Opinion ID: 300588
Heading Depth: 1
Heading Rank: 5

Heading: the volkart decision and manipulative squeezes

Text: 108 Read at its broadest reach, which is the way Cargill reads it, the Volkart decision holds that manipulative squeezes are not prohibited by the Commodity Exchange Act. It is somewhat difficult to discern why the Court reached this result, but apparently its concern was that a contrary result would relieve the shorts of their delivery obligation and transform the futures contract into a gambling transaction. We think this approach disregards commercial reality and the economic functions of the futures market. 109 While the obligation to make or take delivery is a bona fide feature of the futures contract, in reality the futures market is not an alternative spot market for the commodity itself, and indeed the functions performed by the futures market would probably be severely hampered if it were turned into an alternative spot market. Most parties who engage in futures transactions are in no position to either make or take delivery, and if they were required to always make preparations to fulfill their obligations to make or take delivery, the number of persons who could effectively participate in the futures market would be substantially restricted, thus reducting the liquidity and volume of that market. The main economic functions performed by the futures market are the stabilization of commodity prices, the provision of reliable pricing information, and the insurance against loss from price fluctuation. The functions can be fulfilled only if both longs and shorts can be assured that they can offset their contracts at non-manipulated prices. If in a squeeze situation, the shorts must be forced either to pay manipulated prices to offset their contracts or in the alternative to bring in higher priced outside supplies which are neither wanted nor needed in the local market, then both the cash and the futures markets will be dislocated. Cargill's transactions in the liquidation of its futures contracts produced such a dislocation in the futures market in the instant case and we cannot conceive that any useful purpose would be served by encouraging such conduct in the future. 110 Cargill argues in its brief that this position leaves the long at the mercy of the shorts in local shortage situations, and    will succeed only in eventually destroying futures markets.    Further, it is clear that if the long is not permitted to ask what, in his judgment, is a price reflecting the cost of bringing in wheat from outside, the futures market is no longer reflecting the real supply-demand situation, but is artificially low, and the prices are therefore useless to the trade and nation. 111 The first answer to this argument is that it is difficult to imagine a local shortage situation in which the long is at the mercy of the short. Cargill was certainly not at the mercy of the shorts in May 1963 and would not have been had it even liquidated its holdings in an orderly fashion. And had it so liquidated its holdings, it would still have made a handsome profit on its investment, even without the added increment which its manipulation produced. The second answer is that we have been shown no good reason 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 artificially high and therefore useless to the trade and nation. 112 Thus we conclude 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, 7 U.S.C. Sec. 1 et seq., providing for competitive trading markets and proscribing excessive speculation, and should not be followed. PROCEDURAL CLAIM AND OTHER CONTENTIONS 113 Cargill argues that the instant proceeding is void because there was no advance notice given to it that its conduct was violative of the statute, as required by the Administrative Procedure Act, 5 U.S.C. Sec. 558(c), which provides as follows: 114    Except in cases of willfulness or those in which public health, interest, or safety requires otherwise, the withdrawal, suspension, revocation, or annulment of a license is lawful only if, before the institution of agency proceedings therefor, the licensee has been given- 115 (1) notice by the agency in writing of the facts or conduct which may warrant the action; and 116 (2) opportunity to demonstrate or achieve compliance with all lawful requirements. 117 We think it is clear that Cargill's acts were willful within the meaning of the Act and thus the section is not applicable. See Great Western Distributors, supra, 201 F.2d at 484. 118 Cargill also contends that the proceedings were void because of the bias and prejudice of the referee and the reviewing judicial Officer. We find no merit to these contentions. 119 The order is affirmed.