 
n19 See Report of the CFTC Advisory Committee on the Economic 

Role of Contract Markets, published by and on file with the 

Commodity Futures Trading Commission, Washington, D.C., p. 6 (July 

17, 1976). 

n20 H. Working, "Theory of the Inverse Carrying Charge in 

Futures Markets." 30 Journal Farm Economics 1, 4 (1948). 

The hedging function likewise depends on an economic relationship 

between futures and cash prices. The Chicago Board of Trade's Commodity 

Trading Manual explains this principle clearly in these words: "The 

fundamental reason that hedging cash positions with futures positions is 

an effective means of protection is that cash and futures prices have a 

tendency to move in concert with each other and maintain 

 

essentially predictable relationships in situations of fairly normal 

supply and demand. This parallel price movement manifests itself 

because both the cash and futures markets are governed and influenced by 

the same price making factors." n21 

n21 Commodity Trading Manual, published by the Board of Trade of 

the City of Chicago p. 68 (1976). 

Hedging is disrupted when futures prices are squeezed or otherwise 

manipulated away from their normal relationship to cash prices. A 

farmer, for example, who is not in a position to make futures market 

delivery may still hedge his growing corn crop by going short futures as 

long as he can count on continuation of the historical relationship 

between the local price he will actually get for his crop and the 

futures price. When the futures market is functioning properly, the 

farmer-hedger retains a quantity risk with respect to crop size and a 

normal amount of basis risk but he has transferred to others most of his 

market price risk. If special circumstances in the futures market, 

however, should cause the futures price to rise abnormally relative to 

the country elevator price, the proceeds from the farmer's cash sale 

will be exceeded by his losses on the short futures position and the 

hedge will be destroyed at a potentially devastating cost to the farmer. 

The farmer who is indirectly hedged through a grain elevator or a 

cooperative is only one step removed from the same danger. A futures 

market operating to determine prices separately and apart from the 

forces of supply and demand in the underlying cash market will claim the 

hedger as its victim. 

Regulators and self-regulators have long sought to assure that 

futures and cash markets will maintain their fundamental relationship. 

Price discovery can usefully occur only when the price being discovered 

is the true supply and demand price in the underlying cash market. 

Hedging for commercial users whose product is out of location or 

otherwise undeliverable is economically feasible only when cash and 

futures markets are moved by the same forces. It is possible to imagine 

a futures market governed by its own supply and demand forces, 

internalizing the possibility of an occasional squeeze. The majority 

decision may be read as tolerant of this concept. Such a market, 

however, would be of little use for price discovery or hedging. It 

would discover only its own equilibrium price and would serve the 

hedging needs of only those in position to deliver. This is most 

emphatically not the market that has been envisioned by the Congress, 

the exchanges, the regulatory scheme or the courts. 

The job of preventing price distortion is performed today by 

regulatory and self-regulatory rules operating before the fact and by 

threats of private lawsuits and disciplinary proceedings operating after 

the fact. Both elements are essential. Position limits before the 

facts, for example, play an extremely useful role in curbing speculative 
excess, but the Act does not provide the regulators with comparable 

authority for such a rigid approach with respect to hedgers. n22 While 

it might be possible to eliminate manipulation through heightened 

regulation alone, most would find the approach undesirable. Futures 

traders, and especially hedgers, have substantial freedom to pursue 

their competitive interests under present rules. A regulatory scheme 

that fully excluded the possibility of manipulation would necessarily 

curtail such commercial freedom and change the fundamental nature of the 

markets. The Act envisions a careful balance between preventative 

regulation and remedial judicial action. To weaken the latter, as the 

majority proposes, would strengthen the need for the former. 

n22 § 4a(2) of the Act, 7 U.S.C. § 6a(2), provides Commission 

authority to fix position and trading limits but bona fide hedgers 

are expressly exempted from such limits by § 4a(3), 7 U.S.C. § 

6(a)(3). 

The purpose of the Act was not to change the basic configuration of 

commercial trade in commodity futures. Nor was it to establish 

commodity futures contracts as separate but equal economic goods, 

independent of their underlying product markets. The appropriate 

definition of manipulation under the Commodity Exchange Act must be that 

which best protects the functions of accurate price discovery and useful 

hedging through the maintenance of an economic relationship between 

derivative futures market prices and fundamental cash market prices. 

Artificial Price

Price artificiality is an essential ingredient of a completed 

manipulation. It is not, however, sufficient to establish a violation 

of the Act. Artificiality can easily arise absent causation by an 

identifiable individual or group with manipulative intent. It is like a 

new cadaver at the morgue, a trigger for further inquiry but not in 

itself the proof of an offense. As the most objective of the three 

ingredients of a manipulation and the one wherein is found the damage, 

artificiality is the logical starting point for the analysis of any 

specific case. 

The test for artificiality should be workable, direct, and 

conceptually distinct from 

 

the questions of intent or causality that will require evaluation at a 

larger stage of each case. Artificial price must not be equated to a 

murdered cadaver lest the analytical task become so conclusory and so 

circular as to deny an entry point. 

It is well established in the law of manipulation that an artifical 

price is one which does not reflect the forces of supply and demand. 

n23 This is more an axiom than a test since neither supply schedules nor 

demand schedules have tangible manifestations in a marketplace. Prices 

and quantities can be observed in a market, but forces resist 

observation. A test subject to documentation and evidence is required 

if the concept of price artificiality is to have judicial meaning. 

n23 Cargill, Inc., v. Hardin, supra, 452 F.2d at 1163; Volkart 

Brothers v. Freeman, 311 F.2d 52, 58 (5th Cir. 1962). 

The majority decision, a departure from the case law on 

artificiality, seeks its grounding in the economic concepts of market 

efficiency and equilibrium. At one point artificiality is equated with 

movement away from an "equilibrium or efficient" price. (Maj. at 12) A 

review of the economic writing on efficiency casts doubt on the 

applicability of that notion here. Economic efficiency is generally 

descriptive of an optimal allocation of resources in an economic system. 
n24 Economic efficiency is a goal rather than an acomplishment of any 

particular system and proximity to economic efficiency eludes 

unambiguous measurement either prospectively or retrospectively. We 

would place an entirely unreasonable and judicially unprecedented burden 

on an administrative tribunal if, in order to render a manipulation 

decision, it were required to find that the suspect prices were harmful 

to national resource allocation. 

n24 See, for example, M. Henderson and R. Quandt, Microeconomic 

Theory, McGraw Hill, New York, p. 225 (1971). 

