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NEW YORK (Reuters) - Commodity trading giant Louis Dreyfus Commodities BV has been sued by a former senior trader at rival Glencore, who alleges that Dreyfus illegally cornered the cotton market last year as prices tumbled from record highs.
In one of the highest-profile commodity market-manipulation lawsuits in more than a decade, the trader, Mark Allen, accused Dreyfus of violating antitrust law by artificially inflating prices of IntercontinentalExchange cotton futures contracts expiring in May 2011 and July 2011.
Other defendants in the case include Dreyfus's Allenberg Cotton and Term Commodities units, and several individuals including Allenberg's chief executive, Joseph Nicosia, collectively considered the biggest cotton traders in the world.
The "defendants' price control over the May 2011 contract and the July 2011 contract reflects monopoly power and collusion," according to the complaint filed Friday afternoon in the U.S. district court in Manhattan by Allen, who lost his job at Glencore last November after the trading firm lost more than $300 million in the market.
The lawsuit follows last year's upheaval in the cotton market, when prices in March reached their highest level since the U.S. Civil War in 1860S and then more than halved by July.
In that period, Dreyfus affiliates took delivery of most ICE cotton futures contracts at expiration, exchange data showed. The lawsuit alleges that physical cotton was trading at lower prices on the spot market, but Dreyfus declined to buy it.
The U.S. Commodity Futures Trading Commission, which is under pressure to crack down on malfeasance, has already opened a probe into the trading, its second in three years. The CFTC investigated a surge in cotton prices prior to the 2008 financial crisis, but found no evidence of manipulation.
Louis Dreyfus had no immediate comment. Allen declined any comment on the lawsuit.
Manipulation lawsuits are unusual among traders, and regulators rarely bring them because they can be hard to prove. One of the most recent examples was in 2000, when U.S. oil refiner Tosco Corp sued London-based Arcadia Petroleum Ltd for allegedly inflating the price of Europe's Brent crude. That was settled out of court.
"It's really an uphill battle," said Jerry Markham, a former chief counsel in the CFTC's enforcement division who is writing a book on commodity price manipulation.
"Even in a congested market, liability can be shown only if defendants engaged in a manipulative activity with the intent to create an artificial price," said Markham, a law professor at Florida International University in Miami. "Traders with short positions have obligations to protect themselves."
Allen claimed to lose more than $57,000 by paying inflated prices to liquidate positions tied to the contracts, a figure that is dwarfed by his former employers' losses.
Traders said that while Allen's alleged losses are small, the lawsuit could grow exponentially if other parties, such as cotton mills that also paid record prices, sign on.
Glencore is not a defendant in the lawsuit, and declined to comment. The company has blamed cotton market volatility for the majority of its dismal performance in agricultural trading last year, when it turned in a loss of $8 million versus a profit of $659 million the year before.
While other companies and traders were also said to have been caught up in the squeeze - including rival merchant Noble Group - it is unclear whether potential counterparties and customers of Louis Dreyfus will risk their standing in the clubby cotton market by joining the suit.
"The mills are supplied by Allenberg. They account for about 20-25 percent of exports. Why would you want to antagonize them?" said one veteran cotton trader, who declined to be named.
In such "professional" markets, big merchant traders tend to take their lumps and move on rather than seek redress in the courts, forcing them to expose their trading books and risking increased regulatory scrutiny of the market.
The lawsuit from Allen, who has set up a small trading enterprise called Compass Cotton following his departure from Glencore, seeks class-action status on behalf of people with positions in the contracts, as well as triple damages and other remedies.
The action surprised few traders following last year's turmoil.
"My perception is we've got regulations, but they (the CFTC) don't enforce them," said a trader at one cotton mill, who declined to say whether they would be inclined to join the class action. "They've the speed radar, but they never stop anyone."
Privately-held Louis Dreyfus Group is among the four largest agricultural trading firms in the world, with offices in Rotterdam, The Netherlands, as well as in Wilton, Connecticut. It is separate from the Dreyfus mutual fund family, which is part of Bank of New York Mellon Corp.
In the middle of 2011, Louis Dreyfus and its affiliates had held long positions in ICE futures contracts until they expired, forcing shorts - traders who bet on price declines - to make physical delivery of large amounts of cotton.
Allen contended that the defendants failed to sell off their positions even though a 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," he said.
The lawsuit does not make clear how Dreyfus would have profited from its trade. In cotton, as in many commodities, gains or losses in one market can often be offset by positions in a related market, making it difficult to untangle.
That was especially true for cotton last year, as a quadrupling in prices triggered massive defaults by farmers who sought to resell their harvest at higher prices, roiling the trade and leaving merchants and consumers empty-handed.
Reporting by Josephine Mason and Jonathan Stempel in New York; Additional reporting by Gus Trompiz in Paris; Editing by John Wallace, Alden Bentley and Tim Dobbyn