‘Trading Places,’ Dodd-Frank and the Eddie Murphy Rule: Sell 30 April at 142!

This piece was initially posted on Tumblr on August 15, 2013; it is reposted here. ©David Jargiello 2012-2016 All Rights Reserved.

A terrific scene from a terrific movie … The ‘Trading Places’ Exchange Floor Scene.  Personally, I never fully ‘got’ the complex, final trading scene in the 1983 Eddie Murphy/Dan Aykroyd classic Trading Places, and in particular I never understood why the whole affair wasn’t patently illegal.  I mean, there are all sorts of laws governing commodities trading, right … like the Commodity Exchange Act and the Regulations of the Commodity Futures Trading Commission (the “CFTC”).  Isn’t there?

Conveniently, NPR recently analyzed the question … See What Actually Happens At The End of ‘Trading Places’? or Listen NPR Planet Money.

The Explanation in 10 Steps.

#1 – As Randoph Duke (Ralph Bellamy) explains to Billy Ray Valentine (Eddie Murphy), the Duke Brothers …

“… are ‘commodities brokers’[.] … Now, what are commodities?  Commodities are agricultural products … like coffee that you had for breakfast … wheat, which is used to make bread … pork bellies, which is used to make bacon, which you might find in a ‘bacon and lettuce and tomato’ sandwich.  Then there are other commodities, like frozen orange juice …”  See YouTube.

#2 – In the climactic scene, the Duke Brothers have arranged to steal an advance copy of the Department of Agriculture’s report regarding the coming year’s orange crop.  This will give them advance knowledge of the price of frozen concentrated orange juice futures (trading symbol FCOJ) on what is presumably meant to be the New York Mercantile Exchange (NYMEX) (the movie takes place in New York).

#3 – In the movie, Louis Winthorpe (Dan Aykroyd) and Billy Ray Valentine (Eddie Murphy) manage to steal the stolen agricultural report before the Dukes can get a look at it.

#4 – From Winthorpe and Valentine, we learn that the Department of Agriculture predicts that there will be a terrific orange crop with lots of oranges in the coming year.  When this information is released to the public, FCOJ prices will fall.

#5 – Winthorpe and Valentine create a fake Department of Agriculture report that says the orange crop will be disastrously bad.  No oranges, with big orange juice shortage to follow.  In such a scenario, FCOJ prices would rise.  By a lot.

#6 – Winthorpe and Valentine manage to put the fake report in the hands of the Duke Brothers.  As a result, the Dukes think they have material nonpublic information that the orange crop will be bad, and that FCOJ prices are going to rise after the report is finally made public.  As they say to Wilson (the late Richard Hunt, a famous Muppets puppeteer and voice) …

Mortimer Duke (Don Ameche):  We want you to buy as much OJ as you can the instant trading starts … Don’t worry if the price starts going up, just keep buying.

Wilson:  But gentlemen, they’re going to broadcast the crop report in an hour. What if the . . . . .

Randolph Duke (Ralph Bellamy):  Let us worry about that Wilson.“

Wilson:  Yes sir!

#7 – When the commodity market opens, Wilson starts buying up FCOJ at any price he can get.  Predictably, other traders on the commodity exchange floor take notice …

Trader 1:  Hey, hey, the Dukes are trying to corner the [orange juice] market!

Trader 2:  They know something … I can feel it!  Let’s get in on it!

An FCOJ buying frenzy begins and the FCOJ price skyrockets.

#8 – Enter Winthorpe and Valentine with the key line that almost no one understands:

Winthorpe:  Sell 30 April at 142!

This is ‘commodity-speak’ for the proposition that Winthorpe/Aykroyd will “sell orange juice in April for $1.42 per pound.”  The number ‘30’ means that “he wants to start by selling 30 contracts … where one contract [equals] many, many pounds of [frozen concentrated orange juice].” See NPR.  As a result, Winthorpe and Valentine are mobbed by traders, all of whom are still following the Duke Brothers’ lead and thinking that the price of FCOJ is going to rise massively above $1.42 per pound.

#9 – Enter the Secretary of Agriculture with the real crop report.  As Winthorpe and Valentine already know, the orange crop is fine.  This means that (1) the price of oranges and thus orange juice is going to be low in the coming year, and (2) the price of FCOJ futures will be correspondingly low, and (3) all of the frenzied trading has made the price of FCOJ futures artificially high.  Time to sell.  As NPR notes …

“All those traders who, a minute ago, were buying all they could, now suddenly need to sell.  So the price starts falling.  When the price hits 29 cents a pound, Winthorpe and Valentine start agreeing to buy orange juice in April.  In other words, Winthorpe and Valentine have contracts allowing them to buy millions of pounds of orange juice in April for 29 cents a pound, and to sell it for $1.42 a pound.  They sold high and bought low.  They’re rich.  The Dukes made the opposite bet and went broke.”

#10 – We never learn how much Winthorpe and Valentine actually made from their plan beyond a vague impression that it is a lot.  Conversely, the film tells us that the Duke Brothers lost $394,000,000 in 1983 dollars.  Adjusted for inflation, that comes out to something just short of $1 billion in 2013 dollars.  The Duke Brothers are out of business and disappear until saved in a cameo five years later by Prince Akeem (Eddie Murphy again) in Coming to America.

So Why Isn’t It Illegal?

As the WSJ explains to my surprise …

“Unlike most stock markets, insider trading isn’t generally illegal in commodities trading.  An oil company can take advantage of inside information about its production outlook when it makes trades.  However, if traders intentionally create an artificial price and use it to make money, charges of manipulation may arise.” MarketBeat, March 4. 2010.

Wow.

So, putting aside the theft and manipulation of a confidential federal report as, well, dramatic license, the actual trading on material nonpublic information depicted was not per se illegal.  Of course, today, we have the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Summary and Statute) which creates, at Section 746 thereof,  the appropriately named “Eddie Murphy Rule” …

“We have recommended banning using misappropriated government information to trade in the commodity markets. In the movie “Trading Places,” starring Eddie Murphy, the Duke brothers intended to profit from trades in frozen concentrated orange juice futures contracts using an illicitly obtained and not yet public Department of Agriculture orange crop report.  Characters played by Eddie Murphy and Dan Aykroyd intercept the misappropriated report and trade on it to profit and ruin the Duke brothers.  In real life, using such misappropriated government information actually is not illegal under our statute. To protect our markets, we have recommended what we call the “Eddie Murphy” rule to ban insider trading using nonpublic information misappropriated from a government source.”  Gary Gensler, Chairman of the Commodity Futures Trading Commission, Testimony to Congress March 3. 2010.

With apologies to Oscar Wilde, it would seem that life responded to art after art imitated life. See Oscar Wilde, The Decay of Lying (1891) (“life imitates art far more than art imitates life”).

For more see ComplianceWeek, July 22, 2010 and Consumerist, July 17, 2013.

For the whole scene,  see Trading Places.

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