Efficiency is defined somewhat differently in financial literature. 

A financial market is called efficient to the extent that its prices are 

those which would prevail if every investor had possession of all 

relevant market information. n25 A market would become less efficient 

in this sense if invaded by false rumors, but it would be drawn toward 

financial efficiency by any scoundrel who, having arranged the fire 

bombing of his competitor's grain storage, placed his orders long to 

enjoy the impending shortage. Financial efficiency looks only to the 

distribution of information and never to its content. A test so 

narrowly based would exonerate virtually everyone except false rumor 

manipulators and can not possibly be appropriate to the task at hand. 

n25 For a description of financial efficiency, see R. 

Verrecchia, "Consensus Beliefs, Information Acquisition, and Market 

Information Efficiency," American Economic Review, Volume 70, 

Number 5, December, 874 (1980). 

A similar dilemma emerges when equilibrium theory is used to 

formulate a new concept of artificiality. The majority describes an 

artificial price as a "non-equilibrium" price. The trouble is that all 

market prices are necessarily equilibrium responses to the various 

forces operating on them. So the majority standard is modified to 

distinguish between "forces of supply and demand bearing on a particular 

market [which] . . . are all legitimate" and a "factor which is not 

legitimate." (Maj. at 7). The concept of relative legitimacy in supply 

and demand forces takes one quickly beyond economics. Legitimacy, of 

course, can not be objectively observed. It apparently rests on a value 

judgment to be made after the fact. The firebombing scoundrel would 

presumably be found to have introduced an "illegitimate" force into the 

market, while the beneficiary of a natural congestion is explicitly 

invited under this formulation to extract a premium. Legitimacy is more 

properly a statement about intentions than about prices. To equate an 

artificial price with an illegitimate price is to resort prematurely to 

an analysis of mental culpability. The element of intent would come not 

just to enter the artificial price question, but in fact to dominate any 

such analysis. 

If all market forces which contribute to shaping a price are defined 

to be part of legitimate supply and demand, there obviously can be no 

such thing as an artificial price. To make the identification of 

illegitimate market forces a prerequisite for a finding of artificial 

price is an insufficient improvement. Legitimacy with respect to supply 

and demand is undefined in law and in economics, unless the sole 

question is whether the forces were put in motion by an illegal act. 

And this could not be the case, for if it were, price artificiality 

could be found to exist only after another crime on the part of the 

alleged manipulator had been proven. 

The traditional test of price artificiality is neither so circular 

nor so fraught with perils of logic. The case law takes a simpler 

approach, equating artificiality with departures from normal pricing 

relationships. When cash market distortion is not suspected, an 

abnormal deviation of futures prices from cash prices is taken as an 

indication of artificiality in the futures market. When a particular 
futures price is suspect and others are not, a deviation of the suspect 

price from its normal relationship with other futures prices would also 

be useful evidence. A finding of artificiality under this standard is 

neither difficult nor grave. It merely signals an unusual and 

potentially 

 

harmful situation in which it is appropriate to look for an individual 

or group who may have intentionally caused the unusual price 

relationship. 

Price artificiality in December 1947 egg futures was found by the 

Seventh Circuit Court of Appeals in Great Western Food Distributors, 

Inc., v. Brannan on the basis that there were "abnormally high 

refrigerator egg and future prices in relation to (a) the price of 

January 1948 futures and (b) fresh eggs in December 1947." n26 Volkart 

Brothers, Inc., v. Freeman, a manipulation decision by the Fifth Circuit 

Court of Appeals, uses the terms abnormal and artificial 

interchangeably. n27 It also cites the well known Marsh definition of a 

manipulation, which refers to a "price distortion of any kind in any 

market either in itself or in relation to other markets." n28 Cargill, 

Inc. v. Hardin offers an extensive analysis of futures price 

artificiality by the Eighth Circuit Court of Appeals and endorses the 

use of four tests by the Government: whether price movements on the 

suspect days were comparable to movements in the past, whether spread 

movements on the suspect days were comparable to movements in prior 

years, whether the relationship between the Chicago futures price and 

the Kansas City futures price was out of line by historical standards, 

and whether the futures price bore a proper relationship to the prices 

in the cash market. The court concludes that, on the basis of the 

evidence presented, the price was "abnormal" and thus artificially high. 

n29 

n26 Great Western, supra, 201 F.2d at 483. 

n27 Volkart, supra, 311 F.2d at 57-8. 

n28 Volkart, supra, 311 F.2d at 58, restated in the majority 

opinion at 5. 

n29 Cargill, supra, 452 F.2d at 1167-70. 

The straightforward case law approach may not be the only route to 

establishing artificiality, but it does meet the requirement of 

workability and it permits analytical separation of the three elements 

of proof. It has a sound economic foundation as well. When the cash 

market price is reliably reflecting fundamental supply and demand, it 

follows directly from abnormal price divergence that harm will come to 

innocent hedgers and those who rely on futures prices to discover cash 

prices. The appropriate conclusion from abnormality is that there 

exists the likelihood of an economic harm which Congress has taken steps 

to prevent. From there, the search for causality and intent may begin. 

In the instant case, prices were shown to be artificial. The price 

increase on July 20 was said to be the largest one day price rise ever 

recorded for corn futures. (Initial Decision (I.D.) at 51). Spreads 

rose to unprecedented levels within the futures market. And no 

commensurate movement occurred in the cash market for corn, even in 

Chicago. The majority's assertion that the price was "reflective of the 

legitimate forces of supply and demand" at the time follows from its 

novel theory that all forces contributing to an observed price, 

including those lent by an alleged manipulator, are components of supply 

and demand absent a showing of illegitimacy. (Maj. at 22). The 

Administrative Law Judge, on the other hand, observed that there can 

exist "artificiality of price, apart from culpable activity" under 
current law. (I.D. at 52). Careful examination of the evidence led him 

to conclude that "prices in the CBOT 1973 corn futures contract reached 

artificial levels on July 20, 1973." (I.D. at 92). Chairman Johnson, 

who reaches the same conclusion in his concurring opinion, offers a 

thorough and entirely persuasive review of the issue. There is no need 

for replication of the factual analysis here. This finding of the 

Administrative Law Judge should have been affirmed. 

