Commodity trading giant Louis Dreyfus Commodities BV has been sued by a former senior trader at rival Glencore, alleging that Dreyfus illegally cornered the cotton market last year as prices tumbled from record highs.
In one of the biggest commodity market-manipulation lawsuits in more than a decade, the trader, Mark Allen, contended that Louis Dreyfus, its Allenberg Cotton and Term Commodities units and several individuals violated antitrust law by artificially inflating prices of IntercontinentalExchange cotton futures contracts expiring in May 2011 and July 2011.
Manipulation lawsuits are extremely rare among traders and infrequent even from regulators, as they tend to be very difficult to prove.
The drama in the cotton market last year drew the attention of the U.S. Commodity Futures Trading Commission, which is under pressure to crack down on market malfeasance.
Allen said in the suit that he lost more than $57,000 by paying artificially high prices to liquidate positions related to the May 2011 and July 2011 contracts. He was head of cotton trading at Glencore before being fired last year.
Dreyfus, one of the world’s biggest cotton traders, had no immediate comment. Glencore, which is not mentioned in the suit, brought by Allen on a class-action basis, declined to comment.
“Defendants’ price control over the May 2011 contract and the July 2011 contract reflects monopoly power and collusion,” the lawsuit states.
Much of the background of the case is public knowledge. In mid-2011, Dreyfus or one of its affiliated companies held long positions in ICE futures contracts until they expired, forcing short traders to make physical delivery of large amounts of cotton.
The lawsuit alleges that the defendants failed to sell off that futures position despite the fact that similar quality of cotton was trading at lower prices in the physical market.
“If defendants were acting economically, they would have purchased the lower price cotton in the cash market and sold their higher priced futures contracts on the ICE,” it says.
Allen’s lawsuit seeks class-action status on behalf of investors with positions in the cotton futures contracts. It seeks triple and other damages. It was filed Friday afternoon in the U.S. district court in Manhattan.
The lawsuit came after a published report that the CFTC had opened an investigation into volatile trading and large contract deliveries that roiled the cotton market in 2011.
According to the Financial Times, the CFTC enforcement division interviewed traders about the large volume of cotton bales delivered against ICE’s benchmark futures contract.
Market-manipulation cases tend to be difficult to prove. Typically, plaintiffs must show that the alleged manipulator intended to create a “false” price for a commodity, and that the result was indeed a price that can be proven to have “artificially” deviated from the market.
The case has echoes of a suit filed in 2000 by independent U.S. oil refiner Tosco against London-based trading firm Arcadia and others, accusing them of inflating the price of Europe’s Brent crude. That suit was settled out of court.
The case is Allen v. Term Commodities Inc et al, U.S. District Court, Southern District of New York, No. 12-05126.