Cargill Swaps: Hidden Markups and Misleading Pricing Information

In the Cargill swap marks and ProPricing case, the Commodity Futures Trading Commission ordered Cargill to pay a $10 million civil monetary penalty to settle allegations of concealed swap markups and misleading grain-hedge reports. The alleged discrepancies ran between numbers inside the business and numbers customers received: how much the dealer expected to earn, what its valuation disclosed, and how much grain the trading account actually hedged. The Commission’s account of the mark practice covered hundreds of customers and thousands of swaps. Someone working on those valuations or reports could see the difference before a customer could.

The Commission announced the settlement on November 6, 2017. Its action concerned Cargill, Inc., the Minnesota-based agricultural, commodity and financial-services company, and the swap business conducted through Cargill Risk Management. The company’s swap customers were primarily commodity producers and commercial end users buying a way to manage commodity risk. The order addressed both complex swaps and swaps tied to the ProPricing grain-marketing program.

The Mid-Market Mark That Hid the Markup

A mid-market mark gives a swap customer a valuation against which to understand the transaction’s price. The Commission’s settlement order explains that the required mark excluded the dealer’s profit and adjustments for costs such as hedging and funding. Showing the price alongside that mark would let a customer see the dealer’s markup. That was precisely the transparency the Commission alleged Cargill wanted to avoid.

Cargill Risk Management offered standardized swaps and customized products with caps, floors and other features tailored to the customer’s needs. According to the order, its Hedging Products division had used a value that spread expected revenue over an initial period, allowing customers who terminated early to avoid paying the full expected revenue. Cargill later used that early-exit value as its required mid-market mark, the Commission alleged.

The Commission alleged that Cargill modified that approach after provisionally registering as a swap dealer in 2013. It recognized ten percent of expected revenue on the trade date and spread the remaining ninety percent over the next sixty calendar days. The order says this concealed most of the markup when the customer entered the trade. Market prices and other model inputs also changed the reported value. We work with insiders to separate those movements from the revenue being recognized over time.

The rule did not fix a single formula. It required Cargill to disclose how it calculated the daily mark and the assumptions behind it, so customers could assess the swap’s value independently. The Commission alleged that the concealed markup could give Cargill an advantage over competing dealers and keep customers from making fully informed hedging decisions.

A Mark the Customer Would Believe

The Commission’s account describes a business decision about what customers would accept. Employees, including a senior executive, discussed whether the portion of revenue shown at the outset would look believable as Cargill’s markup. The order says they concluded that it would.

The internal discussion also reached compliance leadership. The order quotes a senior compliance employee describing the impact of showing the mid-market price on the Hedging Products business:

We see the absurdity in that concern: the disclosure meant to help customers understand the price was being evaluated for how much it might cost the seller. The order says employees considered asking the Commission about the requirement, then decided against it because a question might reveal their approach and produce an answer they did not want. Other employees raised concerns that the methodology masked the swap’s actual value and failed to meet the rule, taking those concerns to the business and compliance leaders.

According to the Commission, Cargill began describing its revenue-recognition policy to customers in June 2016, after learning of the Enforcement Division’s investigation. The Commission alleged that even those disclosures did not directly explain that the mark failed to reveal the full markup. The order says the methodology continued through the settlement despite the internal concerns.

ProPricing Reports Flattened the Hedge Position

The ProPricing allegations concerned what a report said about grain already enrolled in a marketing program. This part of the agricultural commodity fraud story connects a farmer’s delivery commitment, a marketer’s contract, a hedge account and a swap. Understanding which business held each piece helps explain the alleged reporting discrepancy.

Farmers enrolled bushels for forward delivery through ProPricing contracts. Cargill also licensed the program to third-party marketers that contracted directly with farmers. Cargill hedged the enrolled commodities with futures and options, using a separate account for each commodity, start date and delivery month and year. At delivery, it passed the hedge price achieved to the third-party marketer through a swap.

That chain illustrates a feature of the trade described in Merchants of Integrity? Commodity Trading and Corruption Research for a World in Transition, published by the Global Integrity Anti-Corruption Evidence Programme in 2022. The paper describes commodities passing through complex supply chains with overlapping intermediaries. Here, the order identifies a specific information handoff: Cargill’s periodic updates told the marketer the estimated hedge price and the percentage of enrolled bushels hedged in the corresponding account.