Causality

Once it has been established that an artificial price prevailed in 

the market, inquiry naturally turns to whether causality can be ascribed 

to any identifiable trader or group of traders. There is no completed 

manipulation charge to be brought if artificiality resulted from faulty 

contract specifications, suddenly chaotic cash market conditions, 

government action or other factors beyond any potential respondent's 

control. 

Courts have long recognized the need to demonstrate a causal link as 

a matter of legal logic, but explicit treatment of this element in 

manipulation cases was first given in plain language by the Cargill

court. The Eighth Circuit found May 1963 wheat prices artificial, then 

turned to "whether the artificially high price was caused by Cargill." 

n30 In a case of this nature, the ultimate question to be decided under 

this heading is whether there existed a predominant relationship between 

the behavior of the respondent and the movement of prices toward 

artificial levels. Cases have generally looked to market power, conduct 

and the interplay of exogenous forces for the clues. 

n30 Cargill, supra, 452 F.2d at 1169. 

Market power, sometimes called dominance or capacity, is essential to 

the traditional squeeze or corner. n31 Perfectly competitive markets 

are inhabited only by pricetakers and never by pricemakers; but no one 

expects actual commodity markets to be perfectly competitive. Capacity 

to affect price is thus a matter of degree. Futures regulators 

have often looked to the size of a participant's position in relation to 

both open interest and deliverable stocks as a measure of market power. 

n32 

n31 Cargill, supra, 452 F.2d at 1164. Also see P. Johnson, 

Commodities Regulation, supra, § 5.11. 

n32 One commentator has reduced these factors to a formula. A. 

Bromberg & L. Lowenfels, Securities Fraud and Commodities Fraud, § 

4.6 at p. 82.330 (1975 Supp.). Commission and exchange 

surveillance efforts focus closely on deliverable supply, open 

interest and position size as contracts near expiration. 

Action on the part of an alleged manipulator is similarly 

scrutinized. Since causal links are almost always established 

circumstantially, a close time sequence or an operational connection 

between specific conduct on the part of a dominant market participant 

and the movement of price towards artificiality is given considerable 

weight. n33 The test here is necessarily mechanical rather than 

motivational; questions of mental state, purpose and knowledge require a 

separate and more complex examination under the heading of intent. 

n33 See Cargill, supra, 452 F.2d at 1169-70 (analysis of Cargill 

s last minute actions in liquidating its position). 
A respondent is not the cause of artificial prices if some factor 

exogenous to the relationship between respondent's behavior and market 

price movement can be shown to have played the dominant role. Although 

the majority opinion introduces an analysis of exogenous forces into its 

explanations for finding neither artificial price nor intent, a clearer 

methodology for analyzing manipulation cases treats such considerations 

just once. Only causality is truly affected by the presence of outside 

influences on price. 

Numerous factors, of course, can influence prices and it is the 

nature of markets to reflect them. For an outside force to be of 

relevance in examining causality, it must be shown to have had a special 

impact on the suspect price. An exogenous force raised as a defense in 

a typical futures manipulation case must have caused the subject futures 

price to become artificial in relation to the forces of supply and 

demand in the cash market. 

The Administrative Law Judge and the Commission both exonerate 

Indiana Farm Bureau (IFB) on causality grounds. The judge was not 

convinced that Indiana Farm Bureau ever had the capacity to dominate 

price, having rejected as much too low the Enforcement Division's 

estimate of deliverable stocks. (I.D. at 59-65). He was also highly 

critical of the largest shorts, who remained in the market until the 

last day of trading without having made any provision to secure corn for 

delivery. (I.D. at 69-70). His reasoning follows that of the court in 

Volkart, where it was found the unusually high prices for expiring 

cotton futures were caused largely by a failure on the part of short 

traders to arrange certification of otherwise deliverable cotton. n34 

(I.D. at 71-2). The Commission concurs both with respect to deliverable 

supply and the behavior of the shorts. 

n34 Volkart, supra, 321 F.2d at 59-60. 

The principal weakness in the Enforcement Division's analysis of 

deliverable stocks is its binary treatment of availability. It regards 

corn warehoused in delivery locations as either irrevocably committed or 

available. (I.D. at 59-61). Not surprisingly, it finds that stocks of 

corn uncommitted to export or other uses were low. The proper direction 

of the inquiry would have been toward availability at various levels of 

increasing price. The Division did not demonstrate that stocks 

unavailable at earlier prices were also inaccessible to the market at 

the higher prices prevailing between the market's opening on July 20 and 

the time artificial price levels were reached. Although the majority 

opinion may overstate the situation when it refers to the tightness as a 

"natural" corner, the majority is on sound footing when it calls 

attention to the lack of testimony from any short that corn was not 

obtainable in Chicago on July 20. The apparent apathy on the part of 

the largest short in seeking corn for delivery, and thus testing the 

elasticity of available corn supplies to higher prices, makes the 

Division's case a difficult one to prove. (I.D. at 69-70). 

The market's movement prior to the receipt of Indiana Farm Bureau's 

stepped-up liquidation orders also casts doubt on respondent's 

dominance. At the opening on July 20. IFB was merely one of three very 

large longs and held less than 30% of the open interest. (I.D. at 33). 

The first price explosion, which took July corn to around $ 3.00 per 

bushel, occurred without active participation by the respondent. (I.D. 

at 31). Although IFB had placed large sell orders in the $ 3.00 range, 

no evidence was presented that these orders were disclosed or otherwise 

influenced price prior to their execution. 

