DFA settles cheese trading lawsuit

By Dave Natzke

 

Dairy Farmers of America (DFA) formally announced it has reached a $46 million settlement agreement in a portion of the class-action lawsuit regarding DFA’s trading activity on the Chicago Mercantile Exchange (CME) in 2004. Under the terms of the settlement with the class of direct purchasers of dairy products, filed this week, DFA made no admission of wrongdoing and will pay $46 million to the plaintiff class.

“Our farmer leadership and management team have worked diligently to put certain old issues behind us and resolve pending litigation,” DFA said in a statement. “Recently we were able to settle a class action lawsuit in the Southeast United States. Resolution of both of these lawsuits allows us to remove a source of distraction for our leadership and to avoid additional legal fees.”

The lawsuit stemmed from activities by former DFA officials in 2004, alleging a conspiracy to fix cheese prices on the CME. Those prices are used to establish federal order Class I & III milk prices paid to dairy farmers.

In 2008, the U.S. Commodity Futures Trading Commission (CFTC) announced that DFA, its former chief executive officer Gary Hanman, and former chief financial officer Gerald Bos agreed to 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. Also, Frank Otis and Glenn Millar, former executives of  a DFA subsidiary, paid $150,000 for aiding and abetting DFA’s speculative position limit violation.

Information contained in a CFTC order found that, from May 21-June 23, 2004, DFA, Hanman and Bos allegedly attempted to manipulate the price of CME’s June, July and August 2004 Class III milk futures contracts through purchases of block cheddar cheese on the CME cheese spot call market, in an attempt to prevent falling cheese prices.

According to DairyBusiness Communications’ records, 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 19.5¢/lb.

The CFTC order also 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. The 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.

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 purchased full ownership interest in Keller’s, in 2005.

The order further barred Hanman and Bos from trading futures for five years; and barred DFA from engaging in speculative trading for two years.

Without admitting or denying the CFTC’s findings, current DFA president and CEO Rick Smith – who took the helm of the co-op in 2006 – said DFA had fully cooperated with the CFTC investigation, and had voluntarily developed and implemented new policies and procedures designed to ensure that all trading complies with the spirit and letter of the law.

During DFA’s 15th annual meeting, March 19-20, in Kansas City, Mo., co-op leaders announced DFA would take a $216 million (net after tax) “charge” to cover the lawsuit settlements. 

“The payment of the settlement will not affect the cooperative’s day-to-day operations or its ability to market members’ milk and pay them a competitive price for that milk,” DFA’s statement continued. “Member milk checks and the member equity program will not be impacted.”