The Commission alleged that accounts more than one hundred percent hedged appeared in those reports as exactly one hundred percent, while accounts below zero percent appeared as zero percent. In the program’s terminology, an over-hedged account was short more than the enrolled commodity volume; an account below zero was long. Employees allegedly changed the reported percentage when an account fell outside those endpoints, and Cargill did not disclose that the updates sometimes differed from the actual hedge position.

The order describes several ways those positions could arise: changes in an option’s sensitivity to price movements, bushels withdrawn from a contract, or trades allocated to the wrong account. It also says some known over- or under-hedging was not promptly corrected. The reported percentage purported to show the marketer how much of the enrolled grain was hedged. On the Commission’s account, a clean-looking percentage could conceal an unresolved account problem.

What Is CFTC Reporting?

CFTC reporting includes the swap valuation data a dealer sends to a swap data repository. In this case, Cargill had to report daily valuation data for its uncleared swaps, and the Commission alleged that it sent data consistent with the same inaccurate marks supplied to customers. The customer statement and the regulatory submission carried the same valuation problem into different places.

That is why reporting records and supervision belong alongside the pricing model. Comparing the customer statement with the repository submission alone could show agreement while missing the valuation problem the Commission alleged. We take that comparison back to the method that produced both numbers and the revenue treatment built into it.

What a Cargill Insider Would Have Seen

For concerns like those in the Cargill case, the useful evidence connects the valuation method or hedge position to what the customer was told and what supervisors knew. We examine those connections with the person who understands the business. The CFTC’s account gives a concrete starting point: employees recognized the mark problem, discussed its commercial effect and raised it within the swap business.

A valuation employee may understand how the markup configuration changed the customer-facing mark. We work through the model, the mark and the treatment of expected revenue with you. A salesperson may know what customers heard about the mark or an early termination. Those perspectives connect the calculation to the explanation the buyer received.

A grain-program administrator may instead know which bushels were enrolled, which trades belonged in the account and who changed the percentage in the update. We would connect the enrollment records and hedge book with the report sent to the marketer. Internal questions and responses then help explain who recognized the discrepancy and what happened after it reached a supervisor.

HSBC Bank USA’s swap case also shows why desk communications belong alongside trading records. The Commission’s settlement order in that matter resolved allegations involving swap trading and recording failures. The shared point is the need to connect what happened on the desk with what its records disclosed. A CFTC whistleblower lawyer who understands swap desks needs the person who can explain what each record meant in the transaction.

The Controls the Settlement Required

The Commission alleged failures of supervision behind both Cargill reporting practices. Its order describes employees aware of the markup issue, inaccurate data reaching the repository and repeated ProPricing communications that violated the company’s own accuracy policy. It also says Cargill lacked systems or procedures to prevent or correct the ProPricing misreporting.

The settlement required a model that exposed the full estimated revenue in the mid-market comparison without amortizing it. Cargill could still provide a separate unwind mark reflecting its termination arrangement, but had to label it clearly and explain the arrangement. That separation matters to a customer deciding what the swap is worth and what it would cost to exit.

The order also required corrected disclosures and repository data for open complex swaps, backed by training and audits. The order required separate ProPricing training and audits addressing report accuracy. The remedy reached the model, the communication and the oversight of both.

Whistleblower Rewards and the Trading Evidence

The CFTC whistleblower program can pay 10% to 30% of sanctions recovered in a successful action. Knowledge of a valuation setting or an altered hedge report can give an investigation a direction that the published numbers alone would not supply.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. That is a separate program for fraud involving government money. For the swap-dealer conduct discussed here, we work with you on the CFTC whistleblower opportunity and the trading evidence behind it.

You Know How the Number Was Made

If you saw a valuation setting conceal revenue or a hedge report change before it reached the customer, speak to our whistleblower experts about how the number was made. We build the case around that knowledge, bring in CFTC whistleblower lawyers who understand swap valuation and grain-marketing arrangements, and stay beside you from the first call through the case.