Louis Dreyfus Commodities BV, and its Cordova-based cotton division, Allenberg Cotton Co., are targets of six federal lawsuits that accuse the companies of illegally manipulating the cotton market in 2011.
Filed by traders in U.S. District Court in Manhattan, the lawsuits also name Allenberg’s longtime chief executive, Joseph T. Nicosia, and another Dreyfus company, Term Commodities.
The lawsuits allege the defendants used their monopoly power at the Intercontinental Exchange (ICE) in a successful attempt to fix cotton prices. Those actions violated commodity federal exchange and antitrust laws and caused the plaintiff traders to lose “substantial sums,” the lawsuits allege.
The U.S. Commodity Futures Trading Commission opened an investigation of the 2011 activity earlier this year, the Financial Times has reported.
Last year’s volatile market saw cotton futures prices swell to record levels, topping $2 a pound in March, then quickly collapse to 2010 levels. Hundreds of millions of dollars were made and lost in that market, while higher prices were passed along to mills, retailers and ultimately consumers.
In the first of the six lawsuits, filed June 29, Mark Allen, a former senior trader at Glencore, alleges that Louis Dreyfus and its affiliated companies held the May and July 2011 futures contracts until they expired, even though there was cheaper cotton available on the spot market.
A futures contract allows a buyer to lock in a price for a commodity with payment and delivery occurring at a later agreed-upon date. It’s a way to hedge against wild price swings and ensure the availability of a commodity, but it’s also a process that attracts speculators.
According to the lawsuits, ICE data show that Louis Dreyfus took delivery on 390,000 bales of cotton, or 99.23 percent of the May 2011 contract, and 161,000 bales, or 99.01 percent, of the July 2011 contract.
That action “caused record distortions of prices and uneconomic conditions,” Allen’s lawsuit claims, forcing short sellers — traders like him who were betting on price declines — to come up with cash in order to ensure physical delivery of cotton. Allen claims he lost more than $57,000 from his personal account as a result.
The five other traders — Robert Walford, Christopher Pinkham, William Meierfield, Stuart Satullo, and Raymond Crosta — make similar allegations in their lawsuits. Unlike Allen, they don’t attach a dollar figure to their losses, other than to say they represent “substantial sums of money.”
Lawyers for Allen filed a motion Thursday to consolidate all six cases into a single class-action complaint.
As CEO of Allenberg and head cotton executive at Louis Dreyfus, Nicosia was in charge of the trading activity for the firms, the lawsuit claims.
Through an assistant, Nicosia declined to comment on Monday. Nicosia and the other defendants have not filed a response to the lawsuits.
Allenberg already was the world’s largest cotton merchant when in 2009 it acquired Memphis-based Dunavant Enterprises, a longtime rival.
At the time, volatile prices and tight credit were cited as factors driving consolidation in the cotton merchandising industry.
Nicosia, 53, has served as CEO of Allenberg since 1993 and is one of the industry’s most influential executives, serving as a longtime director of the American Cotton Shippers Association and the ICE. He also serves on the board of the National Cotton Council of America.
In early 2011, when he offered his annual outlook at the Mid-South Farm and Gin Show in Memphis, Nicosia was bullish about cotton’s prospects.
“I haven’t been able to find any agricultural commodity that’s legal that has the bigger possibility to grow than cotton does this year,” he said at the time.