By the time price moved over $ 3.00. Indiana Farm Bureau had a much 

larger share of the open interest but it had liquidated almost half of 

its long position. (I.D. at 30-2). The sharpest price spike began when 

IFB's position was roughly midway between the deliverable stock estimate 

put forth by the Enforcement Division and that found by the 
Administrative Law Judge. (I.D. at 32). IFB had no orders in the pit 

during this second price explosion and was presumably holding for a 

delivery the largest shorts were not preparing to arrange. (I.D. at 

32). 

The step-up orders placed by IFB during the last half hour of trading 

can be more convincingly argued to have had a casual effect. It was as 

those orders were executed that prices took their final upward jump to 

the $ 3.90 high for the day. (I.D. at 32). The record on this score, 

however, is incomplete in light of the market's earlier and undeniable 

momentum. The reckless behavior of the dominant short, moreover, 

holding a four million bushel position and no deliverable corn in what 

seems to have been a gamble on the government's rumored announcement of 

new export controls, is an unusually compelling example of an exogenous 

influence on price movements. (I.D. at 34, 69-70). Although 

foolishness on the part of the shorts would never justify a manipulative 

squeeze, obvious vulnerability on the short side could attempt even a 

disparate collection of independent small longs to require a substantial 

premium for offset. The regulators and self-regulators share the 

responsibility of clearing the market at non-artificial levels in 

situations of this kind. 

Indiana Farm Bureau may have caused some of the price rise on July 

20, but other forces were working as well. The record does not untangle 

from IFB's impact the influence of the shorts, the influence of the 

twenty six orders from other longs filled at prices above $ 3.70, or the 

uncertainties of a deliverable supply which went untested. There is 

little of a precedential nature to be said about causality under the 

unique circumstances of July 20. The Commission simply lacks proof that 

Indiana Farm Bureau was the predominant cause of the artificial futures 

price found to have prevailed that morning. 

Intent

The third and final element necessary to establish a manipulation 

violation is intent. Artificial prices, or even artificial prices 

traceable to the actions of an identified party, may occur from time to 

time without there having been a manipulation. Where price distortion 

is innocently caused, the case law does not provide support for a charge 

of manipulation on the basis of a strict liability doctrine. 

There is no universal standard for culpable intent. Intent in 

criminal law has been described by the Supreme Court as an "elastic and 

ambiguous" concept defined by the context in which it is to be applied. 

n35 The Commodity Exchange Act and its legislative history provide scant 

help in assessing the mental state required to sustain a manipulation 

charge. One must look for guidance in the case law, both under the Act 

and with respect to similar offenses. 

n35 United States v. Bailey, 444 U.S. 394, 404 (1980). 

Courts have drawn a distinction in recent years between standards of 

intent which look to the defendant's knowledge of the likely 

consequences of actions and those which look to the defendant's purpose. 

Common law has traditionally distinguished between general intent and 

specific intent with roughly the same notion in mind. In the case now 

before the Commission, the majority has emphatically adopted a specific 

intent approach and equated this with a requirement that purpose be 

shown. Specifically, the majority asserts that "it must be proven that 

the accused acted (or failed to act) with the purpose or conscious 

object of causing or effecting a price or price trend in the market that 

did not reflect the legitimate forces of supply and demand influencing 

futures prices in the particular markets at the time of the alleged 

manipulative activity." Since the final phrases of this standard are 
drawn directly from the majority's definition of artificial price, the 

standard can be rephrased without violence to its content as requiring 

proof that the accused had "the purpose or conscious object of causing 

or effecting an artificial price or price trend." 

The distinction between general and specific intent has been 

described by the Supreme Court as ambiguous and the "source of a good 

deal of confusion." n36 One reason for this is that specific and general 

intent are generally taken to apply to overall states of mind, whereas 

in reality a human decision may have manifold dimensions. The modern 

differentiation between knowledge and purpose lends itself more readily 

to examination of component elements in reconstructing a defendant's 

state of mind. If we are to look at the applicability of a general or 

specific intent concept with respect to manipulation law, it is useful 

to begin with a reduction of the requisite mens rea into two components: 

state of mind as to control of price and state of mind as to resultant 

price relationships. 

n36 Bailey, supra, "At common law, crimes generally were 

classified as requiring either "general intent" or "specific 

intent." This venerable distinction, however, has been the source 

of a good deal of confusion. As one treatise explained: 

'Sometimes 'general intent' is used in the same way as 'criminal 

intent' to mean the general notion of mens rea. while 'specific 

intent' is taken to mean the mental state required for a particular 

crime. Or, 'general intent' may be used to encompass all forms of 

the mental state requirement, while 'specific intent' is limited to 

the one mental state of intent. Another possibility is that 

'general intent' will be used to characterize an intent to do 

something on an undetermined occasion, and 'specific intent' to 

denote an intent to do that thing at a particular time and place.' 

W. LaFave & A. Scott. Handbook on Criminal Law, Section 28, pp. 

201-202 (1972) (footnotes omitted). 

This ambiguity has led to a movement away from the traditional 

dichotomy of intent and toward an alternate analysis of mens rea."

44 U.S. at 403. 

A trader may take or hold a potentially dominant futures position 

with knowledge that it will yield control over the level or direction of 

prices and with knowledge that the likely result of this action will be 

artificiality of prices. Another trader might take the same position 

with the purpose of exercising control over the level or direction of 

prices and knowledge that the likely result 

 

will be artificiality of prices. A third trader might take this 

position with the purpose of exercising control over prices and the 

purpose of causing artificiality of prices. 

An allegation of manipulation against the first of these traders 

could be sustained only under a general intent theory. For sake of 

example, imagine the following uncontested facts: (a) an artificial 

futures price has been observed and causality has been attributed to a 

particular trader; (b) the trader had taken a dominant long position 

with the sincere but mistaken view that fundamental economic forces 

would soon raise prices; (c) the trader, by benefit of many years' 

experience, knew the position to be so large that, under the 

circumstances of the market in question, the position would force 

futures prices upward even if the bullish initial assessment of the 

fundamentals proved wrong; and (d) the trader had been genuinely 

indifferent as to whether profit arose from correct fundamental judgment 

or an artificial price dictated by the massive position holdings. These 

facts would not support a finding that the respondent's actions during 
the time of the incorrect fundamental assessment were premised on either 

a purpose to control prices or a purpose to render them artificial. 

