DFA, former executives reach $12 million settlement with CFTC

The U.S. Commodity Futures Trading Commission (CFTC) announced that Dairy Farmers of America, Inc. (DFA), its former chief executive officer Gary Hanman, and former chief financial officer Gerald Bos will pay a $12 million civil monetary penalty for attempting to manipulate the Class III milk futures contract and exceeding speculative position limits in that contract. How the payment will be divided was not disclosed.

Additionally, Frank Otis, Ambler, Pa., former president and CEO of a DFA subsidiary, and Glenn Millar, Las Vegas, Nev., former executive vice president of the subsidiary, will pay $150,000 for aiding and abetting DFA’s speculative position limit violation.

According to CFTC acting director of enforcement, Stephen J. Obie: “Today’s enforcement action punishes those responsible for DFA’s manipulative scheme with a $12 million civil penalty and a trading ban, and ensures future compliance with federal commodities laws through the imposition of a monitor. Given the severity of the past misconduct, we are pleased that DFA has committed to reform its trading practices.”

The Commission’s order found that, from May 21-June 23, 2004, DFA, Hanman and Bos  attempted to manipulate the price of the Chicago Mercantile Exchange’s (CME) June, July and August 2004 Class III milk futures contracts through purchases of block cheddar cheese on the CME cheese spot call market. The order found the pricing relationship between the CME block cheese market and the Class III milk futures market is well known throughout the industry, and the CME block cheese market price plays a significant part in establishing Class III milk futures prices.

According to CME Daily Dairy Reports archived by Dairy Profit Weekly, CME cheddar blocks sold in a range of $2.00-$2.20/lb. for most of the spring of 2004, but fell 20¢/lb. on May 21, 2004. During the period cited in the CFTC order, CME cheddar blocks held steady at $1.80/lb. every trading day until June 23, 2004, when prices fell another 19.5¢/lb.

Additionally, the order found that on several days in 2004, DFA’s speculative Class III milk futures contracts exceeded the CME’s speculative position limit, in violation of the Commodity Exchange Act.

A separate order against Otis and Millar found they aided and abetted DFA’s speculative position violation by directing trading of Class III milk futures in an internal sub-account designated for a DFA subsidiary.

According to an Internet search, Otis and Millar were the former management team of Sodiaal North America Corp., which formed a joint venture with DFA in 2000 to create Keller’s Creamery LP. DFA later purchased all the ownership interest in Keller’s Creamery, in 2005.

In addition to imposing civil penalties, the order bars Hanman, now of Platte City, Mo.,  and Bos, now of Weatherby Lake, Mo., from trading futures for five years. It also bars DFA from engaging in speculative trading for two years, and orders DFA to comply with certain undertakings, including: 1) retaining a monitor to ensure that DFA does not engage in speculative trading, and that DFA’s cheese spot call market cheese purchases are made for legitimate business purposes; 2) implementing a compliance and ethics program; and 3) providing future cooperation to the CFTC.

Without admitting or denying the CFTC’s findings in the administrative order, current DFA president and CEO Rick Smith said that agreeing to the settlement was in the best interests of the cooperative and its 18,000 members.

“Settling this matter will allow us to focus wholly on serving our members and moving the cooperative forward,” said Smith, who took the helm of the cooperative in 2006, years after the trading activity in question. “The transactions addressed by the settlement took place over a one-month period more than four years ago. We have fully cooperated with the CFTC’s investigation and wanted to put this matter behind us.”

Prior to reaching the settlement agreement, DFA management voluntarily developed and implemented new policies and procedures designed to ensure that all trading complies with both the spirit and the letter of the law.

 “We are focused on operating in the best interest of our 18,000 dairy farmer owners. We are looking beyond past problems and forward to our bright future,” said Smith.

Unrelated to the CFTC investigation, former DFA CEO Hanman was implicated in two unauthorized payments to DFA leaders: $185,500 to Bucky Jones, a Mississippi dairy farmer and former DFA Southeast Council Board member; and $1 million, to Herman Brubaker, Ohio dairy producer and former DFA board chair.