Opinion ID: 300588
Heading Depth: 1
Heading Rank: 3

Heading: the government's theory of the case

Text: 34 The above statement of the case represents essentially uncontested facts. Issues of fact and law which remain in the case are vigorously contested by the parties. In order to understand the basis of this dispute, it will be helpful to first outline the basic theory of the Government's case that Cargill manipulated the price of the May 1963 wheat futures. 35 The Government's theory of this case is that Cargill manipulated the price of the May 1963 wheat future by means of a device known as a little corner or squeeze. 7 For purposes of clarity in the discussion, we shall use the term squeeze exclusively. The Government contends that the squeeze is a wellknown manipulative device and is a type of manipulation prohibited by the Commodity Exchange Act. 36 Although a squeeze is defined in slightly varying fashion by different authorities, the essential elements seem to be commonly recognized. A good starting point for a definition is that given by Senator Pope when he was in charge of the bill which was enacted as the Commodity Exchange Act: 37 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. 38 This legislative history suggests that indeed squeezes were intended to be prohibited where they were intentionally manipulated. As Senator Pope's definition suggests, a squeeze is to be distinguished from a corner and differs from it in certain respects. In its most extreme form, a corner amounts to nearly a monopoly of a cash commodity, coupled with the ownership of long futures contracts in excess of the amount of that commodity, so that shorts-who because of the monopoly cannot obtain the cash commodity to deliver on their contracts -are forced to offset their contract with the long at a price which he dictates, which of course is as high as he can prudently make it. 8 39 A squeeze is a less extreme situation than a corner. In this case, there may not be an actual monopoly of the cash commodity itself, but for one reason or another deliverable supplies of the commodity in the delivery month are low, while the open interest on the futures market is considerably in excess of the deliverable supplies. Hence, as a practical matter, most of the shorts cannot satisfy their contracts by delivery of the commodity, and therefore must bid against each other and force the price of the future up in order to offset their contracts. Many squeezes do not involve intentional manipulation of futures prices, but are caused 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. 40 The Government contends that Cargill manipulated the market price of the May 1963 wheat futures by means of a squeeze: (1) Cargill acquired and held a controlling long position in the May 1963 wheat futures; (2) there was an insufficient supply of wheat available to the shorts for delivery on the futures, and what supply there was was controlled by Cargill; (3) Cargill exacted an artificially high price in liquidation of its futures contracts; and (4) the squeeze was intentionally caused by Cargill. 41 Cargill, on the other hand, vigorously contests the factual bases which underly each of the above contentions, and in addition offers two defenses which counter the basic theory of the Government. First, it contends that in order to be guilty of manipulation under the Act, a trader must commit an uneconomic act, and secondly, and more fundamentally it contends that squeezes are not a form of manipulation prohibited by the Act. We will deal with this latter contention after we have examined the Government's case for the proposition that Cargill in fact accomplished a squeeze. 42 While Cargill has not specifically defined what it means by an uneconomic act, the apparent implication of its argument is an act which does not make a profit for the party involved. Since it is conceded that all of the acts done by Cargill in the instant case resulted in a profit to the company, it therefore follows from this definition that it has not been guilty of manipulation. This is a rather novel proposition, and we suspect many market traders might be startled to learn that the only manipulators among them are those who failed to make a profit on all of their various maneuvers. Cargill admits there is no case authority for this proposition and suggests it is because it has not been urged before a court in prior cases. It has now been urged and we reject it. 43 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: 44 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.' 45 In the antitrust context, the Supreme Court has said: 46    [M]arket manipulation in its various manifestations is implicitly an artificial stimulus applied to (or at times a brake on) market prices, a force which distorts those prices, a factor which prevents the determination of those prices by free competition alone. United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223, 60 S.Ct. 811, 844, 84 L.Ed. 1129 (1940). 47 We think the test of manipulation must largely be a practical one if the purposes of the Commodity Exchange Act are to be accomplished. The methods and techniques of manipulation are limited only by the ingenuity of man. The aim must be therefore to discover whether conduct has been intentionally engaged in which has resulted in a price which does not reflect basic forces of supply and demand. In such an inquiry, the question of whether an alleged manipulator has made a profit is largely irrelevant, for the economic harm done by manipulation is just as great whether there has been a profit or a loss in the operation. In the few reported cases where a trader has been found guilty of price manipulation under the Commodity Exchange Act, the available facts indicate that the manipulators reaped handsome profits. In the case of G. H. Miller & Co. v. United States, 260 F.2d 286 (7th Cir. 1958), cert. denied, 358 U.S. 907, 79 S.Ct. 582, 3 L.Ed.2d 572 (1959), the manipulators profited in the sum of $162,695.15. Although no figures are given in the case of Great Western Food Distributors, Inc. v. Brannan, 201 F.2d 476 (7th Cir.), cert. denied, 345 U.S. 997, 73 S.Ct. 1140, 97 L.Ed. 1404 (1953), the case clearly indicates that the manipulating parties made profits in their transactions there. And it may be pointed out that one of the most common manipulative devices, the floating of false rumors which affect futures prices, does not involve the commission of an uneconomic act. Thus we must reject Cargill's contention that manipulation under the Commodity Exchange Act must include the commission of an uneconomic act. 48