Whether such behavior is permissible under the Commodity Exchange Act is 

at the heart of the general intent issue. 

The second hypothetical trader, possessing a mixture of purpose and 

knowledge, lies in a domain where the common law intent concepts become 

especially esoteric and confusing. An illustrative example may be 

simply constructed with these facts: (a) artificial price and causality 

have been established: (b) the trader, operating in an illiquid market, 

had decided to preselect a futures price for reasons external to the 

market, such as sheltering income from taxation; (c) the trader had 

received cooperation from a trading partner and had purposely taken the 

futures price to an arbitrary, non-competitive level; and (d) although 

the trader knew the selected futures price would almost certainly be 

artificial with respect to other prices, the trader was absolutely 

indifferent to the cash market or basis relationships. Purpose to 

control prices is evident here, but purpose to render prices artificial 

is not. Charges could be sustained under a specific intent test whose 

focus was purpose to control the level or direction of prices but not 

under a test which required purpose to render prices artificial. 

The third trader, having both a purpose to control prices and a 

purpose to render them artificial, is the classic specific intent 

respondent. Of the three potential respondents discussed in this 

analysis, only this last will find no comfort in the complexities of the 

debate over an intent standard. 

The majority opinion suggests that case law is a definitive bar to 

the general intent test. The majority's selection of quotations and 

citations appears to support that conclusion. A more complete reading, 

however, reveals inconclusive and sometimes contradictory statements on 

the subject of intent. No court has rejected, or even reviewed, a 

general intent manipulation finding. n37 The safest conclusion from the 

case law is that the courts, never having had a general intent 

manipulation case to review, have never thoroughly considered the issue. 

Before precluding the possibility of bringing a general intent case at 

some time in the future, the Commission should more carefully consider 

the law and public policy questions involved. 

n37 The judicial officer in In re General Foods Corp., 6 Agric. 

Dec. 288, 304 (6 A.D. 288, 304) (1947) found that respondents' 

"purpose" was to support price. Similarly, see In re G.H. Miller & 

Co., 15 Agric. Dec. 1015, 1036 (15 A.D. 1015, 1036) (1956); In re 

Great Western Distributors, Inc., 10 Agric. Dec. 783, 806 (10 A.D. 

783, 806) (1951); In re Volkart Brothers, Inc., 20 Agric. Dec. 306, 

327 (20 A.D. 306, 327) (1961); In re Cargill, Inc., 29 Agric. Dec. 

880, 910 (29 A.D. 880, 910) (1970); In re David G. Henner, 30 

Agric. Dec. 1151, 1174 (30 A.D. 1151, 1174) (1971). 

The Supreme Court, in United States v. U.S. Gypsum Corp., approvingly 

quotes the view that a person "intends a result of his act under two 

quite different circumstances: (1) when he consciously desires that 

result, whatever the likelihood of that result happening from his 

conduct; and (2) when he knows that the result is practically certain to 

follow from his conduct, whatever his desire may be as a result." n38 

This is merely a recognition of the impenetrability of human psychology. 

There is no real distinction to be drawn between an action purposely 

taken with knowledge of its results and an action taken with conscious 

purpose or desire. 

n38 United States v. United States Gypsum Co., 438 U.S. 422, 445 

(1978). 
Antitrust law, as shown in Gypsum, goes farther in that it would 

permit a criminal conviction under the knowledge test even where the 

consequences of the offending action were forseeable to less than a 

practical certainty. n39 In business matters normally involving 

consideration of the desired results and a weighing of costs, benefits 

and risks, the Gypsum Court concludes that "a requirement of the proof 

not only of this knowledge of likely effects but also of a conscious 

desire to bring them to fruition . . . would be unnecessarily cumulative 

and unduly burdensome." n40 

n39 Gypsum, supra, 438 U.S. at 445-6. 

n40 Gypsum, supra, 438 U.S. at 445-6. 

The majority cites the Gypsum decision for its discussion of the 

difference between general and specific intent but apparently rejects 

the comparability of Gypsum to manipulation law on this point. The 

reasoning 

 

is unstated and the rejection of antitrust precedent here is most 

puzzling. The Cargill court described antitrust as a "closely related 

field" and analyzed the concept of relevant market in antitrust cases as 

a guide to the definition of supply under manipulation law. n41 

Moreover, since antitrust law applied to manipulation cases prior to the 

passage of more specific provisions in the Commodity Exchange Act, a 

rejection of comparability in favor of a more restrictive reading 

implies that it was the intent of Congress to weaken the enforcement 

remedies available for manipulation cases by its passage of the Act. 

n42 This runs counter to the wording of the Act and an extensive 

legislative history. 

n41 Cargill, supra, 452 F.2d at 1166. See also 1. A. Bromberg & 

L. Lowenfels, Securities Fraud & Commodities Fraud, supra, at p. 

82,324. Manipulation has been described by Johnson in a seminar 

discussion as a "very, very closely related, if not a twin, of the 

antitrust concept of monopoly." Economic Evidence in Manipulation 

Cases. Chicago Board of Trade Research on Speculation -- Seminar 

Report, p. 116 (1981). 

n42 United States v. Patten, 226 U.S. 525, 543 (1913) upheld a 

finding that a futures market corner in cotton violated the Sherman 

Antitrust Act absent allegation of specific intent. (Cited with 

approval by United States v. Griffith, 334 U.S. 100, 108 (1947)). 

Similarly Peto v. Howell, 101 F.2d 353 (7th Cir. 1938), upheld a 

finding that cornering of a corn futures market constituted a 

violation of the Sherman Act. 

The Commission's In re Hohenberg Brothers opinion, which refers to 

purposeful conduct at one point, defines elsewhere an intent standard 

simply requiring "conduct intentionally engaged in resulting in an 

artificial price." n43 If the conduct referred to is the taking of a 

massive position, a general intent standard would be consistent with 

this phrasing. Commentators have noted this lack of clarity in 

Hohenberg. n44 The Cargill case also talks of "conduct . . . 

intentionally engaged in which has resulted in" an artificial price. 

n45 Again, this might be read to cover a trader who purposely takes a 

large position with knowledge that he or she will acquire control of 

prices and that prices will consequently become artificial. Only 

Volkart endorses the majority view throughout and that case has been 

criticized by the later Cargill court as not representing "a clearly 

defined line of cases establishing a definitive standard of acceptable 

conduct under the statute prohibiting manipulation. n46 
n43 [1975-1977 Transfer Binder] COMM. FUT. L. REP. (CCH) P 

20,271 at p. 21,477 (February 18, 1977). 

n44 P. Johnson, Commodities Regulation, supra, Section 5.24. 

n45 Cargill, supra, 452 F.2d at 1163. 

n46 Cargill, supra, 452 F.2d at 1173. 

That a general intent case can be brought under criminal antitrust 

law is well established. Judge Learned Hand put it well when he stated 

that while a "monopolist must have both the power and the intent to 

monopolize . . . to read the passage as demanding 'a specific intent' 

makes nonsense of it, for no monopolist monopolizes unconscious of what 

he is doing." n47 The same thought should apply to at least those 

futures traders for whom knowledge of the likely consequences of their 

positions has been demonstrated. It should apply, moreover, in a 

criminal manipulation context. Any difference between the criminal 

standard and the administrative standard applicable here should operate 

to reduce the burden on the Enforcement Division rather than aggravate 

it. n48 

n47 United States v. Aluminum Co. of America, 148 F.2d 416, 432 

(2d Cir. 1945). 

n48 Cf. Gypsum, supra 438 U.S. at 436-7, note 13. (Analysis of 

higher intent standard for criminal antitrust violation as compared 

with civil violation). 

The majority's discussion of general intent in the context of 

completed manipulation is for the most part gratuitous. Since the 

majority found no artificial price and no causality, it had no need to 

analyze the appropriate standard of intent in completed manipulation 

cases. The facts, moreover, and the conditions of undemonstrated 

causality are logically difficult to reconcile with a general intent 

accusation. The majority also reminds us that the complaint against 

Indiana Farm Bureau charged specific rather than general intent. The 

Division of Enforcement raised the general intent standard only after 

the Administrative Law Judge had completed his hearing. Although the 

Judge spoke of general intent in his initial decision, the distinction 

he drew between general and specific intent was in no way essential to 

his logic in exonerating Indiana Farm Bureau. (I.D. at 56-8). 

The issue of whether a general intent case can be brought under the 

Act must remain open. Should a case arise which fits the general intent 

pattern. I would encourage the Division of Enforcement and the 

Commission to take a fresh look at the matter in the context of specific 

facts. 

The Commission unanimously reads the Commodity Exchange Act to permit 

findings of manipulation based on proof of specific intent. There is 

less agreement on the precise meaning of specific intent. The majority 

apparently holds that there must be proven both a desire to exercise 

control over prices and a desire to render prices artificial. 

Incorporated in this standard of specific intent is the majority's 

definition of artificiality, resting on prices or price trends "effected 

by a factor which is not legitimate." The majority opinion can 

additionally be interpreted as requiring that unlawful intent be 

characteristic of the respondent's mental state when dominance was first 

acquired or congestion enhanced. Each of these restrictions may invite 

behavior threatening to the integrity of the marketplace. 

The failure to separate a desire for control from a desire for 

artificiality is a license to dominate futures prices whenever the 

ultimate goal is other than an artificial price. It leaves the distant 

months in many contracts, where artificiality evades simple 

identification, virtually unprotected from arbitrary use of market 
power. The equation of a purpose to render prices artificial with 

purpose to introduce an illegitimate supply or demand factor brings in 

thorny issues of motive, perhaps even permitting a defense 

 

that the market was controlled for the sake of good rather than evil 

ends. One might imagine, for instance, a producer group or foreign 

government using futures market power to "correct" a price level which 

is perceived to have arisen from conspiracy to deprive its constituents 

for their rightful due. 

The legal basis for the majority's standard is less than robust. 

Greater reliance is placed on the Hohenberg opinion and the Volkart

decision than they can rightly bear in this regard. The Hohenberg

opinion ambiguously presents two different intent standards. n49 

Volkart was not only criticized by the Cargill court for deviating from 

established case law by its "substantial disagreements with both Great 

Western Distributors v. Brannan, 201 F.2d 476 (7th Cir. 1953) and G. H. 

Miller & Co. v. United States, 260 F.2d 286 (7th Cir. 1958)," but the 

subsequent court concluded that "if the Volkart decision is to be 

interpreted as prohibiting regulation of manipulative squeezes, it is 

not in line with the Commodity Exchange Act . . ." n50 

n49 See text accompanying notes 42-44, supra.

n50 Cargill, supra, 452 F.2d at 1173. 

The passage taken by the majority from General Foods Corporation v. 

Brannan speaks of "the creation of an artificial price by planned 

action." n51 This could mean what the majority asserts, although if the 

planned action referred to is the seizing of control over price it 

represents an excellent expression of the opposing point of view. The 

Cargill court was not so approving of this language as has been 

suggested. Rather, it refers to it merely as "one of the few judicial 

definitions to be found." n52 That court makes no attempt to resolve the 

intricate issue of exactly what had to be planned. Its basis for 

upholding the finding against Cargill was merely that respondent had 

"intentionally caused" the situation precipitating the case. n53 

Intentional causation is circularly consistent with all of the proposed 

standards of manipulative intent. 

n51 General Foods Corp. v. Brannan, 170 F.2d 220 (7th Cir. 

1948). 

n52 Cargill, supra, 452 F.2d at 1163. 

n53 Cargill, supra, 452 F.2d at 1170-72. 

Just as a less convoluted standard of artificiality resolves some 

problems in the majority's approach to that issue, so a more direct 

standard of specific intent will better serve the law of manipulation. 

The specific intent to manipulate, as proscribed by the Commodity 

Exchange Act, should encompass all situations in which the respondent 

purposely took control over the level or direction of futures prices, 

whether with a desire to render them artificial or with the knowledge 

that artificiality was a likely consequence. 

The premeditation inherent to the majority's intent standard is 

troubling in that it would seem to make lawful an important form of 

manipulative squeeze. The majority explicitly welcomes the holder of a 

dominant position to seek "the best price from the existing situation" 

where the trader "does not intentionally create the conditions for a 

squeeze, or a congested futures market arises from other causes." The 

extraction by a dominant long of a premium from the shorts is presumably 

sanctioned unless "once the congested situation becomes known to him, 
the long exacerbates the situation by, for example, intentionally 

decreasing the cash supply or increasing his long position in the 

futures market." (Maj. at 17, n. 12). 

This approach runs contrary to many years of marketplace and 

regulatory tradition. It contravenes the 1926 Federal Trade Commission 

Report on which the majority relies. That report had asserted: "The 

long interest, no matter how built up, that allows itself to be tempted 

into exploiting the situation (congestion) in a way to involve acute 

disturbance of the market becomes a cornering interest." n54 It would 

seem to hold harmless the long who enters an unrealisticially large cash 

forward contract, hedges it with a long futures position, and then 

remains in the market to extract a squeeze premium once delivery is seen 

to be impossible. It would seem to encourage the routine entry of 

massive spread orders by traders hoping that a natural congestion will 

develop and the near month will go off at an unusual premium to the 

deferred month. 

n54 VII Report on The Grain Trade, Effects of Future Trading,

Federal Trade Commission, p. 244 (1926). 

Holbrook Working wrote nearly fifty years ago on how such squeezes 

can occur in the wheat market as follows: ". . . purchases of May wheat 

made as part of plan for squeezing the market may be accompanied or 

shortly followed by sales of later deliveries, perhaps July. These 

sales of the later futures would not only provide an assured means of 

disposing of such deliveries on May contracts as may have to be 

accepted, but leave the 'squeezer' indifferent to the development of 

bearish price influences which may wholly offset the bullish effects of 

his operations in May wheat. With a corner or squeeze thus hedged, he 

need be in nowise concerned with the actual changes in price of May 

wheat, since his profits depend merely on his ability to force a 

widening of the spread between May and July wheat of which he can take 

advantage." n55 While the majority might find such a plan unlawful if 

 

conceived from the start as a device for making prices artificial, a 

trader holding such positions in numerous markets merely waiting to see 

if other forces would bring dominance to his doorstep could apparently 

do so with impunity. 

n55 H. Working, "Price Relations Between May and New Crop Wheat 

Futures at Chicago since 1885," Wheat Studies, Vol. X, No. 5, p. 

184 (February 1934). 

The market has long acknowledged a duty on the part of large 

participants to reduce near month positions as they begin to take on 

undue price influence. The surveillance budgets of regulators and selfregulators alike are largely devoted to avoiding the extraction of 

premiums over cash prices in congested markets. It is a dramatic break 

from the past if the Commission majority now thinks it legal to extract 

a substantial premium so long as this was not the original purpose of 

the dominant player at the time the congestion was initiated. 

Lest the wrong impression be created, it is worthwhile to note some 

useful aspects of the majority opinion as well as those fit for 

criticism. The majority does accept the long established precedent that 

intent to manipulate can be inferred from the entirety of the 

respondent's knowledge and actions. The majority does not take issue 

with an important observation of the Administrative Law Judge, drawn 

from the Hohenberg case, that trading "consonant with prudent business 

practice is not in itself sufficient to refute the allegation of 

attempted manipulation." (I.D. at 57). The majority notes that the 

requisite intent may be manifest in inaction of the defendant as well as 
action. One may also infer from the majority opinion that the intent to 

create an artificial price need not have been the sole objective of the 

alleged manipulation or the only possible outcome of the actions under 

scrutiny. 

The majority may also be credited with having developed a reasonable 

intent standard for attempted manipulation. Despite the Commission's 

unsupported assertion in Hohenberg and restatement here that the intent 

standards for completed and attempted manipulations are identical, the 

criminal law has long recognized that a higher standard of intent may be 

required for attempted violations than completed offenses. n56 This is 

particularly so when the actions characterizing the attempt are not in 

themselves exceedingly menacing to society. It is reasonable to require 

that charges of attempted manipulation be supported by evidence of 

heightened mental culpability as well as behavior constituting a real 

threat to market integrity. n57 When heightened mental culpability must 

be inferred, it may often be necessary to demonstrate a level of 

planning similar to that envisioned by the majority. While the 

majority's flirtation with standards of vicious calculation and 

nefarious means in completed manipulation cases is wholly inappropriate, 

the result may approximate the right test in cases of unsuccessful 

attempt. 

n56 See W. LaFave and A. Scott, Criminal Law, p. 428-429. See

also Merritt v. Commonwealth, 164 Va. 653, 660, 180 S.E. 395, 398 

(1935), holding conviction for attempt to commit murder requires 

specific intent to kill; Smith Two Problems in Criminal Attempts,

70 Harv. L. Rev., 422, 429 (1957). Also See Model Penal Code 

Section 5.01, Comment (Tent. Draft No. 10, 1960); Cf. United 

States v. Griffith, 334 U.S. 100, 105 (1948); United States v. 

Aluminum Co. of America, 148 F.2d 416, 432 (1945). 

In the related area of civil antitrust law, the Supreme Court 

has held that proof of attempted monopolization under Section 2 of 

the Sherman Antitrust Act requires a specific intent, while 

completed monopolization may be proved by general intent. Times 

Picayune Publishing Co. v. United States, 345 U.S. 574, 624 (1953). 

n57 Antitrust law has long recognized the need for proof of a 

"dangerous probability" of the proscribed results. Swift and Co. 

v. United States, 196 U.S. 375, 396 (1905). Lorain Journal Co. v. 

United States, 342 U.S. 143, 153 (1952). See, United States v. 

Griffith, supra, 334 U.S. at 1056. See generally, Cooper. 

"Attempts and Monopolization: A Mildly Expansionary Answer to the 

Prophylactic Riddle of Section Two," 72 Michigan Law Review 373 

(1974). See also L. Sullivan, Antitrust, p. 134 (1977). 

An analysis of the final few minutes of the respondent's trading 

provides a particularly instructive example of how a meaningful standard 

of intent can be applied. At the close of trading on July 19, 

respondents had established a long position in the July delivery month 

of over 4.8 million bushels of corn. (I.D. at 30). Only one morning of 

trading remained. (I.D. at 2, 16). Although the Enforcement Division 

has contended that an adverse inference should be drawn from IFB's very 

holding of this position, it has not been shown that the position was 

dominant in relation to the overall July 19 open interest of more than 

17 million bushels. (I.D. at 58, 65). Nor has it been successfully 

demonstrated that this position was excessive by comparison to estimated 

deliverable stocks of Chicago corn. Similarly, the unexecuted spread 

orders of IFB between July 11 and July 17 do not by themselves signal 

manipulative intent. The spread orders involved only a small fraction 

of a nearly 50 million bushel open interest at that time, and the most 

damning interpretation one could give to them is that they were intended 

to test the susceptibility of the market to later and larger orders. 

(I.D. at 58, 77). 
It is IFB's trading before the noon close on July 20 that merits 

exacting attention. The record below indicates that shortly after 11:30 

a.m. on July 20, the floor manager and trader for the commission firm 

used by IFB telephoned respondent Johnston from the floor to inform him 

of an unusual situation. (I.D. at 32, 84-5). Prices had exploded 

upward in a matter of minutes, there were no sell orders in the pit, and 

liquidation was faltering. Johnston gave instructions to sell a total 

of 490 thousand bushels at stepped-up prices of $ 3.70, $ 3.75, $ 3.80, 

$ 3.85 and $ 3.90. (I.D. at 32, 85). These five orders were executed 

beginning at 11:38 a.m. July corn quickly reached a high of $ 3.90, and 

only five thousand bushels of Johnston's order at $ 3.90 remained 

unsold. (I.D. at 32, 85). 

Johnston explained at the hearing that his purpose in entering the 

sell orders was to help the market liquidate. (I.D. at 85). This does 

not address the issue of price. With 30 

 

years of experience in both futures and cash trading, Johnston surely 

knew that orders priced closer to the cash market would be at least as 

useful in helping the liquidation. He was fully cognizant of the 

pressure the situation imposed on the shorts and their presumed desire 

to avoid a default. By the time the sell orders were placed by IFB, 

respondent's share of the total long interest had risen to over 60%. 

(I.D. at 58). It was too late for the shorts to safely acquire cash 

corn; as one expert witness for the respondents testified, it would not 

be known for a day or two whether high prices would bring out more 

product. n58 The shorts were effectively signalling their weakness by 

frantically bidding up the price. It is hard to see step-up orders 

under these conditions as not having a purpose to dictate an upward 

price or price trend or, alternatively, to force default. The latter, 

Johnston agreed, he did not expect. n59 

n58 Testimony of respondent's expert witness Christopher Parrot. 

(Tr. at 3878). 

n59 Respondent Johnston's testimony. (Tr. at 1928). 

Knowledge that prices as high as those reached on July 20 were 

artificial was readily available to the respondents. IFB, despite its 

large long futures position, was net short on July 20 because of large 

export commitments and, consequently, it was bidding for export quality 

corn in the Chicago cash market both before and after July 20. (I.D. at 

26). On Thursday, July 19, respondent bid $ 2.42 for Chicago cash corn 

of deliverable quality. (I.D. at 13). The next day -- the same day it 

was asking $ 3.70 to $ 3.90 in the pit -- its cash bid was $ 2.65. 

(I.D. at 13, 32). The following Monday, July 23, its initial Chicago 

cash bid was $ 2.67, and it acquired 360,000 bushels of Chicago corn at 

$ 2.76. (I.D. at 13). Both IFB and the seller of this corn apparently 

valued it at about a dollar under IFB's offset price the previous 

Friday. 

IFB's futures market operations also lend support to an inference of 

knowledge concerning artificiality. Prior to the step-up orders, IFB 

had reduced its July corn position on the morning of July 20 by 2.25 

million bushels. (I.D. at 30-2). Respondent Johnston had entered four 

spread orders at 9:15 a.m. before the opening of trading to offset July 

corn futures and purchase a like amount in the September contract. All 

of these orders sought premiums of less than fifty six cents for July 

over September, which had closed on July 19 at $ 2.36 7/8 and was 

restricted by a ten cent daily price limit. (I.D. at 31). The implied 

maximum July price for those orders was about $ 3.03. Johnston later 

reduced this spread premium by approximately two and a half cents. 

(I.D. at 31). Consistent with this assessment, IFB just before 10:00 
a.m. entered an order to sell 150,000 bushels of July corn at $ 3.00. 

(I.D. at 31). 

Both the spread orders and the outright orders remained in the market 

until filled between 11:26 a.m. and 11:33 a.m. (I.D. at 31). When 

respondent Johnston altered his offering prices that morning after 

receiving a telephone call from the floor, it seems plain that he did so 

on learning of his futures market strength rather than any reassessment 

of fundamental supply and demand conditions in the cash markets. This 

view is confirmed if we accept the veracity of Enforcement Division 

interview notes which show respondent Johnston subsequently stating that 

he would take delivery of only a minimum of corn at $ 3.80 because "a 

minute or two later corn would be worth a dollar a bushel less." (I.D. 

at 89). 

Were causality to have been found in this case, these would be 

persuasive considerations in an evaluation of intent. Without a finding 

of causality, the respondents must be adjudicated not guilty of 

completed manipulation whatever may be the indicia of intent. And, if 

the appropriate test of attempted manipulation under the Commodity 

Exchange Act incorporates the burden of demonstrating planning or other 

indicia of heightened mental culpability on the part of the respondent 

that count can not be sustained by the facts presented here. 

While the ultimate disposition of the manipulation case against 

Indiana Farm Bureau is accepted by the entire Commission, the matter is 

in fact a much closer call than the majority opinion would indicate. 

The debate over price artificiality and intent has gone on for many 

years, and it will presumably continue. Prospective holders of dominant 

futures positions would be well advised to keep their offsetting orders 

squarely within the price bounds prescribed by the supply and demand 

conditions in the underlying cash markets. 

 

 

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